Receivership: What Happens When an Association Fails?

What happens when an association breaks down? When associations cease to function properly, everything stops: bills go unpaid, directors resign, and critical maintenance is ignored. In this situation, the remaining board members might look to a court-appointed receiver as a way out. But should they?

6 Things to Know About HOAs & Receivership

The appointment of a receiver is a drastic remedy.

Receivership is expensive, time-consuming and someone outside the association makes all the decisions that the Board and/or members would make.

Sometimes receivership is the only remedy...

An association seeking the appointment of a receiver must have a compelling reason that would satisfy the judge that there is an immediate threat of injury, damage or destruction to property and to property values of the residences within the community association. This can happen when there is a deadlock on the board that prevents decisions about critical health and safety repairs.

...after all other efforts have failed.

An association may be required to show to the court different degrees of evidence depending on the reason for its dysfunction. In most cases, the association must show that efforts to resolve the matter were not successful: e.g. ADR failed or was refused, and there is correspondence showing multiple, but unsuccessful attempts to obtain voluntary compliance.

Different events can trigger a motion to appoint a receiver.

Some reasons include member apathy or fear of personal liability (no one will step forward to serve on the board), failure of board to meet its fiduciary duty (failure to undertake reasonable investigations, due diligence or to impose essential emergency assessment), or in a small complex with an even number of units, a tie-vote precludes the passage of a special assessment to fund critical health & safety repairs to structures.

Read More: Bankruptcy Won't Work

Receivership is not a panacea.

It is expensive, the association loses control, and the court directs the receiver to perform all necessary work. The court may impose assessments, and the law requires a receiver to make monthly reports and to file documents with the court. Both requirements add to the cost of the receiver (usually an attorney), who already charges by the hour to do the work that a volunteer board did before the receiver was appointed.

There is no time limit.

The receiver will stay in place until the problem(s) is solved to the satisfaction of the court.

Try to Avoid Receivership

Receivership is like aggressive cancer treatment: the treatment can be deadly, but it's the option when all other treatments have failed. Receivership is usually expensive and divisive, and can leave HOA owners powerless. Whether you are a homeowner or board member, you should work aggressively to inform your neighbors about the consequences of receivership and, if possible, avoid it altogether.

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