Delinquencies, Collections and the Need for a Collection Policy

johnny_automatic_bag_of_moneyCommunity associations are nonprofit corporations, which are funded solely by dues/assessments paid by members. Unfortunately, when one member fails to pay his or her fair share, the rest of the members must make up the difference. As a matter of equity, it is simply unjust for the other co-owners—who typically have not done anything wrong or have no involvement in the defaulting co-owner’s failure to pay—to make up the difference. This article explores the role of the community association board of directors, the property manager and the association’s legal counsel in collecting against a delinquent co-owner.

1. Responsibility for Assessments/Dues

Pursuant to the association’s governing documents, or by statute, as in the case of condominiums [MCL 559.169], a co-owner is required to pay assessments/dues. The governing documents of an association often include the purpose or use of an assessment, the basis for calculating the assessment, payment procedures, collection procedures for delinquent assessments and the authority for levying fines, fees, and interest. Typically, if co-owners within an association are on notice of the consequences of nonpayment, the compliance rate for payment of assessments/dues will be greater. If an association waits until delinquency becomes a problem, it may be too late for the association to obtain a proportionate remedy.

2. Implementation of a Reasonable Collection Policy

A community association’s board of directors is responsible for the implementation, continuation and enforcement of collection actions. Directors cannot ignore delinquencies for a multitude of reasons. First, the board of directors has a fiduciary responsibility to attempt to collect on delinquent assessments/dues. Second, if assessments are not collected in a timely manner, it can jeopardize the association’s economic health and stability. Third, without a steady source of income, the association may be unable to provide essential services to the co-owners, thereby deferring necessary maintenance to roofs, siding, and other responsibilities. Therefore, it is important for board of directors, with the assistance of its attorney, to create a reasonable collection policy which treats all delinquencies equally to avoid a claim for selective enforcement.

A formal collection policy is the foundation of a successful collection program in order to maintain necessary cash flows, reduce financial loss from owner defaults on assessment payments, establish and maintain reserves and present a sound financial picture to potential lenders for the association and/or a mortgage company for potential purchasers or owners refinancing their mortgages. Once the collection policy has been established, it must be communicated/disseminated to the co-owners and become part of the association’s governing documents.

A standard collection policy will set forth a firm due date for assessments [typically by the 1st of the month] and in the case of non-payment, the levying of a late fee [typically the 15th of the month]. In addition, a standard collection policy 1) outlines the steps to be taken by the manager or person responsible for collecting assessments when a payment is overdue, 2) allows for payment plans in cases of special need and financial hardship, 3) specifies when a delinquent assessment should be automatically referred to legal counsel once a delinquent account reaches a specified age or amount [typically no later than two months] to avoid any claims of selective enforcement and/or favoritism, 4) provides for the collection of any attorney fees and costs associated with collecting delinquent assessments and 5) addresses when the assessment of attorneys’ fees are incurred.

When establishing the collection policy, it is also important to make sure that your association’s collection procedures not only conform to state law, such as Article 9 of the Occupation Code on debt collection, MCL 339.901 et. seq., and the Collection Practices Act, codified in MCL 445.251 et seq., but federal statues, as well, such as the Fair Debt Collection Practices Act, 15 U.S.C. 1601 et seq., and provisions within the Bankruptcy Code, Title 11 of the United States Code, among others.

3. Involvement of Legal Counsel

Once the collection policy is implemented and a co-owner becomes delinquent for a specific amount of time, the matter should be tendered to legal counsel. The association’s attorney will evaluate the delinquent member, determine if there are assets and examine all of the various options for pursuing the delinquent member. After a thorough analysis, the attorney should advise the board members as to the best course of action. In order to effectively do this, it is essential that the association’s attorney has as much information available when the account is turned over such as a detailed breakdown of all activity on the account, the name(s), phone number(s) (if known), last known addresses, off-site addresses, names of all occupants and tenants, work addresses, and any other relevant information, copies of checks, money orders, etc., before proceeding with a collection action. If the association’s property manager is not yet involved in the matter, and often times the property manager is intimately involved, the attorney and/or the board should update the property manager regarding the board’s decision.

If the association documents include due process procedures such as notice and a reasonable opportunity to respond prior to initiating any litigation, associations after consultation with the association’s attorney may pursue other options in conjunction with the notice and hearing schedule, such as the suspension of recreational privileges and turning off utilities. In addition, in condominium communities, associations have the ability to divert rent from a delinquent co-owner’s tenant for payment of delinquent assessments/dues. See MCL 559.212.

Often times, payment plans and work-outs for first time delinquents are appropriate. If the association takes an inflexible, hardline approach from the outset, such action may cause additional issues throughout the matter and may force the owner to default on their mortgage or to file for bankruptcy. A payment plan for a “first-time” delinquent will usually result in cooperation and creates goodwill with individuals that have a legitimate financial hardship. However, accepting a payment plan does not mean that you should accept less than the total amount due, including all fees and costs.

4. Collection Litigation

If the non-litigation options fail, there are two basic methods for recovery of delinquent assessments: 1) pursuing the owner’s personal obligation to pay all assessments when they become due while he or she owns the property and 2) the use of an assessment lien which runs with the property itself regardless of who owns the property, which can by foreclosed either judicially or by advertisement, if provided for in the governing documents for homeowner associations and statutorily by MCL 559.208(2) for condominiums. The type of foreclosure will depend on such factors as whether there are junior lien holders that a title company wants a court order of priority in order to issue a commitment, whether the co-owner will vigorously contest the foreclosure, whether there are renters in the unit or simply whether there is equity in the unit.

The owner’s personal obligation entitles the association to file suit for breach of contract against an owner who fails to pay his or her assessments. On the other hand, the assessment lien theory allows an association to file a lien against the property and then do one of three things: 1) wait until the property is sold to collect, 2) foreclose the lien and take the property to satisfy the amount owed, if there is equity in the property or 3) if it is underwater, to lease the unit/home after foreclosing on the lien, until, and if, the first mortgage holder forecloses. By waiting too long to turn over an account, an association may lose out if a mortgage foreclosure is filed against the unit or the owner goes into bankruptcy. In a foreclosure, the lender will assume ownership of the unit before the association has a chance to collect its money.

5. Obtaining Attorney Fees and Costs

With regard to recouping attorney fees and costs, the Michigan Condominium Act allows for condominium associations to recoup reasonable attorney fees and costs incurred for pursuing delinquent co-owners so long as the governing documents provide for this remedy. See MCL 559.206. Likewise, homeowner associations can also recoup reasonable attorney fees and costs incurred so long as the governing documents provide for their recovery and the association prevails in the action against the co-owner/member. All governing documents should include a provision for the recoupment of actual attorney fees and costs.

When determining the reasonableness of attorney fees incurred by the association, courts will often look to data contained in surveys such as the Economics of the Law Practice Surveys that is published by the State Bar of Michigan ( to determine the fee customarily charged in the locality for such services and multiply the fee by the number of hours reasonably spent. Therefore, it is extremely important to ensure that the association’s attorney falls within the reasonable range set forth in the survey.

In addition, recent bankruptcy courts have held that delinquent homeowners are not liable for the fees and costs imposed by an association’s collection company if that company operated on a ‘contingency basis’ instead of a ‘fixed fee’ basis. Because the association was not responsible to pay the collection company’s fees directly, those fees were not costs ‘incurred’ by the association. Thus, it is important to review whether attorney fees are recoverable from the outset.

6. Conclusion

It is critical for the association’s board to continually review receivables and aggressively pursue the collection of delinquent accounts. Being proactive on delinquent accounts typically results in far fewer delinquencies and a shorter period of time co-owners are delinquent. While the association may have to recognize losses, with a firm collection policy in place and the prompt turnover of delinquent owners, the likelihood of collecting and reducing delinquencies increases dramatically.

William Z. Kolobaric is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on community association law, construction law, real estate law, creditor’s rights in bankruptcy and probate and estate planning. He has extensive experience in state and federal courts involving a wide scope of real estate, commercial litigation and creditor’s rights matters. He can be reached at (734) 261-2400 or Please view The Michigan Community Association Law Blog at or for additional resources on Michigan Community Association Law. 

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Attorney Featured on Downtown Mural

Next time you are in Detroit, you may notice a familiar face on a mural located at the corner of Cass Avenue and Bagley Street.  FirstMerit Bank recently unveiled five murals on the sides of buildings throughout Detroit, each promoting a prominent local nonprofit organization.

Ethan Vinson, a partner in our Livonia office, and Vice Chairman of the Belle Isle Conservancy was selected to be feature on one of the murals.  We thank Ethan for his dedication to the Belle Isle Conservancy and for making a positive impact on our community.  Check out the billboard here.

Contributing to a Roth IRA through a Backdoor Option

Many high income earners believe they cannot contribute to a Roth IRA because of the income limitations imposed by the Internal Revenue Service (IRS).  There is a backdoor route high income earners can take, however, to accomplish the same thing as opening a Roth IRA directly.

For 2014, the income and contribution limits for a Roth IRA are as follows:

Filing Status ModifiedAdjusted Gross Income ContributionLimit
Married, Filing Jointly ˂ $181,000 Up to the limit*
≥ $181,000, but less than $191,000 Phased Out Amount
≥$191,000, eligible Ineligible
Married, Filing Separately ˂$10,000 A reduced amount
≥10,000 Ineligible to contribute
Single ˂$114,000 Up to the limit*
≥$114,000, but less than $129,000 Phased Out Amount
≥$129,000 Ineligible to Contribute

* The limit on contributions for 2014 for all traditional and Roth IRAs is $5,500.00 ($6,500.00 if age 50 or older).

Despite the flurry of recent tax legislation, the income limits have remained in place for contributions to a Roth IRA.  However, for conversions from a Traditional IRA to a Roth IRA, the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 has removed these income limits, creating a backdoor for interested investors to utilize.  To contribute to a Roth IRA through the backdoor, follow these steps:

Step 1 – Consult with a tax advisor to determine whether a Roth IRA is an appropriate retirement vehicle for you.  

Step 2 – Contribute to a non-deductible, Traditional IRA up to the contribution limit. 

  • Your contribution will most likely be non-deductible given the income limits, however, contributions to a Roth IRA are not tax deductible anyway.
  • Your contribution will be your “cost basis” for tax purposes.

Step 3 – Convert your Traditional IRA to a Roth IRA.  

  • This process will be much easier if both your Traditional IRA and Roth IRA are held with the same custodian, and if the deposit to the Traditional IRA and the conversion to a Roth IRA, are part of one seamless transaction.
  • Do not confuse a conversion with a distribution, the latter of which will subject you to a 10% penalty if under age 59 ½.
  • The amount of the conversion will be limited to the $5,500.00 (or $6,500.00, if over age 50) assuming that a new Traditional IRA is being opened just for this purpose.
  • For those with an existing Traditional IRA, the limit will be the balance of the account.  Keep in mind, however, that the amount of the conversion will have to be reported as ordinary income, so it may be best to convert smaller portions of anexisting Traditional IRA over a number of years.
  • In determining whether it would be better to convert smaller portions of a Traditional IRA over a number of years, consideration should be given to whether the amount of the conversion will result in a bump up to a higher tax bracket.
  • More likely than not, if requested, your custodian will leave one penny in your Traditional IRA account so that this process can be repeated every year.  (Be sure to ask if interested.)

Step 4 – Make note of any income tax due as a result of the conversion to the Roth IRA.  

  • The income tax due will be zero or close to zero if the non-deductible deposit into the Traditional IRA is followed by an immediate conversion into a Roth IRA.
  • If the conversion results in a higher tax bracket, or more income tax due than the budget allows, then work with your custodian to reverse the process.

Step 5 – Notify the Internal Revenue Service.  

Make sure that IRS Form 8606 is filed with the income tax return for each year that a backdoor Roth IRA contribution is made, in order to alert the IRS that the deposit into the Traditional IRA is non-deductible.  This will also help maintain records of the cost basis.

Roth 401(k) Plans Offered through Employer 

For those who have access to a Roth 401(k) Plan through work, this could be a viable alternative, or addition, to the Roth IRA.  A Roth 401(k) has no income limit, but for 2014, the contribution limit is the same as for a regular 401(k): $17,500 ($23,000 if age 50 or over).  Contributions can be made to both a Roth 401(k) and a regular 401(k) in the same year, so long as the contribution does not exceed the $17,500/$23,000 limit.

The most noteworthy distinction between a Roth IRA and a Roth 401(k) is that the Roth 401(k) is subject to the same minimum distribution rules as a traditional or regular 401(k) require.  Of the three vehicles, the Roth IRA offers the most flexibility in retirement, although contributions are more difficult during the accumulation years for high income earners. The following chart may provide assistance in determining whether a Roth IRA, Roth 401(k), or a traditional or regular 401(k) is the best option for your particular situation:

 Designated Roth 401(k) Account  Roth IRA  Traditional, Pre-Tax 401(k) Account
 Contributions Designated Roth employee elective contributions are made with after-tax dollars. Roth IRA contributions are made with after-tax dollars. Traditional, pre-tax employee elective contributions are made with before-tax dollars.
 Income Limits No income limitation to participate. Income limitation for 2014:

  • Modified AGI married $191,000/single $129,000
No income limitation to participate.
 Maximum Elective Contribution $17,500 for 2014, plus an additional $5,500 for employees age 50 or over. $5,500 for 2014, plus an additional $1,000 for employees age 50 or over. Same aggregate limit as Designated Roth 401(k) Account
 Taxation of Withdrawals Withdrawals of contributions and earnings are not taxed provided it’s a qualified distribution (the account is held for at least 5 years) and made:

  • On account of disability,
  • On or after death, or
  • On or after attainment of age 59½.
Same as Designated Roth 401(k) Account and can have a qualified distribution for a first time home purchase.  Note:·          Contributions may be withdrawn without tax or penalty at any time.·          Conversions may be withdrawn without tax, (and without penalty, but only if held for 5 years). Withdrawals of contributions and earnings are subject to Federal and most State income taxes.
 Required Distributions Distributions must begin no later than age 70½, unless still working and not a 5% owner. No requirement to start taking distributions while owner is alive. Same as Designated Roth 401(k) Account.
* Source:  Internal Revenue Service.  This article is not intended to provide tax advice.  A tax advisor should be consulted when making a contribution, conversion or withdrawal from any retirement vehicle.

Linda Davis Friedland is an attorney in our Livonia office where she concentrates her practice on commercial litigation, employment and labor law, corporate and business law, estate planning, utilities Law and municipal Law. She may be reached at (734) 261-2400 or

Crowdfunding Bill Intended to Assist Entrepreneurs and Small Businesses

On December 30, 2013, Governor Snyder signed into law Public Act 264, Michigan Invests Locally Exemption (MILE), which permits crowdfunding for small business. It is an intrastate exemption from the State of Michigan and Federal securities laws, whereby Michigan residents can invest in Michigan businesses.

Crowdfunding refers to funding a company by selling a small amount of equity to a large number of investors. Michigan is one of the first states to give people the opportunity to support growing local businesses such as restaurants, manufacturers, merchants, and service providers, by helping to fund their startup and growth in exchange for a return on investment. These investments can be made online. If the entire deal stays within the State, the Federal Government does not have jurisdiction, and Federal securities regulations do not apply to the transaction. On signing the bill, Governor Snyder said that the new law will streamline government procedure and eliminate unnecessary regulation.

Raising capital is a challenge all small companies understand. Often small business owners have little access to credit or capital investment and are limited to raising investment or borrowing from family or friends. The crowdfunding process is a new and innovative way for Michigan businesses to gain access to capital to grow and expand, and to create jobs. Because it is less formal than the process of registration of securities, it is important for investors to carefully investigate and evaluate investment opportunities.

The crowdfunding law is intended to allow for more efficient access to capital. It permits a business to raise up to $1,000,000 per year or $2,000,000 per year if the issuer provides audited or reviewed financial statements to the prospective purchaser. An unaccredited investor having a net worth of less than $1,000,000 can invest up to $10,000 a year per business. Accredited investors, having an income in excess of $200,000 (or $300,000 for a married couple) or a net worth in excess of $1,000,000, can invest an unlimited amount.

On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act), which authorizes crowdfunding at the national level. Because of broad political support, it is expected that the Securities Exchange Commission and the Financial Industry Regulatory Authority will complete the rule making process this year, although the new laws provisions governing equity crowdfunding have been criticized as unduly cumbersome.

Crowdfunding has potential drawbacks. Costs, including accounting and legal, may be significant. The law permits only limited direct advertising, and requires disclosures to investors and the State of Michigan on a quarterly basis. Investors will have to be careful to avoid fraud and will have to consider the possible difficulty of selling their interests if they wish to get out of an investment.

We will address the issue of liquidity in a second article discussing the recently introduced House Bill 5273, which would permit the creation of local stock exchanges, and would permit investors and entrepreneurs to buy and sell in state stocks.

Robert J. Hahn is an attorney in our Livonia office where he concentrates his practice on corporate and business law, commercial litigation, utility law and collection and creditor’s rights law. He may be reached at (734) 261-2400 or

Bah Humbug! Holiday Lights and Condominium Restrictions:Navigating Time, Place and Size Restrictions

Traditionally, during this time of year many Americans enjoy displaying lights, wreaths and other decorations as part of the holiday season.  However, what happens when a person moves into a condominium project and the Condominium Association’s property manager or the Board indicates there are restrictions on what items can be hung, where those items can be hung, how long the items can be hung and when lights are permitted?  All too often, a co-owner may become irate and challenge the restrictions as unfair or a violation of the co-owner’s legal rights.  In such situations, a co-owner may be torn between family traditions and complying with community restrictions.

Some 66 million Americans live in a shared ownership community.  A hallmark of shared ownership living is that a co-owner gives up some individual rights for the good of the community as a whole.  Consequently, whether an individual lives in a condominium, a homeowner’s association, a co-operative or a summer resort association, in exchange for having the lawn mowed, the streets, driveways and sidewalks plowed and the outside of the units painted; each co-owner has some restrictions on what can and cannot be done, including holiday decorations.

In order to properly address the displaying of holiday decorations, a Board should first examine its goals in establishing restrictions.  If restrictions are deemed appropriate, the Board should consider holiday decoration restrictions, in general, rather than any specific holiday because doing so could expose the Association to a lawsuit regarding a co-owner’s religious beliefs. Moreover, the restrictions should not dictate the content of the decorations. Finally, the Board should place the restrictions in the Association’s declaration or bylaws and then utilize rules and regulations to implement those restrictions.

After determining its goals, the Board should review the Association’s declaration and/or bylaws to determine its authority to set a policy on decorations and what written provisions, if any, were included in the recorded documents.  In most instances, the Board will have the right to regulate any holiday decorations placed on the common elements or on individual homes. This includes items such as outside lights, blow-up decorations, seasonal greenery and decorations that play music.  In condominiums, most Associations will have restrictions that prohibit residents from attaching lights or individual decorations to the general common elements.  In the case of a homeowner’s association, the Board can generally regulate decorations because the decorations modify home exteriors.

After reviewing the declaration and/or bylaws, the Board should study past policies adopted by previous Boards for the Association and determine if any changes need to be made.  A copy of the policy should be mailed to each co-owner, if changes are made.  Also, a property manager may wish to include a copy of the policy in the Association’s newsletter in advance of the holiday season.

Whether the Board implements past policies or adopts new ones, the restrictions should be reasonable as to the 1) time, 2) placement and 3) size of the decorations.  When creating timing restrictions, the Board should examine how long the decorations should be available during the holiday season and at what times the lights and/or sound can be on, i.e. on at dusk and off by 11:00 p.m.   With regard to decoration placement, the Board will need to determine if the decoration can be placed on the roof, lawn, front yard, backyard, doors, windows and/or roof line.  The Board should also make a determination on whether to restrict the size of the decorations.  For example, the Board can limit the length and/or the amount of decorative lights.  Typically, co-owners do not want to live beside the Griswolds (Christmas Vacation) or Buddy Hall (Deck the Halls) with the night turning into day and/or excessive traffic in the community by gawkers traveling to see the lights.

Frequently, the Board may decide to decorate the common areas itself. The Board should take care to ensure that decorations and holiday displays do not give the impression that the community favors one particular religion over another.  If the Board were to do so, it could subject the Association to potential discrimination claims under the Fair Housing Act (FHA) and other federal and state fair housing laws.  As a matter of prudence, I frequently advise Boards to avoid decorating the common areas.  In the event that the Board decides otherwise, it may be prudent to hang general holiday decorations and signs that state Happy Holidays or other non-religious language.  However, if religious symbols are utilized, the Board should ensure that it allows equal treatment for other religious symbols.  Please note that the FHA restrictions do not apply to religious displays by private homeowners.

Another recent development regarding holiday decorations pertains to our service men and women involved in ongoing conflicts around the world.  As an example, a co-owner may request an exception to the time restrictions for holiday decorations.  In such an instance, the Board may establish a policy for such families to make a written request to the Board that includes the date when the family member is expected to return home in order to allow the Board to monitor which owners have a legitimate reason for not removing decorations and which owners simply have not complied with the Association’s restrictions.  The policy should indicate that any lights and other decorations should be removed within seven (7) days after the family member returns home.

Finally, the decoration restrictions should clearly state the penalties for noncompliance. For practical and legal reasons, the Board should remember to set reasonable standards. All too often, a Board will create intricate restrictions on holiday decorations that other owners have found to be loud, obnoxious and/or extravagant.   As a result, the Board’s knee-jerk response often leads to poorly written policies or documents, unreasonable restrictions or otherwise inconsistent provisions.  If a community’s restrictions have been properly drafted, implemented and enforced in a reasonable and consistent manner, family traditions can continue even after moving into a shared ownership community.  Have a happy and safe holiday season!

William Kolobaric is an attorney in our Livonia office.  He may be reached at (734) 261-2400 or

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Attorney Profiled as Crain’s American Dreamer

In many ways, Metro Detroit was built by the hopes and dreams of people from other countries.  The June 2, 2014 edition of Crain’s Detroit Business included an “American Dreamers” feature highlighting local immigrants who have had business success.  Ronald Acho, co-founder of the Firm, was nominated and selected to be recognized as one of those people.

Mr. Acho’s family fled Iraq when he was four years old to escape religious discrimination against Christian Iraqis and to pursue a better life.  At age 20 he watched his family’s Detroit grocery store be torched to the ground during the riots of 1967.  The devastation left his family penniless, without insurance or building ownership.  Ambitious and determined, Mr. Acho worked as a clerk at Ford Motor Company’s Rouge Plant while sending himself through college.  He went on to earn his law degree and was hired by CMDA in 1975.  Since that time, Mr. Acho has helped grow the firm and has spent countless hours giving back to society.

“With opportunities come responsibilities,” explained Mr. Acho. “It is important to give back to the community, especially to those who are less fortunate, so they, too, have the opportunity to improve their lives.  In the long run, that helps us all.”

Attorney Profiled as Crain’s American Dreamer

In many ways, Metro Detroit was built by the hopes and dreams of people from other countries. The June 2, 2014 edition of Crain’s Detroit Business included an “American Dreamers” feature highlight local immigrants who have had business success. Ronald Acho, co-founder of the Firm, was nominated and selected to be recognized as one of those people.

Mr. Acho’s family fled Iraq when he was four years old to escape religious discrimination against Christian Iraqis and to pursue a better life. At age 20 he watched his family’s Detroit grocery store be torched to the ground during the riots of 1967. The devastation led his family penniless, without insurance or building ownership. Ambitious and determined, Mr. Acho worked as a clerk at Ford Motor Company’s Rouge Plant while sending himself through college. He went on to earn a law degree and was hired by CMDA in 1975.

Since that time, Mr. Acho has helped grow the Firm and has spent countless hours giving back to society. “With opportunities come responsibilities,” explained Mr. Acho. “It is important to give back to the community, especially to those who are less fortunate, so they, too, have the opportunity to improve their lives. In the long run, that helps us all.”