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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 39048
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Our HOA has been the defendents in a lawsuit for the past 2

Customer Question

Our HOA has been the defendents in a lawsuit for the past 2 years. Between attorney fees and normal maintainance expense we can no longer pay our bills. Is there a way for a non-profit corporation (in Texas) to file bankruptcy,,or,,,,???. What are our options?
Submitted: 6 years ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 6 years ago.
A nonprofit can file for Chapter 11 (reorganization) or Chapter 7 (liquidation) bankruptcy, the same as any other corporation.

if you file for Chapter 7, the bankruptcy trustee will attempt to sell all of the common areas of your community to a third party. That third party will be entitled to charge you for the use of the property. This will effectively remove all control over the community from the homeowners, which could end up causing everyone to suffer much higher HOA assessments.

If you file for Chapter 11, then you may be able to create a plan that will permit you to pay your unsecured creditors at a lesser rate than you currently do. However, a Chapter 11 is expensive in terms of legal fees, so you must determine whether or not the cost is worth the amount of debt that you can avoid.

There's no way to evaluate this without consulting a local bankruptcy law firm with previous experience in HOA bankruptcies -- because of the very specialized nature of the proceeding.

No ordinary bankruptcy lawyer will be able to handle your case. You will likely need a fairly sophisticated law firm. For a referral, see:

Hope this helps.

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Customer: replied 6 years ago.
I forgot to mention that this is a condominium HOA. Could the chapter 7 be filed while we are in litigation? What is recievership and how could we be put into that. I know we could not get a membership vote to increase our assessments without a judge or court ordering it.
Expert:  socrateaser replied 6 years ago.
You can file bankruptcy at any time. The lawsuits will all be stopped, and probably transferred to the bankruptcy court for resolution.

Receivership is a state-court process under which an officer and representative of the court is appointed to take possession of and preserve specified property that is the subject of pending litigation or to aid in the enforcement of a judgment. Typically, a receiver is not used except in situations where bankruptcy is not a possible alternative (e.g., where a debt is nondischargeable, so bankruptcy is effectively impossible). There are other reasons for a receivership, but they are inapplicable to your facts.
Customer: replied 6 years ago.
Obviously the bankruptcy option is not the answer, the irate owner who initiated the lawsuit would "buy" the common elements and force the rest of us out. It looks like recievership or chapter 11 is the best choice. How does one become "an officer of the court" in order to be an administrator for the recievership,,,,would it be an attorney,,,or a property management company? We must do something VERY soon in order to survive as an HOA from day to day.
Expert:  socrateaser replied 6 years ago.
The court would never appoint someone with an interest in the HOA to act as a receiver. Receivers must be neutral.

Your most likely solution is Chapter 11. The HOA retains control over the property and can craft a plan to pay creditors what the HOA can afford -- and, the court discharges the remainder of the debts -- which would include the lawsuit.

Hope this helps.
Customer: replied 6 years ago.
Thank you very much for your answers thus far.

We have a 19 member condo association. Two of the three board members are in ill health and NEED to resign (all 3 are over 70 years old). None of the other members are willing to serve at this point (understandably so, as that would be directly exposing themselves to involvement in this litigation). In addition to being financially insolvent, when the current board members resign, the association will have no administrative leadership.

Can we, the current board members request our attorneys to petition the court to place the association into receivership?
Customer: replied 6 years ago.
I understood that I would get unlimited questions/answers for the $38 per month? However each time I click "accept" they say I owe another $38????
Expert:  socrateaser replied 6 years ago.
Note: I "justanswer" questions about the law. I have no control and no knowledge of the website's marketing or account policies. I get paid when you click "Accept," otherwise not. If you are confused about your account (and believe me when I say that I see a lot of customers who appear to be routinely confused), then please contact customer service and resolve the matter before continuing. The last thing that I want is for you to think I'm trying to rip you off, because I would rather that you pay nothing at all, than to think poorly of me.

Now...back to your question.

You indicated that the HOA is in litigation with a member. Other members of the HOA can request that the court appoint a receiver, but there are difficulties with this proposition:

1. Receivers are EXPENSIVE. They charge by the hour and have administrative staff. You could easily be paying $500 per hour to hire a receiver to manage the association.

2. Receivership is not open ended. The court wants to know what the goal is, so that the receiver can come in, do the job and get out. If the HOA is in Chapter 11 reorganization, the bankruptcy court can allow the trustee to manage the reorg, if the members cannot handle it themselves. But, in a state court action, the receiver's goal would be to liquidate the HOA, which is not a realistic outcome, unless you simply want to sell out to the member who is suing you -- in which case, you don't need a receiver -- you can just sell out.

Similarly, in Chapter 11 reorg, the court can appoint a trustee to manage the reorganization of the HOA, when it serves the interests of the parties. This is effectively the same thing as appointing a receiver in state court litigation.

Bankr. Code § 1104(a)(2).

Hope this helps.

Edited by socrateaser on 10/4/2010 at 5:12 PM EST