06 July 2021

Champlain Towers South, Condo Associations, and Bankruptcy

The New York Times has a nice article here on the reason why condo associations, like the one at the collapsed Champlain Towers South, fail to take actions necessary to preserve the value of the building and the lives of its residents. In brief, no one want to raise condo dues. In the short term, this keeps the members happy; in the long run, they might die. 

A few of you might wonder whether condo associations can file bankruptcy and reorganize their debts. After all, the Champlain Towers Association will certainly be a defendant in many wrongful death lawsuits. And, while there is likely to be some insurance, it's very unlikely it will be enough when the damages for over 100 claims are adjudicated.

Bankruptcy won't help much, though. For the reasons why, you can read my article Nine Into Eleven: Accounting for Common Interest Communities in Bankruptcy (here). The short of the problem is that a common-interest-community (CIC) like a condo association that finds itself in bankruptcy will see its powers of assessment exercised for the benefit of its creditors. In other words, the dues will be increased to the maximum owners are willing to pay before walking away from their property. Dues are set by an elected board outside of bankruptcy. Raise assessments too much and a new board is elected by the owners.

But there's no power to elect a new board once the bankruptcy case is filed. A bankruptcy trustee will be appointed if the current board doesn't jack up the dues. At some point, the dues can become so high that folks will walk away, surrendering their equity. Heads, the creditors win; tails, the owners lose.

None of this should be taken as a reason to excuse the condo owners at Champlain Towers; after all, they elected boards who were unwilling to bite the bullet and start repairs in time to prevent a disaster.

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