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Collections, Property Managers, and the Unauthorized Practice of Law

With the world becoming more and more litigious, we all fear we might be sued over everyday actions or minor mistakes.  In our market, homeowners are often trying to find a scapegoat for their financial responsibilities. Without following proper procedure, that scapegoat may be your HOA. WesternLaw Group has observed a rise in the number of Fair Debt Collection Practices Act (FDCPA) lawsuits, wherein homeowners attempt to shift the focus from poor money management to failure by the HOA to follow its procedures and relevant law.

Unfortunately, a mistake in a demand letter or subsequent contact can cost the HOA significant time and money.

A hot topic in HOA law is whether management companies are considered “debt collectors”. If so, can they be sued under the FDCPA? Do any management actions surpass the authority of a traditional manager, and begin to stray into the unauthorized practice of law?

Under the FDCPA, “debt collector” means “any person in any business the principal purpose of which is the collection of any debts or who regularly collects or attempts to collect debts owed or due another.” While a delinquent owner almost certainly believes that the HOA and property manager exist almost solely to take their money, we know this not to be true. A property manager is a central player in helping the community run smoothly and efficiently. Their primary purpose is not just to collect money, but also: arranging for the maintenance of the common areas and facilities, negotiating contracts for utilities and insurance, preparing a budget, maintaining the books and records of each Association, and managing the banking relationship.

In January, 2013, the Eleventh Circuit Court of Appeals held that management companies are protected by the provision in the FDCPA making individuals and entities exempt if their collection efforts are “incidental to a bona fide fiduciary obligation.” The Eleventh Circuit found the collection of money was one of many duties found in management contracts. Therefore, the court held the action of collecting assessments to be “incidental” (or of casual or of secondary importance”) to their other responsibilities. It is difficult to know if Colorado Courts would arrive at a similar ruling. However, as long as a manager performs several duties to keep the Association safe and well maintained–and does not make collecting assessments the sole or primary purpose of their relationship with the association–he will not be found to be a “debt collector”, and therefore not be subject to the Fair Debt Collection Practice Act.

More generally, what other types of activities routinely performed by management companies amount to the unauthorized practice of law? While there is not extensive case law or legislation on the issue, WesternLaw Group strongly discourages property managers from engaging in the following practices:

1)      Drafting documents requiring a legal description of property (filing liens);

2)      Interpreting statutes or governing documents;

3)      Preparing any document in any medium intended to affect or secure legal rights for a specific person or entity;

4)      Giving legal advice as to the legal consequences of taking certain courses of action;

5)      Drafting pre-arbitration demands;

6)      Preparing or signing legal documents on behalf of the association;

7)      Representing another in a judicial, quasi-judicial, or administrative agency or tribunal for a specific person or entity; or

8)      Negotiating legal rights or responsibilities for a specific person or entity.

It is unfortunate that our world is as litigious as it is. FDPCA lawsuits are an unfortunate, and preventable, part of collections practice. In order to avoid extensive costs and fees to engage in such suits, HOAs and property managers are encouraged to turn to legal counsel for help in navigating collection efforts.

WesternLaw Group is sympathetic that a home, condo or apartment may represent the largest investment that Owner has. We strive to be courteous, patient, and collaborative with Owners, Boards and property managers to reach an acceptable resolution (e.g. a payment plan). In the instances where such conversations fail, however, please ensure that your Association has someone well-versed in the FDCPA and similar laws.

John HoltComment