Shall We Obtain Employee Dishonesty Insurance for “Settlement Funds”?
Two weeks ago, I wrote about HUD’s requirement for Employee Dishonesty/Fidelity Insurance for condominium project approval. HUD requires that HOA’s obtain this insurance coverage in the amount of 3 months’ aggregate common charges plus the amount held in all reserve accounts.
But what about “settlement funds”?
Settlement funds are those acquired by the association as a result of foreclosing a unit for nonpayment of common charges and then subsequently selling the unit for profit. Because of the priority of the lien of HOA, it is able to foreclose out any mortgagees who also hold liens on the property, even the first mortgagee.
The most recent case that I encountered was in Connecticut. The HOA foreclosed on a unit for nonpayment of common charges. The first mortgagee was defaulted for failure to appear and the HOA was granted title via foreclosure. The HOA then sold the unit for a $70,000 profit which it placed in its own account, following the advice from its attorney.
After the sale of the unit, the first mortgagee filed a motion to open judgment, set aside the sale, etc. Those were denied. Subsequent motions were also denied.
Since there was a potential that the first mortgagee might open a case against the HOA for unjust enrichment, the association agreed to compensate the first mortgagee in lieu of what could have been a long and expensive litigation with an adversary with much deeper pockets.
The HOA kept only those funds sufficient to make itself whole and would pay the remainder to the first mortgagee. The agreement was accepted by the first mortgagee.
Why did I get into all of this?
Because we were working on getting the project approved with HUD during this time. The Board, in an effort to save money, asked if it could exclude the settlement funds from the calculation for reserve funds. At the time, the agreement was accepted, but not formally. Who knows how long that might take to complete?
I presented three options:
1. Wait for the settlement to be finalized and the funds dispersed, get new bank statements, produce a new balance sheet and then submit.
2. Not increase the policy to include the settlement funds, provide everything that we can to show that the funds will be dispersed soon and cross our fingers that the project reviewer doesn’t Reject the file. (Please refer to my article about the subjectivity of condo approvals)
3. Increase the insurance to cover the settlement funds and after the money is dispersed, reduce it accordingly.
I recommended that they go with #3 as it will certainly save time and #2 could go either way depending on the strictness of the project reviewer. It would be his/her call as to whether or not he/she would wants these funds to be covered by the insurance.
Besides, it does not cost much to increase the policy to cover an additional $70,000 for what may only be a month or two.
Image courtesy of Stuart Miles/freedigitalphotos.net
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
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Check out our article in Common Interest magazine on page 19!