Personal Liability

Posted by on Aug 9, 2011 in Articles, Memos | Comments Off on Personal Liability

Galvin Realty Law Group, P.S.

 

MEMORANDUM

 

 

Personal Liability for Condominium Assessments

  1. FACTS.

Condominium unit owners often fall behind on their homeowners association dues before or during a short sale or foreclosure.  Pursuant to RCW 64.34.364, condominium unit owners are personally liable for past due assessments.

 

  1. ISSUE.

Whether a homeowner should transfer his condominium unit to a limited liability company to avoid personal liability for past due condominium assessments.

 

  1. SHORT ANSWER.

No, a homeowner should not transfer his condominium unit to a limited liability company to avoid personal liability for past due condominium assessments because it is likely that either: (a) the transfer would be set aside as a fraudulent transfer under the Uniform Fraudulent Transfers Act; or (b) the limited liability company would be set aside by piercing the corporate veil.

 

  1. DISCUSSION.

 

  1. Uniform Fraudulent Transfers Act (RCW 19.40).

 

RCW 19.40.041 [Transfers fraudulent as to present and future creditors] provides, in relevant part, that a transfer made by a debtor is fraudulent if the debtor made the transfer with actual intent to hinder, delay or defraud any creditor of the debtor.  RCW 19.40.041(a).  In determining “actual intent,” the Court will give consideration to, among other things, whether: (a) the transfer was to an insider; (b) the debtor retained possession or control of the property transferred after the transfer; (c) the transfer was disclosed or concealed; and (d) the transfer was of substantially all of the debtor’s assets. RCW 19.40.041(b).

 

In this case, the Court would likely find that the homeowner acted with actual intent to hinder, delay or defraud the homeowners association. The transfer was made to a corporate entity which the homeowner has complete control over (see RCW 19.49.011(7) Definition of Insider).  The homeowner retained possession and control of the property.  The transfer was at least somewhat concealed (given the potential due on sale clause violation) and consisted of substantially all of the debtor’s assets (in the typical case).

 

RCW 19.40.051 [Transfers fraudulent as to present creditors] further defines the rule, providing, in relevant part, that a transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer and the debtor was insolvent at that time or became insolvent as a result of the transfer. RCW 19.40.051.  RCW 19.40.021 [Insolvency] provides that “a debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.”  RCW 19.40.021.

 

In this case, the homeowner is likely insolvent.  However, if the transfer is made before the homeowner falls behind on his homeowners association dues, RCW 19.40.051 won’t control.

If the homeowner’s transfer is indeed considered fraudulent, the homeowners association would have four years in which to bring an action for relief under the Uniform Fraudulent Transfers Act (see RCW 19.40.091 for exceptions).  Creditors are entitled to several remedies under the Act, including the catch-all: “any other relief the circumstances may require.” RCW 19.40.071.  In this case, the homeowners association would likely seek avoidance of the transfer to the extent necessary to satisfy its claim. RCW 19.40.071(a)(1).

  1. Piercing the Corporate Veil.

 

Regardless of whether the transfer of the condominium to a limited liability company is considered a fraudulent transfer under the Act, the homeowners association may be able to set aside the corporate form and reach to the individual homeowner by piercing the corporate veil.

 

In order to pierce the corporate veil, two separate, essential factors must be established: first, the corporate form must be intentionally used to violate or evade a duty.  Second, the fact finder must establish that disregarding the corporate veil is necessary and required to prevent an unjustified loss to the injured party.  Dickens v. Alliance Analytical Laboratories, LLC, 127 Wash.App. 433, 111 P.3d 889 (2005), citing Meisel v. M&N Modern Hydraulic Press Co., 97 Wash.2d 403, 645 P.2d 689 (1982).  Whether or not the corporate veil may be pierced is a question of fact. Truckweld Equipment Co., Inc., v. Olson, 26 Wash.App. 638, 618 P.2d 1017 (1980).

 

Typically, the injustice which dictates a piercing of the corporate veil is one involving fraud, misrepresentation, or some form of manipulation of the corporation to the stockholder’s benefit and the creditor’s detriment.  Truckweld Equipment Co., Inc., v. Olson, 26 Wash.App. 638, 618 P.2d 1017 (1980), citing Morgan v. Burks, 93 Wash.2d 580, 611 P.2d 751 (1980).

 

In this case, the Court would likely find that the homeowner’s limited liability company was intentionally used to evade the homeowner’s duty to pay monthly assessments and that (given that the LLC has no other assets or members) piercing the corporate veil is necessary and required in order to prevent unjustified loss to the homeowners association (and, accordingly, other homeowners).

  1. CONCLUSION.

Whether the transfer itself is set aside or the corporate veil is pierced, transferring the condominium to a limited liability company will likely do more harm than good.  It would probably be more beneficial for the law firm to negotiate past due condominium assessments as part of the short sale process rather than setting up new entities for homeowners.

 

The following articles are published for informational purposes and not for the purposes of providing legal advice. Please contact Galvin Realty Law Group at 425.248.2163 for a consultation about your specific needs and circumstances.