A common problem for Associations is delinquent assessments. There are
homeowners who for varying reasons fail to pay their monthly assessments.
The Association is forced to turn to legal counsel to seek enforcement
after its efforts to collect the debt fail. This generally results in
a judgment against the homeowner, which the Association may seek to enforce.
What if the homeowner, however, is an entity, such as an LLC, rather than
an individual or individuals? And, what if that LLC is insolvent?
Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, a California court of appeal had to address a similar situation. Airborne
Turbine Ltd. ("Airborne") failed to pay Relentless Air Racing
("Relentless") for an airplane Relentless had sold to Airborne.
Relentless sued Airborne and obtained a judgment for the funds owed. Relentless,
however, was unable to collect the funds because Airborne was insolvent.
Relentless Air Racing, LLC v. Airborne Turbine Ltd. Partnership, 222 Cal.App.4th 811, 813 (2013).
Relentless, in order to collect the funds owed to it, sought to add additional
parties to the judgment it had already obtained, including Linda and Wayne
Fulton. The Fultons were the sole owners and operators of Airborne. The
question the court had to ask itself was whether it would allow the Fultons
to be added to the already existing judgment.
Relentless Air Racing, LLC, 222 Cal.App.4th at 814-15. The public policy the court had to grapple
with is the defendants' right to give their side of the story during
litigation; that is, to present their case to the judge. However, a debtor,
who is being added to a pre-existing judgment, does not get such a right.
The court in
Air Racing, LLC., however, found that there are certain situations in which the creditor
may add additional debtors. Three criteria must be met for this to be
possible: One, the parties must have had such control in the litigation
that led to the judgment that it was as if they were actually represented.
Two, the additional debtors and business entity are practically identical.
And, three, it would be inequitable to exclude the additional debtors
from the judgment.
Relentless Air Racing, LLC, 222 Cal.App.4th at 815-16.
Applying these three criteria to the case, the court found the Fultons
(1) had full control over their business; (2) they and their business
were not separate from one another. They were the sole owners and operators
of the business; they freely transferred money from their business account
to their personal accounts; they disregarded legal formalities required
for LLCs; and they use the labor and service of the LLC for their own
gain and for their other business' gain rather than the gain of the
LLC. And (3), as the Fultons had such control of the LLC, and there was
no legal difference between the two, the courts inferred that an inequitable
result would occur if the Fultons were not added to the judgment. That
is, the Fultons could keep Airborne insolvent resulting in Relentless
never being paid.
Relentless Air Racing, LLC, 222 Cal.App.4th at 814-16.
While this is a good outcome for Relentless, what does it mean for Associations
seeking payment of delinquent assessments? When the home is owned by a
corporate entity, the Association may be able to add additional debtors
to already existing judgments. This provides the Association with an additional
outlet for compensation if it is discovered after litigation that the
property owner, an entity, is insolvent.