How a District should respond to Bank and Mechanics Lien Foreclosures and Bankruptcy Filings

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2 DISCLAIMER This presentation is intended to provide information about the law and is designed to help Board members of Colorado Special Districts gain a general understanding of relevant legal issues. However, this legal information is not the same as legal advice the application of law to an individual's specific circumstances. Although we have gone to great lengths to make sure our information is accurate and useful, we strongly advise you to consult a lawyer regarding questions about your particular situation. Further, no representation is made as to the completeness or accuracy of the information contained in this presentation.

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4 How a District should respond to Bank and Mechanics Lien Foreclosures and Bankruptcy Filings

5 Introduction Application of this presentation to various Special Districts Mechanic s Lien foreclosures Special District s options upon non-payment of service fees

6 Does a Default Exist? First, the District should determine whether it is being paid current or whether the owner has defaulted on payments to the District If a default has occurred, then determine whether to proceed with the filing of a lien

7 SHOULD A DISTRICT FILE A LIEN? Each District should determine its policy regarding when a lien should be filed, i.e., 6 months or $500 past due, etc. The recording of the lien gives record notice to third parties of the District s lien against the subject property If a District has recorded a lien, it is more likely to receive notice of a foreclosure

8 C.R.S (1)(j)(I) provides that a special district may fix fees, penalties and charges for services provided by the special district which shall constitute a perpetual lien on and against the property served and any such lien may be foreclosed in the same manner as provided by the laws of this state for the foreclosure of mechanic s liens.

9 Lien Procedures If the District decides a lien should be filed, First, determine the amount of the lien Charges for service or availability of service Other fees, rates, tolls, penalties, or charges Include right to collect attorneys fees If penalties, late charges, or attorneys fees are to be included in the lien amount, make sure the District s Rules & Regulations authorize the collection of such amounts

10 Lien Procedures Verify ownership of the property at issue through the Assessor s Office of the County in which the property is located Determine whether the current owner of the subject property has filed bankruptcy. If so, then we follow certain bankruptcy procedures described later Determine whether the property at issue is subject to a public trustee or judicial foreclosure through the Clerk and Recorder s Office for the County in which the property is located

11 Lien Procedures Send Notice of Intent to file lien to owner. Note that this is not required by Colorado law, but we find it to be good practice If the homeowner does not pay the past due amounts within a certain period (usually 10 days) after we send the Notice of Intent to file lien, then we record the Statement of Lien with the Clerk and Recorder of the County in which the property is located

12 Bankruptcies If the homeowner has filed bankruptcy, then: If not already done, record the Statement of Lien with the Clerk and Recorder of the County where the property is located Generally, a valid lien will pass through bankruptcy unaffected so the lien will remain against the property even if the owner is discharged from personal liability for the debt Be careful to avoid violation of automatic stay Recording of lien does not violate automatic stay provided by Section 362(d), because it merely memorializes the perpetual lien that already exists under statute Do not attempt to collect any amounts which became due to the District prior to the date of the bankruptcy filing Although it is probably not a violation of the stay to attempt to collect amounts which become due after the date of the bankruptcy filing, best practice is to proceed through bankruptcy procedures and avoid any collection attempts until after discharge

13 If such adequate assurance is not timely provided, the District may Bankruptcies Bankruptcy Code has special protections for utility providers under Section 366 debtor must provide adequate assurance of payment The adequate assurance of payment is to be provided within 20 days of the filing of the bankruptcy (or 30 days in a Chapter 11 bankruptcy case) The adequate assurance can mean a cash deposit, letter of credit, certificate of deposit, prepayment or other security mutually agreed upon between the District, the homeowner, and the trustee. A party may request an order of the court regarding the nature and amount of such security If your District is a utility provider, you may want to contact counsel for the bankrupt homeowner and request adequate assurance of payment

14 Bankruptcies File a proof of claim and Request for Notices Contact District s attorney for assistance Form is available through bankruptcy court Once completed proof of claim and request for notices are filed with bankruptcy court, District will receive notice of proceedings Make sure to provide copies of all notices to District s attorney

15 Two Types of Foreclosure 1. Judicial Foreclosure 2. Public Trustee Foreclosures

16 Judicial Foreclosure Judicial Foreclosure a lawsuit brought to obtain a court order to foreclose a lien Can apply to a mortgage lien, mechanic s lien, judgment lien or otherwise Brought under Rule 105 Foreclosing party will typically name as defendants in the lawsuit all parties that may have an interest in the property being foreclosed as determined by a litigation guarantee If the District is served with process or otherwise becomes aware of a judicial foreclosure, it should contact its attorney District should participate in process to ensure that its interests are protected If District has recorded a lien, then party seeking to foreclose will have notice of District s interest

17 Public Trustee Foreclosure Public Trustee Foreclosures a non-judicial process administered by the Public Trustee of the County in which the property is located Applies where deed of trust provides for a power of sale Oversight by courts through a Rule 120 process Typically takes 4-6 months to complete the foreclosure and proceed to Public Trustee s sale If the District receives notice or otherwise becomes aware of a public trustee foreclosure, it should contact its attorney District should participate in process to ensure its interests are protected If District has recorded a lien, then party seeking to foreclose will have notice of District s interest District may want to update any previously recorded liens to reflect current amount due If District has a recorded lien but does not receive notice, then lien unaffected by foreclosure

18 Foreclosures Redemption Rights Following a sale by the Public Trustee, there is a short redemption period During this period, junior lien holders may pay off the amount bid at the sale plus allowed fees and costs and become of the owner of the property Redeeming lien holder will take property subject to any liens or interests senior to the foreclosed lien Must follow statutory procedures and submit Intent to Redeem to Public Trustee

19 Foreclosures To ensure the District receives notice of a foreclosure, it should record a Statement of Lien in the event payments to the District are in default Each District should determine its policy regarding when a lien should be filed, i.e., 6 months or $500 past due, etc District should file liens on accelerated basis if aware of foreclosure

20 Foreclosures Because of the importance of services provided by the District, the amount due the District will typically be paid upon a transfer of the property following the foreclosure sale The District should ensure that the post foreclosure owner, manager or broker is aware of any amounts owing

21 Foreclosure Although a District has the right to foreclose its lien in the same manner as a mechanic s lien, a judicial foreclosure process under Rule 105, this is not typical because The District will typically be paid eventually for all amounts due so foreclosure is not necessary If the District successfully foreclosed, it would own the property subject to any senior liens or interests Prohibitively expensive and time consuming litigation guaranty, attorneys fees,

22 Certification to Treasurer A District may certify delinquent water or sewer fees, penalties, charges, etc., to the County Treasurer Such fees must total at least $150 per account and must be at least 6 months delinquent Make sure District s Rules and Regulations authorize the collection of attorneys fees, penalties, and any other charges as a fee or charge Treasurer will collect and pay to District such amounts collected Particularly useful for deliquent Readiness-To-Serve Fees

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