Assigned to CED & APPROP                                                                                    AS PASSED BY THE SENATE

ARIZONA STATE SENATE

Forty-eighth Legislature, First Regular Session

AMENDED

FACT SHEET FOR S.B. 1546

condominium recovery fund

Purpose

            Establishes the Condominium Recovery Fund within the Arizona Department of Real Estate (ADRE) to pay to a buyer any losses that arise from a developer’s failure to complete a condominium project.

Background

            ADRE was established in 1921, to protect the public interest through licensure and regulation of the real estate profession in Arizona.  ADRE is responsible for licensing and regulating real estate, cemetery and membership camping salespersons and brokers; investigating complaints from the public and licensees regarding real estate transactions; prosecuting licensees to resolve alleged violations of real estate statutes and rules; and providing information to the public on department licensees, including complaints filed and disciplinary history.

            In addition, ADRE is responsible for the oversight and regulation of all real estate schools and instructors in the state and the issuance of public reports for subdivisions and unsubdivided land.  ADRE also audits brokers’ records and their handling of client monies to ensure compliance with statutory requirements.

            ADRE administers the Real Estate Recovery Fund, the purpose of which is to compensate persons who have been defrauded in a real estate transaction and subsequently suffered monetary losses.  Those persons may seek a court order for an award if the person who committed the fraud does not have any assets.  The Real Estate Recovery Fund covers up to $30,000 per transaction and up to $90,000 per licensee.  In addition to any other fees, a real estate or cemetery broker applicant is required to pay $20 into the Real Estate Recovery Fund and a real estate or cemetery salesperson applicant is required to pay $10 into the Fund.

            ADRE does not anticipate any fiscal impact to the state General Fund associated with this measure. S.B. 1546 establishes the Condominium Recovery Fund (Fund) for the benefit of any person who is aggrieved by the default of a condominium developer and permits ADRE to use up to $50,000 per fiscal year for administrative costs and to promote the Fund.  It requires each applicant for a public report for a condominium to pay to the Fund an amount established by the Commissioner of ADRE (Commissioner) if, on June 30 of the previous fiscal year, the balance in the Fund is less than $5 million.

Provisions

The Fund

1. Requires the Commissioner to establish and maintain the Fund for the benefit of any buyer who is aggrieved by the failure of a subdivider to complete a condominium project. The Fund does not apply to losses in a subdivision of detached single-family homes.

2. Limits the Fund to payment to an aggrieved person of losses that directly arise out of a real estate transaction, including reasonable attorney fees and court costs, in which both of the following apply:

a) the contract between the buyer and the subdivider in connection with the sale of a condominium is terminated without default by the buyer and the subdivider fails to refund the buyer’s deposit in accordance with the contract.

b) the defendant subdivider failed to complete the condominium project.

c) the contract between the subdivider and the buyer does not require the subdivider to and the subdivider has not placed the deposits in a neutral escrow account at a company licensed to perform escrow business or in the trust account of the licensed real estate broker for the benefit of the purchaser.

3. Prohibits the Fund from providing awards for damages or losses resulting from any of the following:

a) speculation.

b) transaction for condominiums in which the deposits were held by a licensed neutral escrow company or a trust account of a real estate broker.

c) loans, notes, limited partnerships or other securities.

d) a judgment entered against a bonding company if the bonding company is not a principal in the underlying real estate transaction.

e) tenant conduct or neglect.

f) vandalism.

g) natural causes.

h) punitive damages.

i) postjudgment interest.

j) undocumented transactions or losses.

4. Prohibits an award from the Fund from exceeding:

a) 20 percent of the base price for each unit.

b) $1 million for each project, regardless of the number of aggrieved buyers or units involved.

5. Prohibits further awards from being made from the Fund to compensate a buyer for the acts of a subdivider once the awards are made and have reached the prescribed limits.

6. Requires each applicant for a public report for a condominium to pay, in addition to any other fees, an amount established by the Commissioner if, on June 30 of the previous fiscal year, the balance in the Fund is less than $5 million.

7. Requires the Commissioner to deposit in the Fund all monies that are received in connection with the Fund, including interest received on a judgment.  The monies are held by the Commissioner in trust for carrying out all activities related to the Fund.

8. Requires the State Treasurer to invest and divest monies in the Fund on notice from the Commissioner.  All monies earned from investment are credited to the Fund.

9. Permits the Commissioner to spend up to $50,000 per fiscal year from the Fund to administer the Fund and to increase public awareness of the Fund.

Filing an Action

10. Permits an aggrieved buyer who obtains a judgment against a subdivider to apply to ADRE for payment from the Fund and for a return of the buyer’s deposit.

11. Requires an action for a judgment that results in an order for payment from the Fund to be commenced or prosecuted within three years after the cause of action accrues.

12. Permits a summons to be served by alternative methods as provided for by the Arizona Rules of Civil Procedure, including by publication, if an aggrieved buyer commences an action and the defendant subdivider cannot be served process personally in the state.

13. Specifies that a judgment that is obtained as required and that is obtained after service by publication only applies to and is enforceable against the Fund.  ADRE may intervene and defend these actions.

14. Requires the claimant to file with ADRE by personal service or certified mail, the original application for payment from the Fund, including appendices, within two years after the termination of all proceedings, reviews and appeals connected with the judgment.  The Commissioner may waive this deadline if waiver best serves the public interest.

15. Requires the application to be for the unpaid amount on the judgment that represents the claimant’s losses, within the limitations prescribed for an award from the Fund.

16. Requires ADRE to prescribe an application form that includes detailed instructions with respect to documentary evidence, pleadings, court rulings, products of discovery in the underlying litigation and notice requirements to the judgment debtor.

17. Permits the Commissioner to waive certain requirements relating to payment from the Fund if the claim is based on an award due to a criminal restitution order or if the Commissioner is satisfied that the claimant has taken all reasonable steps to collect the amount of the judgment or the unsatisfied part of the judgment from all judgment debtors.

Proration Proceedings

18. Permits the Commissioner to petition the court to initiate a proration proceeding if it is likely that, to pay in full all valid claims of all aggrieved persons against one subdivider, the awards will exceed the award limits. 

19. Requires the court to grant a proration proceeding petition and order a hearing to distribute awards among the claimants proportionately or in another manner as the court deems equitable.  The Commissioner or any party may file a proposed plan for equitable distribution of available monies. 

20. Requires, during a proration proceeding, monies to be distributed among the persons entitled to them without regard to the order in which their judgments are obtained or their applications filed.

21. Permits the court to require all claimants and prospective claimants against one subdivider to be joined in one action so that the respective rights of all claimants may be equitably adjudicated and settled.

22. Prohibits the court from including in the proration claims the claim of any person who, within 90 days after the court has entered the order for proration, has not filed a complaint with the court, served the subdivider and provided written notice of the claim to the Commissioner.

23. Limits the liability of the Fund for any application that the proration proceeding affects to the limits in effect on the date when the last application is filed.

24. Permits the court to refuse to consider or award prorated recovery to any person who fails to expeditiously prosecute a claim or promptly file an application for payment and submit supporting documentation as required.

Payment

25. Requires the automatic termination of a subdivider’s public report for a condominium on the issuance of an order authorizing payment from the Fund. 

26. Requires the Commissioner, should at any time the monies in the Fund be insufficient to satisfy any authorized claim, to satisfy unpaid claims when sufficient money has been deposited in the order they were originally filed, plus accumulated interest of four percent per year.

27. Requires an aggrieved buyer to serve notice of the claim on the judgment debtor, together with a copy of the application, in the form prescribed by the Commissioner, within two years after termination of the proceedings in the following manner:

a) if the judgment debtor holds a current license, the notice and copy of the application may be served by certified mail addressed to the judgment debtor’s business or residence address on file with ADRE.

b) if the judgment debtor does not hold a current license and if by exercising reasonable diligence the claimant cannot effect personal service or service on the judgment debtor’s statutory agency, the claimant must publish the notice once a week for two consecutive weeks in a newspaper of general circulation in the county in which the judgment debtor was last known to reside.

28. Requires a judgment debtor who wishes to contest payment from the Fund to file a written response with the Commissioner within 35 days after service of the notice on the judgment debtor and to send a copy of the response to the claimant.  Failure to do so constitutes a waiver of objection.

29. Establishes that a judgment debtor who fails to file a written response within 35 calendar days after service or after the first publication of the notice is not entitled to notice of any action taken or proposed to be taken with respect to the claim.

30. Requires the Commissioner to mail an itemized list of deficiencies to the claimant within 30 calendar days if a claimant’s application does not include the documents that are minimally necessary to process the claim, including at least a certified copy of the judgment, legible copies of documents establishing the underlying transaction and the amount of losses suffered, and a statement concerning the amount recovered from or on behalf of the judgment debtor.

31. Requires the claimant to respond with the information required within 60 calendar days or ADRE must close the file, unless the claimant requests an extension in writing.

32. Permits a claimant whose file has been closed to submit a new application.

33. Permits ADRE to use all appropriate means of investigation and disclosure that are available in order to determine if a judgment complies with the requirements and is supported by evidence.

34. Requires the Commissioner to make a final written decision and order on a claim within 90 calendar days after receiving a completed application, except in the following cases:

a) a proration hearing is pending.

b) an application is deficient or fails to comply substantially with the requirements or rules. 

c) the claimant agrees in writing to extend the time for making a decision.

35. Provides that if the Commissioner fails to render a written decision and order on a claim within 90 calendar days, or within an extended period of time as permitted, the claim is considered to be approved.

36. Requires the Commissioner to give notice of a decision and order to the claimant and to any judgment debtor who has filed a timely response as follows:

a) if the Commissioner denies the application, the notice must state that the claimant’s application has been denied and the claimant may pursue the application in court.

b) if the Commissioner approves a payment, the Commissioner must provide the judgment debtor with a copy of the decision and order and must advise the subdivider that the subdivider’s public report will be automatically suspended, pending repayment to the Fund, plus interest of ten percent per year.  This notice must describe the subdivider’s right to appeal, if any, and state that failure by the judgment debtor to file a response in a timely manner constitutes a waiver of the objection.

37. Requires a claimant to complete and execute, as judgment creditor, an assignment of judgment lien and notice of subrogation and assignment of rights to the claimant’s judgment on a form provided by ADRE before receiving payment from the Fund.

Denial of Payment

38. Permits a claimant, whose application for payment is denied, to file, within six months after receiving notice of the denial from ADRE, a verified application in the court in which the original judgment was entered in the claimant’s favor for an order directing payment from the Fund based on the grounds set forth in the claimant’s application to the Commissioner.

39. Requires the claimant to serve a copy of the verified application on the Commissioner and on the judgment debtor in the following manner, and to file a certificate or affidavit of service with the court:

a) service on the Commissioner must be made by certified mail addressed to the Commissioner.

b) service on a judgment debtor must be made in the same manner as notice of a claim and must include notice that an application has been filed with the court for a claim against the Fund that the Commissioner previously denied.

40. Requires the Commissioner to advise the subdivider:

a) that if payment is awarded by the court, the subdivider’s public report will be automatically suspended, pending repayment to the Fund, plus interest of ten percent per year.

b) of the subdivider’s right to appear and defend the action.

c) that the judgment debtor’s failure to timely file a response to the verified application constitutes a waiver of objection.

41. Requires the Commissioner and the judgment debtor to each file a written response within 30 calendar days after being served with the verified application.

42. Requires the court to set the matter for hearing on the petition of the claimant and permits the court to grant a request of the Commissioner for a continuance of up to 30 calendar days.  On a showing of good cause by any party, the court may continue the hearing for a time that the court considers appropriate.

43. Requires the claimant to establish compliance with the requirements pertaining to the bringing of a claim and application for monies from the Fund.

44. Permits the Commissioner to compromise or settle the claim at any time during the court proceedings if the judgment debtor fails to file a written response to the application.  Requires the court, on joint petition of the applicant and the Commissioner, to issue an order directing payment from the Fund.

Miscellaneous

45. Permits the Commissioner to enter an appearance, file an answer, appear at a court hearing, defend an action or take any other action the Commissioner considers appropriate on behalf and in the name of the Fund.

46. Requires the Commissioner to be subrogated to all of the rights of the claimant if the Commissioner has paid from the Fund any sum to the claimant and requires the claimant to assign all the rights, title and interest in the judgment to the Commissioner.

47. Permits the Commissioner to record the assignment of judgment lien and notice of subrogation and assignment of rights.

48. Prohibits the claimant from filing a full or partial satisfaction of judgment without the Commissioner’s prior written consent if the Commissioner is subrogated to a claimant’s rights as judgment creditor.

49. Establishes that the failure of an aggrieved person to comply with any of the rules and regulations pertaining to this article constitutes a waiver of any rights to recovery from the Fund.

50. Defines the following terms:

a) condominium.

b) deposit.

c) judgment.

d) judgment debtor.

e) complaint.

51. Becomes effective on the general effective date.

Amendments Adopted by the CED Committee

· Makes a technical change.

Amendments Adopted by Committee of the Whole

1. Requires an applicant for a public report for a condominium to pay an amount established by the Commissioner, as opposed to $10 per unit.

2. Permits the Fund to pay only for losses arising out of a transaction in which the subdivider failed to complete the condominium project, as opposed to acts.

Senate Action

CED                2/7/07     DPA     8-0-0

APPROP         2/20/07   DP        9-0-2

3rd Read         3/5/07                  27-1-2

Prepared by Senate Research

March 9, 2007

LB/ac