New Jersey Highland Lakes v. Franzino (2006): Association Dues and Covenant Enforcement

Quick Answer

In Highland Lakes Country Club and Community Association v. Franzino, decided March 6, 2006, the New Jersey Supreme Court held that a buyer in a private homeowners' community was liable for the prior owners' unpaid association dues because the bylaws withheld membership privileges until "all" arrears were paid. At the same time, the Court held that the association's lien for the earlier arrears was extinguished by a mortgage foreclosure in which the association had been named a party. The debt survived. The lien did not.

The case involved a non-condominium community governed by deed covenants and bylaws, not the Condominium Act, so it does not by itself answer questions about condominium lien statutes.

At a Glance

The Dispute

The Highland Lakes bylaws said that "[m]embership privileges in the Club will not be granted on resale or other transfer of ownership of property until all Club dues, assessments and initiation fees in arrears are paid in full" (Article III, Section VIII). Another section said new owners' membership began at conveyance and that delay in paperwork did not relieve them of paying dues "from the time the same shall have become due" (Section IX). A third section gave the club a lien that would be effective on recording a claim of lien (Section XI).

The prior owners fell into arrears, and the association obtained a docketed judgment against them. A mortgage lender foreclosed in 1990 and named the association as a defendant. The association lost its priority fight, and the lender bought the property at the 1992 sheriff's sale for $100. The lender later sold to Robert Franzino in March 1994. He said he knew of no recorded lien. He paid his own initiation fee and first-year dues, which the association applied to the earlier arrears. He then refused to pay arrears, including his own later assessments.

The association sued for $6,750.14 plus interest and costs. The trial court granted it summary judgment, covering arrears from Franzino's own period and from the earlier owners. The Appellate Division reversed, finding the covenants ambiguous and no recorded lien. The Supreme Court granted review.

What the Court Held

The lien did not survive foreclosure

The Court held that any lien arising from the covenants and bylaws for the earlier owners' arrears "was extinguished by operation of the foreclosure judgment and sale," because the association was a party to the foreclosure. A foreclosure transfers lien claims from the property to the sale proceeds. The Court rejected the argument that covenant-based liens survive foreclosure.

The debt survived

But the Court added that extinguishing the lien "does not affect the validity of the underlying debt." The question then became whether Franzino had taken on that debt.

The bylaws were not ambiguous

The majority read Section VIII to mean that on a resale, the only arrears that can exist are those from prior owners, so the section imposed the obligation to satisfy them on the new owner. It read Section IX as a gap-filler for the new owner's own arrears. It noted that "arrears" means money "owing... that should have been paid in the past."

No recorded lien was needed

Franzino argued that Section XI invited buyers to search for a recorded lien. The Court said that "fuses the procedural step of recording a lien with the substantive right to collect on an underlying debt." Nothing in the bylaws made recording a condition of the debt's validity.

Duty to inquire

The Court said the master deed and bylaws put Franzino on notice that he had to inquire about amounts owed. He could have walked away, had the seller pay at closing, or escrowed funds. The Court noted that identifying "arrears" in Section VIII as including those of predecessors in title "would improve the specificity of notice" and that the information could have been had by a phone call to the association.

The dissent

A dissenting justice would have agreed with the Appellate Division that the bylaws were ambiguous and construed them against the association as drafter.

Why It Matters for Associations

• Foreclosure can wipe out the lien. Our reading: after Franzino, a covenant-based lien for earlier arrears should not be assumed to survive a foreclosure in which the association is a named party. Ask counsel what remedies remain, such as claims for surplus proceeds or against the prior owner.
• The debt may remain. Whether a buyer can be made to pay it depends on the clarity of the recorded documents. Here the conditioning of membership privileges on payment of "all" arrears carried the day.
• Drafting matters. The Court itself said the bylaws could be more specific. Associations may want counsel to review whether their documents say plainly that arrears follow the property or the buyer.
• Not a condominium case. The opinion discusses an association created by covenants without statutory origin. Condominium assessment liens and their priority are governed by the Condominium Act. See our related page on N.J.S.A. 46:8B-21 and do not apply Franzino to a condominium without counsel.
• Prospective buyers. The practical message the Court gave buyers is to ask the association what is owed before closing.

Related New Jersey Law

• N.J.S.A. 46:8B-21: assessment liens and priority
• N.J.S.A. 45:22A-43: association organization and membership
• Siller v. Hartz Mountain Associates (1983)
• New Jersey HOA laws and regulations

Board Checklist

• Have counsel review whether your bylaws or declaration say clearly who owes arrears when a lot is sold.
• Track every foreclosure naming the association and ask counsel what to file to protect the association's position.
• Keep a clear ledger by lot so that arrears can be stated accurately at resale.
• Give a prompt, written payoff statement when a buyer, title agent or seller asks.
• Decide with counsel whether to record liens and how that fits the bylaws.
• Apply payments consistently and record how a buyer's first payment was applied.
• Do not treat this case as controlling for a condominium until counsel confirms.

Frequently Asked Questions

Can a buyer be liable for a prior owner's unpaid dues?

In Franzino, yes, because the bylaws conditioned membership privileges on payment of all arrears and the Court found that language unambiguous. Other documents may read differently.

Does foreclosure erase an association's lien?

The Court held the lien at issue was extinguished by the foreclosure judgment and sale because the association was a party. It said the underlying debt was not affected.

Did the association have to record a lien first?

Not to preserve the underlying debt. The Court said failure to record a lien could not be turned into a failure of notice.

What should a buyer do before closing?

The Court pointed to options such as asking the association for the amount owed, requiring payment at closing, or escrowing funds.

Does this decision cover condominiums?

The community here was a covenant-based association, not a condominium. Condominium liens are addressed by statute. Ask counsel before applying it.

Was the decision unanimous?

No. The opinion includes a dissent that would have found the bylaws ambiguous.

Where This Comes From

We read the full text of the Supreme Court of New Jersey's majority and dissenting opinions in Highland Lakes Country Club and Community Association v. Franzino (decided March 6, 2006), as published at FindLaw's case-law database. The reporter citation 186 N.J. 99, 892 A.2d 646 comes from search results and later court citations, not from the page we read. We give no pinpoint cites and did not run a citator check. Secondary summaries we saw disagreed with each other and with the opinion on the foreclosure point, so this page relies only on the opinion.

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Legal disclaimer: This article is general information, not legal advice. Laws change and associations differ. Confirm the current statute text and how it applies to your governing documents with a licensed New Jersey attorney before acting.