Tuesday, May 3, 2016

Law Unsettled on Liability for Post-Chapter 13 Association Assessments

By:  Janet L. Bozeman

If a condominium unit owner files for bankruptcy protection under Chapter 13 of the Bankruptcy Code and continues to own the unit, should the owner be responsible for future assessments by the condominium association?  Most people would say, "Yes."  After all, why should the unit owner reap the benefit of the association's maintenance and insurance and, in some cases, the provision of services and utilities to the unit for free?  Unfortunately, that is the result in some jurisdictions where the bankruptcy courts have relieved the unit owner of assessment responsibility.

State condominium law generally creates two types of liability for association assessments – the personal liability of the unit owner and the in rem liability (property liability) of the unit.  The unit's in rem liability means that the association has a lien against the unit for unpaid assessments.  The owner's personal liability means that the association can sue the owner to obtain a money judgment.  Once a money judgment is obtained, the association may pursue any of the owner's assets to satisfy the judgment, including garnishing the owner's bank accounts and wages.

The bankruptcy courts are in agreement that a Chapter 13 bankruptcy does not affect the association's assessment lien against the unit.  However, there is a split in authority among bankruptcy courts as to whether a unit owner remains personally liable for assessments by a condominium or homeowners association after the owner completes a Chapter 13 bankruptcy plan.  A Chapter 13 bankruptcy allows the owner/debtor to create a plan for paying all or a portion of his or her pre-bankruptcy debts.  The plan must be approved by the bankruptcy court and may include discharging or relieving the debtor of responsibility for some pre-bankruptcy debts.

The bankruptcy courts have expressed three schools of thought on the bankruptcy's effect on the debtor's personal liability, with the outcome generally hinging on whether the document creating the assessment obligation (the condominium declaration, CC&Rs or similar document) is deemed a pre-bankruptcy contract or a covenant running with the land.  Bankruptcy courts may discharge a debtor's contract obligation.  However, as the U.S. Supreme Court noted, additional difficulties arise "when the bankruptcy power is used to defeat traditional property interests" because the "bankruptcy power is subject to the Fifth Amendment's prohibition against taking private property without compensation."  U.S. v. Security Indus. Bank, 459 U.S. 70, 103 S. Ct. 407 (1982).  The first two schools of thought take the opposite positions of dischargeable and nondischargeable, but some courts apply a third, compromise position of discharging liability for post-bankruptcy assessments unless the debtor continues to reside in or lease the unit.

11 U.S.C. § 1328(a)(2) provides that, after the debtor completes all payments required under the confirmed Chapter 13 plan, the court shall grant the debtor a discharge of all debts addressed by the plan except for certain specified debts.  Among the debts that may not be discharged are those described in eight specified subsections of 11 U.S.C. § 523(a).  At first glance, one might think that Section 523(a) protects the association's right to payment because it specifically mentions association assessments coming due after the discharge order.  However, the first sentence of Section 523(a) indicates that the provisions relate only to discharges under other Bankruptcy Code sections. 

Some courts have found the Section 523(a) association provision, along with its legislative history, indicative of Congress' general intent to protect associations and view the failure to include specific protection under Section 1328(a) as merely an oversight.  Other courts find the omission a glaring indication that Congress did not intend to protect associations in these cases.  Was Congress that purposeful in its drafting or is this a product of sloppy drafting?

A review of cases from the 11th federal circuit illustrates the two diametrically opposed outcomes that may result.  In In re:  Ramirez, No. 08-29681-JKO, 2016 Bankr. LEXIS 714 (S.D. Fla. Mar. 5, 2016), after the bankruptcy case was closed, the debtor's condominium association demanded payment for and eventually sued to collect post-bankruptcy assessments.  The Bankruptcy Court for the Southern District of Florida found the statutory language clear, holding that since association assessments were not specifically made nondischargeable by the statute, the owner was discharged from personal liability for post-bankruptcy assessments.  Thus, the association could not sue the debtors for the post-bankruptcy delinquency, but the association could pursue its assessment lien against the unit.

Just a few days earlier, the Bankruptcy Court for the Middle District of Florida reached the opposite conclusion in In re:  Montalvo, 546 B.R. 880, 2016 Bankr. LEXIS 582 (M.D. Fla. Feb. 25, 2016).  The court determined that the assessment obligation was a covenant running with the land based on Florida law, not just a contractual obligation between the owner and the association.  While the discharge did extinguish the owner's personal liability for pre-bankruptcy assessments, the court held that the owner remained personally liable for post-bankruptcy assessments for so long as the owner owned the unit. 

The Bankruptcy Court for the Middle District of Florida had previously noted that the assessment covenant was an integral part of the condominium unit and had been an encumbrance on the unit's title since before the debtor's ownership.  Thus, to release the debtor from the assessment covenant would be to take a property interest away from the association and to give a property interest to the debtor which it never had in the first place.  This, the court found, would violate the Fifth Amendment's prohibition against taking private property without compensation.  See In re:  Rivera, 256 B.R. 828 (M.D. Fla. 2000).

The Bankruptcy Court for the Northern District of Georgia similarly held that the debtor remained personally liable for the post-bankruptcy assessments since they arose from a covenant running with the land in In re:  Hall, 454 B.R. 230 (N.D. Ga. 2011).  The court expressly rejected the line of cases holding that post-bankruptcy assessments arise from pre-bankruptcy contractual obligations, finding that such treatment would be a serious conflict with Georgia law.  The "obligation to pay assessments follows the property, not the individual homeowner," and the owner's personal obligation for assessments is based on his ownership interest which continued after the bankruptcy.

While the court recognized that the declaration created a pre-bankruptcy relationship between the debtor and the association, it determined that the basis for the debtor's liability to the association was the debtor's default in paying post-bankruptcy assessments.  Since the association had no right to assessments that were not yet due, the court held that post-bankruptcy assessments could not constitute pre-bankruptcy debts or claims subject to discharge.  Further, the assessment obligation cannot be quantified like contract claims because the obligation continues for an indefinite period for so long as the debtor owns the unit.  The court opined that, "The Debtor's fresh start entitles her to relief under her confirmed plan [dealing with pre-bankruptcy debts], but that fresh start does not and should not encourage further defaults."

While the courts discharging the owner's personal liability for association assessments indicate that the association still has an available remedy – that is, to pursue its lien on the unit, this remedy may be of little help in cases where the association's lien is subordinate to the mortgage.  It often does little more than force the other association members to cover the debts of the defaulting owner while the owner continues to reap the benefits provided by the association.  This is especially unfair where the association is obligated to provide a myriad of expensive services to the owner's unit, such as maintenance, insurance and utilities.  It is also particularly troubling that associations are receiving such contrasting treatment by different courts, who purport to be applying the same law. 

So where does this leave associations in jurisdictions that have discharged the owner's post-bankruptcy liability?  The association can get involved in the bankruptcy case before the plan is confirmed and petition the court for the plan to specifically require the debtor to pay all post-bankruptcy petition assessments.  If this is not successful, then the association may seek the court's permission to foreclose on its assessment lien while the bankruptcy case is still pending.  Alternatively, the association could pursue foreclosure of the assessment lien after the bankruptcy case is closed.

The disparate treatment among the bankruptcy courts suggests the issue is surely ripe for appellate review for resolve the conflict.  Or, perhaps Congress will amend the statute to make its intentions clear.

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