Category Archives: Homeowner’s Association Special Assessments and Bankruptcy

Chapter 13 Bankruptcy and Whether HOA Dues are Discharged Post-Petiton

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The Ninth Circuit Bankruptcy Appellate Panel issued an unpublished opinion that analyzes the Bankruptcy Code through history as it applies to homeowner’s association dues. See Batali v. Mira Owners Association; BAP No. WW-14-1557-KiFJu. We have a number of articles about HOA dues and this article does not discuss pre-petition homeowners association dues and their dischargeability. But please note, bankruptcy attorneys need also to be aware of whether or not the HOA has recorded a lien for the pre-filing unpaid dues.

In the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act the treatment of HOA dues was forever changed in Homeowner Association’s favor. There is a lot of confusion with homeowners associations and their non-bankruptcy attorneys regarding this issue. Many please say if you stay you pay. If you do not stay you do not pay.

1994 Changes to Bankruptcy Code

The push to not be able to discharge homeowner’s association dues post-petition began really in 1994. In 1994 Congress added Section 523(a)(16) to the Code. In 1994 Section 523(a)(16) excepted from discharge under §§ 727, 1141, 1228(a), 1228(b) or 1328(b):

A fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a dwelling unit that has condominium ownership or in a share of a cooperative housing corporation, but only if such fee or assessment is payable for a period during which — (A) the debtor physically occupied a dwelling unit in the condominium or cooperative project; or (B) the debtor rented the dwelling unit to a tenant and received payments from the tenant for such period, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.

2005 BAPCPA Changes to Section 523(a)(16)

Section 523(a)(16) was not changed again until the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. Section 523(a)(16) was modified to include homeowners’ associations and delete the language that required debtors to actually physically reside in or collect rents rom the units.

There are a number of cases that discuss the post-petition treatment of HOA dues and whether they are discharged or not. A court in 1997 discussed whether HOA dues were a debt, and if so, did the Chapter 13 Plan provide for the debt? In that case since the time-share was surrendered through the plan the court reasoned the HOA dues were provided for and therefore discharged. The post-petition dues are a claim as defined by Section 101(5) of the Code. The Ninth Circuit Bankruptcy Appellate Panel addressed this issue in Foster v. Double R Ranch Ass’n (In re Foster), 435 B.R. 650 (9th Cir. BAP 2010). The 9th Circuit BAP concluded that that the “ongoing ownership of property with a running covenant creates a post-petition claim even if the debtor does not use the property.”

The issue is whether post-petition homeowner’s associations are discharged upon completion of a Chapter 13 Plan?

To begin the discussion the binding effect of confirmation of a Chapter 13 Plan pursuant to Section 1327 needs to be addressed. Section 1327(a) provides: The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan. While this is true the language of the plan needs to be reviewed. The main problem here is that model Chapter 13 Plans are difference from jurisdiction to jurisdiction and what Chapter 13 Trustee will object to is different from jurisdiction to jurisdiction. Also, a debtor can add language to a Chapter 13 Plan that is not part of a model Chapter 13 Plan. In this case, Batali v. Mira Owners Association, Batali’s Chapter 13 Plan made no mention of discharging the post-petition dues owed to Mira Owners Association. So how can the binding effect of the Chapter 13 Plan discharge the dues owed if no mention of the dues is made? The 9th Cir. BAP concluded the Chapter 13 Plan cannot discharge post-petition dues if they are not mentioned in the Chapter 13 Plan pursuant to Section 1327. Also in the Batali case Mira Owner’s Association requested relief from stay to pursue Batali for the post-petition dues owed and was granted that relief without any opposition from Batali.
Going back to the In re Foster case decided by the 9th Cir. BAP the panel looked at Washington State Law and concluded that are recorded condominium declaration, like that of Mira Owner’s Association, runs with the land and is a property right that cannot be extinguished in a bankruptcy. As long as the debtor continues to have an interest in the property at issue, a debtor cannot discharge the post-petition assessments that arise from the covenant that runs with the property.

We are therefore back to “you stay you pay” argument many bankruptcy attorneys will recite. The argument goes that the debtor provided in the Chapter 13 Plan that they are surrendering the property pursuant to the terms of the confirmed Chapter 13 Plan. The Ninth Circuit Appellate Panel again refers to the reasoning in the Foster case they decided previously. A debtor cannot extinguish a homeowners association’s recorded declaration and may therefore not discharge the debtor’s post-petition assessments even if a debtor does not reside in the property. The 9th Cir. BAP does not believe Section 523(a)(16) provides generally that post-petition HOA dues are claims or debts that can be discharged pursuant to Section 1328(a) of the Code.

The Ninth Circuit Bankruptcy Appellate Panel holds that Section 523(a)(16) is not applicable to discharge under Section 1328(a) and that state law governs the substance of claims. So if the state you are in is different than Washington State Law or more specifically that the HOA declaration is not a covenant that runs with the land then the decision in this case may have been different. The next issue is about what effect a debtor providing a piece of property is to be surrendered in a Chapter 13 Plan. Just because the Chapter 13 Plan says a property is to be surrendered that fact does not actually transfer the property out of the debtor’s name. The debtor still maintains their legal, equitable and possessory interest in the property until foreclosure or some other form of transfer of title out of the debtor’s name. Just giving up possession does not transfer title. Notice of intent to surrender only gives a creditor notice that a debtor will make the collateral available to the secured creditor to use their state law rights to take back the collateral securing the debt. Under most state laws the transfer of real property can only take place by deed.

In the Ninth Circuit and in the state of Washington, based upon Washington state law, homeowner’s association dues that come due after a Chapter 13 Bankruptcy case is filed and when the property titled is transferred out of the debtor’s name are not discharged. Like many things in law this analysis and conclusion may not be an absolute for other debtors in other states and with different Chapter 13 Plan language.

HOA Special Assessments and Bankruptcy

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The issue of how homeowner’s association dues are treated when the homeowner files bankruptcy is for the most part settled law.  HOA dues due pre-filing are dischargeable.  HOA dues that are due post-filing are not dischargeable.  Section 523(a)(16) makes sure of this in a Chapter 7 case and provisions of the bankruptcy code in a Chapter 13 do the same.  If you stay you must pay.  The obligation to pay post-petitions is a covenant that runs with the land.

What about a special assessment of $20,000 for painting the complex or repairing a fence surrounding the association?  Was it assessed pre-petition as a lump sum just like the dischargeable HOA dues were assessed pre-filing?  Was there a lien recorded to secure the special assessment?  Was an installment agreement entered into to pay the $20,000 over year?  Some of the installment payments were due pre-filing and some of the installment payments are due post-filing.

If the special assessment was assessed pre-filing and in a lump sum without a lien being recorded it should be dischargeable just like dischargeable HOA dues that were unpaid before filing bankruptcy.  The issue of whether post-petition HOA dues are dischargeable has been litigated and lost.  The post-petition dues must be paid.  There are issues whether the dues are dischargeable if you are not occupying the home and not collecting rent though.

The biggest issue with attempting to discharge a special assessment is most likely a timing issue.  If you attempt to discharge a special assessment in a Chapter 7 bankruptcy case and the special assessment was assessed a couple months before filing the Chapter 7 there are issues under section 523 and the HOA could file an adversary complaint alleging fraud and other causes of action.  In a Chapter 13 case a HOA could argue that the covenant to pay runs with the land and to stay you need to pay the special assessment just like you will need to pay the post-petition HOA dues in a Chapter 13 case.

A larger concern is how your neighbors will treat you.  If you live in a homeowner’s association and discharge some of your unpaid dues word will get around.  If you also discharge a $20,000 special assessment and continue to live there your neighbors will most likely hate you forever.  They will be stuck with paying for your portion of the repaired fence of repainting of the association while you will not.  The long-term effect of discharging the special assessment may far outweigh the financial benefit in the short-term.  Like all legal matters, it depends upon the circumstances.