Discharge of Condominium and Homeowners' Assessments in Bankruptcy.

Author:Johnson, Jason W.
 
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Since the early 1990s, the federal courts have struggled with whether, and to what degree, a debtor in bankruptcy who receives a discharge is free from liability for post-petition condominium and homeowners' association assessments. The issue is important to condominium associations and homeowner's associations, as well as debtors in bankruptcy. Because the association's assessment lien is often junior to mortgages, foreclosure of the lien may be useless. Therefore, an association might bring a lawsuit seeking a personal money judgment against the owner, hoping the owner's other assets will satisfy the assessment. The debtor's ability to discharge the assessments is, therefore, of paramount importance. While an owner who has been stripped of assets in bankruptcy is not an ideal defendant, associations have sometimes sought to hold discharged debtors liable for delinquent assessments. The question of whether post-petition assessments are discharged takes on added importance because a "discharge injunction" precludes enforcement of a discharged debt and is enforceable by sanctions. (1)

As a result, a few reported bankruptcy cases deal with the discharged owner's liability for assessments. Unfortunately, those cases have not been consistent. Despite two congressional amendments to the Bankruptcy Code that were intended to clarify the law, the dispute has not been fully resolved.

The Discharge

One of the principal purposes of the Bankruptcy Code is to provide a means by which an honest but unfortunate debtor may obtain a "fresh start," allowing the debtor to be rid of many debts that cannot be repaid. The discharge is subject to certain exceptions enumerated in [section]523 of the Bankruptcy Code, many of which relate to whether the debtor is indeed honest and unfortunate, or rather a scoundrel unworthy of a fresh start. Blackletter bankruptcy law holds that the debtor is discharged of liability only for pre-petition debts, and not for post-petition debts. (2) Statutorily, that line is drawn most clearly in Ch. 7 (involving a liquidation of the debtor's nonexempt assets in exchange for receiving an immediate discharge), (3) and less so in Chs. 11, 12, and 13 (where the trade-off for receiving the discharge is that the debtor must pay at least a portion of the debts over time pursuant to an approved plan). (4) Mostly, however, the ambiguity in the case of condominium and homeowners' assessments concerns whether the assessments arise pre-petition or post-petition. Unfortunately, the courts have had divergent views.

Congress Takes on the Caselaw

In In re Rosteck, 899 F.2d 694 (7th Cir. 1990), the Seventh Circuit held that the assessment arose under a contract the debtor entered into prior to the bankruptcy and so, even post-petition assessments were discharged. (5) After noting that the terms "debt" and "claim" were broadly defined by the Bankruptcy Code to include all legal obligations of the debtor, no matter how remote or contingent, the Seventh Circuit concluded that the assessments that came due after the bankruptcy filing were actually a pre-petition debt:

Under those broad definitions of claim and debt, the Rostecks had a debt for future condominium assessments when they filed their bankruptcy petition. It is true that the Rostecks did not actually owe money to Old Willow.... But the condominium declaration is a contract ... and by entering that contract the Rostecks agreed to pay Old Willow any assessments it might levy. Whether and how much the Rostecks would have to pay in the future were uncertain, depending upon, among other things, whether the Rostecks continued to own the condominium and whether Old Willow actually levied assessments. But, as we have seen, contingent, unmatured, unliquidated, and unfixed debts are still debts. (6)

Therefore, the court held that the post-petition assessments were actually pre-petition debts subject to discharge under Bankruptcy Code [section]727(b).

However, Rosteck was not the last word. In River Place E. Hous. Corp. v. Rosenfeld (In re Rosenfeld), 23 F.3d 833 (4th Cir. 1994), the Fourth Circuit rejected the Rosteck analysis:

The [d]eclaration expressly states that it is a covenant running with the land and binds and inures to the benefit of all present and future owners.... Rosenfeld never signed the [declaration itself, but his proprietary lease expressly provides that it is subject to the [declaration.

Under the [declaration, the obligation to pay assessments is a function of owning the land with which the covenant runs. Thus, Rosenfeld's obligation to pay the assessments arose from his continued postpetition ownership of the property and not from a pre-petition contractual obligation.... River Place's right to payment for post-petition assessments did not arise pre-petition and was not extinguished by Rosenfeld's bankruptcy discharge. (7)

The Fourth Circuit was not alone in its dissatisfaction with Rosteck. In 1994, as a result of Rosteck, Congress enacted 11 U.S.C. [section]523(a)(16). The purpose of [section]523(a)(16) was to roll back Rosteck by excepting certain post-petition assessments from discharge. In 2005, Congress broadened the exception to make clear that assessments by homeowners' associations were included in the exception and to address other gaps that courts had identified in the language. The revised language provides in pertinent part as follows:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--

(16) for 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 unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot, 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.... (8)

Even so, gaps remain. Although [section]523(a)(16) currently extends to a "homeowners association," it is not clear how assessments by nonresidential property owner associations would be treated. Also, [section]523(a)(16) applies only to individuals, so it is not clear how assessments against nonindividual debtors in Ch. 11 would be treated. (9) However, as the law now stands, the Rosteck and Rosenfeld decisions have been supplanted by [section]523(a)(16), at least for individual debtors in Chs. 7, 11, and 12. (10) In those instances, it does not matter whether the post-petition assessments arise post-petition or under a pre-petition contract because [section]523(a)(16) makes no distinction so long as the assessment comes "due or payable" after the order for relief. (11) In Ch. 13, however, it may be a different story. Because Congress enacted [section]523(a)(16) to address the split of authority growing out of Rosteck, one might think that one should fall back on Rosteck and Rosenfeld to resolve disputes where [section]523(a)(16) does not apply. However, not all courts have agreed, and Ch. 13 has been their battleground.

Discharge of Post-Petition Assessments in Ch. 13

Chapter 13 is a provision of the Bankruptcy Code that allows an individual debtor to remain in possession of his or her property, continue to generate income for the estate, and to propose a plan that alters the payment terms of the debtor's debts in an effort to work out his or her financial difficulties. Upon completion of the payments under the plan, the debtor is entitled to a discharge. (12)

Congress enacted Ch. 13 in the hope that it would result in greater payment to creditors than often results from a forced sale of the debtor's assets in Ch. 7. In order to encourage debtors to opt for Ch. 13 instead of Ch. 7, Congress offered a number of advantages to debtors under Ch. 13, one of which was an expanded "super-discharge." Certain obligations that were excepted from the discharge under Ch. 7 might be dischargeable under Ch. 13. (13)

Pursuant to [section]727(b) of the Bankruptcy Code, all pre-petition debts are discharged in Ch. 7 unless one of the exceptions to discharge listed in [section]523(a) applies. The exception for post-petition assessments is among those listed in [section]523(a). The discharge exceptions listed in [section]523(a) are also applicable in Ch. 13 to some degree, as is evident from the prefatory language of [section]523(a), which references [section]1328(b), a Ch. 13 discharge provision that applies only if the debtor fails to complete the plan payments. However, [section]523(a) makes no reference to [section]1328(a), which applies if the debtor does complete the plan payments. Rather, [section]1328(a) itself selectively incorporates a number of [section]523(a) exceptions to the discharge, but omits a handful of other [section]523(a) exceptions, which are considered part of the debtor's...

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