Stay, Not Pay? the Goudelock Decision's Impact on Owners, Hoas, and Foreclosing Lenders

• Publication year: 2020
• Author: Katrina E. Solomatina

Stay, Not Pay? The Goudelock Decision's Impact on Owners, HOAs, and Foreclosing Lenders

Katrina E. Solomatina

Katrina E. Solomatina is a real estate attorney with Hopkins & Carley, a premier Silicon Valley law firm. Katrina advises on various aspects of real estate, including: purchase and sale agreements, commercial leases, compliance with Davis-Stirling Common Interest Development Act, construction agreements, licenses, easements, title issues, project financing and title insurance, due diligence, and land use and permitting. Katrina is a frequent speaker and writer on real estate topics.*

I. INTRODUCTION

Bankrupt property owners may benefit from the recent Ninth Circuit ruling in Goudelock v. Sixty-01 Ass'n of Apartment Owners ("Goudelock"),¹ which shifts post-petition burdens of homeownership to creditors and lienholders in Chapter 13 filings as to post-petition homeowner association ("HOA") assessments. In 1994, Congress reformed the bankruptcy code to make it clear that owners who filed Chapter 7 bankruptcy petitions must pay HOA assessments that come due after the filing of the petition in bankruptcy. This was often referred to as "you stay, you pay." Congress failed, however, to clarify if that obligation extended to owners who file for Chapter 13 bankruptcy protection.

Courts throughout the country have been split on this issue. Some courts have taken the position that the HOA's only remedy is to enforce its lien for post-petition assessments through foreclosure. Other courts have taken the position that in addition to foreclosure, HOAs (or the foreclosing lender) may also bring an action against the owner for unpaid post-petition assessments.

Debtors have been plagued for years by the ability to pursue an owner for unpaid post-petition assessments due and owing after the petition is filed until foreclosure by a lienholder. Many debtors have ended up owing significant post-petition HOA fees on property they do not reside in that remain unforeclosed. Sale or foreclosure can take a significant period of time depending upon where the property is located, and a debtor can do little but wait for a lienholder to complete its foreclosure. Further, debtors under a Chapter 13 bankruptcy who receive a hardship discharge may not be discharged because section 523(a)(16) of the Bankruptcy Code specifically states that post-petition assessments are exempt from a hardship discharge.

The failure to foreclose was addressed in HSBC Bank USA, N.A. v. Zair ("Zair").² In Zair, a couple's home was destroyed by Hurricane Sandy. Falling on hard times, they eventually filed a Chapter 13 bankruptcy petition. The homeowners decided they did not want the property and elected to surrender it. The bank determined it also did not want the property. Over the objection of the lender, the bankruptcy court approved a plan that vested title in the property in the lender. The lender appealed, arguing that approval of the plan does not vest legal title and responsibility to maintain the property in the lienholder. The homeowners argued that without being able to vest title in the property in the lender, debtors are at the mercy of the banks and will be incurring expenses associated with the property until the lienholder completes its foreclosure.

The federal district court in Zair, in reversing the bankruptcy court's decision, held that under 11 USC § 1327(b), "the confirmation of a plan vests all of the property of the estate in the debtor." Checking the box "surrender" does not obligate the debtor to do anything, nor does it allow or enable the creditor to do anything. The unfortunate situation is that "[w]here property is surrendered in a Chapter 13 plan, there is often an 'expectation' that the creditor will promptly enforce its rights ... at times, creditors may fail to exercise these rights, leaving debtors stuck with the collateral and responsible for the maintenance, taxes, and other obligations that come with owning property." The court explained that "the Bank is entitled to the full array of property rights that accompany its position as first-priority lienholder, including and especially the right to foreclose its security interest, or to refrain from doing so." As noted in the Zair opinion, the concept of surrender necessarily contemplates permitting the creditor to exercise its property rights "to do nothing to recover its collateral."³

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Balancing the needs of debtors in their search for a "fresh start" and the rights of creditors to enforce their contracts as permitted under state law has become a little more complicated in the Ninth Circuit. The recent ruling in Goudelock, although offering relief for some property owners, shifts post-petition burdens of homeownership to lienholders. This decision will impact how and when an HOA enforces its liens, causing lenders to reconsider how they price their loans and accelerating their foreclosure and disposal actions.

II. THE GOUDELOCK CASE

A. Bankruptcy Court Decision: Stay and Pay

In 2001, Penny Goudelock purchased a condo unit in Redmond, Washington. Her deed was subject to a declaration of covenants and restrictions, which provided, among...