Article Courtesy of The Daily
Business Review
By Zach Shelomith
Published
July 22, 2019
Last year, over 750,000 bankruptcy cases were filed
in the United States. Therefore, it is only natural that a significant
number of owners of properties in community associations are filing
bankruptcy. When that happens, the collision of community association
law and bankruptcy law can create unpleasant pitfalls for associations.
According to recent statistics, there are 342,000 community associations
(including homeowners’ associations and condominium associations) in the
United States. Approximately 69 million Americans -- 21% of the
United States population -- live in community associations. The state
with the most community associations is Florida, with over 47,900
associations. Last year, over 750,000 bankruptcy cases were filed in the
United States. Therefore, it is only natural that a significant number
of owners of properties in community associations are filing bankruptcy.
It is important for these associations to have counsel that recognize
these dangers, who is well-versed in both community association law and
bankruptcy law. Associations enjoy certain privileges under the U.S.
Bankruptcy Code, but there are several instances where their rights can
be waived if they do not participate in the bankruptcy case.
When an owner files bankruptcy, notice must be provided to the
association. Once that notice is received, it is incumbent upon the
association to immediately send the notice to its attorney. Bankruptcy
involves a quagmire of deadlines, and parties can find out that they
waived their rights by not acting in a timely fashion. How an
association is treated in a bankruptcy filed by an owner is largely
dependent on what type of bankruptcy was filed. The most common types of
bankruptcy cases filed by individuals are Chapter 7 (liquidation) and
Chapter 13 (reorganization).
Chapter 7
Chapter 7 is usually the more favorable type of bankruptcy for an
association. Both Chapter 718 (governing condominium associations) and
Chapter 720 (governing homeowners’ associations) of the Florida Statutes
provide associations with liens on the owner’s property to secure the
payment of assessments. Generally, these liens relate back to the date
on which the original declaration of the community was recorded (with
exceptions for first mortgages of record).
In Chapter 7, liens generally survive the bankruptcy. While the in
personam liability associated with the pre-bankruptcy assessments would
be included in a Chapter 7 discharge, the Bankruptcy Code provides that
post-bankruptcy assessments are nondischargeable. Furthermore,
associations can foreclose on those liens that survive a Chapter 7
bankruptcy, once the bankruptcy automatic stay is terminated.
Chapter 13
Chapter 13 presents additional challenges for an association. With
regard to pre-bankruptcy assessments, an owner may be able to “strip”
the pre-bankruptcy lien on assessments, if the owner can prove that the
value of the property is less than the amount owed to the first mortgage
lender. Otherwise, an owner will likely be able to repay those
pre-bankruptcy assessments over a period of time up to five years. An
owner that is current in pre-bankruptcy assessments may opt to continue
paying ongoing assessments “outside” of the Chapter 13 plan.
Upon receiving notice of the owner’s intentions in a Chapter 13
bankruptcy, an association must act quickly to respond. If an owner
intends to “strip” the pre-bankruptcy lien, an association has a
specific period of time to respond and contest the owner’s valuation or
the determination of the amount owed to the first mortgage lender.
Furthermore, when an owner expresses an intention to repay
pre-bankruptcy assessments over a period of time, the association must
ensure that the proposed amounts are correct, or else find itself stuck
with the amount as calculated by the owner, even if incorrect.
One of the special provisions favorable to associations is that even if
the association’s pre-bankruptcy lien is “stripped” in a Chapter 13
bankruptcy, it does not impact a subsequent owner’s in personam
liability for unpaid assessments. Subsequent owners are jointly and
severally liable with current owners for unpaid assessments. While the
current owner’s in personam liability may be discharged and lien rights
may be “stripped,” a subsequent owner will still be liable for those
unpaid assessments. And with that liability, when there is a subsequent
owner, the association can then foreclose on that obligation.
Similarly, with respect to post-bankruptcy assessments in Chapter 13, if
an association disagrees with the owner’s calculation of the correct
monthly amount, depending on the circumstances, the association could be
bound by the owner’s calculation, even if it is incorrect, by sitting on
its rights. One interpretation of the various bankruptcy rules is that
if the association is being paid inside of the owner’s Chapter 13 plan,
the association must file a notice of payment change with the Bankruptcy
Court every time there is a change in the monthly assessment amount,
within 21 days of the payment change, or else it will have waived the
right to seek that increased amount.
Furthermore, unlike Chapter 7, in Chapter 13, the in personam liability
associated with post-bankruptcy assessments, which arose prior to the
completion of the Chapter 13 plan are dischargeable. However, if unpaid,
the association would still maintain its lien on the owner’s property.
Associations must nevertheless be careful when the owner files a
pleading in the Chapter 13 case deeming the owner current, as the
association will be bound if properly served and if the amount of the
post-bankruptcy assessments are incorrect.
Finally, associations may also have the right to charge the owner for
post-bankruptcy interest, legal fees and costs, in the event that there
is equity in the property. An owner who decides to be particularly
litigious during the bankruptcy proceeding may be liable for the
association’s attorney fees under the Bankruptcy Code.
These are just some of the pitfalls involved for associations when an
owner files bankruptcy. The most important points are to not ignore an
owner’s bankruptcy notices and make sure to act quickly to avoid the
waiver of any rights that an association may have.
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