Real Property Law

Are Condominium Assessments Dischargeable in Chapter 13 Proceedings?

Personal liability for prepetition condominium assessments may be dischargeable in a Chapter 13 proceeding under certain circumstances. In this case note, Manuel Farach explains the rational recently employed by the 9th Circuit Court of Appeals in reaching this result.

Manuel Farach
Chapter 13 Proceedings

Chapter 13 Proceedings

The answer is "yes" (under certain circumstances) according to a recent case from the Ninth Circuit Court of Appeals. Goudelock v. Sixty-01 Ass'n of Apartment Owners, No. 16-35385 (9th Cir. July 10, 2018). Specifically, the Ninth Circuit held that a pre-petition in personam debt (or "claim" in precise bankruptcy terminology) for assessments created when a property owner takes title to property which contractually obligates the owner/debtor to pay assessments is dischargeable when the owner/debtor successfully completes a confirmed Chapter 13 plan. While the statement itself appears complicated, analysis of the facts of Goudelock explains and clarifies the statement.

I. Facts

Penny Goudelock purchased a condominium unit in Redmond, Washington in 2001, and as expected, was given a deed to her unit subject to a previously recorded declaration of covenants and restrictions. And again as expected, the declaration provided that the condominium association could charge unit owners with assessments for the costs of running the association and the condominium and do so in two ways: having unpaid assessments become an enforceable lien against the owner's unit and also creating a personal obligation against the owners to pay the assessments. Goudelock at 3 – 4. It is the second right of the association, i.e., to charge the unit owner personally for unpaid assessments, that was in dispute in this case.

Goudelock stopped paying assessments in 2009 and the association began state court foreclosure proceedings. Goudelock responded by moving out of her unit and filing for Chapter 13 bankruptcy protection in March of 2011. Her confirmed Chapter 13 plan included a provision surrendering the unit, and the state court foreclosure sale was cancelled upon the mortgage lender paying the outstanding lien. The lender completed the state court foreclosure in February 2015 and Goudelock completed her plan obligations in July 2015 and received a discharge under 11 U.S.C. § 1328(a). However, Goudelock was not yet out of the woods as the association had brought suit in April 2015 to determine the dischargeability of Goudelock’s personal obligation to pay the post-petition assessments that accrued between the date when Goudelock filed her Chapter 13 petition (March 2011) and the date when the lender foreclosed on the unit in state court (February 2015). The dischargeability of this particular debt is the narrow issue the Ninth Circuit ruled upon.

II. Analysis

The Ninth Circuit began its analysis by first recognizing the issue of dischargeability of post-petition condominium assessments in Chapter 13 proceedings had never been addressed by a circuit court of appeal. Accordingly, it started by analyzing two circuit courts of appeal decisions that discussed whether post-petition assessments were dischargeable in Chapter 7 proceedings: Matter of Rosteck, 899 F.2d 694 (7th Cir. 1990) (obligation to pay condominium assessments is an unmatured contingent debt that arises prepetition and is dischargeable), and In re Rosenfeld, 23 F.3d 833 (4th Cir. 1994) (obligation to pay cooperative association assessments run with the land and arise each month the debtor is in possession of unit). Applying a plain reading of Bankruptcy Code, the Ninth Circuit adopted the Rosteck approach and held that while the association's in rem lien against the unit was not dischargeable in Chapter 13, the pre-petition in personam obligation was indeed dischargeable.

The Ninth Circuit's analysis was an exercise in straightforward statutory analysis. First, the court reviewed Chapter 13 and recognized that a Chapter 13 discharge, with few exceptions, is a discharge of all "debts." 11 U.S.C. § 1328(a). In other words, a Chapter 13 discharge is a discharge that is broader than given in all other sections of the Bankruptcy Code. Goudelock at 8. Moreover, the definition of "claim" under the Bankruptcy Code is also very broad and encompasses all of a debtor's obligations "no matter how remote or contingent." Goudelock at 9, citing In re SNTL Corp., 571 F.3d 826, 838 (9th Cir. 2009) (quoting In re Jensen, 995 F.2d 925, 929 (9th Cir. 1993)) (emphasis in original). And in the view of the Ninth Circuit, the broadness of the Bankruptcy Code language indicated that the in personam obligation to pay association assessments was a "debt" subject to the super-discharge powers of Chapter 13 – even if the debt was contingent or unmatured.

The court next examined the timing of the obligation, and concluded that Goudelock's obligation to pay assessments was a "debt" created when she became the owner of the unit and not the result of a separate post-petition obligation, i.e., post- petition obligations being non-dischargeable. Thus, the debt arose pre-petition and was dischargeable unless a separate section of the Code provided the debt could not be discharged. Looking at Bankruptcy Code subsections 1328(a)(1) – (4) and noting that they enumerate the only exceptions to the broad discharge of debts under Section 1328(a), the Ninth Circuit held the debt was dischargeable because Congress did not specifically list condominium assessments as a non-dischargeable debt in Chapter 13 cases like it did for Chapter 7 cases in Bankruptcy Code 523(a)(16). Goudeck at 11. The Ninth Circuit found a specific exception to the discharge of condominium assessments in Chapter 7 proceeding, and found the exclusion of the exception in Chapter 13 to be purposeful, brushing aside arguments the exclusion was an oversight by Congress.

Likewise, the Ninth Circuit found the Takings Clause of the Constitution was not implicated because the association retained its in rem right to foreclose its lien, and that there were no "equitable" concerns (i.e., possible "free rent" by continuing to live in a unit post-petition without paying assessments) to its decision because any such equitable concerns could not override the express statutory language chosen by Congress.

III. Take-Aways

There are several items practitioners should focus on when confronted with a case similar to Goudelock. First, practitioners should examine under which Chapter of the Bankruptcy Code the debtor filed their petition for relief. If under Chapter 13, practitioners should keep in mind that it is difficult to confirm a plan under Chapter 13 and that conversion to Chapter 7 is often the end result of a Chapter 13 petition filing.

Second and despite the Ninth Circuit's dismissal of equitable concerns, one has to wonder whether a trial court bankruptcy judge would be more amenable to some form of adequate protection or required payment for residing in the unit during the pendency of a bankruptcy case. In that vein, keep in mind that Ms. Goudelock moved out of her unit approximately at the same time that she filed her Chapter 13 proceedings, meaning she was not living "rent free" for a significant period of time. We cannot speculate what the Ninth Circuit may have done had Goudelock attempted to discharge pre-petition obligations while living in the unit for several years, but litigants on the other side of that equation can argue that any such reading of the Goudelock opinion is dicta and cannot be relied upon.

Finally, practitioners may want to focus on the in rem remedies an association may have and concentrate their efforts in that arena. There remain a good deal of questions surrounding different scenarios arising out of the facts of Goudelock, but the in rem remedy continues to be a powerful and forceful way for associations to recover assessments.

IV. Conclusion

Goudelock provides an answer we have not had before that pre-petition condominium assessments are dischargeable in Chapter 13 proceedings, but leaves some crucial questions unanswered. This being the first circuit court case on the issue, chances are the other circuits may weigh in on the issue. Practitioners should be aware of Goudelock and its possible application to every Chapter 13 case where the debtor owns a condominium unit.

Manuel Farach is a Member in the Fort Lauderdale office of McGlinchey Stafford, PLLC, and serves as the Chair of the Section’s Real Property Litigation and Alternative Dispute Resolution Committee. A more detailed biography of Mr. Farach can be found on his LinkedIn page at “Manuel Farach.”

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