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Friday, February 15, 2013

Homeowners association dues still owed after filing a bankruptcy

Much to some bankruptcy filer's chagrin there is some residual liability for association dues that accrue after the bankruptcy case has been filed and/or discharged even for properties that the debtor is surrendering to the mortgage company in their bankruptcy case.  

Under 11 USC 523(a)(16) of the United States Bankruptcy Code there is an exception to discharge for any fee or assessment that comes due and payable after the case is filed.  Any that were due prior to the case being filed are discharged but any that rack up later the debtor is responsible for as long as he or she remains on titleIn Minnesota that means as long as it takes for the mortgage holders to foreclose and for the redemption period to expire which generally speaking can take up to 8 months from the date they start it.  Some mortgage companies though are notorious in neglecting to foreclose for long periods of time....years even.  I have one client who quit making payments on his townhome and moved out in 2009.  He filed bankruptcy in May of 2011.  Now his townhome association is asking the bankruptcy court to let them out of the bankruptcy so they can sue him for the accrued fees and assessments.  I underscored assessments above for a reason.  I had another client in an unrelated case but with similar circumstances.   They had been out of it for at least a year and a half and their bankruptcy petition and Chapter 13 plan stated that they were surrendering the real estate.  Time went on...no foreclosure.  At some point a  water pipe burst.  $10K in repairs as it leaked through is unit into common areas, etc.   
 
Interestingly enough, a strict reading of the bankruptcy code indicates that the exception to discharge does not apply in Chapter 13.  So you'd assume then there would be no liability.  I was at a National Association of Chapter 13 Trustee's convention a couple of years ago in Anaheim, CA.  One of the judges on the panel mentioned this and I took note of it as I thought it was interesting and perhaps useful.  To date I have now had two cases in chapter 13 where the townhome associations have pursued my clients for these fees/assessments in Chapter 13.  My answer to the creditor's attorneys the first time this came up was "tough luck"...the exception to discharge you refer to has no application in Chapter 13.  He bought it and went away because I either convinced him I was right or they simply didn't want to litigate it.  Either way...they haven't bothered my client since as far as I know.  The second which was just recent pressed it.  So I planned to defend my client in court to stop the creditor action which would ultimately lead to collection against my client for a debt I assumed was dischargeable.  Like a lot of things....all is not as simple as it seems.   
Doing my due diligence in terms of legal research I read the cases my opposing counsel relied on plus I did my own research and found other cases which supported my position.  Unfortunately there was nothing quite on point in my jurisdiction.  However, after a careful reading of the cases I did find that had at least some relevance it became clear what the judges decision would be if he/she relied on precedent from other related cases dealing with these issues.  My research and analysis boiled down to this; 

While the statute has no application in chapter 13 the case law determining the nature of the obligation to pay these fees and assessments turned on whether the debt was an obligation that had arisen prior to the bankruptcy case being filed and not whether the exception to discharge I cited in this post applied.  It actually turned on interpretation of what seemed to be at the time an unrelated issue...which would be the nature of the claim.  If, according to the cases I read..the obligation to pay these post petition fees/assessments were determined to be a contractual obligation  there was a good argument that the debt would be included in the bankruptcy as obligations to pay under the terms of the contract  was incurred pre-filing.  Then actually the exception to discharge issue was relevant.  But.....alternatively, if it was an obligation that occurred due to covenants running with the land...then it was a post-petition debt.  If a post filing obligation under the covenant theory then whether or not it is dischargeable is not an issue as one cannot discharge debts which arise post-petition.  The state court  decision I consulted which appears to me to control here turned on the court looking to and interpreting the Declarations published by the association as the basis for the judge's decision.  I consulted the Declaration for the townhome association relative in my client's case and indeed the obligation to pay the fees and assessment was  state as a convenant.  Therefore, I reluctantly informed my client that it appeared to me that he would be liable and would continue to be so until his name comes off title.  Unfortunately for my client when that will  happen is only a guess the mortgage company still shows no interest in foreclosing on this property.  Obviously the mortgage industry/housing meltdown has led to this poor result.  Because this property had no equity or was not anywhere close in terms of value to loan balance they have not foreclosed and how long they will wait to do so no one knows.  Until then my client is responsible for those fees and assessments.

*Note that this is my personal analysis interpreting how the law would apply to this issue in Minnesota.  If you live in another state the result with the same facts/circumstances could be completely the opposite depending on how these issues have been resolved by the courts in your jurisdiction.

 

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