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Court Correctly 'Stripped Off' Condominium Association's Wholly Unsecured Lien

Monday, February 3, 2014
By Diane Davis

Jan. 31 --A bankruptcy court did not err in stripping off the appellant condominium association's lien because the first mortgage's lien was superior, the U.S. District Court for the Southern District of Florida held Jan. 21 (Stonebridge Gardens Section Two, Condo. Ass'n, Inc. v. Campbell, S.D. Fla., No. 0:13-cv-61280-RSR, 1/21/14).

Affirming the judgment of the bankruptcy court, Judge Robin S. Rosenbaum concluded that the appellant condominium association's claim of lien is wholly unsecured because the value of the property is less than the value of indebtedness secured by the first mortgage.

According to the court, the condo association's lien is subordinate to that of the first mortgagee. The court also noted that in the foreclosure context, Florida courts have consistently held that association assessment liens do not generally have priority over a prior-recorded mortgage. Although the association preserves its right to payment, it does not necessarily acquire a superior lien, the court said. The first mortgagee's lien was recorded 13 years before the association's claim of lien, and as a result, the bankruptcy court correctly concluded that the first mortgagee's claim was superior.

The court also determined that a lien that is completely unsecured may be “stripped off.” The Eleventh Circuit has held that wholly unsecured claims are not protected from modification, the court said, citing In re Tanner, 217 F.3d. 1357 (11th Cir. 2000). Thus, the bankruptcy court did not err in stripping off the condo association's lien, the court said. 

Past-Due Condo Fees

Debtor Leroy A. Campbell listed his homestead property on his bankruptcy schedules with a value of $27,500. The property is encumbered by a purchase money mortgage in favor of HSBC Bank USA as trustee for Citigroup Mortgage Loan Trust Inc. (first mortgagee) in the amount of $74,785.

The first mortgagee's lien was recorded June 18, 1998. The appellant Stonebridge Gardens Section Two Condominium Association Inc. subsequently filed a lien claim against the property on Aug. 29, 2011, as a result of the debtor's non-payment of past-due condo assessments totaling $22,147. 

Bankruptcy Court 'Strips Off' Lien

The debtor filed a motion to value and determine secured status of lien on real property, arguing that Stonebridge's lien could be “stripped off” under the Bankruptcy Code.

The bankruptcy court granted the motion, concluding that the first mortgagee's lien exceeded the value of the property at issue, and because Stonebridge's lien was junior to that of the first mortgagee, Stonebridge's lien was wholly unsecured and could be “stripped off” under Bankruptcy Code Section 506(d).

Stonebridge appealed, arguing that its lien is not subordinate to that of the first mortgagee and therefore, is not wholly unsecured. 

Association's Lien Recorded Second

The bankruptcy court determined that the first mortgage was superior under § 718.116, Fla. Stat. Under that statute, a condominium association has a lien on each condominium parcel to secure the payment of assessments, the court said. In general, the lien on each condominium relates back to the recording of the original declaration of condominium, but the lien is effective from and after the recording of a claim of lien, the court said.

In this case, the first mortgagee's lien was recorded on June 18, 1998, and Stonebridge's association lien was recorded on Aug. 29, 2011. Because the association's claim of lien was recorded after that of the first mortgagee, the bankruptcy court determined that the first mortgagee had priority status, the court said. 

Preserves Right to Payment

The court acknowledged Stonebridge's argument was correct that subsequent purchasers--regardless of how title has been acquired--remain liable for unpaid assessments of the condominium unit's prior owner, but noted that nothing in the statute indicates that the association's lien attains priority status in bankruptcy. Further, in the foreclosure context, Florida courts have consistently held that association assessment liens do not generally have priority over a prior-recorded mortgage, the court said.

Once the title is transferred, the association must record a new claim of lien if the person to whom title was transferred fails to pay the past-due assessment within 30 days, the court said, citing Fla. Stat. § 718.116(1)(c). Although the association preserves its right to payment, it does not necessarily acquire a superior lien, the court said. Thus, the bankruptcy court correctly concluded that the first mortgagee's claim was superior, the court concluded. 

Lien Wholly Unsecured

Section 506(a), the court said, determines the secured status of a creditor's claim in that a “claim is secured only to the extent of the value of the property on which the lien is fixed; the remainder of the claim is considered unsecured.” The extent to which a junior creditor holds a secured claim is determined by first deducting the amount of debt secured by senior liens from the value of the property, the court said.

Looking at the property at issue in this case, the court noted that the first mortgagee's lien of $74,785 far exceeds the value of the property with a valuation of $27,500. Thus, Stonebridge's claim is wholly unsecured, the court said. 

Unsecured Lien May Be 'Stripped Off.'

A Chapter 13 debtor may “modify the rights of holders of secured claims” but it may not do so if the creditor's claim is “secured only by a security interest in real property that is the debtor's principal residence,” the court said, citing Section 1322(b)(2). This anti-modification provision prohibits debtors from modifying even partially secured claims, but wholly unsecured claims are not protected from modification, the court said, citing In re Tanner. Thus, a lien that is completely unsecured may be “stripped off,” the court said.

Stonebridge's claim of lien is wholly unsecured because the value of the property is less than the value of indebtedness secured by the first mortgage, the court said. Thus, the appeals court found that the bankruptcy court did not err in stripping off Stonebridge's lien.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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