Chapter 13 Plan, Not Texas Law, Governs HOA Payments

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Daniel Gill

A Texas homeowners association that applied Chapter 13 plan payments first to pre-bankruptcy delinquencies, leading to improper late fees, penalties and interest, was penalized by a bankruptcy court March 27 ( In re Daulton , 2017 BL 96621, Bankr. S.D. Tex., CASE NO. 11-33892-H5-13, 3/27/17 ).

It is the Chapter 13 payment plan which determined how debts will be repaid, even if the plan runs contrary to a state law, Judge Karen K. Brown, U.S. Bankruptcy Judge for the Southern District of Texas, wrote.

Charles and Gretchen Daulton filed a Chapter 13 case in May, 2011. Chapter 13 allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three- to five-year period.

As part of their plan, the Daultons made regular payments to the Northglen Association.

Northglen applied the payments first to delinquent debt, in accordance with Texas property law. It then found that current, ongoing payments were late and charged a series of late fees, penalties and interest.

The Daultons moved the court for an accounting of the moneys owed to Northglen and argued that the late fees should not have been applied, since the debtors made the payments provided in the plan.

Northglen defended its application of the payments by referring to the Texas Property Code.

But the plan provides for how the payments would be applied, not Texas law, the court held. There were no delinquencies after the bankruptcy was filed, and that the Daultons had actually overpaid, the court said.

The court therefore required that Northglen pay nearly $4,500 in attorneys’ fees to the Daultons.

The fees were ordered under Texas law which allows fees for contract actions, including specifically a contract action “regarding the covenants and assessments in neighborhood declarations.”

Reese W. Baker, Houston, appeared on behalf of the Daultons. Northglen HOA was represented by Lambright & Associates, Houston.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

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

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