Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Stephanie Cumings
Dec. 2 — Condo fees that accrue after a bankruptcy filing aren't automatically discharged by a debtor's Chapter 13 plan, according to one appellate court, although not all courts agree on this approach.
The condo fees represented a property right that can't be extinguished through bankruptcy, a three judge panel held in an unpublished opinion. But the court noted that at least one other court within the circuit has come out the other way.
The debtors in this case owned an investment condominium which they surrendered to Bank of America during their bankruptcy. The bank actually foreclosed on the property about three and a half years after the bankruptcy was initially filed.
The condominium association, Mira Owners Association (MOA), asked the bankruptcy court for permission to pursue condo fees that had accrued after the bankruptcy filing. The court issued an order granting MOA's request and the debtors didn't appeal that order.
After MOA sued the debtors in state court for over $28,000 in fees, the debtors sought a determination from the bankruptcy court that the fees would be discharged in the bankruptcy and that MOA had no right to assert a claim for the fees. The bankruptcy court denied the debtors' motion, finding that the bankruptcy plan in no way discharged the fees. The debtors appealed.
The appellate court first noted that the debtors' plan in this case “made no mention of discharging [d]ebtors’ postpetition liability to MOA and thus cannot bind MOA with respect to the dischargeability of the postpetition assessments.” The court said MOA had neither “the notice nor the due process required” to discharge the fees. Also, the bankruptcy court had specifically granted MOA permission to sue for the fees, an order the debtors never appealed.
Next, the court noted that in 1994, Congress added Section 523(a)(16) to the Bankruptcy Code, which excepted condo fees and other similar fees from discharge in certain bankruptcy cases. The court said that this addition was in response to certain cases that had discharged such fees. Congress amended this section in 2005 to slightly alter the requirements.
However, as the court noted, the debtors in this case were seeking a discharge under Section 1328(a) of the Bankruptcy Code. Section 523(a)(16) explicitly does not apply to discharges under Section 1328(a). The court therefore found that in this case, the discharge exception for condo fees under Section 523(a)(16) was inapplicable. No circuit court has analyzed whether these kinds of fees are dischargeable under Section 1328(a) since Section 523(a)(16) was added in 1994, according to research by Bloomberg BNA.
Even so, the court found that these fees should be excepted from discharge. Relying on a prior case from the Ninth Circuit's bankruptcy appellate panel, In re Foster, 435 B.R. 650 (B.A.P. 9th Cir. 2010), the court found that “a recorded condominium declaration, such as MOA's, runs with the land and is a property right that cannot be extinguished in a bankruptcy.” The court emphasized the difference between a debt created by a contractual agreement and a debt stemming from a property right, which enjoy special constitutional protections.
The court held that “as long as a debtor continues to have an interest in the property at issue, he cannot discharge the postpetition assessments that arise from the covenant that runs with the property.” The court said that a legal or equitable ownership interest in the property is enough to trigger liability for the fees, and so it didn't matter that in this case the debtors weren't occupying the condo. Therefore, the court held them liable for all the fees that had accrued from the time of the bankruptcy filing up until the foreclosure.
However, the court acknowledged that another court within the Ninth Circuit reached a different conclusion in In re Coonfield, 517 B.R. 239 (Bankr. E.D. Wash. 2014). The court in Coonfield found that the post-petition fees at issues were “merely the ‘contingent', ‘unmatured' portion of [a] prepetition claim.” The court was also heavily persuaded by the apparent redundancy of Section 523(a)(16) if fees can be excepted from discharge without it.
“A contrary interpretation of the law divests [Section] 523(a)(16) of significance,” the Coonfield court said. “If personal liability on such obligations arise post-petition as the Homeowners Association urges, [S]ection 523(a)(16) is rendered meaningless and simply restates a principle already infused in bankruptcy law; i.e., that a right to payment arising post-petition is not subject to discharge.”
Judges Ralph B. Kirscher, Meredith A. Jury, and Robert J. Faris comprised the three judge panel.
Richard J. Wotipka of Broihier & Wotipka, Seattle, represented the debtors. Thomas J. Coy of the Condominium Law Group, LLC, Seattle, represented MOA.
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