Condo Lien Has Priority in Ch. 13; Can't Be Stripped Off

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...

By Diane Davis

Feb. 22 — A condominium association's lien for unpaid assessments is partially secured, and cannot be stripped off in a Chapter 13 bankruptcy proceeding, a district court in New Jersey held Feb. 17.

Reversing the judgment of the bankruptcy court and remanding the case for further proceedings, Judge Freda L. Wolfson of the U.S. District Court for the District of New Jersey concluded that the bankruptcy court's interpretation conflicts with the plain language of New Jersey's Condominium Act, N.J.S.A. 46:8B-1 to -38.

The Condominium Act doesn't merely provide for the payment of six months of a condominium association's unpaid assessments prior to the payment of other liens, the court said. It also elevates the collateral position of a portion of a duly-recorded lien on those unpaid assessments over other senior claims such as the debtor's mortgage, the court said.

The bankruptcy court erred in treating the association's lien as a “wholly unsecured” claim that could be stripped off either in whole or in part because the lien was partially secured by a security interest in the debtor's principal residence, the court said.

The court's treatment of the debtors' claims as “wholly or partially unsecured” is important because it affects whether the Chapter 13 debtors can strip off certain claims.

Debtors Mark and Ronda Rones own a condominium in New Jersey. Appellant Whispering Woods Condominium Association filed a lien against the debtor's property for $18,761 in unpaid fees and assessments.

Debtors Propose to Strip Off Lien

Subsequently, the debtors filed for Chapter 13 protection. Chapter 13 of the Bankruptcy Code allows individuals receiving regular income to obtain debt relief while retaining their property, but the debtors must propose a plan that uses future income to repay a portion of their debts over a three to five year period.

The debtors valued their property at $170,000, but the mortgage on the property was $288,063. The debtors proposed in their Chapter 13 plan to pay $1,494, which represented six months of the unpaid fees and assessments, and have the remainder of the lien be treated as unsecured and stripped off.

Whispering Woods objected to confirmation of the plan, arguing that its claim was protected from modification by the anti-modification clause in Bankruptcy Code Section 1322(b)(2).

Anti-Modification Clause

Typically, a debtor's plan may modify the unsecured portion of a lien down to the amount of the collateral securing it when the collateral is worth less than the lien, the court said, noting that this process is called “stripping,” “cramming down,” or “bifurcating” the lien, the court said. Under Section 1322(b)(2), however, debtors can't strip off a lien if it is “secured only by a security interest in real property that is the debtor's principal residence.” This provision is known as the “anti-modification clause” and has been interpreted to prevent modification of claims in a bankruptcy plan where those claims are either secured or are partially secured by a debtor's principal residence, the court said, citing Nobelman v. Am. Savings Bank, 508 U.S. 324 (1993). Even if one dollar of a creditor's claim is secured by a security interest in a debtor's principal residence, the entire claim — both secured and unsecured portions — can't be modified under Section 1322, the court said, citing In re Vidal, Nos. 12-11758, 12-12319, 12-12340, 12-12563, 2013 BL 30866 (Bankr. D. Del. Feb. 5, 2013).

Allowed Lien Stripped Off

The bankruptcy court concluded that the lien was wholly unsecured, and that except for the payment of six months of fees and assessments entitled to priority under the Condominium Act, the rest of the lien could be stripped off in the plan.

According to the bankruptcy court, the lien was a consensual lien and therefore a security interest, a conclusion that none of the parties challenged on appeal.

The association appealed to the district court, arguing that confirmation of the debtor's plan was erroneous because the association's lien wasn't “wholly unsecured” and thus, could not be stripped off. The association also contended that the bankruptcy court's order violated public policy because it would result in creditors being treated better under Chapter 13 than under Chapter 7.

Follow ‘One Dollar' Rule

The bankruptcy court's conclusion is in conflict with the plain language of the Condominium Act, the district court said. The statute doesn't merely provide for the payment of six months of unpaid assessments prior to the payment of other liens, but rather ensures that the collateral position of a portion of a duly-recorded lien is elevated over other senior claims, such as the mortgage, the court said.

The bankruptcy court shouldn't have stripped off the lien as “wholly unsecured,” the court said. By operation of the New Jersey statute, a limited portion of the lien was elevated in priority over the mortgage. Under the “one dollar” rule, because a portion of the lien was secured by a security interest in the debtor's principal residence, no portion of the association's lien could be stripped off under Section 1322, the court concluded.

Mitchell Evan Zipkin, Griffin Alexander PC, Randolph, N.J., represented appellant Whispering Woods Condominium Association, Inc.; Bruce Hugh Levitt, Levitt & Slafkes, PC, South Orange, N.J., represented appellees Mark William Rones, Ronda Jacqueline Rones; Albert Russo, Albert Russo, PC, Robbinsville, N.J., represented Chapter 13 Trustee, appellee Albert Russo; and Timothy P. Duggan, Stark & Stark, PC, Princeton, N.J., represented amicus Condominium Associations Institute.

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