Daily Development for Wednesday, February 16, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

BANKRUPTCY; LIENS; CONDOMINIUMS;: A post-bankruptcy petition condominium assessment is a claim that arose before commencement of the case and a condominium association needs relief from the automatic stay to collect the assessment.

In re Hawk, 314 B.R. 312 (D. N.J. 2004)

The bankruptcy court characterized this case as the first bankruptcy court decision evaluating the impact of an automatic stay on post petition condominium assessments.

A debtor filed a voluntary Chapter 13 petition, listing his residential condominium unit on Schedule A of his petition, and listing the condominium association as a secured creditor.  The debtor's Chapter 13 plan provided for payment of the pre-petition debt to the association, and set forth that should he default on those payments, the association could obtain stay relief by submitting a certification of default to the Bankruptcy Court.

Under a Chapter 13 procedure, even after the plan in confirmed, the automatic stay remains in effect (more or less) for a subsequent five year period.

The debtor later  failed to pay post-petition condominium charges.  Instead of certifying the plan default to the bankruptcy court as apparently contemplated by the consent order, the association commenced a collection action in the state court, filed a lien against the debtor's residence, and obtained a money judgment.  The debtor asserted that because the association never obtained relief from the automatic stay, its collection activities with respect to post-petition condominium assessments and fees willfully violated the automatic stay provisions of 11 U.S.C. § 362(a), pursuant to § 362(h).

The filing of a bankruptcy petition under Chapter 13 operates as an immediate stay against any of the activities enumerated in § 362(a) and not excepted under § 362(h).  The stay remains in effect until it is vacated or until the case is closed, or dismissed, or the debtor's discharge is granted or denied.  As indicated above, the case is not closed in a Chapter 13 when the plan is confirmed.

The association argued that there was no stay violation because title to the debtor's condominium had revested to the unit owner on confirmation of the plan, and therefore, the unit was no longer property of the bankrupt estate.  Under the association's theory, because the unit owner's assessments in dispute were all post-petition, they fell outside the scope of the automatic stay.  The Court disagreed, holding that the scope of the automatic stay is broader than merely protecting property of the estate.

To determine if the association had violated either subsections (a) or (b) of §363, the Court needed to determine if the post-petition condominium assessments constituted a claim that arose before the commencement of the case.  The Bankruptcy Code defines a "claim" as a right to payment.  The Court noted that Congress intended to adopt the broadest available definition of "claim."  Even though the code does not define when a "right to payment" arises, case law suggests that "right to payment" means nothing more than an enforceable obligation.  The New Jersey Condominium Act (Act) gives a condominium association the power and responsibility to make assessments.  The Act suggests that the obligation to pay assessments arises after the taking of title; the rights of the association need not await the actual assessment.  Although the extent of a unit owner's liability for common area expenses is determined by the assessments, the liability does not arise as a result of them.  Se!

courts have noted that the obligation to pay condominium fees is unconditional.  Therefore, the Bankruptcy Court held that the assessments here were an enforceable obligation, and therefore fell within the code's definition of a “claim.”  According to it, the assessments were a pre-petition claim because they arose when the debtor took title to the condominium unit, which occurred pre-petition.  Therefore, the Court held that the association had violated the Bankruptcy Code.  And, since the association was aware of the bankruptcy filing, the Court granted the unit owner's request to void all of the association's actions in violation of the stay.

On the other hand, the Court denied the debtor's claim for damages arising out of the stay  violation.  The Bankruptcy Code provides that a debtor injured by the willful violation of the automatic stay shall recover damages, but under case law, damages can be denied when the violating creditor has persuasive legal authority arguing that its actions did not violate the stay and where the law on the issue is sufficiently unsettled.  In this case, the Court held that because the law on post-petition condominium assessments  was unsettled and because it was the first bankruptcy decision to address post-petition condominium fees in the context of § 362, the unit owner would not receive a damage award.

Comment: The editor does not represent that he understands all (or even many) of the intricacies of Chapter 13.  But the holding that an failure to pay an assessment billed postpetition is in fact the incurring of a prepetition indebtedness strikes the editor as pretty strange.  It also seemed that way to bankruptcy maven Ray Warner, a colleage at St. John’s Law School where the editor is visiting.  Veeeery interesting - but stupid.

Readers are encouraged to respond to or criticize this posting.

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