Condominium Assessments: Dischargeable or Not?

In re Montalvo, 546 B.R. 880 (Bankr. M.D. Fl. 2016)

A chapter 13 debtor moved for sanctions against a condominium as one for violations of the automatic stay and discharge injunction based on collection of condominium assessments. The court’s decision turned on whether the condo declaration was a covenant running with the land or merely a personal contractual relationship.

The debtor originally owned two condominium units, both of which were subject to periodic assessments that the debtor stopped paying. He did not live in either unit; both were subject to mortgages; and the debtor surrendered his interest in both units during his bankruptcy case. The debtor confirmed a chapter 13 plan and obtained a discharge injunction.

  • The debtor’s confirmed chapter 13 plan provided that “[t]he debtor is responsible for paying all post-petition ongoing homeowners assessments, homeowners’ dues, and/or property taxes; the automatic stay shall not apply to these debts.”
  • The discharge order included a provision that “a creditor may have the right to enforce a valid lien … against the debtor’s property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case.”

The condo association obtained a receiver in state court to rent empty units and apply collected rents to unpaid assessments associated with the unit. The receiver rented at least one of the debtor’s surrendered units and applied collected rents to the oldest assessments, all of which were prepetition obligations.

The debtor reopened his bankruptcy case and sought sanctions against the condo association, arguing that this violated the automatic stay and his discharge injunction. He argued that it was a violation to apply rent to pre-petition assessments, and he had no liability for post-petition assessments because the fees “emanate” from a prepetition contract between the condo association and the debtor.

The condo association responded that there was no violation because it was only taking in rem action against the property and not collecting from the debtor personally. Further, it argued that the debtor was liable for post-petition assessments both because the plan confirmation order directed the debtor to pay and because the declaration created a covenant running with the land that was unaffected by the debtor’s bankruptcy or discharge injunction. Consistent with this argument the declaration provided that the condo association was granted a lien on each condo unit to secure payment of assessments and that the restrictions constituted covenants running with the land.

The court viewed the issue as “whether the obligations created by [the condo declaration] ‘run with the land’ and are non-dischargeable liens secured by real property or, instead, mere contractual obligations between an association and a real property owner.” It noted that applicable state law articulated the distinction as something that concerns the property as opposed to something that is collateral, and cases described a condo declaration as akin to a condominium’s constitution, which is more than a mere contract. Similarly, the state condominium act provided that all provisions of a declaration run with the land and are effective until the condominium is terminated.

Citing over 50 cases the court acknowledged that there is a split on whether postpetition assessments are dischargeable in bankruptcy. Under one line of cases assessments are nondischargeable because they arise from a covenant running with the land. Another line holds that postpetition assessments are dischargeable because they arise from a prepetition contract. A third compromise approach is that postpetition assessments are dischargeable unless the debtor resides in or leases a unit. Some cases noted that Congress attempted to resolve this split through a 1994 amendment to the Bankruptcy Code adding Section 523(a)(16) – which provides that postpetition fees (but not prepetition fees), including condo fees, are excepted from discharge. However, the cases go on to note that this section is not applicable to a discharge under Section 1328(a) of the Bankruptcy Code.

The bankruptcy court agreed with the line of cases holding that the obligation to pay condo assessments is based on a covenant running with the land, which is a property interest, and generally the discharge does not affect property interests. Thus it concluded that the debtor was responsible for all postpetition assessments until title to the property transferred, and while the discharge relieved the debtor of in personam liability for prepetition assessments that did not preclude in rem remedies.

In this case the condo association did not do anything to collect the prepetition assessments from the debtor personally, and the collection of rents from the property for application to the assessments was permitted. Consequently, the court denied the debtor’s motion for sanctions.

In this case the court specifically held that surrender of the condo units was not relevant since the debtor remained the record owner. According to the court, surrender does not require the debtor to deliver possession. Among other things that would allow a secured creditor to circumvent state foreclosure law requirements. Thus a debtor remains liable for postpetition assessments for as long as he is the record owner.

Intuitively it seems reasonable that a debtor that continues to own a condominium unit will be a liable for ongoing assessments. However, this is another example of the fact that surrender of property does not relieve a debtor of the ongoing obligations related to that property – which is probably not what a typical individual has in mind when making the decision to surrender property.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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