Condominium Assessments: When Is Postpetition Really Prepetition?

Goudelock v. Sixty-01 Ass’n of Apartment Owners, 895 F.3d 633 (9th Cir. 2018) –

A condominium association sought a determination of the dischargeability of a chapter 13 debtor’s personal liability for postpetition assessments on a condo unit. The bankruptcy court determined that the assessments are nondischargeable; the district court affirmed; and the debtor appealed to the Ninth Circuit.

The debtor purchased a condominium unit prior to bankruptcy. Under the declaration of covenants and restrictions, the condo association could charge owners assessments for monthly fees and for maintenance, repairs, and capital improvements. Assessments could be collected in one of two ways: unpaid assessments (1) constituted a lien on the condo unit that could be enforced by foreclosure, and (2) were a personal obligation that could be collected from the owner of the condo unit.

After the debtor stopped paying assessments in 2009, the condo association initiated a foreclosure action. The debtor moved out of the unit and filed a chapter 13 bankruptcy in 2011. The association filed a proof of claim in the bankruptcy, noting that assessments continued to accrue. As part of her plan the debtor surrendered the condo unit. The association canceled its foreclosure sale because a mortgage lender paid outstanding assessments.

The unit sat unoccupied for a while until the mortgage lender foreclosed. Shortly afterwards the debtor completed plan payments and received a discharge. In the meantime, the association sought a determination that the debtor’s personal obligation to pay assessments that accrued between the date the bankruptcy petition was filed and the date the mortgage lender foreclosed could not be discharged.

The bankruptcy court determined that the postpetition assessments “were not dischargeable because they arose at the time of their assessment and were an incidence of legal ownership of the burdened property.” The court rejected the debtor’s argument that the obligation to pay assessments was a prepetition debt that arose at the time the debtor purchased the condo unit. The district court affirmed, and the debtor appealed.

The Ninth Circuit began by analyzing Seventh Circuit and Fourth Circuit opinions that addressed postpetition assessments in a chapter 7 case. The Seventh Circuit concluded that the obligation to pay condo association assessments was an unmatured contingent debt that arose prepetition when the property was purchased. Consequently, the debt was dischargeable. In contrast, the Fourth Circuit held that the obligation to pay ran with the land and arose each month based on the debtor’s continued ownership of the property. Consequently, in its view assessments that became due and payable postpetition were not dischargeable because they were not prepetition debts.

The Ninth Circuit agreed with the reasoning of the Seventh Circuit and concluded that the same reasoning was applicable in Chapter 13 cases. It further distinguished the in rem remedy of foreclosing the lien, which was not dischargeable, from the in personam obligation that could be enforced through a collection action.

The court noted that a chapter 13 “discharge of all debts” excluding only a limited number of exceptions is broader than the discharge under any other chapter. The court reasoned that “debt” was defined as a “liability on a claim.” In turn “claim” was defined as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.”

In this case an assessment was a debt since it created a right to payment. Since only debts arising prepetition can be discharged, the critical question was when the claim arose. The Ninth Circuit used a “fair contemplation” test which provides that “a claim arises when a claimant can fairly or reasonably contemplate the claim’s existence even if a cause of action has not yet accrued under nonbankruptcy law.”

Since it could have been contemplated at the time the condo was purchased that monthly assessments would continue to accrue while the debtor owned the condo unit, the obligation to pay assessments arose prepetition at the time of purchase. Thus, the personal obligation to pay assessments could be discharged. The court acknowledged that until assessments became due they were unmatured and contingent upon continued ownership. However, unmatured contingent debts are still dischargeable.

Turning to the discharge exceptions, although there is an exception for postpetition association assessments for cases under chapter 7, chapter 11 and chapter 12, there is no corresponding exception in a chapter 13 case. The court rejected the association’s speculation that this was a congressional oversight, noting that Congress could amend the Bankruptcy Code if it disagreed.

The court also rejected the argument that discharging the obligation to pay assessments was an unconstitutional taking since only the in personam debt was discharged, not the association’s in rem interest. Finally, the court rejected an argument that allowing the debtor “free rent” for four years was inequitable and unjust because equity cannot override express provisions of the Bankruptcy Code.

Consequently, the court reversed finding that the personal obligation to pay assessments accruing postpetition was dischargeable as a prepetition debt.

While determining when a claim arises might seem straightforward, that is often not the case. Issues can become even more complicated if different rules apply to cases filed under different chapters of the Bankruptcy Code.

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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