(NOTE: footnotes omitted from online version)
Condominium liens are neither a mortgage nor an executory contract, although bankruptcy courts have treated them as both. The truth is that condominium liens have the attributes of both, as well as other attributes not easily categorized under the United States Bankruptcy Code ("the Code"). For instance, condominium liens can be foreclosed in the same manner as mortgages if not paid. Also, ownership of a condominium imposes on both the condominium association and the co-owner continuing ("executory") obligations regarding maintenance and repair of the unit and the common elements and compliance with the bylaws, rules, and regulations of the project.
Condominiums were not treated at all in the Code until the Bankruptcy Reform Act of 1994, and because this amendment did not address Chapter 13 cases, courts, trustees, debtors, and condominium associations continue to struggle with how to treat condominium assessments in the context of a Chapter 13 bankruptcy case. This article presents a paradigm for treatment of condominium assessments in a Chapter 13 case. The appendix to the article is a proposed Proof of Claim on behalf of a condominium association in a Chapter 13 case.
Condominiums are creatures of statute; condominiums did not exist at common law. A parcel of real property is established as a condominium by the recording of a Master Deed. The affairs of the condominium project are usually governed by a nonprofit corporation ("the association") organized for that purpose. Once established, each condominium unit, together with and inseparable from its assigned share of the common elements, is subject to ownership, mortgaging, taxation, possession, sale, and all types of juridical acts, inter vivos or causa mortis independent of the other condominium units in the project.
The enabling statute for condominium liens is MCLA ß559.208(1); it provides that sums assessed to a co-owner by the association of co-owners which are unpaid constitute a lien upon the unit or units in the project owned by the co-owner at the time of the assessment. Assessments typically consist of the unit's proportionate share of the monthly operating expenses of the project and additions to the reserves of the association (the "general" assessment), although additional and special assessments for large repairs or additions to the project are not uncommon. The typical assessment is payable on a monthly basis, usually on the first of the month. Additional and special assessments are payable at such times as the board of directors may direct, or as may be provided in the condominium bylaws.
The due dates for assessments can be confusing. Although the general assessment is levied on a monthly basis, some condominium documents provide for the general assessment to be an annual assessment payable in monthly installments, with provision for acceleration of the balance of the annual assessment upon default. Additional and special assessments are generally due when the Board of Directors, the condominium documents, or the authorizing resolution adopted by the co-owners provides. It is not uncommon for additional and special assessments also to be payable in installments, with or without acceleration.
Unpaid condominium assessments constitute a claim under the Code. The Code differentiates between secured and unsecured claims: a claim is a secured claim only to the extent that there is identifiable collateral of a sufficient value to pay the full amount of the debt. For a condominium lien, the collateral is the condominium unit or units subject to the lien. If the value of the collateral is less than the amount of the debt, the debt is bifurcated under the Code into a secured claim to the amount of the value of the collateral and an unsecured claim for the excess debt over value. If there is no value in the collateral to which the debt can attach, the claim is completely unsecured.
By statute, a condominium lien is junior to tax liens in favor of any state or federal taxing authority and to sums unpaid on a first mortgage recorded prior to the recording of the Notice of Lien. Depending upon the balance due on senior liens, it is possible that a condominium lien will be partially or completely unsecured. Since Chapter 13 plans can provide for minimal payments on unsecured claims , being completely unsecured may mean that the condominium association receives only a few cents on the dollar.
If the condominium lien can be completely unsecured, then valuing the condominium unit and establishing the balance due on superior claims is extremely important to the condominium association. The court will determine the value of a claim secured by a lien on property on motion of any party in interest and after a hearing on notice to the holder of the secured claim and any other entity the court may direct. The value is to be determined in light of the purpose of valuation and of any proposed disposition or use of the property and in conjunction with a hearing on a plan affecting the creditor's interest. By local rule in the Eastern District of Michigan, a chapter 13 plan must state the value of each item of encumbered property. A creditor who objects to the valuation assigned in the plan may file objections to the valuation, either as an objection to confirmation or in its proof of claim, in which case the valuation must be decided prior to confirmation of the plan.
A valuation hearing may take place as a part of the confirmation hearing, although it may be necessary to schedule a separate evidentiary hearing due to time considerations. The association's attorney should at least have an appraisal of the unit, and may wish to consider having the appraiser present to testify at the hearing if valuation cannot be resolved with the debtor prior to the hearing. The association's attorney will also need to subpoena the records of any senior lien creditors to find out their balance due, if there is a dispute with the debtor as to the amounts due on these prior claims. At a minimum, the bankruptcy court's claims file should be reviewed to determine the amounts for which these prior creditors have filed proofs of claim.
As evidence of their claim, creditors file a proof of claim. A claim for which a proof of claim has been filed is automatically allowed unless a party in interest objects to it. If an objection is made, the court shall, after notice and hearing, determine the amount of the claim in US dollars as of the date of the filing of the petition.
The condominium association's proof of claim consists foremost of condominium assessments. The proof of claim should list the months and dollar amounts of the assessments which fell due prior to the filing of the case. While an itemization is not specifically required by the Code, listing the months and dollar amounts of the general (and the special and additional assessments if any) helps all parties understand the details of the claim, serves to reduce objections to claims, and helps the trustee set up the claim properly for payment. Most condominium bylaws also provide for the recovery of interest on unpaid assessments as well as late charges, and the proof of claim should state the rate and amount of interest and the late charge rate.
The Michigan Condominium Act and most condominium documents provide that "[i]n a proceeding arising because of an alleged default by a co-owner, the association of co-owners, if successful, may recover the costs of the proceeding and such reasonable attorney fees as may be determined by the court." If the condominium lien was in foreclosure at the time of filing of the bankruptcy case, the proof of claim should itemize the attorney fees and costs incurred in the foreclosure proceedings. Since a bankruptcy proceeding is also a "proceeding arising out of a default by a co-owner,î the proof of claim should include fees for the filing of the proof of claim. Note that the Code provides that a lien holder is entitled to recover any reasonable fees, costs, or charges provided for under the agreement under which such claim arose only if there is excess value over and above the amount of the lien. Again, valuation is important; if there is not sufficient equity in the condominium unit, costs and fees incurred subsequent to the filing of the case need not be paid. While the statute speaks in terms of the agreement under which such claim arose,î the Supreme Court has held that holders of nonconsensual liens are entitled to recover interest.
The association's proof of claim should also state the current amount of monthly assessments and the next due date from the date of filing, so that the trustee can set up his records for payment of the future assessments. At least, setting forth the future rate of assessments puts the debtor, his attorney, and the trustee on notice that there are future assessments that must be taken into consideration at some point in the debtor's plan.
The debtor is required to file a plan not later than 15 days after the filing of his case, unless the time is extended by the court for cause upon a motion filed within the 15 days. The plan sets forth the treatment of claims. The Code provides the debtor several options for treatment of claims, depending upon the type of claim and its status at the time of filing.
If the Association had not recorded a lien prior to the filing of the case, the debtor may classify the Association as an unsecured creditor, which will be paid some percentage of its claim. This percentage may be between 100% plus interest down to 10% or less, depending upon a variety of factors, including the debtor's income and the amount and type of his other debts. Obviously, it is to the association's benefit to record a lien prior to the filing of a case.
Assuming that a notice of lien was recorded prior to filing, a Chapter 13 plan may provide for the curing of any arrears due on a claim on which the last payment is due after the scheduled completion of the plan over a reasonable period of time and maintenance of the current monthly payment during the life of the plan. 11 USC §1322(b)(5). It is questionable whether this provision applies to condominium assessments, since assessments theoretically do not exist until they have been levied, and thus there are no continuing monthly payments to be maintained On the other hand, condominium assessments can reasonably be expected to be levied as long as the condominium exists, so it is reasonable to argue that condominium assessments should be treated under this section of the Code.
If a notice of lien was filed and the debtor does not elect to treat the claim in accordance with 11 USC §1322(b)(5), 11 USC §1322(c)(2) provides that the claim may be modified. If the association is only partially secured and the condominium unit is not the debtor's principal residence, the debtor may attempt to "cram down" the association's debt to the debtor's equity in the property remaining after prior liens, and pay that amount over the life of the plan. However, if the claim is modified in this fashion, arguably any assessments levied post-petition would be a post-petition debt not subject to the Chapter 13 plan. If the debtor attempts to modify the association's debt in this fashion the debtor will still have to provide in the plan for payment of future assessments as they fall due, or the debtor will quickly face a post-petition default.
Another possibility is that post-petition condominium assessments are administrative expenses. 11 USC §503(b)(1)(A) provides that there shall be allowed administrative expenses, including "the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case." Certainly condominium assessments, which are the co-owner's share of the common expenses of administration of the project are incurred for preserving the condominium unit, which became property of the estate upon filing. Since the budget on which the assessments are based is a projection for the coming year, the assessments may not be "actual" costs and expenses within the meaning of this section.
Administrative expenses must be paid in full in the course of a case, but the Code does not specify when they must be paid. The debtor could provide for payment of all post-petition assessments at the end of the plan. The association's counter to this is that doing so does not provide the association with adequate protection, since it continues to incur the expenses even while they are not being paid.
Finally, the debtor may provide for direct payment of condominium assessments. This seems allowable as long as the debtor is current on assessments at the time of filing and remains so up until confirmation.
Section 1322(b)(2) of the Code provides that a Chapter 13 plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence. î Prior to 1993, some courts had held that it was possible for a plan to "strip" a partially secured security interest down to the fair market value of the property, paying the balance as an unsecured debt; however, the Supreme Court held in Nobelman v. American Savings Bank that such lien stripping modified the right of a partially secured mortgagee to receive payments in the amount and at the times specified in the mortgage and thus ran afoul of this anti-modification provision. Thus, as long as a condominium lien is at least partially secured by value in the condominium unit, the condominium association's claim must be paid in full.
However, the protection is not absolute. By its own terms, the Code section applies only to security interests in the debtor's principal residence; it does not apply to second homes, a common use for condominiums, especially in resort areas. It does not apply if the security interest covers more than just the residence; since the lien covers all units owned by the co-owner, this protection probably does not apply to a condominium lien against a co-owner who holds more than one unit in the project. Finally, if there is no equity at all to which the condominium lien can attach because of the balance due on the first mortgage and/or tax liens, at least one court has held, despite Nobelman, that the security interest is not "secured" by the debtor's principal residence and the debt can be paid as an unsecured claim.
As with most things in life, timing in the filing of a bankruptcy case is everything. If the co-owner wishes to pay the arrears owed to the association over the life of the plan, the co-owner must file his case prior to a foreclosure sale of the condominium unit. Once the sale has been held, the co-owner may only redeem the unit within the redemption period provided by law.
If the association believes that the debtor is not treating its claim properly in accordance with the Code, the association may file objections to confirmation. The association may also object to confirmation of the case if the association believes that the case has been filed in bad faith. The objection must be served on the Debtor, the debtor's attorney, the Chapter 13 trustee, and the United States Trustee. The court will hold a hearing on confirmation to resolve any objections.
The rate of the monthly assessment can reasonably be expected to change during the life of a typical three-to-five year plan, based upon changes in the association's budget. If the trustee is paying the current assessments, the association must notify the trustee of any change in the payment amount so that the trustee can make adjustments in payment accordingly. It is important to notify of the payment change, so that the trustee makes the payments in the proper amount. If a payment increase occurs relatively early in the life of a plan and no notification is given, the debtor will accrue a significant deficit by the time the plan is completed. This defeats the purpose of a Chapter 13 plan, which is to cure any arrears and allow the debtor to pick up with only current obligations at the end of the plan. Although the Code provides that a debt provided for under 11 USC §1322(b)(5) is not discharged, Local Rule 13.13 for the U. S. Bankruptcy Court for the Eastern District of Michigan provides that a discharge of the debtor means that all payments on such a continuing debt are considered current. A prudent condominium attorney will advise his client in writing of the obligation to update the debtor and the trustee with payment changes to avoid the possibility of discharge of post-petition assessments.
A condominium lien is perfected by recording a Notice of Lien with the Register of Deeds for the county in which the project is located. The Code gives the trustee the power to avoid the fixing of a statutory lien on property of the debtor if the lien is not perfected or enforceable at the time of commencement of the case against a bona fide purchaser that purchases such property at the time of commencement of the case, whether or not such a purchaser exists. The Code also give the trustee the rights and powers of a bona fide purchaser of real property from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of commencement of the case, whether or not such a purchaser exists.
However, a condominium lien is enforceable against a bona fide purchaser of a unit: unless a prospective purchaser requests a statement from the association at least 5 days before the sale, the purchaser shall be liable for any unpaid assessments against the condominium unit together with interest, costs, and attorney fees incurred in the collection thereof. Because the lien is enforceable against bona fide purchasers under applicable non-bankruptcy law even if not recorded, the author would argue that the condominium lien must be treated as a secured claim even if the Notice of Lien has not been recorded as of the commencement of the case.
Why is this issue important to the condominium association? Because the difference between treatment as a secured claim and as an unsecured claim may mean the difference between payment in full and receiving only a few cents on the dollar. If the association's lien can be avoided, the association is unsecured. It is unclear to what extent either the trustee or the debtor may attempt to avoid the association's lien. The duties of the Chapter 13 trustee do not include the avoidance powers, and the debtor is not specifically granted the avoidance powers. Possibly, they share the power jointly.
The sad truth is that the majority of Chapter 13 cases end in dismissal, not discharge. Upon a default by the debtor in payment subsequent to confirmation of a plan, the association will need to take prompt action to protect its interest, especially if the condominium is only partially secured. If the debtor were current on assessments at the time of filing so that no lien had been recorded pre-petition, can the association file a lien for post-petition assessments? Determining the answer to this question requires a careful review of several provisions of the Code.
The commencement of a case creates an estate, which consists generally of all legal or equitable interests in property of the debtor as of the commencement of the case. 11 USC ß541(a). The automatic stay applies to acts against the debtor or property of the estate. 11 USC ß362(a). The Chapter 13 plan may provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity. 11 USC ß1322(b)(9). The stay of a prohibited act against property of the estate continues until the property is no longer property of the estate. 11 USC ß362(c)(1). The stay of a prohibited act against the debtor continues until the case is closed, the case is dismissed, or a discharge is granted, whichever is earlier. 11 USC ß362(c)(2).
The recording of a lien against the condominium unit may not be stayed post-confirmation if the debtor's plan provides that property of the estate vests in the debtor on confirmation. The service of the lien or otherwise to make a demand for payment to the debtor for solely post-petition assessments would not appear to run afoul of any of the prohibited acts against debtors under 11 USC ß362(a). The association should make darn sure that the demand letter and lien cover only post-petition assessments. Because an individual injured by a willful violation of the stay may recover actual and punitive damages, costs and attorney fees, the prudent association will seek relief from the automatic stay before pursuing collection of post-petition condominium assessments. When in doubt, seek relief from the stay first.
The more usual situation is that the debtor had defaulted prior to filing the bankruptcy case and the association was pursuing foreclosure at the time of filing. In this case, the association should seek relief from the automatic stay prior to pursuing its state court remedies, as to do otherwise would be a violation of one or more prohibited acts against the debtor.
What of the co-owner who is making the payments, but is violating some other provision of the condominium documents? For instance, what if the co-owner has moved a dog into the unit in violation of the condominium bylaws? The Code prohibits the commencement or continuation of judicial action against the debtor which was or could have been commenced before the commencement of a bankruptcy case. The author strongly suggests that the association obtain relief from the automatic stay prior to commencing or continuing injunctive relief against the co-owner, especially since the association will likely be requesting the state court to award the association its costs and fees incurred in obtaining the injunction. Again, when in doubt seek relief first.
On request of a party in interest and after notice and a hearing, the court may grant relief from the stay for cause, including lack of adequate protection of an interest in property or because the debtor does not have an equity in the property and the property is necessary for an effective reorganization. Relief is requested by motion. Both the Eastern and Western Districts have rules governing both motions generally and motions for relief specifically, and the bankruptcy attorney should familiarize himself with the procedures. In either district, if no response to a motion for relief is filed within a certain period of time, the motion is granted by default and the moving party may submit an order lifting the stay for entry without a hearing.
Under the Code, the stay is lifted automatically 30 days after the filing of the motion unless the court after notice and a hearing orders the stay to continue in effect pending a final hearing, which again must be held within 30 days of the preliminary hearing. Because of this provision the courts give priority to motions for relief.
Counsel should take particular care in determining the persons entitled to notice of the motion. Of course, the debtor, the debtor's attorney, and the Chapter 13 trustee should receive notice. In addition, all parties with an interest in the property and/or parties protected by the co-debtor stay should be served. If the motion is combined with a motion to dismiss or convert the case to a Chapter 7, the United States Trustee should also be served with the motion.
At the hearing on a motion for relief, the moving party has the burden of proof on the debtor's equity in the property, and the party opposing relief has the burden of proof on all other issues. Other issues can include whether the debtor has defaulted in payments to the trustee and/or the association and by how much, whether the debtor has defaulted in some other provision of the condominium documents, and whether the condominium unit is the debtor's principal residence or is otherwise necessary to complete the plan of reorganization. In a chapter 13 proceeding, the debtor's lack of equity in the property is rarely the grounds for seeking relief from the stay: usually the creditor is asking the stay be lifted for cause: the debtor has defaulted either in payments required to be made to the trustee under the plan or in payments to be made directly to the creditor. If the initial hearing is also the "final" hearing, the association's attorney should be prepared to present testimony as to the default to the trustee and/or to the condominium association.
The condominium association should closely monitor the accounts of its co-owners, and promptly file a lien if a co-owner becomes delinquent. Having a recorded lien in place prior to the filing of the co-owner's bankruptcy case can greatly increase the association's chances for collecting all unpaid assessments in bankruptcy. However, the absence of a recorded lien does not necessarily mean that the association should lose all hope of collection. The association's attorney should carefully review the Chapter 13 plan and determine that the plan properly treats condominium assessments, as well as file a timely proof of claim on behalf of the association. The attorney should also counsel his client that responsibility does not end at plan confirmation; the association should monitor the debtor's faithful performance of the terms of the plan, should notify of any increases in assessments, and should take prompt action upon a material default by the debtor under the plan. Taking a proactive approach to bankruptcy can minimize its effect on the association.
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