Source: https://lowndes-law.com/2018/02/05/discharge-of-condominium-and-homeowners-assessments-in-bankruptcy/
Timestamp: 2019-04-26 05:35:06+00:00

Document:
As a result, a few reported bankruptcy cases deal with the discharged owner’s liability for assessments. Unfortunately, those cases have not been consistent. Despite two congressional amendments to the Bankruptcy Code that were intended to clarify the law, the dispute has not been fully resolved.
One of the principal purposes of the Bankruptcy Code is to provide a means by which an honest but unfortunate debtor may obtain a “fresh start,” allowing the debtor to be rid of many debts that cannot be repaid. The discharge is subject to certain exceptions enumerated in §523 of the Bankruptcy Code, many of which relate to whether the debtor is indeed honest and unfortunate, or rather a scoundrel unworthy of a fresh start. Blackletter bankruptcy law holds that the debtor is discharged of liability only for pre-petition debts, and not for post-petition debts.2 Statutorily, that line is drawn most clearly in Ch. 7 (involving a liquidation of the debtor’s nonexempt assets in exchange for receiving an immediate discharge),3 and less so in Chs. 11, 12, and 13 (where the trade-off for receiving the discharge is that the debtor must pay at least a portion of the debts over time pursuant to an approved plan).4 Mostly, however, the ambiguity in the case of condominium and homeowners’ assessments concerns whether the assessments arise pre-petition or post-petition. Unfortunately, the courts have had divergent views.
Therefore, the court held that the post-petition assessments were actually pre-petition debts subject to discharge under Bankruptcy Code §727(b).
“The [d]eclaration expressly states that it is a covenant running with the land and binds and inures to the benefit of all present and future owners….Rosenfeld never signed the [d]eclaration itself, but his proprietary lease expressly provides that it is subject to the [d]eclaration.
Even so, gaps remain. Although §523(a)(16) currently extends to a “homeowners association,” it is not clear how assessments by nonresidentialproperty owner associations would be treated. Also, §523(a)(16) applies only to individuals, so it is not clear how assessments against nonindividual debtors in Ch. 11 would be treated.9 However, as the law now stands, the Rosteck andRosenfeld decisions have been supplanted by §523(a)(16), at least for individual debtors in Chs. 7, 11, and 12.10 In those instances, it does not matter whether the post-petition assessments arise post-petition or under a pre-petition contract because §523(a)(16) makes no distinction so long as the assessment comes “due or payable” after the order for relief.11 In Ch. 13, however, it may be a different story. Because Congress enacted §523(a)(16) to address the split of authority growing out of Rosteck, one might think that one should fall back on Rosteck and Rosenfeld to resolve disputes where §523(a)(16) does not apply. However, not all courts have agreed, and Ch. 13 has been their battleground.
Further, by enacting §523(a)(16), Congress at most recognized only that someassessments might otherwise be dischargeable, depending on state law. TheRosteck courts say that the question of whether the claim arose pre-petition or post-petition is a federal question,22 no doubt because the terms “claim” and “debt” are defined by the Bankruptcy Code. However, Rosteck itself cited Illinois law in concluding that assessments coming due post-petition arise under a pre-petition contract. Rosenfeld relied upon Virginia law in holding that those assessments arise post-petition.23 Thus, it seems that the result is governed at least in part by state law.24 By enacting §523(a)(16), Congress was not necessarily acknowledging that post-petition assessments are always dischargeable absent the exception. It may have acknowledged that in certain states they are dischargeable absent the exception.
However, Davenport noted §1305 expressly provides certain instances in which a post-petition claim is allowed under Ch. 13, and held in effect that §1305 lists the only instances in which post-petition claims can be restructured in Ch. 13.35 The court also said that §1305 does not apply unless the creditor itself seeks allowance of its post-petition claim,36 but observed that §1305 does not fully resolve the issue because the question remains whether the assessments are post-petition or pre-petition debts. As a result, the statute points inevitably back to Rosteck and Rosenfeld to make that call.
The challenge for the Rosenfeld courts is to explain why §1328(a) is not listed in §523(a)(16) and vice versa.45 One possible explanation is that there may be some states where Rosteck applies as a matter of state law. In addition,Davenport suggests that if the association were to file a claim under §1305 for post-petition assessments, those could potentially be discharged under §1328(a). Congress may have intended to expand the superdischarge to those situations without otherwise altering the discharge in those states whereRosenfeld applies. A similar argument might be that §523(a)(16) should be regarded as a safe harbor that protects post-petition assessments from discharge, but which is limited to certain circumstances and does not alter the rules of dischargeability in those instances where it does not apply.
As a result, some courts have actively sought to hold the debt dischargeable despite Rosenfeld. In In re Colon, 465 B.R. 657 (Bankr. D. Utah 2011), for example, the court sidestepped the issue of whether the obligation ran with the land, and despite noting that the debtors retained title to the property, stated, “the [d]ebtors have no consequential interest in the [p]roperty that measures up to rights to exercise ownership interests and control.”46 Of course, the question of whether the debtors’ ownership was sufficient to trigger liability was a matter of state law, not bankruptcy law. One might even suggest that it would be more appropriate for a state court judge to make that determination rather than a bankruptcy court judge. The bankruptcy courts seem motivated to resolve these issues themselves, however, where the debtor’s discharge is involved.
The courts following Rosteck and holding that post-petition assessments are included in the Ch. 13 superdischarge give more significance to every aspect of the text of §523(a)(16) and §1328(a) than do courts that hold those assessments are discharged under Rosenfeld. One can sympathize with the unfortunate debtor in Rosa. However, the analysis those courts employ is more complex than the Rosenfeld analysis and creates a number of new issues. TheRosteck courts would presumably hold that post-petition assessments against a nonindividual debtor under Ch. 11 or by nonresidential property owner’s associations remain dischargeable notwithstanding §523(a)(16). Further, not every debtor desires to abandon the property as did the debtor in Rosa. TheRosteck courts might make exception for the situation in which the debtor retains the property, but it is a struggle to explain why there should be such an exception given their statutory logic, and in particular, why a post-petition decision by the debtor should impact the discharge of what they consider to be a pre-petition debt. A debtor retaining the condominium could potentially be compelled to pay the post-petition assessments under an executory contract theory,47 but if courts treat these arrangements as executory contracts, then the debtor would presumably be required to pay pre-petition arrearages as well, pursuant to 11 U.S.C. §365(b).
A simpler approach would be to regard §523(a)(16) as a safe harbor that does not alter the underlying rules of dischargeability in those situations in which it does not apply. However, courts would still be confronted with whether Rosteckor Rosenfeld governs when the safe harbor does not apply, and there is no assurance the result would favor the unfortunate debtor in Rosa while protecting the association in other instances. Perhaps a compromise would be to hold that while Congress did not intend to codify Rosteck with the enactment of §523(a)(16), it nevertheless did intend to include post-petition assessments in the debtor’s Ch. 13 superdischarge in those states where Rosteck applies as a matter of state law. That would place the burden on the association to object if the post-petition assessments are not properly treated in the Ch. 13 plan in those states.
The disagreement between Rosteck and Rosenfeld has not been resolved. Despite congressional action, the disagreement continues to remain important in Ch. 13, as well as in cases involving nonresidential property owners’ associations and nonindividual debtors. The courts will inevitably find themselves dealing with these issues until either Congress or the Supreme Court definitively resolves the matter.
Dave Peterson has a broad background in bankruptcy and creditors’ rights, as well as commercial litigation, in general. Dave represents lenders, creditors and lessors in sophisticated Chapter 11 reorganizations and Chapter 7 liquidations. He has represented creditors in negotiating Chapter 11 bankruptcy plans, as well as litigation concerning confirmation of bankruptcy plans.

References: §523
 §727
 §523
 §523
 §523
 §523
 §523
 §523
 §523
 §523
 §1305
 §1305
 §1305
 §1305
 §1328
 §523
 §1305
 §1328
 §523
 §523
 §1328
 §523
 §365
 §523
 §523