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Is homeowner liable for assessments after Chapter 7 bankruptcy and abandonment of home?

newsMy colleagues at the Raleigh firm of Jordan Price Wall Gray Jones & Carlton, well-known for their HOA expertise, published an article on a case they handled involving a common bankruptcy issue: when a homeowner files Chapter 7 and moves out of the home, indicating in their bankruptcy petition that they are surrendering the home back to the mortgage lender, is the  homeowner still liable for ongoing HOA assessments if the lender does not foreclose?  

A homeowner files for chapter 7 bankruptcy.  At the outset of the case, the homeowner declares that they will be “surrendering” the property in order to allow for the bank take property back through foreclosure.  However, the bank sits on its rights and delays foreclosing on the property for months, if not years. All the while, the homeowner’s association assessments continue to accrue and remain unpaid during this time to the detriment of the association and its members.  This is a frustrating situation for many associations and has been occurring all too frequently in the last 3 years of economic downturn.  Can the association pursue the homeowner-debtor for the assessments that have accrued after the bankruptcy filing and before the foreclosure, even though the homeowner has “surrendered” the property?

An even more troubling scenario – the association tries to collect from the homeowner, still legally the titled owner of the property, and in response gets a motion  from  the  debtor’s attorney  for monetary  sanctions against  the association  for  violation  of  the  federal  bankruptcy  laws.    These  sanctions motions have also become an all too frequent occurrence in recent years.  Panic is the most common reaction from most volunteer HOA boards.    The idea of risking possible hefty fines from the court, and further legal fees to the association’s attorney to fight the penalties, is simply too much of a risk for many associations.   In these situations, it often takes one association to stand up to enforce the law.  Thanks to the tenacity and courage of the Board of the Churchill Community Association in Knightdale, North Carolina, and their community manager who advises the Board, we now have clear direction from the court and hope these tactics will be a thing of the past.  Churchill COA is managed by Crystal Whittenton, PCAM, of PPM, Inc. in Raleigh.

A bankruptcy judge in the Eastern District of North Carolina has now confirmed that YES, the association can pursue the homeowner-debtor for post- petition assessments so long as the homeowner-debtor remains the owner of the property.   This is true even if the homeowner has abandoned the property and is not living there.  Simply put, just because the homeowner declared their intent to surrender the property, the declaration in itself does not transfer title of the property to the bank.  The “surrender” only means that the homeowner is not going to challenge the bank (or the HOA) enforcing its rights to pursue recovery of the property through foreclosure.

With respect to post-petition assessments, a particular provision of the Bankruptcy Code, 11 USC §523(a)(16), explicitly states that that so long as the debtor-homeowner has a legal, equitable or possessory interest in the property, the  homeowner-debtor  will  be  responsible  for  the  association  assessments. This means that even if the homeowner-debtor has indicated that they are going to  surrender  the  property,  and  even  if  they  have  in  fact  moved  out  of  the property, the homeowner-debtor is still responsible for the post-petition assessments as he retains title to the property.

The law firm of Jordan Price Wall Gray Jones & Carlton was pleased to represent the Churchill COA in securing an order entered on August 29, 2012 from the Bankruptcy Court in Raleigh in In re Weber, 09-09438-8-SWH.  Churchill COA filed a state court lawsuit to collect unpaid assessments that had accrued after the homeowner filed for chapter 7 bankruptcy (suit was filed after the bankruptcy case was closed).   In the course of the bankruptcy case, the homeowner had declared her intent to surrender the property and in fact moved out of the property shortly after the bankruptcy filing.  Even though the debtor moved   out   in   late   2009,   the   lender   allowed   nearly   2   years   of   unpaid homeowner’s association assessments to accumulate without moving to foreclosure – of course, the Bank was not being paid during this time either, but never made a move to foreclose.  In response to the Churchill lawsuit, the debtor filed a motion seeking to sanction the association for violating the automatic stay.  Following the clear language of the Bankruptcy Code, the Bankruptcy Court ruled that the homeowner’s association did not violate the automatic stay or the discharge injunction in pursuing post-petition assessments.  The motion for sanctions was dismissed and the Association’s lawsuit allowed to proceed.

While the Weber case is a good example of what can be done to pursue post-petition  association  assessments,  it  is  extremely  important  to  note  that

§523(a)(16) only applies for assessments that accrue after the bankruptcy has been filed.  Any attempt to pursue collection of pre-petition assessments (even a demand  letter)  is  outside  the  scope  of  this  section  and  will  subject  the homeowner’s association to sanctions for violating the automatic stay or the discharge injunction.   Also, it remains unclear how this situation would be resolved in a Chapter 13 filing.  The Weber decision is certainly a great tool, though, for HOAs in defending this new trend of sanctions motions and attempting to recoup some of these lost assessments that fall into the “no-man’s land” when the bank is dragging its feet on foreclosure.

Hope Derby Carmichael and Philip W. Paine are partners with the Raleigh firm of Jordan Price Wall Gray Jones & Carlton, PLLC.  Mrs. Carmichael practices exclusively in the area of community associations and condominium law, and Mr. Paine specializes in bankruptcy law in all areas.