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Griffin Alexander PC, prevails in appeal of Bankruptcy Court's Decision regarding the treatment of condominium liens in Chapter 13 cases

February 18, 2016 Posted in Community Association Law

In what will be a benefit to condominiums throughout the State, when confronted with collection actions that fall into Chapter 13 bankruptcy, the U.S. District Court reversed a determination of the Bankruptcy Court that Association liens could be “stripped off” and disregarded. 

On appeal from the Bankruptcy Court, Judge Freda Wolfson of the United States District Court issued a decision yesterday reversing a ruling of Judge Gravelle finding that in Chapter 13 cases, a condominium association’s lien cannot be “stripped off” (aside from the statutory six months of maintenance provided for in the New Jersey Condominium Act).   

In the matter of, In Re Rones, 15-4271-FLW, an Association filed an amended lien on the debtors’ primary residence prior to the debtor’s filing for Chapter 13 bankruptcy.  At the time of the bankruptcy filing, it was believed that more was owed on the mortgage than the property was worth.   

The debtors filed a Chapter 13 plan proposing to only pay the Association six months of maintenance fees, and to strip off the remainder of the lien. The Association objected on the grounds that its lien was protected under the anti-modification provision of the Bankruptcy Code, 11 U.S.C. 1322(b)(2). 

The Bankruptcy Court issued an opinion finding that the lien was wholly unsecured except for the six months of maintenance fees that were entitled statutory priority under the New Jersey Condominium Act. The Court said that the remainder of the lien could be stripped off. The Bankruptcy Court and the parties all agreed that the lien was consensual in nature, and therefore a security interest. This part of the Bankruptcy Court’s decision was not contested on appeal. (Had the lien been determined to be statutory, as opposed to consensual – by agreement through the Master Deed – this would have ended the issue, because statutory liens are stripped off.)  

Despite the Court’s conclusion that the lien was a consensual one, the Bankruptcy court determined that only six months of maintenance fees would be paid, and that the remainder of the lien would be stripped off. The Bankruptcy Court decided that the Condominium Act does not elevate the lien over any other senior claims but rather provides a statutory priority for payment of a portion (six months) of those unpaid assessments.  

The Association disagreed. Griffin Alexander, P.C. produced this appeal on behalf of the Association, and an Amicus (“friend of the Court”) brief was filed by the Community Associations Institute. On appeal, the Association’s position was that the Bankruptcy Court erred because the plain meaning of the Condominium Act provision created a lien priority, not a payment priority. As the lien priority was secured by the property, and was not “wholly unsecured”, the lien could not be stripped off.  

As the Condominium Act provides that an Association’s lien has a limited priority over a first mortgage, the lien operates as a security interest in the debtor’s principal residence. When there is a security interest, secured by a debtor’s principal residence, Section 1322 of the Bankruptcy Code prohibits stripping off a lien. 

The proceedings were remanded back to the Bankruptcy Court, where the onus will be on the debtors to propose a new plan that pays the Association’s entire amended lien as secured. 

The importance of this decision for the condominium industry in New Jersey is that there now exists a clear decision that prohibits debtors from attempting to strip off any portion of a condominium lien. The lien must merely predate the filing of the Chapter 13 bankruptcy petition. The entire lien will have to get paid through the plan, or the plan will not be able to be confirmed, and the lien will survive. The debtor can convert to Chapter 7, if he/she qualifies, but that would allow the Association to foreclose on the lien.

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