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The U.S. District Court for the District of New Jersey Decides Case That Positively Impacts Amount Of Money A Condominium Association With A Properly Recorded Lien Is Entitled To Receive When a Unit Owner Files a Chapter 13 Bankruptcy Petition.

March 5, 2019 Posted in Community Association Law

The U.S. District Court for the District of New Jersey, in a matter captioned In Re Spradley, recently handed down a decision that positively impacts the amount of money a condominium association with a properly recorded lien is entitled to receive when a Unit Owner files a Chapter 13 petition in bankruptcy.

As you know, the New Jersey Condominium Act allows condominium associations to file liens in response to a failure to pay maintenance fees. The filing of a lien is important because in a Bankruptcy, the lien creates a "security interest", which gives an Association a certain priority compared to claims by other creditors.

This security interest does not take priority over municipal or other tax liens, and it does not give a priority over mortgages filed before the Association's lien except for 6 months of maintenance fees.  But the amount specified in the lien does receive priority over other normal debts that people incur, such a doctor bills, cable bills, credit card bills and the like.

What to do with Association liens when someone files a Chapter 13 bankruptcy has been the subject of much disagreement among the Courts hearing those cases. As you know, Chapter 13 bankruptcy is a reorganization in which the debtor does not discharge all debts, but seeks the help of the Court to keep creditors at bay until it can file a reorganization plan to pay certain of the debts and sometimes discharge others, under the supervision of the Court, through a bankruptcy trustee.

At issue in these Chapter 13 cases has been the question of whether the Association's lien must be paid off, or can be "crammed down" and discharged along with debts that are not "security interests".

In February of 2016, in a case entitled Whispering Woods Condo. Ass'n v. Rones (In re Rones), our firm won what we thought was a major victory.  The Court in that case held that the Association lien was a security interest, and that a lien, once partially secured cannot be "crammed down".  Thereafter, however, two separate Court opinions ruled that only the six (6) month part of the lien that was secured, pursuant to the Condominium Act was entitled to protection, and that the rest of the lien amount could be crammed down. 

This new case reverses course again, giving full protection to the entire lien. The Court held that no amount of an Association lien may be crammed down based upon 11 U.S.C 1322(b)(2), which the Court found requires that when any portion of a lien is entitled to priority, no portion of a lien may be crammed down.

The bottom line is that this new case prevents cramming down some or all of an Association's liens in Chapter 13 cases. This means that the debtor must include the Association's debt (or at least the portion covered by a lien) in its plan for repayment. While it may take up to 5 years to get paid under a Chapter 13 reorganization plan, at least the debt gets paid.

The good news about this new case - In re Spradley - is that it was an appeal from the Bankruptcy Court, where there has been so much disagreement among judges, and is the first decision on point at the appellate level.  Hopefully, the precedent of In re Spradley will remain in effect, but we caution that there continues to be disagreement on this point, and the distant future is uncertain.

We hope that this explanation has been helpful. For further information, please feel free to contact us at Griffin Alexander, (973)366-1188.

The information in this Client Alert is provided solely for information purposes. It should not be construed as legal advice on any specific matter and is not intended to create an attorney-client relationship. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based upon particular circumstances.  Each legal matter is unique, and prior results do not guarantee a similar outcome.


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