Post-Petition Condo Fees Dischargeable

Posted by NCBRC - July 11, 2018

Condominium association assessments that become due after the debtor has filed for chapter 13 bankruptcy are dischargeable. Goudelock v. Sixty-01 Ass’n of Apartment Owners, No. 16-35384 (9th Cir. July 10, 2018).

When chapter 13 debtor, Penny Goudelock, stopped her condominium association (CA) payments in 2009, Sixty-01 initiated foreclosure proceedings. In March 2011, Ms. Goudelock moved out of her condominium. She filed for bankruptcy and surrendered her unit. Sixty-01 filed a proof of claim for $18,780.35 for unpaid pre-petition assessments and noted that the assessments continued to accrue at $388.46 per month. The mortgage lender foreclosed on the property in February, 2015 and Ms. Goudelock successfully completed her plan in July, 2015. Sixty-01 moved the bankruptcy court for an order finding that the CA assessments that accrued between the time Ms. Goudelock filed her bankruptcy petition and the time the mortgage lender foreclosed were not dischargeable. The bankruptcy court granted summary judgment in favor of Sixty-01 and the district court affirmed. Goudelock v. Sixty-01 Ass’n of Apartment Owners, No. C15-1413-MJP, 2016 WL 1365942 (W.D. Wash. Apr. 6, 2016).

Noting that the issue of whether post-petition CA assessments are dischargeable in bankruptcy has not been addressed by any circuit court in the context of a chapter 13 case, the Ninth Circuit looked at two chapter 7 cases in which the courts reached opposite conclusions: Matter of Rosteck, 899 F.2d 694 (7th Cir. 1990) (finding that post-petition CA assessments are dischargeable, unmatured, contingent debts, based on the homeowner’s contract), and In re Rosenfeld, 23 F.3d 833 (4th Cir. 1994) (CA assessments run with the land and create new, nondischargeable debt as they accrue).

The Goudelock court agreed with the Seventh Circuit. It was persuaded by the plain language of the Code and operation of Ninth Circuit law.

Starting with section 101(5)(A), the court found that a “claim” is broadly defined to include an unmatured, contingent right to payment. The court turned to Ninth Circuit jurisprudence to determine the issue of when Sixty-01’s claim arose. The Ninth Circuit applies a “fair contemplation” test under which a claim is found to arise “when a claimant can fairly or reasonably contemplate the claim’s existence even if a cause of action has not yet accrued under nonbankruptcy law.” Under that test, the court reasoned that when Ms. Goudelock entered into the condominium agreement upon purchase of her unit, Sixty-01 could contemplate that she would accrue liability for monthly CA assessments. The court thus found that her in personam obligation to pay the assessments arose at the time she bought the condominium and matured monthly as long as she continued to own the unit.

As unmatured, contingent debts, therefore, the court found the assessments were dischargeable under section 1328(a) unless they fell under one of the exceptions to discharge listed in section 1328(a)(1)–(4). Because Congress did not include CA assessments in the list of debts that are excepted from discharge, Sixty-01 argued that Congress’s silence was inadvertent and that the court should find them nondischargeable. The court disagreed, finding that even it were true that the omission of CA assessments from the exceptions-to-discharge provision was congressional error, it was up to Congress, not the courts, to correct the error.

The court went on to reject Sixty-01’s argument that permitting discharge of the post-petition CA assessments amounted to a violation of the Fifth Amendment’s Takings Clause. The court found that the Takings Clause pertains to in rem rights and, as Sixty-01 retained those rights with respect to the property, that clause was inapplicable.

Finally, the court addressed Sixty-01’s argument that as a court of equity, the bankruptcy court was in a position to prevent the unfair result of a debtor being allowed to live rent free in her condominium. In this case, the debtor surrendered the property and moved out, but the court found that was not dispositive of the issue as its holding would apply to a debtor who remained on the property. Rather, the court acknowledged the existence of the equitable quandary, but concluded that the Bankruptcy Code resolved the issue in favor of the debtor.

NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor.

Goudelock 9th Cir July 2018


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