Last week, the 9th Circuit Court of Appeals issued an opinion that will impact condominium and homeowners who file for bankruptcy. In essence, the law has changed such that it will be more difficult to collect assessments under a certain type of bankruptcy. Furthermore, there will be new burdens on management companies, attorneys, and debt collectors to assure that associations do not attempt to collect future assessments when an owner has obtained a discharge in a Chapter 13 bankruptcy.
The case, Goudelock v. Sixty-01 Association of Apartment Owners, involved a condominium owner in Washington state who filed a Chapter 13 bankruptcy. Individuals who file for Chapter 13 bankruptcy typically earn a healthy wage and are expected to pay back a portion of their creditors during a plan that runs for three to five years. This is different than a Chapter 7 bankruptcy, where an individual is usually eligible for an immediate discharge of debt without having to pay their creditors.
While Congress in 1994 reformed the Bankruptcy Code to make it clear that owners who file a Chapter 7 bankruptcy must pay assessments that come due after the filing of the bankruptcy, Congress failed to clarify if that obligation extends to owners who file for Chapter 13.
Courts throughout the country are split on this issue. While all courts agreed that pre-bankruptcy assessments are discharged, some judges tell community associations that they are out of luck with respect to future assessments that come due in the Chapter 13 context. Instead of being able to force the owner to pay, all an association can do is foreclose and hope to recover from potential equity in the condo/home. Other courts side with associations, holding that the personal obligation to pay assessments is a covenant running with the land. In Western Washington, for example, our bankruptcy judges required owners to pay ongoing assessments in a Chapter 13 bankruptcy so long as they own the real estate and regardless of their circumstances. In Eastern Washington, judges held the opposite.
In Goudelock, the 9th Circuit has made it clear that if a condominium or homeowner files for bankruptcy in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon or Washington and doesn’t want to pay future assessments anymore, they don’t have to. Attempting to pursue an owner for future assessments during or after the bankruptcy concludes will be a violation of federal law. Associations and management companies will need to update their statements and delinquency forms to avoid inadvertent efforts to collect assessments that have been discharged in a Chapter 13 bankruptcy.
To learn more, feel free to reach out to us. Our firm has been representing the condominium association in this matter and is fully equipped to answer questions on how the decision will impact our other clients. The full opinion is available here.