– By Steven Kirkland, Esq. (originally published in July 1999)

With the continuous rise of bankruptcy filings, those of us involved in collection of homeowners’ assessments are all too familiar with the effect a bankruptcy discharge order has on the ability to collect assessments that were delinquent when the homeowner filed for bankruptcy protection. The slate is wiped clean and the delinquent account immediately becomes “current.” This can be a bitter pill to swallow while lying next to the debtor at the community pool (the very one that the assessments are maintaining). On the other hand, most of us can understand the concept behind the bankruptcy “fresh start”—everyone makes mistakes and everyone deserves a second chance.

The waters become muddy when attempting to understand the bankruptcy code’s treatment of collecting assessments that have become due after the bankruptcy has been filed (known as “post-petition” assessments). Pursuant to the code, if the debtor does not physically occupy the dwelling or does not receive income from renting the residence, the debtor may “abandon” the property and become immune from paying post-petition assessments.

From an association’s perspective, usually the bleeding does not stop (and assessment payments begin) until the residence is foreclosed upon by the lender, a circumstance that can literally take years. This post-petition, pre-foreclosure state of limbo generates more frustration than all the poor tee shots and missed putts of this century.

Some relief for this problem was the result of a recent federal appellate court decision, In re Lozada. In that case, the Lozadas were sued by the Old Bridge Estates Community Association to recover $581.57 in post-petition assessments which had accrued after they had vacated their property in the association and filed for bankruptcy. The Lozadas unsuccessfully argued that the post-petition debt should have been discharged through their Chapter 7 bankruptcy pursuant to 11 U.S.C. Section 523(a)(16) which states, in pertinent part:

A discharge… of this title does not discharge an individual debtor from any debt — (16) for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a dwelling that has condominium ownership or in a share of a cooperative housing corporation. 11 U.S.C.523(a)(16)

The bankruptcy court looked to the plain wording of the statute and declined to discharge the post-petition debt because the Lozada’s residence was not located in either a “condominium project” or a “cooperative housing corporation.” The court reasoned that, while similar in many ways, a homeowners’ association fee still differed from that of a condominium and cooperative association fee. The court further noted that had the legislature meant to include other types of homeowners’ association fees into the conditions of discharge, it would have done so in the statue. Thus, the court concluded that while the Lozada’s had vacated their property in the association, their post-petition assessments were not discharged in the bankruptcy case and they were liable for those assessments.

How does the Lozada decision affect my association?

Because this decision came from a federal appellate court in Virginia (the Fourth Circuit), the Lozada holding is not binding in California, (the Ninth Circuit). This means that a bankruptcy court in California would not have to treat this decision as law. However, the Lozada case could be cited as persuasive authority as to how one court has treated this issue. What is encouraging is that the court simply relied on the “plain language” of Section 523(a)(16) in reaching its conclusion that post-petition assessments arising outside of a condominium or stock cooperative project are not dischargeable, despite the debtor’s abandonment of the property and lack of receiving rental income.

We can only hope that this argument will be raised and found to be equally as compelling by a California bankruptcy court.

While condominium and cooperative housing corporations may continue to experience the frustration of the post-petition state of limbo, other types of homeowners associations may see some light at the end of the bankruptcy tunnel.