– By Laurie S. Poole, Esq., and Jennifer Todd (originally published in Fall 2001)
In all bankruptcy cases, the debtor is required to pay his or her homeowner association assessments that become due and owing after the date of the filing of the bankruptcy (also known as “post- petition” assessments). Many times, owners that file bankruptcy and either reside in the property located within the association or receive a monetary benefit from the property do not pay these post-petition assessments. Associations are left wondering how can they collect these assessments while the owners’ bankruptcy case is still pending.
This was the issue raised in a recent Virginia bankruptcy case, In re: Reynard. In the Reynard case, the debtors filed a bankruptcy case under Chapter 13 of the Bankruptcy Code (“Code”). The debtors proposed to pay their pre-petition debts in 3 years, through the bankruptcy case. However, debtors failed to pay the homeowners association assessments that became due on their property for eleven months after they filed their bankruptcy case. The association wanted to collect these post-petition assessments through a lawsuit since the debtors’ property was foreclosed upon by the holder of the first deed of trust.
Upon filing bankruptcy, a law immediately goes into effect under Section 362 of the Code which prohibits creditors from taking any action against the debtor seeking to recover a debt that arose prior to the bankruptcy case. This law is known as the “Automatic Stay.” In the Reynard case, the association filed a Motion For Relief From Automatic Stay (“Motion”) seeking permission to file a lawsuit against the debtors for the delinquent post-petition assessments.
The court determined that the Automatic Stay did not prevent the commencement of a lawsuit to collect post-petition assessments since the claim did not arise prior to the filing of the debtors’ Chapter 13 case. As such, the court denied the association’s Motion indicating that it was premature. The court did recognize that the Automatic Stay would prevent the association from executing any judgment obtained while the debtors’ bankruptcy case was pending since section 362 prevents any act to exercise control over “property of the estate” which could include debtors’ earnings. The court stated:
|…the appropriate time to seek relief from the stay is after a final judgment has been obtained in state court and relief is necessary to execute against property of the estate.|
It is important to note that because this case is from Virginia, a California bankruptcy court would not be bound to follow this decision, but could find its reasoning persuasive. Also, associations should understand that the only action the association in the Reynard case could take without first filing a Motion for Relief was to file a lawsuit against the debtors. Since attempting to record a lien or foreclose on a lien against property owned by debtors in an active bankruptcy case would violate the Automatic Stay, a Motion for Relief should be obtained prior to filing a lien or attempting to foreclose. As with any bankruptcy issue, associations should consult with legal counsel prior to taking any action against an owner who has filed a bankruptcy case.