02/22/2016

Client Alert

Written by: Jonathan H. Katz, Esq.

The District Court recently delivered a rare win for condominium associations throughout New Jersey dealing with bankruptcy actions filed by their residents. The Court reversed a 2015 decision that allowed debtors filing Chapter 13 bankruptcy petitions to “strip off” or “cram down” an association’s lien, which in most cases resulted in that the association only receiving six (6) months of assessments and having to write off as bad debt all of the remaining unpaid amounts.

On February 17, 2016, the United States District Court for the District of New Jersey issued a decision in In re Rones (Civil Action No. 15-4271), which denied a debtor’s attempt to strip a condominium association lien as part of a Chapter 13 bankruptcy action. In Rones, the District Court reversed the Bankruptcy Court’s determination that the association’s lien is wholly unsecured and may be stripped off in the Plan with the exception only of the six (6) month “limited priority” afforded pursuant to the New Jersey Condominium Act. Rather, the District Court held that since the lien at issue has limited priority over the mortgage on the property, it is partially secured and therefore no portion of the lien can be stripped off under the anti-modification clause of the Bankruptcy Code.

The pertinent facts of the case are as follows: Mark and Ronda Rones own a unit within the Whispering Woods Condominium Association, Inc. (the “Association”). When the Rones became delinquent in the payment of their common expense assessments, the Association recorded liens on their unit in March 2013 and again in January 2014. In December 2014, the Rones filed a Chapter 13 bankruptcy petition. As part of their Chapter 13 Plan, the Rones argued that because their mortgage exceeded the value of the unit, they should only be responsible to pay six (6) months worth of unpaid assessments and could treat the remaining amounts secured by the Association’s liens as unsecured and “stripped off.”

The Association objected to confirmation of the Rones’ plan, but the Bankruptcy Court held that except for six (6) months of assessments entitled to statutory priority pursuant to the Condominium Act, the remainder of the lien could be “stripped” in the plan. The Association appealed, and the District Court reversed, finding that the Bankruptcy Court misinterpreted the Condominium Act’s limited “super-priority” for assessment liens as being for payment purposes only and not changing the priority of the lien itself. Instead, the District Court held that the Association’s lien has a limited priority over the Rones’ mortgage, which made it partially secured by a security interest in the debtor’s principal residence and thus unable to be stripped off or crammed down under Section 1322 of the Bankruptcy Code.

Put simply, this decision now prohibits condominium owners who file Chapter 13 bankruptcy petitions from being able to avoid payment of delinquent common expense assessments that have been secured by an association recording a lien on the unit prior to the bankruptcy filing. Please note: because of the limited priority granted by the Condominium Act, this decision only applies to condominium associations and not homeowners associations or other planned unit developments in New Jersey. Again, this decision is a huge win for condominium associations in trying to collect delinquent assessments from its owners, and it is also a not-so-subtle reminder to condominium associations throughout New Jersey of the necessity of properly recording and updating liens when appropriate.

You can read the District Court’s decision in In re Rones by clicking here.