Chapter 13 Bankruptcy: How Does it Affect Condominium Associations?

Condominium owners’ associations are unique under Florida law—particularly when it comes to the collection of delinquent assessments and liability. The already complicated bankruptcy process thus becomes even more complex when a condominium owner with unpaid assessments is involved. Assessments that arose prior to the filing of the bankruptcy petition are subject to discharge in the bankruptcy. But, the question then arises as to whether or not the unit owner is liable for post-petition assessments. While an owner/debtor who files for Chapter 7 is personally liable for assessments arising post-petition, there is a split in authority among Florida’s bankruptcy courts as to whether a unit owner remains personally liable for assessments when he or she files Chapter 13.

A Chapter 13 bankruptcy allows the owner/debtor to create a plan for paying all or a portion of his or her pre-bankruptcy debts. The plan must be approved by the bankruptcy court and may include discharging or relieving the debtor of responsibility for some pre-bankruptcy debts. The bankruptcy courts are in agreement that a Chapter 13 bankruptcy does not affect the association’s assessment lien against the unit, but they are not in accord on the issue of personal liability for the assessments—i.e., whether the unit owner herself is liable for the assessments or if the association must pursue its assessment lien against the unit itself (known as an in rem proceeding).

One Florida bankruptcy court has ruled that a Chapter 13 bankruptcy discharges the owner’s personal responsibility for the debt, but still allows the association to proceed in rem against the unit. However, another Florida bankruptcy court, just a few days later, held that, while the bankruptcy petition extinguished the pre-petition assessment debt, the owner still remained personally responsible for post-bankruptcy assessments for as long as he owned the unit.

In In re Ramirez, Case No. 08-29681 (Bankr. S.D. Fla. Mar. 2016), the owners of the unit filed a Chapter 13 petition and named their condominium association as a secured creditor in their bankruptcy plan, due to the owners’ unpaid assessments. The owners completed all payments due under their plan and received a discharge from bankruptcy. Subsequent to the discharge, the association made a demand for payment of post-petition assessments. When the owners refused to make payment, the association filed suit against the owners, subsequently obtaining a money judgment against them. The owners responded to the lawsuit by seeking sanctions against the association for violating the bankruptcy court’s discharge order.

The Bankruptcy Court for Florida’s Southern District found that the owners had no personal liability to pay post-petition assessments, but nonetheless, the association’s lien for assessments was still valid as it was a covenant that ran with the land. The Court looked to Chapters 5 and 13 of the Bankruptcy Code and held that, according to Chapter 5, a discharge does not apply to assessments coming due post-bankruptcy for as long as the debtor owns the property. But, the Court also found that, per Chapter 13, when a debtor completes her Chapter 13 plan, she is discharged of all debts listed therein, except for certain debts made non-dischargeable by specific sections of the Bankruptcy Code. The Court held that Chapter 5’s non-discharge provision was not one of Chapter 13’s discharge exceptions, and thus post-bankruptcy condominium assessments are not discharged. Accordingly, while the association could not pursue the owners directly for the post-petition assessments, it was still able to foreclose its lien as a means of satisfying the post-petition assessments.

However, just a few days later, in In re Federico Augusto Montalvo, 536 B.R. 880 (Bankr. M.D. Fla. Feb. 2016), the Bankruptcy Court for Florida’s Middle District came to the opposite conclusion. There, the debtor/owner owned two condominiums within a community. The owner filed for Chapter 13 bankruptcy and named the condominium association as a secured creditor in his bankruptcy plan. The owner subsequently received a discharge from bankruptcy when he completed his plan. The debtor then also surrendered the units, but title remained in his name.

Pursuant to Florida law, the association then began collecting rents from the tenants in the units, applying the monies collected to the oldest assessments, which had arisen pre-petition. The association also sought to collect assessments that arose post-petition. The owner responded by moving for sanctions in the bankruptcy proceeding, arguing that the association violated the discharge order when it applied the collected rent to the pre-petition assessments, and also for collecting the post-petition assessments from him personally.

The Court ruled for the association, finding that it was entitled to use the collected rent monies to satisfy pre-petition assessments, as the association was not collecting directly from the owner himself. Additionally, the Court held that the condominium declaration created a covenant that ran with the land from the time of discharge until the owner transferred title, and thus the owner was personally liable for all post-petition assessments. The Court went on to find that that the owner’s surrender of the units did not require him to turn over physical possession of the units, as surrender of the units was not equivalent to foreclosure. Because the mortgage lender had no right to possession of the unit until transfer at a foreclosure sale, the owner continued to own the property until he transferred title and therefore remained liable for the assessments so long as he is the record owner. Resultantly, in contrast to In re Ramirez, the unit owner was found personally liable for the post-petition assessments.

Based on the foregoing, it is unclear how Florida courts will treat liability for post-petition assessments in Chapter 13 bankruptcies. It is equally as possible that a court will rule that the post-petition payments are not the responsibility of the owner, but may be enforced against the unit, as it is that the court will rule that the owner is responsible for the assessments as they come due. Accordingly, associations and their attorneys must carefully assess their strategy for how to collect post-petition assessments when an owner files for Chapter 13 bankruptcy, taking both of the above cases into account.