Condominium Association Fees in a time of COVID 19

April 21, 2020

By: Brian T. Gallagher

In 427 BC, the philosopher Plato said “strange times are these in which we live.”  Over 2,000 years later this quote feels especially accurate.  These are not only strange times, but they are scary times.  For those living, working and servicing the condominium association industry, these are going to be challenging times.

Community associations are principally designed to centralize management of common areas of the property, provide services for owners, and develop a sense of community through social activities and/or amenities.  The lifeblood of this purpose is the ability to assess and collect association fees.  When the members cease paying the monthly dues, and the association ceases to enforce collection, it is a death spiral that leads to vacancy, property damage, and ever decreasing property values.  Part and parcel to that death spiral is bankruptcy.  

In these ‘strange’ times we will inevitably see an exponential spike in owner bankruptcy filings.  Condominium associations need to be prepared to deal with an increase in owner bankruptcy filings.  To that end, this paper is intended to provide legal guidance regarding the implications of an owner bankruptcy filing and the rights and liabilities of the condominium association. Please note that this paper only concerns condominium associations, as opposed to homeowners association. There are significant legal differences between the two entities in the context of a bankruptcy filing and I hope to address homeowners association in a separate note.  Additionally, this paper focuses primarily on condominium associations in Maryland, Virginia and the District of Columbia.  

In Personam v. In Rem Liability

A little Latin is necessary to completely understand the rights of a condominium association in bankruptcy.  In the context of condominium association fees, there are two separate types of liability an owner faces when they do not pay.  The first is in personam liability.  This is the type of liability that subjects you to a personal money judgment.  For instance, if you don’t pay $10,000 in condominium association fees, then you are personally liable to the association for $10,000.  The second type of liability is in rem liability.  In Latin, this translates to “against or about a thing.”  This is the right to proceed against the owner’s property, typically by way of a foreclosure or sheriff’s sale.  As will be explained below, a bankruptcy discharge has severe implications on whether a condominium association is entitled to pursue an owner personally for condominium fees (in personam liability), or whether they are limited to foreclosing on the property (in rem liability).   

Chapter 7 Bankruptcy

When an owner files for bankruptcy, the first thing a condominium association should do is consult their attorney in order to assess the best course of action.  A Chapter 7 Bankruptcy is a liquidation filing for people with limited incomes.  In this type of filing, the bankruptcy trustee will assess whether the debtor has any assets that can be liquidated for the benefit of the creditors.  If there are assets, the trustee will liquidate the assets and distribute the funds pro rata to the creditors.  If not, the debtor will typically receive a “no asset” discharge.  This means that any debts owed by the debtor as of the time of the Chapter 7 filing are discharged.  This has several implications for a condominium association.

  • Liability for Pre-Petition Condominium Association Fees.
    When a condominium owner obtains a Chapter 7 Bankruptcy discharge, his in personam liability for pre-petition condominium fees is discharged.  This means that the condominium association cannot send demand letters, file a lien, or institute a lawsuit for condominium association fees that were incurred prior to the time the owner filed his bankruptcy petition.  See 11 U.S.C. § 727. However, the discharge extinguishes only “the personal liability of the debtor.” 11 U.S.C. § 524(a)(1).  The Chapter 7 discharge has no effect on the validity of an association's recorded lien against the owner's unit for unpaid condominium fees and it does not affect an association's ability to pursue its in rem right to foreclose its lien against owner’s condominium unit.
     
  • Post-Petition Liability.
    What about condominium association fees that are incurred after the owner files for bankruptcy? The Bankruptcy Code was amended in 2005 to specifically address post-petition condominium association fees in Chapter 7 cases.  As stated by 11 U.S.C. §523(a)(16), personal liability continues after discharge on condominium fees in cases under Chapter 7.  In re Khan, 504 B.R. 409, 413 (Bankr. D. Md. 2014), as corrected (Jan. 30, 2014); citing 11 U.S.C. §523(a)(16).  This means that condominium association fees incurred by the owner after they filed a Chapter 7 Bankruptcy petition are not subject to discharge and the owner remains personally liable for those fees as they come due.  As such, the condominium association can pursue those post-petition fees by way of a lawsuit against the owner, by recording a lien, and by foreclosing on that lien.  

Chapter 13 Bankruptcy 

A Chapter 13 bankruptcy filing is called the “wage earner’s plan” because it allows an individual with regular income to repay their debts through an approved “Plan.”  Depending on the circumstances, the Plan will be for a period of three or five years, at the conclusion of which the debtor will receive a discharge of all pre-petition debts.  Chapter 13 is starkly different for condominium associations than a Chapter 7 filing and it is important to understand those distinctions.  Failing to recognize the distinctions can land an association in hot water for violating the law against attempting to collect a discharged debt.  

  • Liability for Pre-Petition Condominium Association Fees.
    Same as a Chapter 7 discharge.  The owner’s in personam liability for pre-petition condominium association fees is discharged.  In rem liability remains and the association is free to foreclose on any recorded liens (assuming they obtained relief from the stay or the case is closed). 
     
  • Post-Petition Liability.
    Unfortunately, the 2005 amendment to the Bankruptcy Code referenced above only applied to Chapter 7 filings.   After a Chapter 13 discharge, the condominium owner is NOT personally liable for condominium fees that accrue post-petition.  In re Khan, 504 B.R. 409, 414 (Bankr. D. Md. 2014), as corrected (Jan. 30, 2014).  That said, post-petition condominium fees continue as an in rem obligation. Id, citing In re Colon, 465 B.R. 657, 662–63 (Bankr.D.Utah 2011). This means that while the condominium association can still file liens against the owner and the property for post-petition condominium association fees, it cannot seek to obtain a personal money judgment against the owner for post-petition condominium association fees.

Conclusion 

The bottom line is that a condominium association needs to consult with their attorney when dealing with an owner that is either in bankruptcy, or who has previously filed for bankruptcy.  Going it alone and making a mistake can subject your condominium association to significant liability.  This liability arises in the form of allegations that you violated the automatic stay of §362 by trying to collect a debt while the debtor is still in bankruptcy, or that you violated the bankruptcy discharge by attempting to collect on a debt in violation of the debtor’s bankruptcy discharge.  A simple call to your attorney can save months of headaches.  

 

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