In re: Michael Batali and Kellie Batali ( 2015 )

FILED
DEC 01 2015
1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. WW-14-1557-KiFJu
)
6 MICHAEL BATALI and ) Bk. No. 11-10114
KELLIE BATALI, )
7 )
Debtors. )
8 )
)
9 MICHAEL BATALI; )
KELLIE BATALI, )
10 )
Appellants, )
11 )
v. ) M E M O R A N D U M1
12 )
MIRA OWNERS ASSOCIATION, )
13 )
Appellee. )
14 ______________________________)
15 Argued and Submitted on September 25, 2015,
at Seattle, Washington
16
Filed - December 1, 2015
17
Appeal from the United States Bankruptcy Court
18 for the Western District of Washington
19 Honorable Marc L. Barreca, Bankruptcy Judge, Presiding
20
Appearances: Richard J. Wotipka of Broihier & Wotipka argued for
21 appellants Michael and Kellie Batali; Thomas J. Coy
of Condominium Law Group PLLC argued for appellee
22 Mira Owners Association.
23
Before: KIRSCHER, JURY and FARIS, Bankruptcy Judges.
24
25
26
1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may have
(see Fed. R. App. P. 32.1), it has no precedential value. See 9th
28 Cir. BAP Rule 8024-1.
1 Debtors Michael and Kellie Batali (“Debtors”) appeal an order
2 denying the discharge of their postpetition condominium
3 association assessments. For the reasons discussed, we AFFIRM.
4 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
5 The facts are undisputed.2 Debtors filed their voluntary
6 chapter 133 petition on January 6, 2011. On schedule A, Debtors
7 listed, in addition to their residence and undeveloped land, an
8 investment condominium located in Kirkland, Washington (“Kirkland
9 Condominium”) with a value of $225,000. Debtors’ schedules also
10 disclosed that Bank of America, N.A. held two liens against the
11 Kirkland Condominium originating from a first and second mortgage.
12 Debtors also listed “Mira Condominium Owners” as a secured
13 creditor with a lien against the Kirkland Condominium, describing
14 the lien as:
15 Lien: condo assoc. statutory lien
Security: [Debtors’] investment condominium
16 Past Homeowners Dues & Water/Sewer
17 Debtors did not list the debt owed to “Mira Condominium Owners” as
18 contingent, unliquidated or disputed. Debtors did not schedule
19 any postpetition assessments as potential liabilities or
20 contingent future obligations.
21 Debtors’ statement of monthly net income contained on their
22
23 2
Because the record did not include some relevant documents,
we exercised our discretion to reach the merits of the appeal by
24 independently reviewing the bankruptcy court’s electronic docket
and the imaged documents attached thereto. See O’Rourke v.
25 Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58
(9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co.
26 (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
27 3
Unless specified otherwise, all chapter, code, and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and
28 the Federal Rules of Bankruptcy Procedure, Rules 1001–9037.
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1 schedule J disclosed their average monthly income as $18,874.00
2 and their average monthly expenses as $21,420.42, which included
3 monthly installment payments of $2,846.00 on the Kirkland
4 Condominium.
5 Debtors’ revised first amended chapter 13 plan (“Amended
6 Plan”) filed September 9, 2011, did not provide for any
7 postpetition payments either within the plan or outside the plan
8 on the Kirkland Condominium and provided for the surrender of that
9 property. The Amended Plan provided: payments over sixty months;
10 that the Kirkland Condominium would be surrendered to Bank of
11 America, N.A. and “Mira Condominium Owners” upon confirmation; and
12 that “all creditors to which the debtor is surrendering property
13 pursuant to this section are granted relief from the automatic
14 stay to enforce their security interest against the property
15 including taking possession and sale[.]” The bankruptcy court
16 confirmed the Amended Plan on October 28, 2011.
17 The bankruptcy court granted relief from the automatic stay
18 to the secured lender on the Kirkland Condominium on September 9,
19 2013, thereby permitting the secured lender to foreclose upon and
20 obtain possession of the Kirkland Condominium. The secured lender
21 foreclosed on the Kirkland Condominium on July 25, 2014.
22 Likewise, on February 6, 2014, Mira Owners Association (“MOA”)
23 sought “relief from the automatic stay for purposes of pursuing a
24 judgment against the Debtor for [postpetition] assessments, dues,
25 costs, fees, and other charges.” MOA attached a copy of the
26 CONDOMINIUM DECLARATION FOR MIRA, A CONDOMINIUM (“Declaration”) to
27 its motion to modify stay. The Declaration, recorded in King
28 County, Washington, on December 20, 2006, provides: in
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1 Section 17.1, that MOA “has a lien on a Unit for any unpaid
2 Assessment levied against a Unit from the time the Assessment is
3 due[;]” and in Section 17.5, that “all sums assessed by the
4 Association chargeable to any Unit, including all charges provided
5 in this Article, shall be the personal obligation of the Owner of
6 the Unit when the Assessment is made.” Debtors did not oppose
7 MOA’s motion. On March 5, 2014, the bankruptcy court entered an
8 order granting MOA relief from the automatic stay.4 That order
9 specifically provided:
10 1. In addition to the relief from stay accorded
against the property pursuant to Debtors’ Chapter 13
11 Plan, Paragraph V, the automatic stay of [] § 362(a)
shall be and hereby is terminated as to Creditor so that
12 Creditor may enforce its rights at state law stay [sic]
for purposes of pursuing a judgment against the Debtors
13 for [postpetition] assessments, dues, costs, fees, and
other charges.
14
On April 8, 2014, MOA sent Debtors a letter demanding that
15
16 4
MOA asserted in its motion to modify stay that Debtors owed
$17,218.41 in postpetition arrears. MOA also maintained:
17
Creditor is a Washington nonprofit corporation and
18 is the community association for The Mira Condominium.
19 * * *
20 Pursuant to Creditor’s recorded condominium
declaration and [WASH. REV. CODE (“RCW”) §] 64.34.364,
21 Creditor has a statutory lien which arises automatically
and is perfected at the time assessments come due, and
22 which lien acts as security for its debt against the
property.
23
* * *
24
Debtor’s obligation to pay [postpetition] assessments is
25 an obligation arising out of a covenant running with the
land, and is not subject to the discharge. Foster v.
26 Double R Ranch Ass’n (In re Foster), 435 B.R. 650 (9th
Cir. BAP 2010). Debtor is personally liable for all
27 [postpetition] assessments coming due until such time as
the property is foreclosed on, and such assessments are
28 not affected by the bankruptcy. Id.
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1 they pay $26,507.96 in postpetition condominium association dues,
2 fees and interest through May 12, 2014. On or about August 25,
3 2014, MOA filed an action against Debtors in the Superior Court of
4 the State of Washington, King County, seeking an award of
5 “$28,672.30 for past due assessments, fees, interest, and
6 attorney’s fees and costs, plus interest and attorney’s fees and
7 costs which become due before entry of judgment, together with
8 interest[.]”
9 Thereafter, Debtors filed on October 8, 2014, a motion
10 seeking a determination that: (1) the postpetition condominium
11 association dues for the Kirkland Condominium would be discharged
12 by Debtors’ chapter 13 discharge; and (2) Debtors’ confirmed
13 Amended Plan eliminated MOA’s right to assert a claim against
14 Debtors for postpetition assessments. MOA opposed Debtors’
15 motion.
16 The bankruptcy court orally denied Debtors’ motion at a
17 hearing held November 6, 2014.5 The bankruptcy court, adopting
18 the reasoning set forth by the Panel in Foster v. Double R Ranch
19 Ass’n (In re Foster), 435 B.R. 650 (9th Cir. BAP 2010), concluded
20 that the “ongoing ownership of property with a running covenant
21 creates a postpetition claim even if the debtor does not use the
22 property.” The bankruptcy court then rejected Debtors’ res
23
5
At the hearing, the bankruptcy court noted that the
24 determination of whether a debt is dischargeable is a matter
generally determined in an adversary proceeding. Debtor and MOA
25 both waived the procedural elements afforded by Rule 7001 and
agreed that the bankruptcy court could decide Debtors’ motion as a
26 contested matter. See United Student Aid Funds, Inc. v. Espinosa,
559 U.S. 260, 272 (2010) (“Due process requires notice ‘reasonably
27 calculated, under all the circumstances, to apprise interested
parties of the pendency of the action and afford them an
28 opportunity to present their objections.’”).
-5-
1 judicata argument, concluding that the confirmed Amended Plan did
2 “not effectuate a transfer of the property[,]” and did not
3 expressly provide for the discharge of any postpetition
4 condominium association dues. The bankruptcy court entered a
5 written order on November 13, 2014, which memorialized its oral
6 ruling by providing that “the [Debtors’ postpetition] homeowner
7 assessments are not subject to discharge in this case.”
8 Debtors timely appealed. Debtors also sought reconsideration
9 of the bankruptcy court’s November 13, 2014 order. On
10 February 20, 2015, the bankruptcy court granted Debtors’ request
11 for reconsideration and entered a revised order that confined its
12 ruling solely to the dischargeability of postpetition assessments
13 in Debtors’ chapter 13 bankruptcy case.
14 II. JURISDICTION
15 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
16 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
17 III. ISSUE
18 1. Whether Debtors’ confirmed Amended Plan discharged Debtors’
19 postpetition condominium association dues.
20 2. Whether postpetition condominium association dues on property
21 surrendered under the terms of a confirmed chapter 13 plan
22 are dischargeable under § 1328(a).
23 IV. STANDARDS OF REVIEW
24 In reviewing a bankruptcy court's determination of an
25 exception to discharge, we review its findings of fact for clear
26 error. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th
27 Cir. BAP 2009). We review issues of statutory construction and
28 conclusions of law de novo. Mendez v. Salven (In re Mendez),
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1 367 B.R. 109, 113 (9th Cir. BAP 2007).
2 V. DISCUSSION
3 Debtors contend that three issues exist on appeal: (1) that
4 the confirmed Amended Plan will discharge the postpetition
5 condominium association dues owed to MOA and that the plan is res
6 judicata; (2) that the postpetition condominium association dues
7 will be discharged under § 1328(a); and (3) that the bankruptcy
8 court inappropriately ruled that Debtors’ postpetition condominium
9 association dues would not be dischargeable under chapter 7 of the
10 Bankruptcy Code. The bankruptcy court’s Amended order entered
11 February 20, 2015, renders Debtors’ third argument on appeal moot
12 and we will not discuss this issue further.
13 A. Binding Effect of Confirmation
14 Debtors argue that the terms of their confirmed Amended Plan
15 bind MOA and will result in the discharge of MOA’s claim for
16 postpetition condominium association dues. The premise of this
17 argument is correct. Section 1327(a) provides:
18 The provisions of a confirmed plan bind the debtor and
each creditor, whether or not the claim of such creditor
19 is provided for by the plan, and whether or not such
creditor has objected to, has accepted, or has rejected
20 the plan.
21 § 1327(a); Fadel v. DCB United LLC, Tr. of the Eisenhower UDT 7-
22 22-11 (In re Fadel), 492 B.R. 1, 9-10 (9th Cir. BAP 2013). The
23 bankruptcy court confirmed the Amended Plan on October 28, 2011.
24 MOA had notice of the Amended Plan and did not object. Thus, the
25 confirmed Amended Plan is binding upon MOA.
26 However, Debtors’ confirmed Amended Plan made no mention of
27 discharging Debtors’ postpetition liability to MOA and thus cannot
28 bind MOA with respect to the dischargeability of the postpetition
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1 assessments. Simply stated, MOA received neither the notice nor
2 the due process required by the Rules and Espinosa for a discharge
3 of Debtors’ postpetition condominium association dues.
4 The Panel further notes that the bankruptcy court granted MOA
5 relief from the automatic stay on March 5, 2014, so MOA could
6 specifically “pursu[e] a judgment against the Debtors for
7 [postpetition] assessments, dues, costs, fees, and other charges.”
8 The March 5, 2014 order is directly at odds with Debtors’ argument
9 here. Debtors did not seek reconsideration of or appeal that
10 order, which is now final.
11 B. Discharge of Postpetition Condominium Association Dues
Under § 1328(a)
12
13 The record does not establish whether Debtors have completed
14 their Amended Plan’s payments and are now eligible for a discharge
15 under § 1328(a). A prerequisite to the discharge on any debt
16 under § 1328(a) is that Debtors complete all the payments due
17 under the terms of their confirmed Amended Plan.6 See e.g.,
18 In re Khan, 504 B.R. 409, 413 (Bankr. D. Md. 2014) (“Until the
19 discharge is entered, Debtor is stuck for the payment of [his
20 postpetition condominium association fees].”).
21 The issue of whether postpetition homeowner or condominium
22 association assessments are dischargeable has been litigated
23 through several cases. See e.g., In re Horton, 87 B.R. 650, 652
24 (Bankr. D. Colo. 1987) (a chapter 7 debtor’s postpetition
25 homeowners’ association assessments were not discharged; “[t]he
26
27 6
If this case were converted to chapter 7 or if Debtors were
to seek a hardship discharge under § 1328(b), the Panel’s analysis
28 would not be necessary as the matter would be governed by statute.
-8-
1 benefits of owning property go hand in hand with the burdens
2 arising from ownership”); In re Rink, 87 B.R. 653, 654 (Bankr. D.
3 Colo. 1987) (postpetition condominium assessments are not
4 discharged, but “the estate is responsible for any [postpetition]
5 condominium assessments which arise during the administration of
6 the estate”); In re Montoya, 95 B.R. 511, 513 (Bankr. S.D. Ohio
7 1988) (In a chapter 7 case, the “fees assessable against a debtor
8 pursuant to a declaration of condominium ownership and the by-laws
9 of a unit owner association may be discharged as an unmatured
10 claim where the debtor abandons the condominium and all rights
11 associated with such ownership before or upon the bankruptcy
12 filing”); and In re Elias, 98 B.R. 332, 337 (N.D. Ill. 1989)
13 (“[C]ondominium assessments that accrue postpetition but arise out
14 of a prepetition contract are ‘debts’ within the meaning of
15 [§] 101(11) and are dischargeable in a Chapter 7 proceeding.”)
16 In 1990, the Seventh Circuit Court of Appeals, in
17 In re Rosteck, 899 F.2d 694, 695 (7th Cir. 1990), considered in a
18 chapter 7 case “whether the bankruptcy court’s December 1983
19 discharge order discharged the Rostecks’ obligation to pay
20 [postpetition] condominium assessments” for a condominium in which
21 the debtors did not reside. The court in Rosteck answered that
22 question by examining when the debt arose. Id. According to that
23 court, the condominium declaration was a prepetition contract from
24 which the postpetition assessments arose. Id. at 696-97.
25 Consequently, because the debtors’ “debt for future assessments,
26 based on their [prepetition] agreement to pay those assessments,
27 existed when they filed their bankruptcy petition, that debt was
28 discharged by the bankruptcy court in its discharge order.” Id.
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1 at 697. The condominium association in Rosteck argued that
2 allowing debtors in bankruptcy to escape postpetition assessments,
3 while still possibly residing in their homes, afforded debtors a
4 “head start” rather than a “fresh start.” Id. The Rosteck court
5 admitted that its decision could be “troubling” but reasoned:
6 [W]e think the broad language Congress used in the
Bankruptcy Code compels the result we reach. We have no
7 power to change that language to reach a more palatable
result. Contingent debts are still debts, and Congress
8 has not exempted the type of debt in this case from
discharge.
9
10 Id. Other courts reached a similar conclusion, See, e.g.,
11 In re Cohen, 122 B.R. 755, 758 (Bankr. S.D. Cal. 1991);
12 In re Garcia, 168 B.R. 320, 324-25 (Bankr. E.D. Mich. 1993).
13 In 1994, the Fourth Circuit Court of Appeals considered facts
14 similar to those in Rosteck and reached a different conclusion on
15 the issue of whether “a discharge in bankruptcy relieves a debtor
16 from personal liability for [postpetition] assessments of
17 cooperative housing dues.” River Place E. Hous. Corp. v.
18 Rosenfeld (In re Rosenfeld), 23 F.3d 833, 835 (4th Cir. 1994).
19 The chapter 7 debtor in Rosenfeld did not live in the property
20 and, in fact, had signed a consent order granting the mortgage
21 lienholder relief from the automatic stay. Id. The debtor,
22 however, retained ownership of the property. Id. The court in
23 Rosenfeld, like the court in Rosteck, first considered the
24 definition of the terms “debt” and “liability on a claim.” Id. at
25 836. But the court in Rosenfeld declined to follow Rosteck and
26 its progeny, which held that an association’s right to payment of
27 dues arises when the contract is made and is contingent on the
28 debtor's continued ownership of the property, and instead
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1 concluded that postpetition assessments do not arise until they
2 are assessed. The court in Rosenfeld reasoned that “the
3 obligation to pay assessments is a function of owning the land
4 with which the covenant runs” and the “obligation to pay the
5 assessments arose from [the debtor’s] continued ownership of the
6 property and not from a [prepetition] contractual obligation.”
7 Id. The court in Rosenfeld explained:
8 [The debtor’s] personal liability under the covenant to
pay assessments is not destroyed by River Place’s access
9 to alternative remedies, and even if Rosenfeld has not
exercised the benefits of ownership, as title holder he
10 has the legal right to do so. In order to terminate his
responsibility for assessments, Rosenfeld must transfer
11 title to the property, if necessary by a deed in lieu of
foreclosure. In re Horton, 87 B.R. at 652; In re Rink,
12 87 B.R. at 654. His consent to an order granting the
mortgage holder relief from the automatic stay did not
13 end his ownership.
14 Id. at 838.
15 In 1994, Congress responded to Rosteck7 and its progeny by
16 adding § 523(a)(16) to the Code. The Bankruptcy Reform Act of
17 1994 became Public Law No. 103-394 on October 22, 1994, and
18 excepted from discharge under §§ 727, 1141, 1228(a), 1228(b) or
19 1328(b):
20 [A] fee or assessment that becomes due and payable after
the order for relief to a membership association with
21 respect to the debtor’s interest in a dwelling unit that
has condominium ownership or in a share of a cooperative
22 housing corporation, but only if such fee or assessment
is payable for a period during which—
23
(A) the debtor physically occupied a dwelling unit
24 in the condominium or cooperative project; or
25
7
Legislative history indicates that The Bankruptcy Reform
26 Act of 1994 was in the drafting stages as early as January of
1994. Also, statements made on October 4, 1994, at 140 Cong. Rec.
27 H. 10753 cite only Rosteck. It logically follows that the
addition of § 523(a)(16) to the Code was a response to Rosteck and
28 its progeny, and not a response to Rosenfeld.
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1 (B) the debtor rented the dwelling unit to a tenant
and received payments from the tenant for such
2 period,
3 but nothing in this paragraph shall except from
discharge the debt of a debtor for a membership
4 association fee or assessment for a period arising
before entry of the order for relief in a pending or
5 subsequent bankruptcy case.
6 Section 523(a)(16) remained unchanged until the passage of
7 the Bankruptcy Abuse Prevention and Consumer Protection Act of
8 2005 (“BAPCPA”), Pub. L. 109-8 Stat. 23 § 442 (Apr. 20, 2005),
9 when Congress amended § 523(a)(16) to include homeowners’
10 associations and to delete the requirement that debtors physically
11 reside in or collect rents from the unit. Section 523(a)(16) now
12 excepts from discharge:
13 [A] fee or assessment that becomes due and payable after
the order for relief to a membership association with
14 respect to the debtor’s interest in a unit that has
condominium ownership, in a share of a cooperative
15 corporation, or a lot in a homeowners association, for
as long as the debtor or the trustee has a legal,
16 equitable, or possessory ownership interest in such
unit, such corporation, or such lot, but nothing in this
17 paragraph shall except from discharge the debt of a
debtor for a membership association fee or assessment
18 for a period arising before entry of the order for
relief in a pending or subsequent bankruptcy case[.]
19
20 After § 523(a)(16) was added to the Code in 1994, and putting
21 aside the issue concerning homeowner associations, the primary
22 area of litigation concerning § 523(a)(16) shifted to chapter 13
23 bankruptcy cases.
24 In 1997, a bankruptcy court considered whether postpetition
25 time-share assessments relating to a surrendered time-share
26 interest were discharged in a debtor’s chapter 13 bankruptcy.
27 In re Mattera, 203 B.R. 565 (Bankr. D.N.J. 1997). Following the
28 language of § 1328(a), the court in Mattera framed the issue as
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1 two-fold: “[W]hether the association’s [postpetition] assessments
2 constitute a ‘debt’ under [] § 1328(a), and, if so, whether that
3 debt has been ‘provided for’ by debtor’s Chapter 13 plan.” Id. at
4 570. The court, believing “that the Rosteck opinion best
5 reflect[ed] a plain reading of the statutory definition of
6 ‘claim’” and interpreting the terms “debt” and “claim” broadly,
7 concluded:
8 [A]t the time of the filing of debtor's Chapter 13
petition, the obligation of the debtor to Ocean High for
9 [postpetition] assessments was a contingent, unmatured,
unliquidated, unfixed right to payment which constituted
10 a “claim” and a “debt” for § 1328(a) discharge purposes.
The claim was contingent upon the retention of ownership
11 by the debtor, and the regular assessment of fees by the
association. The claim was not fixed in terms of a
12 certain and definite amount due at the time of the
filing of the petition. The debt would mature each month
13 as assessments were made by the association.
14 Id. at 571. The Mattera court went on to explain:
15 Our conclusion that [postpetition] assessments
constitute claims within the definition of [] § 101(5)
16 and may, therefore, be discharged as an in personam
obligation of the debtor does not mean that if the
17 debtor continues to use the unit and/or receives benefit
from it, that she may do so without compensating the
18 association. While this factual scenario is not
directly implicated here because debtor has certified
19 that she did not use or benefit from the time-share
following the filing of the petition, liability for
20 [postpetition] use and occupancy, on theories of unjust
enrichment and/or quantum meruit, might be available.
21 See, e.g., In re Lamb, 171 B.R. 52, 55 (Bankr. N.D. Ohio
1994).
22
23 Id. at 572. As to the second prong of the issue, the court in
24 Mattera concluded that the debtor’s postpetition assessments were
25 provided for in the plan because debtor’s plan provided for the
26 surrender of the time-share and specifically listed the time-share
27 association as a secured creditor. Id.
28 Years later, in a factual scenario alluded to but not present
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1 in Mattera, the Ninth Circuit Bankruptcy Appellate Panel addressed
2 whether a chapter 13 “debtor’s obligation to pay [homeowners’
3 association (“HOA”)] dues after the order for relief [was] an
4 affirmative covenant that runs with the land, unaffected by
5 debtor’s discharge, or [was] it . . . a contractual obligation
6 between the parties, making it a dischargeable prepetition debt.”
7 In re Foster, 435 B.R. at 658. Importantly, the debtor in Foster
8 did not intend to surrender his home, but instead, merely sought
9 to discharge his postpetition homeowner association dues.
10 The debtor in Foster raised two arguments on appeal. The
11 first argument involved whether § 523(a)(16) is applicable to
12 § 1328(a); the parties conceded that § 523(a)(16) was inapplicable
13 to a discharge under § 1328(a). Id. at 657-58. The second
14 argument involved whether the postpetition HOA dues constituted
15 prepetition debts that arose out of a prepetition contract. Id.
16 In addressing the debtor’s second argument, the Panel in Foster
17 did not answer the specific question of “[w]hether the omission of
18 § 1328(a) in § 523(a)(16) or vice versa [was] a statutory
19 misstep.” Id. at 659. Instead, the Panel concluded that “[u]nder
20 Washington law, the affirmative covenant to pay HOA dues is not
21 contractual, but is a covenant running with the land. As such,
22 debtor’s personal liability for the dues is an incidence of
23 ownership of his property not affected by the filing of his
24 bankruptcy.” Id. at 653.
25 In reaching its decision, the Panel first examined Rosteck,
26 Rosenfeld and the history of § 523(a)(16). Because of the broad
27 dischargeability provisions afforded chapter 13 debtors, the Panel
28 expressed its “doubt [that] the omission of § 1328(a) in
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1 § 523(a)(16) or vice versa evinces a legislative intent to
2 discharge postpetition HOA dues under § 1328(a) when the debtor
3 used the cure and maintenance provisions under chapter 13 to stay
4 in his or her property.” 435 B.R. at 559.
5 The Panel in Foster then examined Washington law and
6 concluded:
7 [U]nder Washington law and the Declaration, debtor’s
obligation to pay the HOA dues was a function of owning
8 the land with which the covenant runs and not from a
prepetition contractual obligation. As such, the
9 holding in Rosenfeld is persuasive. It follows that
debtor’s liability is “not ‘rooted in the
10 [prebankruptcy] past’, but rather [is] rooted in the
estate in property itself.”
11
12 Id. at 660-61 (quoting Beeter v. Tri–City Prop. Mgmt. Servs., Inc.
13 (In re Beeter), 173 B.R. 108, 122 (Bankr. W.D. Tex. 1994)). The
14 Panel concluded that the Rosenfeld approach was consistent with
15 the RESTATEMENT (THIRD) OF PROPERTY. Id. at 661. And finally, the
16 Panel in Foster noted the different treatment of property rights
17 and contract rights under the Bankruptcy Code:
18 While a debtor’s personal obligation under a contract
may be discharged in most instances, “bankruptcy power
19 is subject to the Fifth Amendment’s prohibition against
taking private property without compensation.”
20 In re Rivera, 256 B.R. 828, 834 (Bankr. M.D. Fla. 2000)
(quoting United States v. Sec. Indus. Bank, 459 U.S. 70,
21 75 [] (1982)). “A homeowners’ association’s right to
impose postpetition assessments pursuant to a recorded
22 Declaration of Covenants and Restrictions is within the
scope of the traditional property interests protected by
23 the Fifth Amendment.” Rivera, 256 B.R. at 834.
24 Although § 101(5)(A) defines a “claim” as a “right
to payment”, “[t]he key to distinguishing a right to
25 payment that is or is not subject to . . . discharge is
simply whether the right to payment is based on a
26 property interest or something else.” Id. at 833.
Since Washington law does not view the Declaration as a
27 contract (or “something else”) and the affirmative
covenant to pay HOA dues is one that runs with the land,
28 it follows that the Association's right to payment of
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1 unassessed postpetition HOA dues is based on a property
interest not subject to discharge under § 1328(a). The
2 Rivera court explained the reason for this rule:
3 A covenant running with the land, including any
express provision for the debtor to be personally
4 obligated to pay the homeowners’ association, is an
integral part of the property which the debtor
5 acquired when the debtor acquired title to the
property. The debtor never had title clear of the
6 previously recorded covenant running with the land.
Even though a mortgage and deed may be executed
7 simultaneously, they are separate transactions.
The debtor’s acceptance of a deed and the
8 corresponding recorded covenants, however, is one
single and inseparable transaction. Therefore, to
9 release the debtor from a recorded covenant is to
take a property interest away from the homeowners'
10 association and give the debtor a property interest
which the debtor never had in the first place. Any
11 release from a covenant would in effect be a forced
conveyance of a property interest from the
12 homeowners’ association to the debtor, something
clearly beyond the scope of the Chapter 7
13 discharge.
14 Rivera, 256 B.R. at 833–34.
15 Accordingly, we hold that, as a matter of law,
debtor’s personal liability for HOA dues continues
16 postpetition as long as he maintains his legal,
equitable or possessory interest in the property and is
17 unaffected by his discharge. In essence, the ‘running’
covenant rule in this case boils down to one of ‘you
18 stay, you pay’ since debtor’s confirmed plan indicates
he will stay in his home by curing prepetition default
19 on his mortgage and maintain on-going payments through
his confirmed Chapter 13 plan.
20
21 Foster, 435 at 661.
22 Under Washington law, the Foster Panel found that a recorded
23 condominium declaration, such as MOA’s, runs with the land and is
24 a property right that cannot be extinguished in a bankruptcy. The
25 “you stay, you pay” rule is the logical extension of that finding;
26 as long as a debtor continues to have an interest in the property
27 at issue, he cannot discharge the postpetition assessments that
28 arise from the covenant that runs with the property.
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1 Debtors construe Foster’s holding as simply one of “you stay,
2 you pay,” and argue it is not controlling because Debtors have not
3 occupied the Kirkland Condominium during the postpetition period
4 and have indicated their intent to surrender it pursuant to the
5 terms of their confirmed Amended Plan. Rather, citing
6 In re Coonfield, 517 B.R. 239 (Bankr. E.D. Wash. 2014), Debtors
7 argue that “[MOA’s] claim for the ongoing assessments that are at
8 issue . . . is merely the ‘contingent”, ‘unmatured’ and
9 ‘unliquidated’ portion of [MOA]’s pre-petition claim and its
10 status as a debt for purposes of discharge under []§ 1328(a) is
11 not dependant on characterization of the obligation as one arising
12 from ‘a covenant running with the land’ versus one ‘flowing from a
13 contract.’”
14 The court in Coonfield held that the chapter 13 debtors could
15 discharge their postpetition homeowner association dues,
16 reasoning:
17 A contrary interpretation of the law divests []
§ 523(a)(16) of significance. If personal liability on
18 such obligations arise [postpetition] as the Homeowners
Association urges, [§] 523(a)(16) is rendered
19 meaningless and simply restates a principle already
infused in bankruptcy law; i.e., that a right to payment
20 arising [postpetition] is not subject to discharge.
21 Id. at 243. Coonfield’s reasoning is not persuasive. First,
22 Coonfield runs contrary to our precedent in Foster. Moreover, as
23 discussed earlier, Congress added § 523(a)(16) to the Code in
24 response to Rosteck, which held that the debtors’ postpetition
25 condominium assessments were discharged because they were debts
26 stemming from a prepetition contractual obligation. Congress’s
27 concern with Rosteck’s holding could only be that the postpetition
28 assessments were not debts, or if they were debts, that they were
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1 not prepetition debts. This highlights the flaw in Coonfield’s
2 analysis, and also the ambiguity created by the absence of a
3 reference to § 523(a)(16) in § 1328(a)(2).
4 Foster is well-reasoned and consistent with canons of
5 statutory construction set forth by both the Supreme Court and the
6 Ninth Circuit Court of Appeals. Foster dictates that the Debtors
7 in this case may not extinguish MOA’s recorded Declaration and may
8 not discharge their postpetition assessments, even though they did
9 not reside in the Kirkland Condominium postpetition. Unlike the
10 court in Coonfield, the Panel in Foster was not persuaded “that
11 § 523(a)(16) establishes generally that postpetition HOA dues
12 constitute ‘claims’ or ‘debts’ which can be discharged [under
13 § 1328(a)].” Foster, 435 B.R. at 659. The Panel’s reasoning in
14 Foster was two-fold. Id. First, § 523(a)(16) is not applicable
15 to a discharge under § 1328(a), and second, “state law governs the
16 substance of claims.” Id. As discussed earlier, the Panel in
17 Foster found the holding in Rosenfeld persuasive and concluded
18 that under Washington law, “the HOA dues [were] a function of
19 owning the land with which the covenant runs” and as a
20 consequence, “the Association’s right to payment of unassessed
21 postpetition HOA dues is based on a property interest not subject
22 to discharge under § 1328(a).” Id. at 660-61.
23 Foster holds that the nondischargeable liability continues to
24 accrue “as long as [the debtor] maintains his legal, equitable or
25 possessory interest in the property . . . .” Id. at 661 (emphasis
26 added). While the Debtors had given up possession of the Kirkland
27 Condominium, they had not divested themselves of their legal and
28 equitable ownership interests in it. As the bankruptcy court
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1 correctly noted, surrender under the plan “[did] not effectuate a
2 transfer of the property.” See Pratt v. Gen. Motors Acceptance
3 Corp. (In re Pratt), 462 F.3d 14, 18-19 (1st Cir. 2006);
4 In re Rosa, 495 B.R. 522, 523 (Bankr. D. Haw. 2013) (“surrender
5 does not transfer ownership of the surrendered property. Rather,
6 ‘surrender’ means only that the debtor will make the collateral
7 available so the secured creditor can, if it chooses to do so,
8 exercise its state law rights in the collateral”); In re Gollnitz,
9 456 B.R. 733, 736 (Bankr. W.D.N.Y. 2011) (“Authorization for
10 surrender does not constitute a transfer of title. Rather,
11 transfer requires both the surrender of an interest and its
12 acceptance.”). Subject to exceptions not applicable here, under
13 Washington law, “[e]very conveyance of real estate, or any
14 interest therein . . . shall be by deed[.]” RCW § 64-04.010. To
15 qualify as a deed, an instrument must comply with RCW § 64.04.020,
16 which requires that “[e]very deed shall be in writing, signed by
17 the party bound thereby, and acknowledged by the party before some
18 person authorized by this act to take acknowledgments of deeds.”
19 The confirmed Amended Plan does not substitute for a deed.
20 Under the facts as presented, Debtors were the owners of the
21 Kirkland Condominium until July 25, 2014, when the secured lender
22 foreclosed. As such, the postpetition condominium association
23 dues assessed between Debtors’ petition date and July 25, 2014,
24 are not discharged under § 1328(a).
25 VI. CONCLUSION
26 For the foregoing reasons, we AFFIRM the ruling of the
27 bankruptcy court.
28
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