An all-too-common scenario occurs when a homeowners association attempts to collect past dues and the homeowner files bankruptcy. The law is clear that the bankrupt homeowner is still liable for those post-petition dues. The United States Bankruptcy Code at Section 523(a)(16) makes the homeowner liable for “a fee or assessment that becomes due and payable after the order for relief to a [homeowners association] for as long as the debtor . . .  has a legal, equitable, or possessory ownership interest in such unit.”

In other instances the homeowner decides to walk away from the property and surrenders the property to the lender. Instead of foreclosing, however, the lender simply does nothing. Therefore, the title of the property is still in the name of the bankrupt homeowner who walked away from the property, and they are not paying the assessments. The lender has not foreclosed so they are not paying the assessments. How can the homeowners association collect these past due post-petition assessments?

In a recent bankruptcy case from the Middle District of Tennessee, Pigg v. BAC Home Loans Servicing, Bank of America, and Belle Management Corp., the bankruptcy court reviewed that very scenario. The unit owner surrendered her condominium, the bankruptcy court lifted the automatic stay, and the bankruptcy trustee filed a no asset report.

The lender did not foreclose on the property, but it did change the locks and maintain property and liability insurance on the property. The bankruptcy court determined that those actions constituted “taking possession” giving the condominium association priority over the Bank’s interest “for amounts that became due after the [lender] took possession.”

Furthermore, the court exercised its equitable powers to “fashion any remedy deemed necessary and appropriate to do justice in a particular case.” In this case, the court reasoned that the unit owner was being “denied the fresh start promised by bankruptcy” unless the court exercised its equitable powers.

Accordingly, the bankruptcy court ordered the bankruptcy case reopened and it set aside the unit owner’s discharge. The court reappointed the trustee, ordered the trustee to sell the condominium and required that the proceeds of the sale be paid in this order:

1. To the trustee,
2. To the unit owners’ association for all its past due fees and expenses,
3. To the lender,
4. To junior lien holders, and
5. To the bankruptcy estate.

This area of law will continue to change, so remember to check with your association attorney for advice and guidance.

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John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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