Court Permits Strip-off of Lien for Delinquent HOA Assessments

A condominium lien which is wholly unsecured under section 506(a) by virtue of a first mortgage may be treated as unsecured in the chapter 13 plan and may be avoided through the mechanism of either a valuation hearing under Fed. R. Bankr. P. 3012 or through a stand-alone adversary proceeding. The court rejected the condo association’s attempt to benefit from the state’s “super lien” law in light of the fact that no judicial sale of the property had taken place. Sligh v. Northpoint I Condominium Assoc., No. 14-14544, Adv. Pro. No. 15-56 (Bankr. E.D. Pa. Dec. 3, 2015).

The condominium association filed a claim in Ms. Sligh’s chapter 13 bankruptcy for delinquent assessments secured by Ms. Sligh’s condominium unit. Ms. Sligh responded with an adversary complaint seeking a finding that because the condominium is subject to a first mortgage that exceeds its value, the condo association’s claim should be treated as wholly unsecured subject to discharge and the lien should be stripped-off.

The court agreed. It rested its analysis on section 506(a) which “generally allows for the bifurcation of an undersecured claim into a secured claim and an unsecured claim if the unpaid balance of a claim exceeds the value of the property securing the claim.” In a footnote, the court acknowledged the split in the case law on the issue of whether a lien for unpaid condominium assessments is a “statutory lien” or is a “security interest” that may not be amenable to bifurcation under the anti-modification clause in section 1322(b)(2). In this case, the parties stipulated that the lien was a statutory lien, and, in any case, the court noted that under In re McDonald, 205 F.3d 606, 611-12 (3d Cir. 2000), because the lien was wholly unsecured, it would be strippable even if it were a security interest. The court further noted that Dewsnup v. Timm, 502 U.S. 410 (1992), does not prevent strip-off in chapter 13 of a lien that is valueless, and that in the Eastern District of Pennsylvania, the accepted mechanism for strip-off is through an adversary proceeding or valuation hearing.

[For an extensive discussion of the nature of condominium liens—i.e. consensual, judicial or statutory—see In re Rones, 531 B.R. 526 (Bankr. N.J. 2015) (currently on appeal to the district court, No. 3:15-cv-4271, (filed June 24, 2015).) That court found the lien was a wholly unsecured security interest which could be stripped and the fact that under New Jersey law statutory priority was afforded a portion of the lien did not alter its valuation as unsecured under section 506(a). It could therefore be stripped off without offending the anti-modification provision in section 1322(b)(2).] Rones Bankr NJ opinion June 2015

The Sligh court rejected North Point’s argument that under state condominium law, a portion of its lien had priority over other later-recorded liens as a “super lien.” In the case of an earlier recorded lien, state law provides that a condominium association’s lien shall be divested except for common expense assessments “that come due during the six months immediately preceding the date of a judicial sale.” 68 Pa.C.S. §3315(b). The court found that North Point’s lien did not meet the requirements of the statute to qualify as a super lien because there had been no judicial sale of the property. The court declined North Point’s suggestion that, because there was no judicial sale, it use the bankruptcy filing as the look-back point and give super lien status to the fees that came due in the six months preceding that. The court found that there was no legislative justification for reading the statute that broadly. The court concluded that the lien was wholly unsecured and was subject to strip-off upon Ms. Sligh’s successful completion of her chapter 13 plan.

Sligh Bankr ED Pa opinion Dec 2015