The Treatment of HOA Liens During a Debtor’s Bankruptcy Proceedings
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Homeowners’ Associations (HOAs) have remedies available, under Florida law, when its residents fail to pay their periodic HOA assessments in a timely manner. One such remedy is a statutory lien pursuant to Chapter 720, Florida Statutes. According to Florida law, when a community is subject to mandatory HOA fees, the HOA has the statutory authority to levy assessments and to secure its claim for any unpaid assessments by placing a lien on the debtor’s property within that community. Fla. Stat. § 720.3085(1).
Once recorded, the HOA’s statutory lien can only be satisfied upon payment in full of all unpaid assessments, as well as interest, late charges, reasonable costs and attorney’ fees. Id. If the debtor refuses to satisfy the lien, the HOA, in an effort to recover the amount owed to it, can bring action to foreclose in the same manner in which a mortgage holder can foreclose due to unpaid mortgage payments. Fla. Stat. § 720.3085(1)(c). Thus, the HOA’s lien creates a beneficial interest in the debtor’s real property that the HOA can use to enforce its authority.
In a down economy, the problem many HOAs are confronted with is if a resident isn’t paying his or her HOA assessments, that resident is more than likely not paying other bills as well. This can lead to that resident filing for bankruptcy, and although Florida law provides HOAs with statutory remedies allowing the HOA to have an interest in the debtor’s real property, the HOA’s interest is still subject to the laws governing bankruptcy. Bankruptcy protections that can work to defeat the HOA’s interest in a debtor’s property include the treatment of unsecured claims and the dischargeability of debt.
The optimal scenario for the HOA is for all liens it records on the properties of delinquent homeowners to be secured claims. A secured claim exists when there is enough equity in the property, which in this context would be the debtor’s residence, to cover the amount of the outstanding claim. 11 U.S.C. § 506(a)(1). With Florida housing prices still depressed, the odds are that an HOA lien does not enjoy secured status but, instead, is unsecured. To illustrate, if the debtor has a first mortgage on the property for $300,000, but the home is only valued at $250,000, then the property is underwater and all claims recorded on the property after the first mortgage will be unsecured as there is no remaining equity in the property to cover any additional liens.
With an unsecured claim status, it is unlikely the HOA will ever receive any funds to satisfy the unpaid assessments once the debtor enters bankruptcy. This is because, in a Chapter 7 bankruptcy, most, if not all, of the debtor’s unsecured, pre-bankruptcy-petition debts are discharged. 11 U.S.C. § 727(b). And this is true even though the HOA assessment is attached to the property. The Court, in In re O’Mara explained that unpaid HOA assessments, although levied against the debtor’s property through the recordation of a lien, are still considered personal obligations of the debtor and, therefore, are dischargeable debts under Court order. 141 B.R. 237, 238-39 (Bankr. M.D. Fla. 1992).
While there are a few exceptions to discharge pursuant to 11 U.S.C. § 523, there are no specific exceptions afforded to HOA liens for unpaid, pre-petition assessments. The result is the HOA’s unsecured lien in the debtor’s property being discharged, leaving the HOA unable to recover any funds to satisfy the debtor’s pre-petition, unpaid assessments. Moreover, a discharge operates as a permanent injunction, prohibiting pre-petition creditors of the debtor from pursuing those pre-petition, discharged debts through other means. In other words, if an HOA, realizing that it can no longer collect its unpaid, pre-petition assessments, wishes to punish the debtor-residents by suspending or terminating amenities, it cannot do so as that action violates the Court’s permanent injunction. When the Court discharges pre-petition debt, any negative action against the debtor pursuant to that discharged debt is prohibited, and if an HOA were to take such action, the Court could impose sanctions and fines against the HOA.
Although the Court’s discharge prevents an HOA from pursuing those unpaid, pre-petition assessments, an HOA can still hold the debtor liable for any unpaid, post-bankruptcy-petition assessments if the debtor remains in the property after his or her bankruptcy proceedings and fails to pay the HOA assessments. Florida Courts have held that a debtor’s obligation for post-petition HOA assessments would survive the Chapter 7 discharge because a debtor’s continued ownership of the lot after the bankruptcy procedures subject him or her to assessments incurred after the discharge. In re Rivera, 256 B.R. 828, 835 (Bankr. M.D. Fla. 2000). The reasoning behind this is because the “obligation to pay homeowners’ association assessments is based on a covenant running with the land, a property right.” Id. at 832.
If the debtor remains in the property after the bankruptcy discharge and fails to pay post-petition assessments, the HOA can then suspend and/or terminate the debtor’s amenity rights. The difference being the withholding of amenity rights is now based upon unpaid assessments incurred after the bankruptcy proceedings, not before. The extent to which an HOA can withhold amenity rights is determined by its declaration, bylaws and other operating documents.
If the HOA’s statutory lien were secured, rather than unsecured, it could better protect its interest in the debtor’s property. A secured creditor can seek relief from the bankruptcy code’s automatic stay and demand adequate protection during the debtor’s bankruptcy proceedings. See 11 U.S.C. § 362(d). These protections are only available to holders of secured debt and not to holders of unsecured debt because the unsecured debt will ultimately be discharged.
There are ways in which an HOA can ensure that liens it records for unpaid assessments will have priority over all other liens, and, therefore, enjoy secured status even in a depressed housing market. See Coral Lakes Cmty. Ass’n, Inc. v. Busey Bank, N.A., 30 So.3d 579, 584 (Fla. 2d DCA 2010). For example, if the HOA’s declaration includes language stating that any lien it levies for unpaid assessments relates back to the date the declaration was initially recorded then such liens will have priority over all other liens recorded after the HOA’s declaration, such as mortgages. Id. The HOA can also draft its declaration to include language that expressly states that its liens have superiority over intervening mortgages. Id.; LR5A-JV, LP v. Little House, LLC, 998 So.2d 1173, 1175 n.2 (Fla. 5th DCA 2008).
For an HOA to claim that its liens for unpaid assessments are superior to previously recorded mortgages, the language in its declaration must be clear and unequivocal because that is how mortgage lenders are placed on notice that their economic positions would be subordinate to any HOA claims. See Busey Bank, N.A., 30 So.3d at 585. However, any HOA considering this method of protection should take heed. If mortgage lenders know their secured statuses are vulnerable and subordinate to HOA liens for unpaid assessments, it may discourage such lenders from financing purchases within that community.