New Case Law Involving Chapter 13 Bankruptcy Debtors
The 9th Circuit United States Court of Appeals issued an opinion recently in Goudelock v. Sixty-01 Association of Apartment Owners holding that an owner’s personal obligation to pay assessments that become due after the debtor has filed a Chapter 13 bankruptcy are dischargeable under §1328(a) of the Bankruptcy Code. This means that if an owner receives a discharge in a Chapter 13 bankruptcy case filed in Washington, Oregon, Alaska, Arizona, California, Hawaii, Idaho, Montana, or Nevada, that owner will no longer be personally obligated to pay any post-petition assessments.
It is critical to distinguish that this case does not impact the personal obligation to pay post-petition assessments for owners who file Chapter 7 bankruptcy or owners in a Chapter 13 bankruptcy who receive a hardship discharge, because Section 523(a)(16) of the Bankruptcy Code specifically states that post-petition assessments are exempted from discharge under those circumstances. The Goudelock case only impacts an association with regards to an owner who files and completes a Chapter 13 bankruptcy.
Unfortunately, any attempt to request payment of assessments from an owner during a Chapter 13 bankruptcy case is likely a violation of the automatic bankruptcy stay, and any attempt to do so after the owner receives a discharge will now be a violation of the Chapter 13 bankruptcy discharge injunction. If a notice of Chapter 13 bankruptcy is received, it is crucial that the association and its managing agent appropriately flag or note that file to ensure statements and notices are reviewed carefully for demands or language that could violate federal law.
While the result of the Goudelock case is unfortunate, the opinion does not completely eliminate an association’s ability to collect unpaid post-petition assessments. Generally, a Chapter 13 bankruptcy case does not impact an association’s delinquent assessment lien against the unit/lot. If an owner who received a Chapter 13 bankruptcy discharge fails to voluntarily pay post-petition assessments, the Association can initiate a lawsuit to foreclose its lien. An owner who received a Chapter 13 bankruptcy discharge may be motivated to voluntarily pay post-petition assessments, even though their personal obligation to pay the assessments was discharged, in order to avoid their ownership interest in the unit/lot being terminated through a foreclosure action.
It is clear that the decision in the Goudelock case will have wide-ranging impacts on how associations communicate with and collect unpaid post-petition assessments from owners who have received a Chapter 13 discharge. It is now even more important that your association seek legal counsel if you receive notice that an owner has filed Chapter 13 bankruptcy. Legal counsel can help make sure the association’s interests are protected and that you avoid actions that could violate either the automatic bankruptcy stay or the discharge injunction.
As always, if you have any questions regarding how Chapter 13 bankruptcy affects the Association’s ability to collect assessments, or would like to discuss collections in general, please do not hesitate to contact our office.
Lastly, here is a link to the Court’s full Goudelock opinion if you are curious and wish to read it: http://cdn.ca9.uscourts.gov/datastore/opinions/2018/07/10/16-35384.pdf