The Fifth Circuit Court of Appeals recently held that a lien in favor of a condominium association is not a “security interest” for purposes of 11 U.S.C. § 1322(b)(2).
The debtor in In re Torrance Tremayne Green[1] owned a condominium in Riverbend Condominiums in New Orleans. The condo is subject to both a Louisiana statute, the Louisiana Condominium Act, and a contract, the condominium declaration. When the debtor fell behind on dues, the association filed a lien affidavit and obtained a default judgment against the debtor for some $23,000.
Subsequently, the debtor filed for chapter 13 bankruptcy and moved to avoid the lien securing the condominium dues. The association opposed the motion, arguing that the lien could not be avoided because the debtor could not modify the rights of creditors secured only by a “security interest” in the debtor’s principal residence. Specifically, the association argued that the lien was a voluntary security interest and thus could not be bifurcated under § 1322(b)(2). The debtor argued that the lien was statutory and therefore subject to bifurcation under § 1322(b)(2).
The bankruptcy court first reviewed the definitions of various liens in the Bankruptcy Code. There are three such kinds of liens: (1) statutory liens; (2) judicial liens; and (3) security interests. A statutory lien arises solely by force of a statute on specified circumstances or conditions. A judicial lien is obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding. A “security interest” is a lien created by an agreement.
The court concluded that that the condominium lien was a statutory lien, and thus the anti-modification provision did not appy. The Fifth Circuit Court of Appeals agreed.
The court of appeals first reviewed both the declaration (a voluntary agreement) and the statute. It found that the declaration essentially repeats the applicable Louisiana statute and thus simply repeats Louisiana law. The court rejected the association’s argument that by filing the declaration into the mortgage records, it transformed a statutory privilege into a consensual security interest. The court did so for several reasons. It explained that there are two types of security devices under Louisiana law with respect to “immovable property.” One is a “privilege,” and the other is a mortgage. A “privilege” arises under Louisiana law through the Condominium Act — i.e., as a matter of law.
It explained that a “privilege” is equivalent to a statutory lien, since it arises by law. Importantly, the court held that the language in the declaration could not have given the association a “privilege” in the condo but for the Condominium Act. And because the declaration could not have given the association a privilege, the only other possibility was that it gave the association a mortgage, which is a consensual security interest in immovable property. But the debtor did not sign anything giving rise to a “mortgage” — i.e., the association lien — under the Condominium Act, so there was no “security interest.”
In sum, the parallel inclusion of a reproduction of the Louisiana Condominium Act in the declaration had no effect. The “privilege” arose by operation of law and was not deemed a “security interest.” Thus, the anti-modification provision of § 1322 did not apply.