Resolving a split among the lower courts in its jurisdiction, the Ninth Circuit ruled that condominium assessments coming due after a chapter 13 filing will be discharged when the debtor completes plan payments.
The debtor moved out of her condominium unit before filing a chapter 13 petition. Her plan called for surrendering the unit, which sat unoccupied for more than four years during the chapter 13 case. The lender eventually foreclosed about six months before the debtor completed her plan payments.
Before the debtor received her discharge, the condominium association brought suit to determine the dischargeability of the post-filing assessments that arose between the filing date and foreclosure. Affirmed in district court, the bankruptcy court ruled that the post-filing assessments arose post-petition and were not discharged.
The Ninth Circuit reversed in a July 10 opinion by District Judge Eduardo C. Robreno of Philadelphia, sitting by designation. An amendment to the statute by the Bankruptcy Reform Act in 1994 played a key role in the decision.
In the early 1990s, the Seventh and Fourth Circuits reached different results about post-filing assessments in chapter 7 cases. The Chicago-based court held that post-filing condominium assessments were dischargeable, theorizing that the obligations arose when the debtor purchased the unit before bankruptcy, even though the liability was unmatured and contingent on filing.
The Fourth Circuit split with the Seventh by holding that post-filing assessments were not dischargeable because they ran with the land and arose each month.
Congress intervened in 1994 on the side of the Fourth Circuit with Section 523(a)(16), which provides that condominium or cooperative assessments due and payable after filing are not dischargeable. By virtue of Section 523(a), that subsection is applicable to discharges in chapters 7, 11 and 12, but only to chapter 13 hardship discharges under Section 1328(b).
Significantly, the Section 523(a) exception from discharge is not applicable to the so-called superdischarge that the debtor received under Section 1328(a) upon completing her plan payments.
In deciding how to rule, Judge Robreno mentioned that a chapter 13 discharge is broader than the discharge in any other chapter. In addition, he said that bankruptcy is designed to provide a fresh start and that provisions in the Bankruptcy Code are to be construed liberally in favor of debtors.
Also in terms of policy, Judge Robreno said that the “definition of claim is very broad.” Based on several factors, he concluded that post-petition assessments are prepetition claims even though they are unmatured and contingent on filing.
Judge Robreno said that the debtor’s personal liability for post-filing assessments met the Ninth Circuit’s “fair contemplation” test for categorizing claims as prepetition. He also noted that unmatured and contingent debts are discharged under Section 1328(a).
The liability for post-filing assessments, according to Judge Robreno, was created when the debtor purchased the unit, not as a “result of a separate, post-petition transaction.”
In chapter 13, Judge Robreno said, the only exceptions to discharge are in Section 1328(a)(1)-(4). “Notably absent,” he said, is a reference to Section 523(a)(16). He concluded that the omission of Section 523(a)(16) from Section 1328(a) “was purposeful.”
Judge Robreno bolstered his conclusion that the assessments were dischargeable by reference to the legislative history accompanying Section 523(a)(16), where the House Report said that post-filing assessments are dischargeable “[e]xcept to the extent that the debt is nondischargeable under” Section 523.
Near the end of his opinion, Judge Robreno said there was “no legal basis for distinguishing between whether [the debtor] retained possession of her condominium unit post-petition and, thus, continued to enjoy the benefit of occupancy at no cost, or, instead, surrendered it at some point.”
Read literally, the quotation might mean that a debtor could remain in possession of a condominium unit during chapter 13 and escape liability for assessments if the condominium association slept on its rights and did not take action to recover payments due after filing. However, the statement may only relate to Judge Robreno’s rejection of the association’s argument for liability based on notions of equity.