August 26, 2019– The Bankruptcy Appellate Panel of the 9th Circuit issued an important ruling in the case of Highland Greens Homeowners Association v. De Guillen. The court ruled that, for purposes of determining secured amounts in bankruptcy proceedings, a Notice of Delinquent Assessment is not a continuing lien.
A delinquent homeowner filed for Chapter 13 bankruptcy, listing their homeowners’ association as holding debts secured by the property. Years prior, the homeowner fell behind on their association dues. The association filed a lien against the property soon after, amending the notice two years later, and eventually taking the homeowner to court to enforce the lien.
After the homeowner filed for bankruptcy, the association was asked to provide proof of claim, which they attached eight pages of CC&Rs. The homeowner filed abjection arguing the claim should be reclassified as unsecured because the association did not comply with the Davis-Stirling Act to find an equitable lien.
IMPACT TO YOUR ASSOCIATION
A lien would not continue to accrue delinquent amounts beyond what was filed and any amount that came due after the lien recording are unsecured. Associations have the option to record multiple liens to match the amount accruing, however, liens can be costly and time-consuming to file.
This has the most significant impact for Chapter 7 cases where the owner would have a complete discharge of their personal obligation for unsecured debts. In cases where the owner then also surrenders their home to the mortgage company, this will be less significant, as the secured nature of the debt becomes virtually irrelevant once a senior lienholder forecloses.
In situations where a debtor files Chapter 7 but is able to keep their home is where the largest impact will be felt. In those situations, the association would be limited to enforcing only the amounts listed on a recorded lien. Unless there is another owner of the property who was not included in the bankruptcy, the association would have no choice but to write off the remainder of the pre-bankruptcy assessments.
Communities could also benefit from amending their governing documents to expressly state that all future amounts in addition to that those listed on the lien be secured before future legislature or legal initiatives can develop.
HOA advocates should consider ways to reduce the costs of lien filings through legislative initiatives. The legislature should also consider amendments to the Davis-Stirling Act that would make it clear that liens secure any future assessments.
*Please be advised that this memo is not legal advice and should not be relied upon or constructed as such. Equity Experts, nor any of their employees, are acting in the capacity of an attorney on behalf of any management agent or association.