A recent Bankruptcy Court decision in New Jersey highlights two important issues for community associations:

 

  1. Record your Governing Documents;
  2. Timely file an objection to a Chapter 13 Plan if the Association is a creditor and objects to the treatment in the debtor’s Chapter 13 Plan.

In In re Johnson and Specht, Case No. 10-26741, the debtors proposed a plan wherein they surrendered property (that was part of a homeowners association) in full satisfaction of its mortgage. The debtors failed to list the homeowners association as a creditor and the Association did not receive notice of the bankruptcy. The Chapter 13 plan was later confirmed. Almost two (2) years later, the Association filed a complaint in Superior Court seeking a money judgment for unpaid assessments. Thereafter, the Association sought relief from the automatic stay in the Bankruptcy Court to "institute or resume and prosecute to conclusion," its rights in the property. Relief from the automatic stay was granted.

The debtors filed a Chapter 13 modified plan ("Modified Plan") stating title to the property shall vest in the Association upon confirmation of the Modified Plan, and that all claims secured by the debtors’ property (which would include the Association’s liens) would be paid by surrender of the property and foreclosure of the property interest in full satisfaction of the liens. The Association filed a timely written objection to the Modified Plan raising several objections (i.e., challenging abandonment; arguing that the debtors could not avoid payment of post-petition assessments; alleging that all of the debtors’ income was not being paid to the Modified Plan).

Relying solely on case law regarding homeowners associations (since it concluded that the New Jersey Condominium Act did not apply to a homeowners association), the Court found that homeowners’ association liens are equitable liens because they are created by the covenants contained in the members’ deeds, and that the Association was a secured creditor because the by-laws and the declaration of covenants ("Governing Documents") of the homeowners association were recorded. The recording of the Governing Documents is significant because if the actual lien claims were not recorded, the Association may still be considered a secured creditor if the Governing Documents were recorded. This is important in a Bankruptcy context because as a secured creditor, if the Association does not accept the Chapter 13 Plan, the debtor must provide for payment of the lien in full until the lien is discharged or there is surrender of the property securing the claim. The debtors’ argument focused on what was in the written objection and not the fact that there was an objection.

The Court disagreed and held that any timely written objection and an appearance at oral argument on that objection was sufficient to deny confirmation under the Bankruptcy Code, and sufficient to establish the secured creditor’s lack of acceptance of the plan, even with no reason specified in the objection. The Court noted that while there is no Bankruptcy Code requirement that a secured creditor must take affirmative action to register its acceptance of a Chapter 13 Plan or specific method to note a lack of acceptance, case law establishes that the failure to file an objection may constitute acceptance of the Chapter 13 Plan. It further highlighted that there is also no case law that requires a secured creditor to clearly state the grounds for its objection to be considered rejection of the Chapter 13 Plan.  Fileing

Regardless of its content, the filing of a timely objection to confirmation and appearance at oral argument for confirmation is the determinative factor in whether a plan can be confirmed without a secured creditor’s acceptance. While the Court noted that focusing on the content of the objection rather than the fact of objection was a compelling argument, it was not one it agreed with.

The moral of this case is timely file an objection to a Chapter 13 Plan if the Association does not agree with its treatment in the Plan, and get those Governing Documents recorded as soon as possible so that the Association can be considered a secured creditor.