Articles Posted in Bankruptcy

JordanWeinkle.jpg JeffreyBerlowitz.jpg The firm’s Jeffrey S. Berlowitz and Jordan G. Weinkle wrote an article that appeared in today’s edition of the Daily Business Review, South Florida’s only business daily and official court newspaper, about how bankruptcy and community association attorneys must work together in order to assess the strength of an association’s construction defect claim against a debtor company that files for an asset liquidation under the state’s Assignment for the Benefit of Creditors statute. Their article reads:

Unlike federal bankruptcy proceedings, with an Assignment for the Benefit of Creditors (ABC), the assignor, or debtor, company that elects to liquidate its assets in order to repay its creditors is able to do so in a more debtor-friendly state court proceeding in which they are able to select and appoint the assignee, who then serves in the role in which trustees serve in bankruptcy cases to oversee the liquidation of the assignor’s assets in order to pay secured creditors and unsecured creditors.

The ABC liquidation process typically takes the form of a private sale or auction in which creditors and parties of interest are notified of the sale and have the opportunity to present higher and better offers for the assets. Ultimately, the sale of the assignor’s assets must be approved by the state court.

While there is no “automatic stay” on pending litigation imposed upon the filing of an ABC, unlike a bankruptcy stay which is immediately in effect upon the filing of a bankruptcy petition, creditors of the assignor are essentially stayed from continuing their pursuit of claims because the comprehensive liquidation of the debtor’s assets makes it virtually impossible to collect on a judgment.

The most notable benefit of an ABC to the assignor company is the opportunity that the assignor’s principals have to buy back their assets under a newly formed entity, should that newly formed entity offer the highest and best bid for the assets.

With ABCs, the assignors can and often do negotiate the buy-back of their business assets via the liquidation or auction process through a separate entity, enabling them to stay in business with little interruption or disruptions whatsoever while diminishing their debts to pennies on the dollar.

Their article concludes:

As a result, we are now starting to see cases in which condominium associations and homeowner associations that either have pending construction defect litigation or have filed a notice of claim against developers, general contractors, subcontractors or other firms are being notified that their payouts will be determined via ABC actions in state court.

The ability to assess the strength of an association’s construction defect claim against a debtor company filing an ABC requires a unique blend of bankruptcy law and community association law knowledge.

The analysis of the association’s construction defect claim against the debtor would not only take into account the merit and magnitude of the underlying claim itself but also the strength of the claim as it relates to the ABC.

The association counsel, together with experienced bankruptcy counsel, should review the number of secured and unsecured creditors of the debtor, its assets and liabilities, the priority that the association’s claim would take compared to the other claims, the amount that the association might recover through the post-liquidation payouts to creditors, and the practical nuances of an ABC in general.

Depending on how far along in the defect litigation the association may be when the ABC is filed, it is also important to consider whether the assignee will have adequate documentation regarding the association’s claim in order to effectively determine how much of the claim, if any, will be allowed.

They will typically consider all of the engineering reports and evidence of the defects, but they will also take into account the practical considerations of the total sum that the sale of the assets will generate and the sums that are due to other creditors.

An association may seek to resolve its claim with the assignee who has been engaged to liquidate the assets and make distributions on allowed creditor claims by reaching a settlement with them for an allowed unsecured claim in the ABC, staving off unnecessary attorney fees to prove the construction defect claim.

Our firm congratulates Jeffrey and Jordan for sharing their insights into this matter for community associations that file construction defect claims against defendants that resort to using the state’s Assignment for the Benefit of Creditors statute. Click here to read their complete article in the newspaper’s website (registration required).

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JeffreyBerlowitz.jpgFirm partner Jeffrey S. Berlowitz wrote an article that appeared in today’s edition of the Miami Herald’s “Business Monday” about the recent decision by the U.S. Supreme Court in the case of Bank of America v. Caulkett. His article calls for changes to the bankruptcy code to eliminate lien stripping for community associations. It reads:

The Supreme Court ruling does not completely prevent homeowners from canceling second mortgages or other junior lienholders in bankruptcy. Debtors can continue to strip off second mortgages by filing for bankruptcy under either Chapter 11 or 13, which are financial reorganization forms of bankruptcy in which they must pay back creditors over a period of time.

For community associations, the ruling will direct the bankruptcy courts to conclude that the secured liens that associations file against units whose owners have not paid their association dues also cannot be wiped away by underwater homeowners in Chapter 7 bankruptcies. Homeowners and condominium associations in Florida have had to contend with record numbers of foreclosures during the meltdown in the housing market, and many owners of units in foreclosure have been filing for bankruptcy protection and using the same “lien stripping” provisions that were extinguished for Chapter 7 bankruptcies by this Supreme Court ruling to wipe away their association liens. This has resulted in significant shortfalls in associations’ finances that have had to be made up by all of the paying unit owners, who are essentially being forced by the delinquent owners to pay more than their fair share.

While the new ruling will benefit community associations by eliminating lien stripping for Chapter 7 bankruptcies, the ruling does not apply to the financial reorganization forms of bankruptcy under Chapter 11 and Chapter 13, in which lien stripping has been particularly abundant for Florida associations. This means that many associations might continue to see their right to collect from delinquent unit owners voided by the bankruptcy courts.

This Supreme Court ruling has shined a spotlight on the lien stripping provisions of the federal bankruptcy code like never before, and the time has come for our country’s lawmakers to take note of the fact that legislative changes are required in order to address the inequities that are caused by these provisions as they now stand. Lien stripping represents a huge windfall for homeowners who fall into foreclosure, fail to pay their association dues and are then able to eliminate 100 percent of their association debt by filing for bankruptcy. The associations maintain the property values of the residences for the benefit of the delinquent homeowners, who end up retaining their home free of their maintenance assessment arrears through their repayment plan approved by the bankruptcy court, and they preserve the collateral of the homeowners’ first-mortgage lenders. The fellow neighbors of the delinquent unit owner end up footing the bill, which in some cases reach six figures after years of nonpayment, while the debtor and their mortgage lender reap the rewards of a properly maintained property at no expense to either of them.

While the U.S. bankruptcy code is a federal law and the laws governing condominium associations and HOAs are state laws, the lawmakers from states such as Florida, which is the state with the most associations at approximately 46,000, should now consider changes to the federal bankruptcy code that would enable community association liens to take a higher priority. Due to the special role that the associations play in preserving the underlying collateral for home mortgages, their liens should either be exempt from lien stripping altogether or there should be some form of a surcharge against the first mortgage lender to force it to pay the association that is maintaining its collateral.

Our firm congratulates Jeffrey for sharing his insight into this important Supreme Court ruling with the readers of the Miami Herald and calling for the elimination of lien stripping against community associations by unit owners who file for bankruptcy. Click here to read his complete article in the newspaper’s website.

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JeffreyBerlowitz.jpgThe firm’s Jeffrey S. Berlowitz, who has focused much of his work on helping community associations to contend with unit owners who attempt to wipe away association liens by filing for bankruptcy, was quoted extensively in an article in today’s edition of the Daily Business Review on the implications of the recent ruling by the U.S. Supreme Court in the case of Bank of America v. Caulkett. The court ruled that homeowners who are underwater on their first mortgage cannot void second mortgages by filing for Chapter 7 bankruptcy, and the ruling also appears to apply to other secured lienholders including community associations.

The article reads:

Jeffrey Berlowitz is optimistic that within the risky realm of second mortgages, the Supreme Court’s ruling may help refresh the lending stream that dried up in the market crash.

“You may see second mortgages being extended if there’s equity,” said Berlowitz of Coral Gables-based Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, which represents community associations.

Still, a divisive footnote in the decision suggests if only the debtors had asked the court to overrule its 1992 decision in Dewsnup v. Timm, the court would have obliged. Three justices didn’t join Thomas’ footnote, meaning they could be outvoted 6-3 if the right case came along.

Dewsnup rejected one form of lien-stripping. The footnote quotes Thomas’ concurrence in a 1999 opinion: the “methodological confusion created by Dewsnup has enshrouded both the Courts of Appeal and … Bankruptcy Courts.”

Berlowitz said, “Thomas’ comments could lead us to believe the court could overrule Dewsnup down the road.” Then lien-stripping would be available in Chapter 7 cases, allowing debtors to void wholly unsecured mortgages. And partially unsecured mortgages could be stripped down to the property’s market value.

For now, Berlowitz is happily sharing the ruling with his condo board clients. They’ve been frustrated by homeowners who fail to pay their fees through months or years of foreclosure and bankruptcy while the association maintains the community.

“There’s such animus for the folks who aren’t paying while their neighbors are,” he said. “I had to explain to our clients this is the law, I’m not making it up.”

Our firm congratulates Jeffrey for sharing his insight into this ruling and its implications for community associations with the readers of the Daily Business Review, which is South Florida’s exclusive business daily and official court newspaper. Click here to read the complete article in the newspaper’s website (registration required).

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JeffreyBerlowitz.jpgOur firm’s Jeffrey Berlowitz has been working closely with many of our community association clients in helping them to contend with bankruptcy filings by unit owners, who can use the bankruptcy code to wipe away association liens. During the last several years, he has also counseled several associations on the prospect of a Chapter 11 bankruptcy reorganization filing to enable them to overcome dire financial circumstances.

On Monday, March 23, Jeffrey’s article on Chapter 11 filings for community associations appeared in the pages of the “Business Monday” section of The Miami Herald. His article reads:

While the housing market in South Florida is continuing its recovery, many of the community associations in the region are still struggling with delinquencies by unit owners in the payment of their association dues. The shortfalls in the associations’ collections, which in some cases have also been exacerbated by gross mismanagement or even theft by members of association boards, are causing scores of South Florida condominium and homeowners associations to experience significant difficulties in satisfying their operational expenses.

For associations that are incapable of meeting all of their financial obligations, seeking relief through a Chapter 11 bankruptcy reorganization plan has now become a viable option in order to avoid forcing some unit owners to pay more than their proportionate share of the assessments.

While many typically think of financial reorganization under Chapter 11 as being reserved exclusively for large corporations, condominium and homeowners associations are also entitled by law to file for this form of bankruptcy relief. In fact, over the last few years, a couple of South Florida associations have already emerged through a successful Chapter 11 reorganization and regained their financial footing.

Chapter 11 is a designed financial reorganization program that is operated under bankruptcy court supervision, and it enables an association to restructure its debt with the protection of an “automatic stay,” which halts creditor collection proceedings during the pendency of the bankruptcy case unless they are otherwise allowed by the court. An association in Chapter 11 has the opportunity to negotiate with its creditors, cancel or renegotiate onerous contracts and leases, and avoid the seizure of assets and garnishing of bank accounts by creditors holding judgments.

In South Florida, two recent cases of association bankruptcies highlight the potential benefits for financially strapped condominiums and HOAs. The first was The Spa at Sunset Isles, which is a 232-unit condominium in Palm Beach County that filed for Chapter 11 bankruptcy in 2010. Because the community’s financial strains were being caused by many units under foreclosure, the bankruptcy court issued an order requiring the lenders that were languishing in their foreclosure actions to begin paying monthly assessments to the association before taking title to the units and, at the same time, ordered them to complete their foreclosure actions. Given that certain of The Spa’s units were in foreclosure proceedings for more than three years, the bankruptcy court’s order provided immediate and substantial relief. Ultimately, the community confirmed its reorganization plan with substantial funds in its operating account resulting from the payments it received from the foreclosing lenders.

Another recent South Florida association bankruptcy was filed last November by the Bella Luna Condominium Association, which was facing court battles with creditors, a 25 percent delinquency rate among its residents, and a threat from the City of Hialeah to cut off its water due to significant arrears in the payment of its water and sewer bills. With the help of the bankruptcy court, the condominium was able to slash its unsecured debt by approximately 85 percent and restructure its remaining debt, paving the way for this community to regain its financial wellbeing.

With the modest pace of the recovery in the housing market, many community associations are still facing significant financial distress, and Chapter 11 bankruptcy reorganization represents perhaps their best possible opportunity for a positive financial future. In fact, for associations that continue to face an exorbitant percentage of units in prolonged foreclosures, the ruling in the Palm Beach County case could set the tone for similar cases in the future. It has the potential to open the door for other associations to seek similar relief whereby lenders behind with their foreclosure actions are forced to begin paying assessments before they take title to the units, which will undoubtedly compel them to expedite their foreclosures.

In light of the two successful Chapter 11 bankruptcy reorganizations by South Florida community associations, the associations that currently find themselves in unsustainable financial straits may consider a bankruptcy reorganization filing as a viable option for a potentially solid financial future.

Our firm congratulates Jeffrey for sharing his insights into the considerations for community associations concerning Chapter 11 reorganization with the readers of The Miami Herald.

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Jeffrey Berlowitz - Siegfried law firm.jpgOur community association attorneys contribute articles on association issues to a number of publications on a regular basis. In the July issue of Florida Community Association Journal, the leading publication focusing on associations in the state, partner Jeffrey S. Berlowitz wrote an extensive article on the latest court decisions and legal strategies that are offering some relief for associations which are contending with unit owners who file for bankruptcy.

The article discusses the “lien stripping” provisions of the bankruptcy code and how associations can respond:

With regard to associations, most owners who file for Chapter 13 are striving to save their home from foreclosure. However, what is becoming more prevalent with bankruptcy filers who reside in community associations is the taking advantage of a debtor friendly component of the bankruptcy laws affording a debtor the right to “strip off” second mortgages, lines of credit and association liens in the event that the debtor evidences to the court that the value of their unit is less than the amount due on their first mortgage. If successful, then the unit owner may receive the benefit of a complete avoidance of an association’s lien claim in the amount that existed as of the date of the bankruptcy filing; ultimately a remarkable benefit to a debtor and a potentially harsh outcome to the community association.

. . . Associations should be well advised that an owner’s intentions to lien strip an association claim does not mean that the association cannot challenge or object to the owner’s effort to avoid the association’s lien. My colleagues and I have assisted associations in overcoming lien stripping efforts by debtor owners notwithstanding the debtor-friendly law supporting lien stripping. This is accomplished by countering the owner’s value of their home with an appraisal procured by the association which demonstrates that the value of the unit at the time of the bankruptcy filing was greater than the amount due under the owner’s first mortgage. Simply stated, this is an “all-or-nothing” deal: If the bankruptcy court determines that the unit maintains even just a single dollar of equity, then the owner will be required to cure all arrears due to the association over the life of the bankruptcy plan. Should the court find that the unit is underwater and lacks equity, then the owner will be in a position to carry out the bankruptcy plan to strip off the amount due to the association as of the day in which the bankruptcy case was filed. Given the risk associated with going before the bankruptcy court in this all-or-nothing lien stripping venture, wherein the bankruptcy judge will make a finding on the unit’s value that will inure entirely to the benefit of either the association or the debtor/owner, often the parties will amicably resolve the matter wherein the association agrees to accept a portion of the arrears paid through the bankruptcy plan by the debtor/owner, as opposed to having the association’s lien avoided entirely. However, should the matter proceed to a valuation hearing before the bankruptcy judge, no matter the findings of the court, an owner remains liable to the association for all regular monthly maintenance assessments as well as any special assessment that come due after the day the bankruptcy case was filed.

flcaj_logo.jpgJeffrey also writes about recent rulings that preclude bankruptcy lien strips from being extended to subsequent buyers:

Additionally and as a related event connected to the craze of the foreclosure crisis in South Florida over the last several years, associations are finding that investors (a/k/a “third-party buyers”) are positioning themselves to purchase units in foreclosure. Florida Statutes governing associations provide that a “subsequent owner” is liable to the association for the prior owner’s outstanding maintenance obligations. Notwithstanding, these third-party buyers who purchase a unit out of foreclosure that was formerly owned by an individual who filed for bankruptcy relief have creatively argued that they should get the benefit of the prior owner’s bankruptcy discharge or, in certain circumstances, the prior owner’s avoidance of the association’s lien via the lien stripping action and, therefore, are not liable to the association as the subsequent owner for the prior owner’s liabilities that were released through the bankruptcy case.

Those arguments have failed. Recent court decisions favor associations that lose certain of their lien rights against bankrupt owners and then attempt to collect the past-due assessments from the subsequent buyers of the properties. In a case that was decided by one of the local bankruptcy judges in the Southern District of Florida earlier this year, the court determined that even if an owner strips off a condominium association lien because the unit lacks equity and that individual is ultimately released from their pre-bankruptcy personal obligations to the association, the subsequent owner will not receive the benefit of the prior owner’s lien strip and will remain liable to the association for the prior owner’s unpaid assessments that were due at the time title to the unit transferred to the subsequent owner. In other words, no matter what a unit owner in bankruptcy accomplishes in their bankruptcy case with respect to their liability for association assessments, nothing can impact a subsequent owner’s personal liability for the unpaid assessments and nothing in the prior owner’s bankruptcy impacts the association’s right to pursue payment from that subsequent owner.

Similarly, in a case in which I represented a community association, a successful third-party purchaser at the prior owner’s foreclosure sale argued in state court that it was not liable for the prior owner’s unpaid assessments because the prior owner filed bankruptcy and received a personal discharge from his monetary obligations to the association. The new owner asked the court to give it the benefit of the prior owner’s bankruptcy discharge and the resulting avoidance of the prior owner’s personal liability to the association for unpaid assessments. I successfully demonstrated to the court that the bankruptcy discharge had no legal bearing on the statute assigning liability for past unpaid assessments to the new subsequent property owner. The court concurred and issued a summary judgment in favor of the association and ruled that the subsequent purchaser does not receive the benefit of the prior owner’s bankruptcy discharge.

Click here to read the complete article.

I have written several articles in this blog about the challenges that community associations are facing with unit owners who file for personal bankruptcy and utilize what is known as the “lien stripping” provisions of the bankruptcy code to avoid pre-bankruptcy maintenance assessment arrears due to their associations. If approved by the bankruptcy court, these code provisions enable a debtor in bankruptcy to wipe away second mortgages and association liens tied to their real property if they are able to demonstrate that they owe more to their first mortgage lender than what their home is worth. However, recent court decisions are a boon for the associations that lose certain of their lien rights against these bankruptcy debtors and then attempt to collect the past-due assessments from the subsequent buyers of the properties.

In a case recently decided by one of our local bankruptcy judges in the Southern District of Florida, the court determined that even if an owner strips off a condominium association lien because their unit lacks equity and is ultimately released from their pre-bankruptcy personal obligations to the association, the subsequent owner will not receive the benefit of the prior owner’s lien strip off and will remain liable to the association for the prior owner’s unpaid assessments that were due at the time title to the unit transferred to the subsequent owner. bankruptcy court sign.jpg In other words, no matter what a unit owner in bankruptcy accomplishes in their bankruptcy case with respect to their liability for maintenance assessments, nothing can impact a subsequent owner’s personal liability for the unpaid assessments and nothing in the prior owner’s bankruptcy impacts the association’s right to pursue payment from that subsequent owner.

Similarly, in a case in which I represented the community association, a new third-party purchaser at the prior owner’s foreclosure sale argued in court that they were not liable for the prior owner’s unpaid assessments because the prior owner filed bankruptcy and received a personal discharge from his obligations to the association. The new owner asked the court to give it the benefit of the prior owner’s bankruptcy discharge and the resulting avoidance of the prior owner’s personal liability to the association for unpaid assessments.

I successfully demonstrated to the court that the bankruptcy discharge had no legal bearing on the statute assigning liability for past unpaid assessments to new property buyers. The court concurred and issued a summary judgment in favor of the association, ruling that the subsequent purchaser does not receive the benefit of the prior owner’s bankruptcy discharge.

The lien stripping provisions of the bankruptcy code have definitely taken a financial toll on many community associations throughout Florida. Thankfully for the associations, these recent rulings by a state circuit court and local bankruptcy court should provide some clarity that the courts are not going to exacerbate the damage lien stripping brings upon an association by applying it to subsequent buyers. Our other community association attorneys and I will continue to write about important issues for Florida associations in this blog, and we encourage association directors, members and property managers to submit their emails in the subscription box at the top right of the blog in order to receive all of our future articles.

Thumbnail image for Jeffrey Berlowitz - Siegfried law firm.jpg Thumbnail image for Jonathan Mofsky Gort photo.jpgBy Jeffrey S. Berlowitz and Jonathan M. Mofsky.

Associations have been contending with unit owners who file for personal bankruptcy protection in greater numbers since the start of the economic crisis. In response to a unit owner bankruptcy, and in an effort to preserve and protect the rights of an association as a creditor in the bankruptcy proceeding, a number of effective tactics have emerged for associations and their attorneys when faced with a unit owner bankruptcy filing. This article provides an overview of certain of these strategic measures for condominium associations and homeowners associations.

Typically, unit owners file either a Chapter 7 or Chapter 13 bankruptcy petition, both of which are personal bankruptcy filings. A Chapter 7 bankruptcy case is filed by an individual and involves the complete liquidation of a debtor’s non-exempt assets to pay creditors in exchange for a discharge of the debtor’s remaining debt, giving the debtor what is referred to as a “fresh start.” In Chapter 7, an individual can wipe out many types of unsecured debt and certain secured debt (in the event the debtor surrenders possession of the secured creditor’s collateral – typically real estate or an automobile). However, in the event the debtor elects to retain their real property or automobile, the secured obligation survives the bankruptcy and the debtor remains responsible for these secured obligations during and after the close of the bankruptcy case. This affects an association to the degree an owner elects to retain their unit. If such an election is made, then a Chapter 7 debtor remains obligated to pay the assessments that come due after the bankruptcy filing. Otherwise, if the owner surrenders the unit, then the owner will receive a full discharge of all monetary obligations to the association. As an aside, some debts, including alimony and child support obligations, taxes less than three years old, student loans and several others, are not dischargeable in a Chapter 7 bankruptcy.

To the extent there is a distribution to creditors in a Chapter 7 case, which is not the norm, the amount creditors will receive is determined by the value of the debtor’s non-exempt assets that are liquidated for the benefit of creditors.

With regard to real property, a unit owner who files for Chapter 7 bankruptcy is either retaining the unit and will agree to continue to pay the monthly assessments that become due after the bankruptcy case is filed, or alternatively, will surrender their unit as a result of the proceedings. In this context, associations should be cognizant of whether the owner is retaining or surrendering their unit. A retention of the unit most often results in the owner maintaining current with the assessments after the bankruptcy is filed. A surrender of the unit, which means the owner is relinquishing possession of the unit to his or her secured creditors (the first mortgage lender and/or the association), will result in the owner discharging all monetary obligations due the association as of the date of the bankruptcy filing. Additionally, at the successful conclusion of a Chapter 7 bankruptcy case, the owner will receive a discharge of all sums due the association as of the date of the bankruptcy filing. However, as stated, if the owner elects to retain the unit, then the owner will remain liable for all assessments that come due after the bankruptcy case is filed.

Sometimes called a personal reorganization bankruptcy, a Chapter 13 bankruptcy does not require debtors to hand over any property to creditors. Instead, they must use their income to pay all or some of what is owed over a three to five year period, depending on the scope of the debt and income. Those who qualify for Chapter 13 must submit a detailed repayment plan that is subject to objections by creditors and must ultimately be approved by the court. Most owners who file for Chapter 13 are striving to keep their residence. Underwater house.jpg However, unit owners are now attempting to take advantage of a debtor friendly component of the bankruptcy laws affording a debtor the right to “strip off” all junior mortgages, lines of credit and association liens in the event the debtor proves to the court that the value of their unit is less than the amount due on their first mortgage. If successful, then the unit owner may receive the benefit of a complete avoidance of an association’s lien claim that existed as of the date of the bankruptcy filing. Discussed below, the association is not without a remedy and there are approaches to defending against a lien strip.

For owners in Chapter 13 bankruptcy who are trying to formulate a plan to repay some of their debt, the association has the right to review and object to the plan being considered by the bankruptcy court. However, bear in mind that judges tend to be fairly lenient in favor of debtors who make a good faith effort to confirm a repayment plan resulting in a restoration of their financial lives. In reviewing the owner’s proposed repayment plan, a primary concern of an association should be to verify that the amount that the debtor claims to the court that they owe to the association is correct and includes interest and attorneys’ fees. To best protect the association’s claim in the bankruptcy case, the association should file a “Proof of Claim,” which details to the penny exactly what the association is owed by the unit owner as of the bankruptcy filing date.

As mentioned, many Chapter 13 bankruptcy debtors attempt to utilize the lien stripping provisions of the bankruptcy code that enable them to have the bankruptcy court wipe away any second mortgages and association liens tied to the property if they are able to demonstrate that they owe more to their first mortgage lender than what their home is worth. If successful, then the owner will be able to avoid all sums due the association as of the bankruptcy filing date. However, note that in order to gain the benefit of the lien stripping laws, the owner must complete his or her bankruptcy plan and remit all payments due under the plan to the bankruptcy court. If the owner’s Chapter 13 case is dismissed for any reason or if the case is converted to a Chapter 7 liquidation (usually because the owner could no longer afford the Chapter 13 plan payments) then the association’s lien will be reinstated against the unit. Importantly, and as some consolation to the association, the owner remains liable to the association for all assessments that come due after the bankruptcy filing, even if a lien stripping action is in place. In other words, if the owner is maintaining the unit in either Chapter 7 or 13, the owner is liable for all assessments that accrue against the unit after the bankruptcy filing date.

As we have noted in previous articles and videos in this blog, we have assisted associations to avoid having their past-due assessments wiped away by Chapter 13 debtors using lien stripping. This is accomplished by countering the owner’s value of their home with an appraisal procured by the association which demonstrates that the current market value is actually greater than the amount due under the owner’s first mortgage.

In the rare case that the unit owner in Chapter 13 bankruptcy is current in the payment of their association fees and assessments at the time the bankruptcy case is filed, then the owner is authorized to make the assessment payments directly to the association outside of the structure of the bankruptcy repayment plan. Should the owner fall behind with these payments after the bankruptcy filing date, then the association can automatically commence collection/foreclosure actions directly against the owner without obtaining the bankruptcy court’s permission or otherwise going through the process of the bankruptcy proceedings.

Last, but not least, and of significant importance, once a bankruptcy case is commenced, under any chapter (7, 11 or 13), there is an “automatic stay” on all collection actions by any creditor, including the association. No creditor may continue to collect a pre-bankruptcy debt from a debtor, after the bankruptcy case is commenced, unless the court authorizes that creditor to do so. There are mechanisms and procedures to be followed in seeking “stay relief” from the court to resume collections, and these actions should be coordinated with a bankruptcy attorney who focuses on creditors’ rights.

Upon the issuance of a bankruptcy discharge in favor of a unit owner, which signifies the successful completion of the bankruptcy case, the stay on collections is lifted, but the association is no longer able to pursue personal liability against the unit owner for their debt which was owed as of the date of the bankruptcy filing. However, the association can and should pursue its lien rights by initiating a foreclosure action against the unit itself. This will help ensure that it will receive the maximum reimbursement from the foreclosing lender allowed under Florida law and from any potential third party who successfully bids on the unit at the foreclosure sale. The association should also send a letter to the owner acknowledging it is aware of the bankruptcy discharge and will act accordingly, including by exercising its rights to pursue a foreclosure action against the property itself as allowed under the law, and not seek monetary relief against the owner, personally.

Our attorneys who focus on bankruptcy matters and community association law work closely with associations that are contending with unit owners who file for bankruptcy. We write about important issues such as these for condominium associations and HOAs in this blog, and we encourage association members and directors as well as property managers to enter their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

Never underestimate the power of the United States bankruptcy courts. As a much younger lawyer, I was amazed to learn that in a bankruptcy proceeding, rather than requiring a process server to serve the complaint upon the defendants, a debtor-plaintiff can actually serve their bankruptcy complaint on the creditor-defendants by U.S. First Class Mail! Yes, the bankruptcy court is full of surprises. A bankruptcy court might even be able help fix the unfixable, unanswerable problem: How can an association require a first mortgagee lender to pay assessments during the lender’s own self-stalled foreclosure?

If you’re following recent developments in the foreclosure courts, you already know that many lenders have stopped their foreclosures cold because they have no confidence in their very own mortgage documents. Apparently, with the securitization of mortgage backed securities, “Wall Street” failed to keep track of the actual mortgage documents. For analogy, imagine the paperwork that evidences each residential mortgage as a stack of paper six inches high. Imagine how many six inch stacks of paper can fit into a semi-trailer. Now imagine each semi-trailer full to the brim with these six inch stacks. Remember, each six inch stack represents only one mortgage. Think of the loaded semi-trailer as the hard asset upon which each mortgage backed security was created; one semi-trailer for each mortgage backed security that was created. With that in mind, imagine that the semi-trailer representing only one of seemingly countless mortgage backed securities, is bought and sold multiple times each day to multiple investors from all over world . . . every day for several years. What happened to the semi-trailers? Where are all of those loan documents that together comprise the mortgage backed security?

Recently, “60 Minutes” suggested that hundreds of thousands of loan documents were re-created by companies outsourced by our nation’s largest lending institutions. These re-created documents are nothing more than forgeries. Any lawyer who knowingly forecloses a debtor based on fraudulent documents commits a fraud on the court, not to mention exposing their client to significant liability. Meanwhile, associations, large and small, suffer from a continued lack of assessment revenue from these stalled foreclosures.

For a time, upon proper motion, the trial courts were ordering stalling lenders to either move their foreclosures along or pay assessments. On appeal, the appellate courts reversed. Primarily, they held that where a remedy at law exists, the trial courts could not create equitable relief for associations. With that in mind, how can the lender ever be responsible to pay assessments before it finally acquires title to the property?

bankruptcy court sign.jpgThe answer, pending the financial strength of your association, might be a bankruptcy to reorganize the debts of the association. In these situations, a Chapter 11 bankruptcy might just be what the doctor ordered. Not only does it provide the restructuring of existing debts, but it allows the federal bankruptcy court to do what the state courts cannot. Specifically, under federal bankruptcy law, the court can order the secured creditor (in this case, the lender whose mortgage is secured by the property) to pay a “surcharge” during the reorganization.

As discussed in the recent United States, Southern District Bankruptcy Court case, In re the Spa at Sunset Isles Condominium Association, the federal bankruptcy “surcharge” can be implemented to require a lienholder (the lender) to be charged with the reasonable costs and expenses incurred by the debtor (the association) to preserve or dispose of the lienholder’s collateral to the extent that the lienholder derives a benefit as a result.

The lender had argued that any order requiring it to pay the “surcharge” was improper because state law had already prohibited requiring the lender to pay towards the upkeep of the property prior to the time it acquires title to the property as a result of its own foreclosure. The bankruptcy court looked to Article VI of the United States Constitution, the Supremacy Clause, which provides that the laws of the United States “shall be the supreme law of the land and the judges in every state shall be bound thereby, anything in the Constitution or Laws of any state to the contrary notwithstanding.” The court required the lender to pay their pro rata share of preserving the association’s common elements.

Not every association is a candidate for a Chapter 11 bankruptcy. Pending the number of foreclosures in your community, the financial shortfall created by the debt, the association’s cash on hand, the ability of the association to pay its debts, etc., a Chapter 11 bankruptcy may or may not be appropriate. Clearly, the necessary first step is consultation between the board and qualified bankruptcy counsel.

A couple of weeks ago I wrote an article for this blog that focused on the tactics that we are using to enable community associations to contend with unit owners who file for personal bankruptcy protection. For my first video as part of our new video series, I focused on one of the strategies that we have now been using with considerable success.

Many of these associations are quite surprised when they learn that under Chapter 13 bankruptcy, homeowners can strip away any second mortgages or association liens if they are able to prove that they have absolutely no equity in the home. By submitting to the bankruptcy court a professional appraisal that says that the current market value of their home or condo is actually less than the amount that they owe under the first mortgage, they are able to use the “lien stripping” provisions under Chapter 13 bankruptcy to wipe out everything that they owe to the association or under a second mortgage from prior to the bankruptcy filing.

As you can well imagine, the use of lien stripping has grown quite a bit during the last several years with the meltdown in the housing market, and as a result we are working with a number of our association clients to help them to fight it. To learn more about exactly how we are helping our association clients to successfully contend with lien stripping by their members in bankruptcy, click below to watch my brief video on the matter and scroll down to read my article posted on Sept. 20.

 

 

The recent report in The Miami Herald stating that the number of South Florida homeowners who owe more on their mortgage than their property is worth remains above 400,000 was very disquieting for the thousands of community associations in the region. Many of these associations have already discovered that their members who file for Chapter 13 bankruptcy have the opportunity to wipe away their association lien and second mortgages or secured credit lines if they are able to demonstrate that they have no equity in their property because it is now valued at less than what they owe on their first mortgage. With so many homeowners underwater on their first mortgages in South Florida, the use of these lien stripping provisions under the bankruptcy code seems destined to continue to rise.

Thankfully for the associations, there is a strategy that we have been using with considerable success to enable them to fight back and avoid lien stripping. It hinges on the fact that the criteria in the bankruptcy code for lien stripping to take place essentially creates an all or nothing requirement for the debtor who is trying to show that they have no equity in the residence. Thumbnail image for Underwater house.jpg If the association is able to demonstrate to the bankruptcy judge that there is even just one dollar in equity in the residence, then the debtor is unable to strip away the association lien or second mortgage.

The issue becomes a “battle of appraisers.” Given that, we are counseling our association clients in these cases to obtain detailed professional appraisals based on recent comparable sales and the condition of the residence that show that it is worth more than the balance due on the debtor’s first mortgage. We then submit the higher appraisal to the bankruptcy court, and in many of these cases we are able to reach a settlement to recoup some of the delinquent fees that would otherwise have been eliminated using lien stripping. In one recent case, the association was owed $28,000 and we secured a settlement for $17,000 to be paid through the Chapter 13 bankruptcy, marking a very successful outcome for the association in today’s “debtor friendly” bankruptcy world.

The results, of course, will vary based on the amount that the homeowner owes under their first mortgage and the strength of the association’s higher appraisal. However, we have certainly realized a great deal of success using this approach, and we plan to continue using it on behalf of many of our association clients that are facing the prospect of receiving nothing for what they are owed from prior to their member’s bankruptcy filing.