FILED DEC 01 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. WW-14-1557-KiFJu ) 6 MICHAEL BATALI and ) Bk. No. 11-10114 KELLIE BATALI, ) 7 ) Debtors. ) 8 ) ) 9 MICHAEL BATALI; ) KELLIE BATALI, ) 10 ) Appellants, ) 11 ) v. ) M E M O R A N D U M1 12 ) MIRA OWNERS ASSOCIATION, ) 13 ) Appellee. ) 14 ______________________________) 15 Argued and Submitted on September 25, 2015, at Seattle, Washington 16 Filed - December 1, 2015 17 Appeal from the United States Bankruptcy Court 18 for the Western District of Washington 19 Honorable Marc L. Barreca, Bankruptcy Judge, Presiding 20 Appearances: Richard J. Wotipka of Broihier & Wotipka argued for 21 appellants Michael and Kellie Batali; Thomas J. Coy of Condominium Law Group PLLC argued for appellee 22 Mira Owners Association. 23 Before: KIRSCHER, JURY and FARIS, Bankruptcy Judges. 24 25 26 1 This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th 28 Cir. BAP Rule 8024-1. 1 Debtors Michael and Kellie Batali (“Debtors”) appeal an order 2 denying the discharge of their postpetition condominium 3 association assessments. For the reasons discussed, we AFFIRM. 4 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY 5 The facts are undisputed.2 Debtors filed their voluntary 6 chapter 133 petition on January 6, 2011. On schedule A, Debtors 7 listed, in addition to their residence and undeveloped land, an 8 investment condominium located in Kirkland, Washington (“Kirkland 9 Condominium”) with a value of $225,000. Debtors’ schedules also 10 disclosed that Bank of America, N.A. held two liens against the 11 Kirkland Condominium originating from a first and second mortgage. 12 Debtors also listed “Mira Condominium Owners” as a secured 13 creditor with a lien against the Kirkland Condominium, describing 14 the lien as: 15 Lien: condo assoc. statutory lien Security: [Debtors’] investment condominium 16 Past Homeowners Dues & Water/Sewer 17 Debtors did not list the debt owed to “Mira Condominium Owners” as 18 contingent, unliquidated or disputed. Debtors did not schedule 19 any postpetition assessments as potential liabilities or 20 contingent future obligations. 21 Debtors’ statement of monthly net income contained on their 22 23 2 Because the record did not include some relevant documents, we exercised our discretion to reach the merits of the appeal by 24 independently reviewing the bankruptcy court’s electronic docket and the imaged documents attached thereto. See O’Rourke v. 25 Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co. 26 (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 27 3 Unless specified otherwise, all chapter, code, and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and 28 the Federal Rules of Bankruptcy Procedure, Rules 1001–9037.
-2- 1 schedule J disclosed their average monthly income as $18,874.00 2 and their average monthly expenses as $21,420.42, which included 3 monthly installment payments of $2,846.00 on the Kirkland 4 Condominium. 5 Debtors’ revised first amended chapter 13 plan (“Amended 6 Plan”) filed September 9, 2011, did not provide for any 7 postpetition payments either within the plan or outside the plan 8 on the Kirkland Condominium and provided for the surrender of that 9 property. The Amended Plan provided: payments over sixty months; 10 that the Kirkland Condominium would be surrendered to Bank of 11 America, N.A. and “Mira Condominium Owners” upon confirmation; and 12 that “all creditors to which the debtor is surrendering property 13 pursuant to this section are granted relief from the automatic 14 stay to enforce their security interest against the property 15 including taking possession and sale[.]” The bankruptcy court 16 confirmed the Amended Plan on October 28, 2011. 17 The bankruptcy court granted relief from the automatic stay 18 to the secured lender on the Kirkland Condominium on September 9, 19 2013, thereby permitting the secured lender to foreclose upon and 20 obtain possession of the Kirkland Condominium. The secured lender 21 foreclosed on the Kirkland Condominium on July 25, 2014. 22 Likewise, on February 6, 2014, Mira Owners Association (“MOA”) 23 sought “relief from the automatic stay for purposes of pursuing a 24 judgment against the Debtor for [postpetition] assessments, dues, 25 costs, fees, and other charges.” MOA attached a copy of the 26 CONDOMINIUM DECLARATION FOR MIRA, A CONDOMINIUM (“Declaration”) to 27 its motion to modify stay. The Declaration, recorded in King 28 County, Washington, on December 20, 2006, provides: in
-3- 1 Section 17.1, that MOA “has a lien on a Unit for any unpaid 2 Assessment levied against a Unit from the time the Assessment is 3 due[;]” and in Section 17.5, that “all sums assessed by the 4 Association chargeable to any Unit, including all charges provided 5 in this Article, shall be the personal obligation of the Owner of 6 the Unit when the Assessment is made.” Debtors did not oppose 7 MOA’s motion. On March 5, 2014, the bankruptcy court entered an 8 order granting MOA relief from the automatic stay.4 That order 9 specifically provided: 10 1. In addition to the relief from stay accorded against the property pursuant to Debtors’ Chapter 13 11 Plan, Paragraph V, the automatic stay of [] § 362(a) shall be and hereby is terminated as to Creditor so that 12 Creditor may enforce its rights at state law stay [sic] for purposes of pursuing a judgment against the Debtors 13 for [postpetition] assessments, dues, costs, fees, and other charges. 14 On April 8, 2014, MOA sent Debtors a letter demanding that 15 16 4 MOA asserted in its motion to modify stay that Debtors owed $17,218.41 in postpetition arrears. MOA also maintained: 17 Creditor is a Washington nonprofit corporation and 18 is the community association for The Mira Condominium. 19 * * * 20 Pursuant to Creditor’s recorded condominium declaration and [WASH. REV. CODE (“RCW”) §] 64.34.364, 21 Creditor has a statutory lien which arises automatically and is perfected at the time assessments come due, and 22 which lien acts as security for its debt against the property. 23 * * * 24 Debtor’s obligation to pay [postpetition] assessments is 25 an obligation arising out of a covenant running with the land, and is not subject to the discharge. Foster v. 26 Double R Ranch Ass’n (In re Foster), 435 B.R. 650 (9th Cir. BAP 2010). Debtor is personally liable for all 27 [postpetition] assessments coming due until such time as the property is foreclosed on, and such assessments are 28 not affected by the bankruptcy. Id.
-4- 1 they pay $26,507.96 in postpetition condominium association dues, 2 fees and interest through May 12, 2014. On or about August 25, 3 2014, MOA filed an action against Debtors in the Superior Court of 4 the State of Washington, King County, seeking an award of 5 “$28,672.30 for past due assessments, fees, interest, and 6 attorney’s fees and costs, plus interest and attorney’s fees and 7 costs which become due before entry of judgment, together with 8 interest[.]” 9 Thereafter, Debtors filed on October 8, 2014, a motion 10 seeking a determination that: (1) the postpetition condominium 11 association dues for the Kirkland Condominium would be discharged 12 by Debtors’ chapter 13 discharge; and (2) Debtors’ confirmed 13 Amended Plan eliminated MOA’s right to assert a claim against 14 Debtors for postpetition assessments. MOA opposed Debtors’ 15 motion. 16 The bankruptcy court orally denied Debtors’ motion at a 17 hearing held November 6, 2014.5 The bankruptcy court, adopting 18 the reasoning set forth by the Panel in Foster v. Double R Ranch 19 Ass’n (In re Foster), 435 B.R. 650 (9th Cir. BAP 2010), concluded 20 that the “ongoing ownership of property with a running covenant 21 creates a postpetition claim even if the debtor does not use the 22 property.” The bankruptcy court then rejected Debtors’ res 23 5 At the hearing, the bankruptcy court noted that the 24 determination of whether a debt is dischargeable is a matter generally determined in an adversary proceeding. Debtor and MOA 25 both waived the procedural elements afforded by Rule 7001 and agreed that the bankruptcy court could decide Debtors’ motion as a 26 contested matter. See United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 272 (2010) (“Due process requires notice ‘reasonably 27 calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an 28 opportunity to present their objections.’”).
-5- 1 judicata argument, concluding that the confirmed Amended Plan did 2 “not effectuate a transfer of the property[,]” and did not 3 expressly provide for the discharge of any postpetition 4 condominium association dues. The bankruptcy court entered a 5 written order on November 13, 2014, which memorialized its oral 6 ruling by providing that “the [Debtors’ postpetition] homeowner 7 assessments are not subject to discharge in this case.” 8 Debtors timely appealed. Debtors also sought reconsideration 9 of the bankruptcy court’s November 13, 2014 order. On 10 February 20, 2015, the bankruptcy court granted Debtors’ request 11 for reconsideration and entered a revised order that confined its 12 ruling solely to the dischargeability of postpetition assessments 13 in Debtors’ chapter 13 bankruptcy case. 14 II. JURISDICTION 15 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 16 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158. 17 III. ISSUE 18 1. Whether Debtors’ confirmed Amended Plan discharged Debtors’ 19 postpetition condominium association dues. 20 2. Whether postpetition condominium association dues on property 21 surrendered under the terms of a confirmed chapter 13 plan 22 are dischargeable under § 1328(a). 23 IV. STANDARDS OF REVIEW 24 In reviewing a bankruptcy court's determination of an 25 exception to discharge, we review its findings of fact for clear 26 error. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th 27 Cir. BAP 2009). We review issues of statutory construction and 28 conclusions of law de novo. Mendez v. Salven (In re Mendez),
-6- 1 367 B.R. 109, 113 (9th Cir. BAP 2007). 2 V. DISCUSSION 3 Debtors contend that three issues exist on appeal: (1) that 4 the confirmed Amended Plan will discharge the postpetition 5 condominium association dues owed to MOA and that the plan is res 6 judicata; (2) that the postpetition condominium association dues 7 will be discharged under § 1328(a); and (3) that the bankruptcy 8 court inappropriately ruled that Debtors’ postpetition condominium 9 association dues would not be dischargeable under chapter 7 of the 10 Bankruptcy Code. The bankruptcy court’s Amended order entered 11 February 20, 2015, renders Debtors’ third argument on appeal moot 12 and we will not discuss this issue further. 13 A. Binding Effect of Confirmation 14 Debtors argue that the terms of their confirmed Amended Plan 15 bind MOA and will result in the discharge of MOA’s claim for 16 postpetition condominium association dues. The premise of this 17 argument is correct. Section 1327(a) provides: 18 The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor 19 is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected 20 the plan. 21 § 1327(a); Fadel v. DCB United LLC, Tr. of the Eisenhower UDT 7- 22 22-11 (In re Fadel), 492 B.R. 1, 9-10 (9th Cir. BAP 2013). The 23 bankruptcy court confirmed the Amended Plan on October 28, 2011. 24 MOA had notice of the Amended Plan and did not object. Thus, the 25 confirmed Amended Plan is binding upon MOA. 26 However, Debtors’ confirmed Amended Plan made no mention of 27 discharging Debtors’ postpetition liability to MOA and thus cannot 28 bind MOA with respect to the dischargeability of the postpetition
-7- 1 assessments. Simply stated, MOA received neither the notice nor 2 the due process required by the Rules and Espinosa for a discharge 3 of Debtors’ postpetition condominium association dues. 4 The Panel further notes that the bankruptcy court granted MOA 5 relief from the automatic stay on March 5, 2014, so MOA could 6 specifically “pursu[e] a judgment against the Debtors for 7 [postpetition] assessments, dues, costs, fees, and other charges.” 8 The March 5, 2014 order is directly at odds with Debtors’ argument 9 here. Debtors did not seek reconsideration of or appeal that 10 order, which is now final. 11 B. Discharge of Postpetition Condominium Association Dues Under § 1328(a) 12 13 The record does not establish whether Debtors have completed 14 their Amended Plan’s payments and are now eligible for a discharge 15 under § 1328(a). A prerequisite to the discharge on any debt 16 under § 1328(a) is that Debtors complete all the payments due 17 under the terms of their confirmed Amended Plan.6 See e.g., 18 In re Khan, 504 B.R. 409, 413 (Bankr. D. Md. 2014) (“Until the 19 discharge is entered, Debtor is stuck for the payment of [his 20 postpetition condominium association fees].”). 21 The issue of whether postpetition homeowner or condominium 22 association assessments are dischargeable has been litigated 23 through several cases. See e.g., In re Horton, 87 B.R. 650, 652 24 (Bankr. D. Colo. 1987) (a chapter 7 debtor’s postpetition 25 homeowners’ association assessments were not discharged; “[t]he 26 27 6 If this case were converted to chapter 7 or if Debtors were to seek a hardship discharge under § 1328(b), the Panel’s analysis 28 would not be necessary as the matter would be governed by statute.
-8- 1 benefits of owning property go hand in hand with the burdens 2 arising from ownership”); In re Rink, 87 B.R. 653, 654 (Bankr. D. 3 Colo. 1987) (postpetition condominium assessments are not 4 discharged, but “the estate is responsible for any [postpetition] 5 condominium assessments which arise during the administration of 6 the estate”); In re Montoya, 95 B.R. 511, 513 (Bankr. S.D. Ohio 7 1988) (In a chapter 7 case, the “fees assessable against a debtor 8 pursuant to a declaration of condominium ownership and the by-laws 9 of a unit owner association may be discharged as an unmatured 10 claim where the debtor abandons the condominium and all rights 11 associated with such ownership before or upon the bankruptcy 12 filing”); and In re Elias, 98 B.R. 332, 337 (N.D. Ill. 1989) 13 (“[C]ondominium assessments that accrue postpetition but arise out 14 of a prepetition contract are ‘debts’ within the meaning of 15 [§] 101(11) and are dischargeable in a Chapter 7 proceeding.”) 16 In 1990, the Seventh Circuit Court of Appeals, in 17 In re Rosteck, 899 F.2d 694, 695 (7th Cir. 1990), considered in a 18 chapter 7 case “whether the bankruptcy court’s December 1983 19 discharge order discharged the Rostecks’ obligation to pay 20 [postpetition] condominium assessments” for a condominium in which 21 the debtors did not reside. The court in Rosteck answered that 22 question by examining when the debt arose. Id. According to that 23 court, the condominium declaration was a prepetition contract from 24 which the postpetition assessments arose. Id. at 696-97. 25 Consequently, because the debtors’ “debt for future assessments, 26 based on their [prepetition] agreement to pay those assessments, 27 existed when they filed their bankruptcy petition, that debt was 28 discharged by the bankruptcy court in its discharge order.” Id.
-9- 1 at 697. The condominium association in Rosteck argued that 2 allowing debtors in bankruptcy to escape postpetition assessments, 3 while still possibly residing in their homes, afforded debtors a 4 “head start” rather than a “fresh start.” Id. The Rosteck court 5 admitted that its decision could be “troubling” but reasoned: 6 [W]e think the broad language Congress used in the Bankruptcy Code compels the result we reach. We have no 7 power to change that language to reach a more palatable result. Contingent debts are still debts, and Congress 8 has not exempted the type of debt in this case from discharge. 9 10 Id. Other courts reached a similar conclusion, See, e.g., 11 In re Cohen, 122 B.R. 755, 758 (Bankr. S.D. Cal. 1991); 12 In re Garcia, 168 B.R. 320, 324-25 (Bankr. E.D. Mich. 1993). 13 In 1994, the Fourth Circuit Court of Appeals considered facts 14 similar to those in Rosteck and reached a different conclusion on 15 the issue of whether “a discharge in bankruptcy relieves a debtor 16 from personal liability for [postpetition] assessments of 17 cooperative housing dues.” River Place E. Hous. Corp. v. 18 Rosenfeld (In re Rosenfeld), 23 F.3d 833, 835 (4th Cir. 1994). 19 The chapter 7 debtor in Rosenfeld did not live in the property 20 and, in fact, had signed a consent order granting the mortgage 21 lienholder relief from the automatic stay. Id. The debtor, 22 however, retained ownership of the property. Id. The court in 23 Rosenfeld, like the court in Rosteck, first considered the 24 definition of the terms “debt” and “liability on a claim.” Id. at 25 836. But the court in Rosenfeld declined to follow Rosteck and 26 its progeny, which held that an association’s right to payment of 27 dues arises when the contract is made and is contingent on the 28 debtor's continued ownership of the property, and instead
-10- 1 concluded that postpetition assessments do not arise until they 2 are assessed. The court in Rosenfeld reasoned that “the 3 obligation to pay assessments is a function of owning the land 4 with which the covenant runs” and the “obligation to pay the 5 assessments arose from [the debtor’s] continued ownership of the 6 property and not from a [prepetition] contractual obligation.” 7 Id. The court in Rosenfeld explained: 8 [The debtor’s] personal liability under the covenant to pay assessments is not destroyed by River Place’s access 9 to alternative remedies, and even if Rosenfeld has not exercised the benefits of ownership, as title holder he 10 has the legal right to do so. In order to terminate his responsibility for assessments, Rosenfeld must transfer 11 title to the property, if necessary by a deed in lieu of foreclosure. In re Horton, 87 B.R. at 652; In re Rink, 12 87 B.R. at 654. His consent to an order granting the mortgage holder relief from the automatic stay did not 13 end his ownership. 14 Id. at 838. 15 In 1994, Congress responded to Rosteck7 and its progeny by 16 adding § 523(a)(16) to the Code. The Bankruptcy Reform Act of 17 1994 became Public Law No. 103-394 on October 22, 1994, and 18 excepted from discharge under §§ 727, 1141, 1228(a), 1228(b) or 19 1328(b): 20 [A] fee or assessment that becomes due and payable after the order for relief to a membership association with 21 respect to the debtor’s interest in a dwelling unit that has condominium ownership or in a share of a cooperative 22 housing corporation, but only if such fee or assessment is payable for a period during which— 23 (A) the debtor physically occupied a dwelling unit 24 in the condominium or cooperative project; or 25 7 Legislative history indicates that The Bankruptcy Reform 26 Act of 1994 was in the drafting stages as early as January of 1994. Also, statements made on October 4, 1994, at 140 Cong. Rec. 27 H. 10753 cite only Rosteck. It logically follows that the addition of § 523(a)(16) to the Code was a response to Rosteck and 28 its progeny, and not a response to Rosenfeld.
-11- 1 (B) the debtor rented the dwelling unit to a tenant and received payments from the tenant for such 2 period, 3 but nothing in this paragraph shall except from discharge the debt of a debtor for a membership 4 association fee or assessment for a period arising before entry of the order for relief in a pending or 5 subsequent bankruptcy case. 6 Section 523(a)(16) remained unchanged until the passage of 7 the Bankruptcy Abuse Prevention and Consumer Protection Act of 8 2005 (“BAPCPA”), Pub. L. 109-8 Stat. 23 § 442 (Apr. 20, 2005), 9 when Congress amended § 523(a)(16) to include homeowners’ 10 associations and to delete the requirement that debtors physically 11 reside in or collect rents from the unit. Section 523(a)(16) now 12 excepts from discharge: 13 [A] fee or assessment that becomes due and payable after the order for relief to a membership association with 14 respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative 15 corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, 16 equitable, or possessory ownership interest in such unit, such corporation, or such lot, but nothing in this 17 paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment 18 for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case[.] 19 20 After § 523(a)(16) was added to the Code in 1994, and putting 21 aside the issue concerning homeowner associations, the primary 22 area of litigation concerning § 523(a)(16) shifted to chapter 13 23 bankruptcy cases. 24 In 1997, a bankruptcy court considered whether postpetition 25 time-share assessments relating to a surrendered time-share 26 interest were discharged in a debtor’s chapter 13 bankruptcy. 27 In re Mattera, 203 B.R. 565 (Bankr. D.N.J. 1997). Following the 28 language of § 1328(a), the court in Mattera framed the issue as
-12- 1 two-fold: “[W]hether the association’s [postpetition] assessments 2 constitute a ‘debt’ under [] § 1328(a), and, if so, whether that 3 debt has been ‘provided for’ by debtor’s Chapter 13 plan.” Id. at 4 570. The court, believing “that the Rosteck opinion best 5 reflect[ed] a plain reading of the statutory definition of 6 ‘claim’” and interpreting the terms “debt” and “claim” broadly, 7 concluded: 8 [A]t the time of the filing of debtor's Chapter 13 petition, the obligation of the debtor to Ocean High for 9 [postpetition] assessments was a contingent, unmatured, unliquidated, unfixed right to payment which constituted 10 a “claim” and a “debt” for § 1328(a) discharge purposes. The claim was contingent upon the retention of ownership 11 by the debtor, and the regular assessment of fees by the association. The claim was not fixed in terms of a 12 certain and definite amount due at the time of the filing of the petition. The debt would mature each month 13 as assessments were made by the association. 14 Id. at 571. The Mattera court went on to explain: 15 Our conclusion that [postpetition] assessments constitute claims within the definition of [] § 101(5) 16 and may, therefore, be discharged as an in personam obligation of the debtor does not mean that if the 17 debtor continues to use the unit and/or receives benefit from it, that she may do so without compensating the 18 association. While this factual scenario is not directly implicated here because debtor has certified 19 that she did not use or benefit from the time-share following the filing of the petition, liability for 20 [postpetition] use and occupancy, on theories of unjust enrichment and/or quantum meruit, might be available. 21 See, e.g., In re Lamb, 171 B.R. 52, 55 (Bankr. N.D. Ohio 1994). 22 23 Id. at 572. As to the second prong of the issue, the court in 24 Mattera concluded that the debtor’s postpetition assessments were 25 provided for in the plan because debtor’s plan provided for the 26 surrender of the time-share and specifically listed the time-share 27 association as a secured creditor. Id. 28 Years later, in a factual scenario alluded to but not present
-13- 1 in Mattera, the Ninth Circuit Bankruptcy Appellate Panel addressed 2 whether a chapter 13 “debtor’s obligation to pay [homeowners’ 3 association (“HOA”)] dues after the order for relief [was] an 4 affirmative covenant that runs with the land, unaffected by 5 debtor’s discharge, or [was] it . . . a contractual obligation 6 between the parties, making it a dischargeable prepetition debt.” 7 In re Foster, 435 B.R. at 658. Importantly, the debtor in Foster 8 did not intend to surrender his home, but instead, merely sought 9 to discharge his postpetition homeowner association dues. 10 The debtor in Foster raised two arguments on appeal. The 11 first argument involved whether § 523(a)(16) is applicable to 12 § 1328(a); the parties conceded that § 523(a)(16) was inapplicable 13 to a discharge under § 1328(a). Id. at 657-58. The second 14 argument involved whether the postpetition HOA dues constituted 15 prepetition debts that arose out of a prepetition contract. Id. 16 In addressing the debtor’s second argument, the Panel in Foster 17 did not answer the specific question of “[w]hether the omission of 18 § 1328(a) in § 523(a)(16) or vice versa [was] a statutory 19 misstep.” Id. at 659. Instead, the Panel concluded that “[u]nder 20 Washington law, the affirmative covenant to pay HOA dues is not 21 contractual, but is a covenant running with the land. As such, 22 debtor’s personal liability for the dues is an incidence of 23 ownership of his property not affected by the filing of his 24 bankruptcy.” Id. at 653. 25 In reaching its decision, the Panel first examined Rosteck, 26 Rosenfeld and the history of § 523(a)(16). Because of the broad 27 dischargeability provisions afforded chapter 13 debtors, the Panel 28 expressed its “doubt [that] the omission of § 1328(a) in
-14- 1 § 523(a)(16) or vice versa evinces a legislative intent to 2 discharge postpetition HOA dues under § 1328(a) when the debtor 3 used the cure and maintenance provisions under chapter 13 to stay 4 in his or her property.” 435 B.R. at 559. 5 The Panel in Foster then examined Washington law and 6 concluded: 7 [U]nder Washington law and the Declaration, debtor’s obligation to pay the HOA dues was a function of owning 8 the land with which the covenant runs and not from a prepetition contractual obligation. As such, the 9 holding in Rosenfeld is persuasive. It follows that debtor’s liability is “not ‘rooted in the 10 [prebankruptcy] past’, but rather [is] rooted in the estate in property itself.” 11 12 Id. at 660-61 (quoting Beeter v. Tri–City Prop. Mgmt. Servs., Inc. 13 (In re Beeter), 173 B.R. 108, 122 (Bankr. W.D. Tex. 1994)). The 14 Panel concluded that the Rosenfeld approach was consistent with 15 the RESTATEMENT (THIRD) OF PROPERTY. Id. at 661. And finally, the 16 Panel in Foster noted the different treatment of property rights 17 and contract rights under the Bankruptcy Code: 18 While a debtor’s personal obligation under a contract may be discharged in most instances, “bankruptcy power 19 is subject to the Fifth Amendment’s prohibition against taking private property without compensation.” 20 In re Rivera, 256 B.R. 828, 834 (Bankr. M.D. Fla. 2000) (quoting United States v. Sec. Indus. Bank, 459 U.S. 70, 21 75 [] (1982)). “A homeowners’ association’s right to impose postpetition assessments pursuant to a recorded 22 Declaration of Covenants and Restrictions is within the scope of the traditional property interests protected by 23 the Fifth Amendment.” Rivera, 256 B.R. at 834. 24 Although § 101(5)(A) defines a “claim” as a “right to payment”, “[t]he key to distinguishing a right to 25 payment that is or is not subject to . . . discharge is simply whether the right to payment is based on a 26 property interest or something else.” Id. at 833. Since Washington law does not view the Declaration as a 27 contract (or “something else”) and the affirmative covenant to pay HOA dues is one that runs with the land, 28 it follows that the Association's right to payment of
-15- 1 unassessed postpetition HOA dues is based on a property interest not subject to discharge under § 1328(a). The 2 Rivera court explained the reason for this rule: 3 A covenant running with the land, including any express provision for the debtor to be personally 4 obligated to pay the homeowners’ association, is an integral part of the property which the debtor 5 acquired when the debtor acquired title to the property. The debtor never had title clear of the 6 previously recorded covenant running with the land. Even though a mortgage and deed may be executed 7 simultaneously, they are separate transactions. The debtor’s acceptance of a deed and the 8 corresponding recorded covenants, however, is one single and inseparable transaction. Therefore, to 9 release the debtor from a recorded covenant is to take a property interest away from the homeowners' 10 association and give the debtor a property interest which the debtor never had in the first place. Any 11 release from a covenant would in effect be a forced conveyance of a property interest from the 12 homeowners’ association to the debtor, something clearly beyond the scope of the Chapter 7 13 discharge. 14 Rivera, 256 B.R. at 833–34. 15 Accordingly, we hold that, as a matter of law, debtor’s personal liability for HOA dues continues 16 postpetition as long as he maintains his legal, equitable or possessory interest in the property and is 17 unaffected by his discharge. In essence, the ‘running’ covenant rule in this case boils down to one of ‘you 18 stay, you pay’ since debtor’s confirmed plan indicates he will stay in his home by curing prepetition default 19 on his mortgage and maintain on-going payments through his confirmed Chapter 13 plan. 20 21 Foster, 435 at 661. 22 Under Washington law, the Foster Panel found that a recorded 23 condominium declaration, such as MOA’s, runs with the land and is 24 a property right that cannot be extinguished in a bankruptcy. The 25 “you stay, you pay” rule is the logical extension of that finding; 26 as long as a debtor continues to have an interest in the property 27 at issue, he cannot discharge the postpetition assessments that 28 arise from the covenant that runs with the property.
-16- 1 Debtors construe Foster’s holding as simply one of “you stay, 2 you pay,” and argue it is not controlling because Debtors have not 3 occupied the Kirkland Condominium during the postpetition period 4 and have indicated their intent to surrender it pursuant to the 5 terms of their confirmed Amended Plan. Rather, citing 6 In re Coonfield, 517 B.R. 239 (Bankr. E.D. Wash. 2014), Debtors 7 argue that “[MOA’s] claim for the ongoing assessments that are at 8 issue . . . is merely the ‘contingent”, ‘unmatured’ and 9 ‘unliquidated’ portion of [MOA]’s pre-petition claim and its 10 status as a debt for purposes of discharge under []§ 1328(a) is 11 not dependant on characterization of the obligation as one arising 12 from ‘a covenant running with the land’ versus one ‘flowing from a 13 contract.’” 14 The court in Coonfield held that the chapter 13 debtors could 15 discharge their postpetition homeowner association dues, 16 reasoning: 17 A contrary interpretation of the law divests [] § 523(a)(16) of significance. If personal liability on 18 such obligations arise [postpetition] as the Homeowners Association urges, [§] 523(a)(16) is rendered 19 meaningless and simply restates a principle already infused in bankruptcy law; i.e., that a right to payment 20 arising [postpetition] is not subject to discharge. 21 Id. at 243. Coonfield’s reasoning is not persuasive. First, 22 Coonfield runs contrary to our precedent in Foster. Moreover, as 23 discussed earlier, Congress added § 523(a)(16) to the Code in 24 response to Rosteck, which held that the debtors’ postpetition 25 condominium assessments were discharged because they were debts 26 stemming from a prepetition contractual obligation. Congress’s 27 concern with Rosteck’s holding could only be that the postpetition 28 assessments were not debts, or if they were debts, that they were
-17- 1 not prepetition debts. This highlights the flaw in Coonfield’s 2 analysis, and also the ambiguity created by the absence of a 3 reference to § 523(a)(16) in § 1328(a)(2). 4 Foster is well-reasoned and consistent with canons of 5 statutory construction set forth by both the Supreme Court and the 6 Ninth Circuit Court of Appeals. Foster dictates that the Debtors 7 in this case may not extinguish MOA’s recorded Declaration and may 8 not discharge their postpetition assessments, even though they did 9 not reside in the Kirkland Condominium postpetition. Unlike the 10 court in Coonfield, the Panel in Foster was not persuaded “that 11 § 523(a)(16) establishes generally that postpetition HOA dues 12 constitute ‘claims’ or ‘debts’ which can be discharged [under 13 § 1328(a)].” Foster, 435 B.R. at 659. The Panel’s reasoning in 14 Foster was two-fold. Id. First, § 523(a)(16) is not applicable 15 to a discharge under § 1328(a), and second, “state law governs the 16 substance of claims.” Id. As discussed earlier, the Panel in 17 Foster found the holding in Rosenfeld persuasive and concluded 18 that under Washington law, “the HOA dues [were] a function of 19 owning the land with which the covenant runs” and as a 20 consequence, “the Association’s right to payment of unassessed 21 postpetition HOA dues is based on a property interest not subject 22 to discharge under § 1328(a).” Id. at 660-61. 23 Foster holds that the nondischargeable liability continues to 24 accrue “as long as [the debtor] maintains his legal, equitable or 25 possessory interest in the property . . . .” Id. at 661 (emphasis 26 added). While the Debtors had given up possession of the Kirkland 27 Condominium, they had not divested themselves of their legal and 28 equitable ownership interests in it. As the bankruptcy court
-18- 1 correctly noted, surrender under the plan “[did] not effectuate a 2 transfer of the property.” See Pratt v. Gen. Motors Acceptance 3 Corp. (In re Pratt), 462 F.3d 14, 18-19 (1st Cir. 2006); 4 In re Rosa, 495 B.R. 522, 523 (Bankr. D. Haw. 2013) (“surrender 5 does not transfer ownership of the surrendered property. Rather, 6 ‘surrender’ means only that the debtor will make the collateral 7 available so the secured creditor can, if it chooses to do so, 8 exercise its state law rights in the collateral”); In re Gollnitz, 9 456 B.R. 733, 736 (Bankr. W.D.N.Y. 2011) (“Authorization for 10 surrender does not constitute a transfer of title. Rather, 11 transfer requires both the surrender of an interest and its 12 acceptance.”). Subject to exceptions not applicable here, under 13 Washington law, “[e]very conveyance of real estate, or any 14 interest therein . . . shall be by deed[.]” RCW § 64-04.010. To 15 qualify as a deed, an instrument must comply with RCW § 64.04.020, 16 which requires that “[e]very deed shall be in writing, signed by 17 the party bound thereby, and acknowledged by the party before some 18 person authorized by this act to take acknowledgments of deeds.” 19 The confirmed Amended Plan does not substitute for a deed. 20 Under the facts as presented, Debtors were the owners of the 21 Kirkland Condominium until July 25, 2014, when the secured lender 22 foreclosed. As such, the postpetition condominium association 23 dues assessed between Debtors’ petition date and July 25, 2014, 24 are not discharged under § 1328(a). 25 VI. CONCLUSION 26 For the foregoing reasons, we AFFIRM the ruling of the 27 bankruptcy court. 28
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