Arizona is a land of master planned communities. We have nicely manicured lawns and well kept common areas. Many Arizona homeowners can bask in the sparkle of a clean and well-maintained community pool without having to incur the cost of putting one in their own backyards. How is this all achieved? The answer is through a home owner’s association. These community associations rule over many Arizona neighborhoods, and they have many positive features. The HOA police are what keep your pesky neighbors from letting weeds take over their front lawns or stacking junk on the sides of their houses. The HOA works hard to keep your property values high (or as high as it can be in this market). But all that policing comes at a price, specifically in the form of monthly HOA dues. When it comes to dues, HOAs can quickly turn from a blessing to a very big burden.
Many of our clients come to us with monthly expenses that vastly exceed their monthly incomes. They are struggling to cut whatever expenses they can and essentially “robbing Peter to pay Paul.” Regardless of their intentions to keep or let their houses go, one of the first expenses cut is payment to their home owners’ associations. The bankruptcy code provides, ” nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.” 11 U.S.C. 516 (a)(16). This means that a Debtor can discharge any HOA dues that have not be paid and that are owed at the time the bankruptcy petition is filed. Great news! Right? Not so fast. As many of you have probably learned from by previous blogs, there is always some kind of twist in the bankruptcy world. And, here is where the HOA blessing quickly deteriorates.
For the most part, HOA pre-filing (or pre-petition) dues can be discharged, unless the HOA files a lien of assessment. The right to file a lien is written into most HOA covenants and states that the HOA can file a lien on your property for the value of the overdue HOA fees. The HOA may even have the right to foreclose if the dues exceed a certain amount. If you plan to file bankruptcy and surrender your home, this is no problem. The lien becomes unsecured, and all dues are discharged. But, if you intend to keep your home, you may still have to pay these dues in full to get the lien released. Because an HOA is an assessment lien, and not a lien obtained by a legal judgment, it most likely cannot be avoided through the bankruptcy.
The burden gets heavier for those debtors who wish to surrender their homes, but do not have an immediate foreclosure of their property. The bankruptcy code states that HOA fees are dischargeable except for, “for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot.” 11 U.S.C. 526(a)(16). The possession stated here has been interpreted as both physical and legal possession. So, even if a debtor has vacated his/her home in anticipation of foreclosure, he/she is still responsible for post-filing HOA fees until the home is legally out of his/her name. For many people this can be a long, long time.
Recently, the issue arose before the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit of whether the prohibition against discharging post-filing HOA fees also applies to debtors seeking a discharge under Chapter 13. In the case of In re Foster, BAP No. WW-09-1377-JuHRu, the BAP decided that it did. The important deciding factor in this case was the determination of the BAP that HOA fees are something that we lawyers call a “covenant that runs with the land.” The BAP refused the Debtor’s assertion that HOA fees are based on a contract obligation, and therefore fully extinguished at the timeof discharge. The obligation to pay on a contract, like a credit card, would end when a case is discharged so that creditor could no longer collect on its debt. A covenant that runs with the land is, instead, an ongoing obligation that comes with owning the land and is “rooted in the estate in property itself.” Foster at 17. This is a hard concept to understand, most lawyers struggle with it, but essentially it means that as long as you are obligated to the land, you are privy to the covenant that runs with it. You do not dispose of the covenant until the land transfers to someone else. Therefore, HOA fees that become due after a bankruptcy is filed are your responsibility until the home is no longer yours.
While the Foster case comes out of Washington and is based on Washington property law, the BAP panel of judges that made the decision consisted of one of our Arizona bankruptcy judges. And most likely any Arizona cases involving HOA fees will meet a similar decision.