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Condo Liens and Bankruptcy: In re Rones

What is the effect of the filing of a Chapter 13 bankruptcy petition on a lien asserted by a condominium association? In re Rones, 531 B.R. 526 (Bankr. D.N.J. 2015), a recent opinion by Judge Christine M. Gravelle, attempts to answer this question. The debtors, Mark and Ronda Rones, owned a unit in Whispering Woods Condominium, located in Monmouth Junction. They failed to pay dues imposed by the condominium association [the “Ass’n”], and in 2013 the Ass’n filed a lien in the original amount of approximately $6,000, which was later increased to a sum in excess of $18,000. The unit was also encumbered by a first mortgage which exceeded the value of the realty. Therefore, to the extent the Ass’n’s lien was subordinate to the mortgage lender’s, it was unsecured. In 2014, Mr. and Mrs. Rones filed a Chapter 13 petition. The Plan submitted by the debtors acknowledged approximately $1,500 of the Ass’n’s lien as secured; the balance was treated as unsecured. The Ass’n objected to confirmation of the Plan.

Judge Gravelle began her analysis by noting that the Bankruptcy Code [the “Code”] recognizes three types of liens: judicial, statutory and consensual. It permits a Chapter 13 debtor to “strip down” or “bifurcate” certain liens into secured and unsecured portions, citing 11 U.S.C. §§ 506(a) and 1322(b). But this remedy is not available if the claim is secured “...only by a security interest in real property that is the debtor’s principal residence...”. 11 U.S.C. §1322(b)(2); Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993). Into which category does a condominium association lien fall?

After analyzing the relevant sections of the New Jersey Condominium Act, N.J.S.A. 46:8B-1 et seq. [the “Act”], the court found that the lien in question could best be characterized as a consensual lien (rather than as a statutory lien), notwithstanding the wording of N.J.S.A. 46:8B-21 (which states that unpaid dues are liens on the units). The lien is consensual because it arises from the master deed and by-laws, even though it is also referred to in the statute. The court also determined that the lien is a “security interest”. So does 11 U.S.C. §1322(b)(2) support the Ass’n’s objection to the Plan?

The court distinguished Nobelman, supra, which involved a mortgage, finding that N.J.S.A. 46:8B-21 provides the Ass’n with a statutory right to payment, which is not modified by the Plan. Unlike a mortgage lender, a condominium association enjoys the benefit of N.J.S.A. 46:8B-21.b, which provides its lien with a limited (i.e., 6 month) super-priority over mortgages, etc. (As noted above, the Plan acknowledged this by classifying a sum equivalent to 6 months of dues ($1,500) as secured, and the balance as unsecured.) Therefore, the Ass’n is not a creditor whose claim is secured “...only by a security interest in real property that is the debtor’s principal residence...”. The court thus determined that the anti-modification provisions of 11 U.S.C. §1322(b)(2) were not applicable in this case and over-ruled the Ass’n’s objections to the Plan.

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