6th Circuit Bankruptcy Panel rules that condo association may reschedule pre-petition foreclosure

On August 4, 2016, the Bankruptcy Panel of the Federal Sixth Circuit Court of Appeals issued an opinion holding that a condominium association could foreclose on a pre-petition lien for unpaid assessments that was not extinguished in the bankruptcy proceedings. In re: Byron G. Jackson, Case No. 15-8037 involved a situation where a co-owner filed a petition under Chapter 7 of the Bankruptcy Code on June 19, 2014. The co-owner’s unit was subject to a first mortgage held by Bank of America and a lien for unpaid condominium assessments at the time of the filing. Bank of America and the co-owner enter into a loan modification agreement. After the loan modification was entered into, the Carlton House Condominium Unit Owners Association of Cuyahoga County (the “Condominium Association”) filed a motion seeking relief from the automatic stay to pursue in rem relief (i.e. foreclosure on the unit) due to multiple bankruptcy filings related to the unit. The trial court denied the motion for lack of cause. The co-owner received a Chapter 7 discharge on December 9, 2014 and the case was closed.

Almost immediately after the bankruptcy case was closed, the Condominium Association re-noticed the sheriff’s sale, which was the final step in the foreclosure action that had commenced in 2008, and was based on the state court’s order of foreclosure entered in 2009. On January 21, 2015, the co-owner moved to re-open the bankruptcy to avoid the Condominium Association’s lien and argued that the Condominium Association was attempting to collect discharged debts. The trial court found that the Condominium Association had violated the discharge by continuing with the foreclosure action and was in fact attempting to collect a discharged debt through a “disguised” in personam collection.

The Bankruptcy Panel of the Sixth Circuit Court of Appeals held that the discharge of personal obligations through a Chapter 7 discharge does not terminate a secured creditor’s in rem rights unless the creditor’s lien was avoided during bankruptcy. The appellate court held that the Condominium Association’s lien continued after the discharge and that the Condominium Association was entitled to foreclosure on all sums secured by the initial lien, both prepetition and post-petition. However, the appellate court did hold that the Condominium Association would only be entitled to collect post-petition attorney’s fees related to the foreclosure pursuant to Bankruptcy Code § 523(a)(16), as the pre-petition attorney’s fees had been discharged.

Accordingly, while many condominium associations give up on collecting assessments when a co-owner declares bankruptcy, condominium associations should be aware that a possibility still exists that the condominium association’s lien can be foreclosed on, even after a co-owner obtains a bankruptcy discharge, if the lien is not avoided during the bankruptcy proceedings.

Kevin Hirzel is a Partner at Cummings, McClorey, Davis & Acho, P.L.C. and leads the Community Association Practice Group. He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. Cummings, McClorey, Davis & Acho, P.L.C. has Michigan offices in Clinton Township, Grand Rapids, Livonia and Traverse City. Mr. Hirzel can be contacted at (734) 261-2400 or khirzel@cmda-law.com. Please view The Michigan Community Association Law Blog at http://micondolaw.com for additional resources on Michigan Community Association Law.