As the Supreme Court has held – state law defines property interests. While this proposition seems rather simple on its face, in bankruptcy we regularly grapple with the intersection of state defined property interests and the Bankruptcy Code. Sometimes, these state and federal principles seemingly collide rather than coexist. This has occurred in cases deciding whether the Bankruptcy Code permits the bifurcation of a lien held by a New Jersey condominium association when the lien is recorded pursuant to the New Jersey Condominium Act, which provides a priority of payment as a result of following certain requirements set forth in the Condominium Act. It is this issue that must be resolved by the Court.
This matter comes before the Court on a confirmation hearing of the Chapter 13 plan (“Plan“) filed by the “Debtor“. Under the Plan, the Debtor seeks to, inter alia, modify the secured claim filed by Condominium Association, Inc. (the “Association“) by reclassifying a portion of the secured claim as unsecured. The Association objects to confirmation, asserting that the Plan should not be confirmed because it improperly seeks to cram-down a partially secured consensual lien on the Debtor’s principal residence. The Association maintains that its secured claim is protected by section 1322(b)(2) of Bankruptcy Code and, therefore, it cannot be bifurcated. The Debtor counters by asserting she may, in fact, bifurcate the Association’s secured claim pursuant to section 1322(c)(2) of the Bankruptcy Code.
According to Article VII, Sections 7-9 of the Master Deed, each member of the Association is obligated to pay maintenance fees to the Association on a monthly basis to cover the common expenses of the Association. In relevant part, Article VII, Section 9 states:
9. That the owner of each unit is bound to contribute according to the percentage of his undivided interest in the common elements towards the expenses of administering and of maintenance and repairs of common elements, the expenses of administering and maintaining the Association, and all of its real and personal property in such amounts as shall from time to time be fixed by the Association. . . .
According to the Association’s Bylaws and its Resolution Pertaining to Collection of Delinquent Assessments (the “Resolution“), if a unit owner defaults in paying his/her maintenance fees, the Association may accelerate the monthly payment for the remainder of the Association’s fiscal year, record a lien against the unit for any portion of the unpaid maintenance fees, and foreclose upon said lien in the same manner as afforded to mortgage lenders.10 In pertinent part, the Resolution provides the following:
[a]ll installment payments on any type of assessment including special assessments shall be due and payable within fifteen (15) days after the due date thereof. The remaining assessment installments, including any special assessment instalments, shall be accelerated if the delinquent installment has not been paid by ninety (90) days after the due date. After ninety (90) days the entire assessment balance shall be fully due and payable and the delinquent unit owner shall be notified that a lien for the accelerated assessment amount shall be recorded following a time period set forth in the notice if not paid in full. Should default continue for a period of thirty days (30) days or more after the filing of the lien, then the Board may foreclose on the lien pursuant to Law and/or commence a suit against the delinquent unit owner to collect the assessment. The Board shall also notify any Mortgage holder on the unit of the default by the owner.
Article VII, Section 10 of the Master Deed provides that late fees may be assessed for the unit owner’s failure to pay maintenance fees on time. It further provides that reasonable attorney’s fees and costs incurred are to be assessed to the defaulting unit owner. In relevant part, Article VII, Section 10 states:
10. That all charges, expenses and assessments chargeable to any unit plus reasonable attorney’s fee [sic] incurred for the recovery thereof, shall constitute a lien against said unit in favor of the Association, which lien shall be prior to all other liens except: (1) assessments liens and charges for taxes past due and unpaid on the unit; and (2) payments due under bona fide mortgage instruments, duly recorded, prior to such assessments. The Association’s lien shall be recorded inthe [sic] Clerk’s Office of Sussex County pursuant to the Condominium Act, N.J.S.A. 46:8B-21. . . .
On February 29, 2012, the Association recorded a $5,370.08 lien against the Property for unpaid assessments, charges, and expenses due to the Association (“2012 Lien“). The 2012 Lien was recorded in the Sussex County Clerk’s Office in Book 8964, Page 216. On June 12, 2013, the Association recorded a second lien against the Property for $3,723.67 for unpaid assessments, charges and expenses due to the Association (“2013 Lien“). The 2013 Lien was recorded in the Sussex County Clerk’s Office in Book 9143, Page 546. The 2012 and 2013 Liens will be collectively referred to as the “Liens.”
On February 10, 2016, the Debtor filed a voluntary petition under Chapter 13 of the Bankruptcy Code. The Association filed a proof claim on March 14, 2016 asserting a $13,790.45 claim against the Debtor for unpaid condominium maintenance fees. The proof of claim provides for a $9,093.75 secured portion (the total of the 2012 Lien and 2013 Lien combined) and a $4,696.70 unsecured portion. The unsecured portion represents the arrears owed to the Association, which were not part of the Liens and arose after their recordings. The Debtor lists the Property on Schedule A with a $142,000.00 value. Champion Mortgage Company (“Champion Mortgage“) holds a $174,174.28 first mortgage on the Property. The parties do not dispute that there is insufficient equity in the residence to support both the entire outstanding claim for unpaid assessments and the mortgage held by Champion Mortgage.
On its face, the Plan proposes to cram-down and bifurcate the Association’s claim under section 1322(b)(2). Pursuant to the Plan, the Association’s secured claim is reduced to $1,710.00 and the balance of the secured portion is reclassified as unsecured. The Debtor asserts that “the amount of $1,710.00 was calculated by multiplying the monthly aggregate customary condominium assessments against the unit, $285.00, times 6 months pursuant to [section] 46:8B-21.” Absent from the Plan is any legal analysis/explanation as to how the Association’s secured claim may be modified pursuant to section 1322(b)(2). Although not raised by the Debtor or the Association, the Court notes that at the time the 2013 Lien was recorded, the monthly condominium assessments were $250.00. Indeed, the Association charged the Debtor a $285.00 monthly condominium assessment, but that only started in January 2014.24 Neither the Debtor nor the Association informed the Court of the amount of the monthly condominium assessments for the time period covered by the 2012 Lien.
The Association objected to the Plan. The Association contends that it is entitled to the full value of its secured claim and that the Debtor’s attempt to bifurcate and cram-down the Association’s secured claim is in contravention of section 1322(b)(2). The crux of the Association’s arguments is two-fold. First, the Association asserts section 46:8B-21(b) of the Condominium Act provides condominium association liens with a limited priority over prior recorded mortgages to the extent of six months of customary maintenance fees. Thus, even when a hypothetical condominium owner’s prior recorded mortgages exceed the value of the property (i.e., the property is “underwater”), the condominium association’s lien, even if recorded after the mortgage is recorded, will always receive, at a bare minimum, the value of six months of customary maintenance fees if and when the property is foreclosed upon.
Second, the Association asserts that, unless the value of the Property is entirely exceeded by municipal and federal tax liens, the limited priority created by section 46:8B-21(b) guarantees a portion of the Association’s claim will always have a secured interest in the Property. A secured interest in the Property, the Association contends, “trigger[s] protection under the Anti-Modification Clause [(section 1322(b)(2)], even when there is no other equity in the property that the [A]ssociation’s lien would attach to.” The Association cites to two New Jersey bankruptcy court decisions, In re Robinson (“Robinson I“) and In re Robinson29 (“Robinson II“) and one New Jersey district court decision, Whispering Woods Condo. Ass’n v. Rones (In re Rones), wherein the courts held, inter alia, that section 46:8B-21(b) provides a limited priority for condominium associations’ liens for unpaid assessments, thereby treating the lien as a security interest in the debtors’ principal residence and preventing it from being modified under a Chapter 13 plan. Indeed, by asserting its claim is protected by section 1322(b)(2), the Association concedes its claim is secured by a security interest (a consensual lien).