District Court Holds Condo Association’s Interest Is Not Protected by 1322(b)(2) Because It Is Both A Security Interest and a Statutory Lien (Subtitle: Good Case to Brush Up on Exceptions to Anti-Modification Rule of 1322(b)(2) Regarding HOA and Condo Association Liens)

District Court Holds Condo Association’s Interest Is Not Protected by 1322(b)(2) Because It Is Both A Security Interest and a Statutory Lien (Subtitle: Good Case to Brush Up on Exceptions to Anti-Modification Rule of 1322(b)(2) Regarding HOA and Condo Association Liens)

On May 21, 2019, the United States District Court for the District of New Jersey reversed the dismissal of the Debtor’s chapter 13 petition and remanded it for a redetermination of the feasibility of the proposed plan.  The Debtor was represented by NACBA member Herbert B. Raymond.

Prior to filing bankruptcy, the Debtor owned a condominium as her residence. When she purchased the condo, the deed referenced a Master Deed with gave the condo association a lien on unpaid charges and expenses. She fell behind on her condo association payments. The condo association filed several liens for these missing payments with the county Register’s Office.

On March 9, 2015, the Debtor filed a chapter 13 bankruptcy. The value of the condo was less than the first mortgage. Her plan proposed to partially avoid the Condo Association’s liens on the property. The bankruptcy court held that the Condo Association’s lien could not be modified, denied confirmation and dismissed the case. The district court reversed the dismissal and remanded it for further proceedings.

The bankruptcy court then held that the Condo Association’s claim was purely a security interest, that a portion of the claim was entitled to super-priority status under New Jersey law, and that the Condo Association’s claim was therefore protected by the anti-modification provision in 11 U.S.C. § 1322(a)(2). The bankruptcy court then denied confirmation and dismissed the case again. This appeal followed.

The Condo Association argued that their claim was protected by the anti-modification provision because New Jersey law placed six months of delinquent payments as a super-priority lien ahead of the mortgage. Since it was at least partially secured, its claim could not be modified.

The Debtor argued that the claim was secured by both the master agreement creating a “security interest” and also New Jersey law which created a statutory lien. Since the anti-modification provision in 11 U.S.C. § 1322(b)(2) protected claims only secured by a security interest, and the claim was secured by both a security interest and a statutory lien, the anti-modification provision did not apply.

On appeal the district court reviewed several issues pertinent to debtors with liens from HOA’s or condo associations.

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