Recent Rulings Provide Some Relief for Associations Contending with Bankruptcies by Unit Owners

I have written several articles in this blog about the challenges that community associations are facing with unit owners who file for personal bankruptcy and utilize what is known as the “lien stripping” provisions of the bankruptcy code to avoid pre-bankruptcy maintenance assessment arrears due to their associations. If approved by the bankruptcy court, these code provisions enable a debtor in bankruptcy to wipe away second mortgages and association liens tied to their real property if they are able to demonstrate that they owe more to their first mortgage lender than what their home is worth. However, recent court decisions are a boon for the associations that lose certain of their lien rights against these bankruptcy debtors and then attempt to collect the past-due assessments from the subsequent buyers of the properties.

In a case recently decided by one of our local bankruptcy judges in the Southern District of Florida, the court determined that even if an owner strips off a condominium association lien because their unit lacks equity and is ultimately released from their pre-bankruptcy personal obligations to the association, the subsequent owner will not receive the benefit of the prior owner’s lien strip off and will remain liable to the association for the prior owner’s unpaid assessments that were due at the time title to the unit transferred to the subsequent owner. In other words, no matter what a unit owner in bankruptcy accomplishes in their bankruptcy case with respect to their liability for maintenance assessments, nothing can impact a subsequent owner’s personal liability for the unpaid assessments and nothing in the prior owner’s bankruptcy impacts the association’s right to pursue payment from that subsequent owner.

Similarly, in a case in which I represented the community association, a new third-party purchaser at the prior owner’s foreclosure sale argued in court that they were not liable for the prior owner’s unpaid assessments because the prior owner filed bankruptcy and received a personal discharge from his obligations to the association. The new owner asked the court to give it the benefit of the prior owner’s bankruptcy discharge and the resulting avoidance of the prior owner’s personal liability to the association for unpaid assessments.

I successfully demonstrated to the court that the bankruptcy discharge had no legal bearing on the statute assigning liability for past unpaid assessments to new property buyers. The court concurred and issued a summary judgment in favor of the association, ruling that the subsequent purchaser does not receive the benefit of the prior owner’s bankruptcy discharge.

The lien stripping provisions of the bankruptcy code have definitely taken a financial toll on many community associations throughout Florida. Thankfully for the associations, these recent rulings by a state circuit court and local bankruptcy court should provide some clarity that the courts are not going to exacerbate the damage lien stripping brings upon an association by applying it to subsequent buyers. Our other community association attorneys and I will continue to write about important issues for Florida associations in this blog, and we encourage association directors, members and property managers to submit their emails in the subscription box at the top right of the blog in order to receive all of our future articles.