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In re Holmes

United States District Court, D. New Jersey

May 21, 2019



          HON. KEVIN MCNULTY, U.S.D.J.

         The debtor, Lindsey C. Holmes, appeals from an order by Judge Rosemary A. Gambardella of the United States Bankruptcy Court for the District of New Jersey, entered on remand from a prior appeal. (DE 1-2). Judge Gambardella has denied confirmation of the debtor's modified plan and dismissed the voluntary petition for relief under Chapter 13 without prejudice. (DE 1-2; see generally No. 15-cv-6834, DE 9). The plan, the bankruptcy judge found in a careful and detailed decision, was not feasible because a lien for condominium charges could not be modified as a matter of law.

         At issue is the scope of 11 U.S.C. § 1322(b)(2). This anti-modification clause, particularly as it interacts with state law, gives rise to a difficult issue of interpretation that has divided the courts; in picking a side, I by no means intend to criticize any court, including the bankruptcy court here, that has seen the matter differently. For the reasons set forth below, I will reverse the dismissal of the Chapter 13 petition and remand for a redetermination of the feasibility of the proposed Plan.

         PREFACE: MY 2016 OPINION

         The prior remand to the bankruptcy court was structured by the analysis in my prior Opinion. (2016 Op.} DE 9) For clarity, I will simply reprint here the most pertinent portions of that Opinion, indented and in a smaller font:

This appeal presents a single issue: whether a condominium association lien is a security interest in the debtor's principal residence, and hence subject to the "anti-modification" clause, 11 U.S.C. § 1322(b)(2). That issue of law is reviewed de novo. See In re American Pad & Paper Co., 478 F.3d 546, 551 (3d Cir. 2007); In re Untied Healthcare Sys., Inc., 396 F.3d 247, 249 (3d Cir. 2005). For die reasons set forth below, however, die decision of the bankruptcy court must be REMANDED for factual findings pertinent to that issue.

         I. BACKGROUND

         Ms. Holmes is a condominium unit owner; Community Hills is die condominium association. Community Hills claims a lien on Holmes's unit representing unpaid condominium assessments. The unit was on the verge of a Sheriffs sale when, on March 9, 2015, Holmes filed a Chapter 13 petition.

         Bank of America, which holds a mortgage on the unit, filed a proof of claim of $206, 525.23. The value of the property was estimated at $85, 000. There seems to be no dispute that die mortgage lien easily exhausts the equity in the property. Holmes filed a schedule showing a net disposable income of $200 per month. She proposed a plan whereby she would pay $200 per month.

         Under the "anti-modification clause" of 11 U.S.C § 1322(b)(2), certain security interests relating to the debtor's principal residence cannot be modified. It follows that a plan that relies on die modification of such a principal-residence lien is not feasible as a matter of law; confirmation may therefore be denied witiiout exploration of other pertinent issues. That is what happened here. The bankruptcy court held that Community Hills' lien on the condominium could not be modified, and therefore declined to confirm die plan. It is from that order that Holmes has appealed.


         A. Rones and the N.J. Condominium Act

         Holmes acknowledges that the Community Hills unit is her principal residence. She contends, however, that § 1322(b) neverdieless does not apply.

         I am initially guided by In re Rones, 551 B.R. 162, 168 (D.N.J. 2016), in which Judge Wolfson discussed many of the issues presented here. Rones starts from die indisputable premise that a Chapter 13 plan may, in general, modify die rights of holders of secured claims. See generally 11 U.S.C. § 506(a)(1). A nominally secured claim will be considered unsecured, however, to die extent it exceeds the value of die collateral, and may be "stripped down" or "crammed" to that value. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 239, 109 S.Ct. 1026 (1989).

         Section 1322(b)(2) places an important limit on modification of secured claims. It prohibits modification, stripping, or cramming down of claims secured only by a security interest in the debtor's principal residence:

(b) Subject to subsections (a) and (c) of this section, die plan may-
(2) modify die rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims....

11 U.S.C. § 1322(b)(2) (emphasis added). See Nobelman v. Am. Savings Bank, 508 U.S. 324, 331-32, 113 S.Ct. 2106 (1993).

         There is an exception to the exception-i.e., an avenue of escape from the anti-modification clause of § 1322(b)(2). If the relevant lien, even one on a principal residence, is junior to a lien that exceeds the value of the residence collateral, it is treated as unsecured. Being wholly unsecured, it is of course not secured by a principal residence, and therefore does not fall under § 1322(b)(2). See in re McDonald, 205 F.3d 606, 613-14 (3d Cir. 2000); Rones, 551 B.R. at 168.

         So whether a condominium association's lien for assessments is secured only by a security interest in the debtor's unit might depend [inter alia) on whether it is junior to another lien that exhausts the value of the collateral; if it is junior, it might not be secured by anything at all. On that question, Rones found the New Jersey Condominium Act to be dispositive. That statute gives the condominium lien a limited priority:

         [quoting N.J. Stat. Ann. § 46:8B-21(a) & (b). The statute is set out in an Appendix to this opinion.]

         .... Thus, under subsection (b), a condominium association's lien is granted priority to the extent of six months' worth of assessments. The condo lien, to that extent, is elevated to first priority. Rones reasoned that the condo lien was, at least to the extent of six months' assessments, secured by the principal residence, because it was senior to other liens. It followed, held Rones, that § 1322(b) applied.

         Another issue arises. Assume arguendo that more than six months' assessments are in arrears. Under the N.J. Act, the lien is senior only to the extent of six months' worth of assessments. Beyond that, it is junior- "subordinate," in the words of the statute. N.J. Stat. Ann. § 46;8B-2l(a). Now it is possible to envision a rule that the lien should be bifurcated into a secured (up to six months) and unsecured (beyond six months) component. Thus bifurcated, it would have a hybrid quality; to the extent the lien is unsecured by the unit, it would not be subject to the "no-modification" rule of§ 1322(b).

         Case law forecloses that approach. The rule is applied broadly, and the exception strictly:

[I]f even one dollar of a creditor's claim is secured by a security interest in a debtor's principal residence, then the entire claim-both secured and unsecured portions-cannot be modified under Section 1322. See In re Vidal, No.'s 12-11758, 12-12319, 12-12340, 12-12563, 2013 WL 441605, *3, 2013 Bankr. LEXIS 496, at *8 (Bankr. D. Del. Feb. 5, 2013) ("If there is even a single dollar of value available for the junior Henholder in the collateral, however, § 1322(b)(2) requires that the plan treat the junior claim as fully secured."); see also In re Kennedy, No. 12-11223, 2013 Bankr. LEXIS 2350, at *4 (Bankr. D. Del. June 10, 2013). This rule is known as the "one dollar rule."

In re Rones, 551 B.R. at 168.

         Applying the "one dollar rule," Rones held that "because a portion of the Lien was secured by a security interest in the debtor's principal residence, no portion of the Association's lien could be stripped off under Section 1322." 551 B.R. at 171 (citing In re McDonald, 205 F.3d at 613-14).

         B. Security interest vs. statutory lien

         But hold on, says Holmes. The Rones analysis does not even come into play unless the lien at issue is a "security interest." Otherwise, § 1322(b)(2), by its plain language, does not apply at all.

         A "security interest," as the term is used in § 1322(b)(2) and elsewhere, is defined as a "lien created by an agreement." 11 U.S.C. § 101(51). As such, it is to be distinguished from a "statutory lien," i.e., one "arising solely by force of a statute on specified circumstances or conditions."[1]The categories are mutually exclusive. See In re Young, 477 B.R. 594 (W.D. Pa. 2012).

         Rones, says Holmes, did not squarely face that definitional issue. Indeed, it appears that Rones accepted the conclusion of the bankruptcy court that the lien was created by agreement: "[T]he Bankruptcy Court itself observed when determining whether the Lien was consensual or statutory, [that] the Condominium Act did not create the Lien-it was created by the Master Deed .... [T]he Condominium Act merely altered the priority of a portion of the Lien." 551 B.R. at 171.

         But the N.J. Act seemingly can operate to create a lien; consider the language of N.J. Stat. Ann. § 46:8B-21(a), quoted above ("The association shall have a lien on each unit for any unpaid assessment... upon proper notice to the appropriate unit owner"). And the subsection (b) priority operates to elevate, not just any old lien, but "[a] lien recorded pursuant to subsection a." So it is not so simple to say that there is a security interest (i.e., one arising from agreement), as to which the Act merely sets a priority. Remember, the condominium association's lien is secured by the unit (which is underwater on its mortgage) only to the extent it can be regarded as senior to the mortgage. So the priority issue under the State Act is inextricably intertwined with the issue of whether the lien is secured by the unit at all There is more. The § 1322(b) no-modification rule applies to a lien secured only by a security interest (Le., a contractual lien). But this lien, says Holmes, is also secured by a statutory lien, defined as one that arises "solely by force of a statute." Those dueling claims of exclusivity seem to reinforce the notion that the contractual and statutory liens, assuming both are present, must be considered separately.

         The case law has meandered as to whether a condominium lien like this one is a statutory or consensual one. See In re Rones, 531 B.R. 526 (Bankr. D.N.J. 2015) (surveying case law), reu'd, 551 B.R. 162 (D.N.J. 2016). As the Bankruptcy Court observed in Tories, the issue may depend on how and when a lien arose. A consensual lien arises from the purchase of the unit, but depends on other facts, such as the content of the master deed and presumably the existence of an arrearage. A statutory lien, too, depends on facts such as the filing of the master deed, notice to the unit holder, and recordation. And the operation of priority rules, particularly where the mortgage exceeds the value of the property, will determine whether the lien is secured at all.

         I think that the bankruptcy court should have first crack at these issues. Some of these ramifying issues may be mooted by a clear set of facts. Here, says Holmes, by contrast with Rones, the bankruptcy court never made a finding as to whether this lien was created by contract or only by statute. Community Hills did not submit the master deed or by-laws for the court's consideration. It is not clear that a security interest, in the sense of a lien arising by contract, perfected and secured by equity in the unit, even exists. To determine that, the bankruptcy court must make specific findings as to the facts and determine the priority of such a security interest.

         The parties have not pointed this court to any facts about the creation or perfection of any contractual lien, notice to the unit holder under the State Condominium Act, recordation, or other pertinent facts. Rather, the facts and contentions seem to have evolved and tumbled out over die course of multiple attempts by die debtor to propose a feasible plan. It is not at all clear that die bankruptcy court was given a fair opportunity to assess the issues.


         For the foregoing reasons, the order of the bankruptcy court is reversed and remanded for further consideration. The parties shall present die matter to the bankruptcy judge in a manner tiiat permits the judge to make factual findings as to die existence, priority, and recordation of (a) any security interest; (b) any statutory lien; (c) the priority of such; and (d) relatedly, whether any such lien is secured by equity in the property. I express no view as to whetiier, even if all of tiiese issues were decided favorably to the debtor, die plan would be a feasible and confirmable one.

         On remand, the bankruptcy judge rendered a decision in which she again declined to confirm the Plan, leading to the current appeal.

         I. BACKGROUND[2]

         With my prior opinion as background, I will first review the facts most pertinent to this appeal and then discuss the legal issues.

         a. Facts

         i. The Mortgage

         Ms. Holmes owns a condominium unit at 252 West Kinney Street, Newark, New Jersey (the "Condo") (Bankr. Op. p. 2), which is part of Community Hills Condominium Association Inc. ("Community"). (Id. p. 3).[3] It is undisputed that the Condo is Ms. Holmes's principal residence. (Id.).

         The Condo is subject to a mortgage lien in the amount of $206, 523.23 (the "Mortgage"), held by Bank of America, N.A., as the successor to Countrywide Home Loans, Inc. ("Countrywide" or "Mortgagee"). (Bankr. Op. 3). The estimated value of the property is just $85, 000. (Id.).

         The Condo was purchased by Deed, recorded on April 19, 2007[4] with the Register's Office in Essex County, New Jersey. (Id. p. 2-3). That Deed referenced a Master Deed. (Id. p. 3). Paragraph 7.02 of the Master Deed, titled "Lien in Favor of the Association," states in pertinent part:

All charges and expenses chargeable to any Unit constitute a lien against that Unit in favor of the Association. Those Hens are prior to all other liens except (a) assessments, liens and charges for taxes past due and unpaid on the Unit and (b) payments due under bona fide and duly recorded Mortgage instruments, if any, except to the extend modified by any applicable New Jersey or federal law. . .

(Bankr. Op. p. 3). Community has filed condominium liens against the Condo in the aggregate amount of $27, 358.71 for unpaid condominium fees and other charges. (Bankr. Op. p. 3. See also Id. (discussing Paragraph 16.03, titled "Master Deed Provisions and Exhibits to be a Covenant Running with the Land.")).

         ii. The First Foreclosure Complaint

         On August 18, 2008, Countrywide, which held a first mortgage on the Condo, filed a complaint in foreclosure against the Condo (hereinafter, the "First Foreclosure Complaint"), which also named Community as a defendant. (Bankr. Op. p. 4).

         iii. The 2008 Lien

         On September 2, 2008 and October 15, 2008, Community sent notices warning Ms. Holmes that failure to pay the delinquent amounts might result in the association's filing a lien against the Condo. The notices advised that the Association had directed its then-counsel, Stark & Stark, P.C., to prepare and file a Notice and Assessment of Lien against the Condo. (Id.). On December 19, 2008, Community recorded a first lien against the Condo in the amount of $5, 822.25 (hereinafter, the "2008 Lien"). (Id.).

         iv. The Second Foreclosure Complaint

         On March 20, 2009, Countrywide filed another complaint in foreclosure against the Condo (hereinafter, the "Second Foreclosure Complaint"). (Id. pp. 4-5). The Second Foreclosure Complaint named Community as a defendant and specifically referred to the 2008 Lien in the amount of $5, 822.25. (Id. p. 5).

         v. The 2009 Lien and Money Judgement

         On April 17, 2009, Community recorded a lien on the Condo in the amount $4, 348.00 for unpaid common expense assessments and other charges (hereinafter, the "2009 Lien"). [Id.).

         On October 2, 2009, after filing an action against Ms. Holmes in the Superior Court of New Jersey, Law Division, Special Civil Part (hereinafter, the "Special Civil Action"), Community obtained a money judgment for unpaid fees and charges in the amount of $11, 899.00. (Id.). Community sent multiple letters to Ms. Holmes regarding the Special Civil Action. (Id.).

         vi. Satisfaction of 2008-09 liens

         On April 9, 2010, Community sent Ms. Holmes a letter advising her of the 2009 lien (then about a year old), and sent a copy of the letter to Countrywide. (Id.). On May 28, 2010, Community advised Countrywide of the payoff amount of $18, 707.41, representing the total delinquent amount owed to Community. (Id.).

         At some point, Community's 2008 and 2009 Hens were, apparently, satisfied. (Id.; see also Feldman Cert., Bankruptcy DE 115-1, ¶ 6).

         vii. Four remaining Liens and dismissals of foreclosure actions

         I turn to the period from December 2011 through March 2014. In that period, Community filed four additional liens for unpaid common expense assessments and other charges, as described in this section. These are the liens that make up its current Proof of Claim in bankruptcy. (Id. p. 5). All of the four remaining liens remain unsatisfied. (Id. p. 6). During this period, the 2008 and 2009 foreclosure actions were dismissed. (Id. p. 4-5).

         1. December 2011 Lien

         On November 4, 2011, Community sent Ms. Holmes notice of its intent to file a lien. On December 15, 2011, Community recorded the first lien in the amount of $5, 237.38 (hereinafter, the "December 2011 Lien"). (Id.).

         2. Dismissal of the First Foreclosure Complaint

         On January 26, 2012, the First Foreclosure Complaint was dismissed without prejudice. (Id. p. 4).

         3. March 2012 Lien

         On March 5, 2012, Community recorded a second lien in the amount of $5, 186.00 (hereinafter, "March 2012 Lien"). (Id.). On March 16, 2012, Ms. Holmes and Countrywide were sent Notice that the March 2012 Lien had been recorded. (Id.).

         4. Dismissal of the Second ...

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