United States District Court, D. New Jersey
KEVIN MCNULTY, U.S.D.J.
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.
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.
MY 2016 OPINION
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.
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.
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.
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
Rones and the N.J. Condominium Act
acknowledges that the Community Hills unit is her principal
residence. She contends, however, that § 1322(b)
neverdieless does not apply.
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.
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
(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).
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.
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
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.
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§
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.
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).
Security interest vs. statutory lien
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.
"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."The categories are
mutually exclusive. See In re Young, 477 B.R. 594
(W.D. Pa. 2012).
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.
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
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.
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.
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.
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.
remand, the bankruptcy judge rendered a decision in which she
again declined to confirm the Plan, leading to the current
prior opinion as background, I will first review the facts
most pertinent to this appeal and then discuss the legal
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). It is undisputed
that the Condo is Ms. Holmes's principal residence.
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.
Condo was purchased by Deed, recorded on April 19,
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.")).
The First Foreclosure Complaint
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).
The 2008 Lien
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").
The Second Foreclosure Complaint
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).
The 2009 Lien and Money Judgement
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").
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.).
Satisfaction of 2008-09 liens
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
point, Community's 2008 and 2009 Hens were, apparently,
satisfied. (Id.; see also Feldman Cert., Bankruptcy
DE 115-1, ¶ 6).
Four remaining Liens and dismissals of foreclosure
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).
December 2011 Lien
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").
Dismissal of the First Foreclosure Complaint
January 26, 2012, the First Foreclosure Complaint was
dismissed without prejudice. (Id. p. 4).
March 2012 Lien
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.
Dismissal of the Second ...