A bankruptcy case from the Northern District of California provided new restrictions for homeowners associations dealing with an owner's bankruptcy. In In re Sarah-Jane Parker, involving a years-long dispute between the Bayside Court Owners Association and an owner at the Association, the Court imposed harsh penalties for the Association's attempts to impose fines and penalties during the bankruptcy proceedings.
The owner held title to the largest property in the Association, which had variable assessments based on square footage. The Association's budget stated that the property's annual assessments comprised 12% of the annual revenue. Unfortunately, the Association had little recourse to recover pre-petition debts because it alleged that the property was upside down. The Association's Board of Directors took steps to protect their post-petition rights, some of which the Court deemed too aggressive.
After the Association received relief from the automatic stay on an unopposed motion, it sent significant demand letters and “settlement offers” of both pre-petition and post-petition debts. Further, the Association declined the owner's offer to surrender title to the property to the Association. However, the Association later amended its CC&Rs to allow it the right to lease the property despite not having an ownership interest.
Additionally, the Association began sending letters to the owners claiming that the property was in “substantial non-compliance” with the governing documents. The Association then called her to hearings and levied numerous $500 fines for alleged governing document violations. Unfortunately for the Association, the Court found that the alleged violative conduct began before the owner filed her bankruptcy petition. Under the Court's analysis, the fines were considered a pre-petition debt because the violations occurred before her bankruptcy filing.
The Court affirmed the analysis in another bankruptcy case, Goudelock v. Sixty-01 Association, that common interest assessments are a pre-petition debt and that the debtor has no personal obligation to pay assessments following a discharge. Moreover, Bankruptcy Code § 362(k) authorizes damages for willful violations of the automatic stay. The Court found that the Association's aggressive tactics violated the automatic stay and that the facts supporting the disciplinary fines arose pre-petition. The Court found the Association liable for $5,000.00 in emotional distress damages, $39,000.00 in property right interference damages, and $10,000 in punitive damages. The Court also awarded the owner attorney's fees and costs.
The primary takeaway should be for Associations to proceed cautiously when an owner filed for Chapter 13 bankruptcy protections. Courts have expanded the definition of pre-petition debts and the scope of the automatic stay. Any conduct that results in monetary penalties must have arisen after the bankruptcy petition for the fines to be enforceable. Furthermore, Boards that want to aggressively pursue collection efforts during a pending bankruptcy do so at significant risk. Associations should always thoroughly review their options with legal counsel before taking action during a bankruptcy matter.