NJ Federal Court Says Condo Association Lien May Have Priority in Chapter 13 Bankruptcy Plan

Timothy Duggan, Esquire and Chris Florio, Esquire of Stark & Stark, as Amicus Curiae (friend of the Court), were successful in convincing the United States District Court for the District of New Jersey to reverse a bankruptcy court decision, which allowed a bankruptcy condominium owner to avoid paying a condominium lien in full under a bankruptcy plan. The Condominium Association Institute (CAI) authorized Stark & Stark to participate in the appeal since the issue in question was important to all condominium associations in New Jersey and other states.

The issue in dispute was whether a condominium lien, which is recorded and served on the owner and mortgagees, is a fully secured claim under bankruptcy law, or a partially secured claim which may be “stripped off” in a bankruptcy plan. In the case in dispute, Whispering Woods Condominium Association (“Condo Association”) filed a lien for $6,085.85 (later amended to $18,761) for unpaid association fees and assessments. Of this amount, $1,494 (six month priority) was entitled to “priority” over the existing mortgages under New Jersey law. When the owner filed for Chapter 13 bankruptcy protection, the unit was worth $170,000 and encumbered with a first mortgage in the amount of $288,063. Therefore, when the case was filed, the lien priority was:

Six Month Priority for Condominium Lien	$1,494
First Mortgage	$288,063
Balance of Condominium Lien	$17,267

Under bankruptcy law, if a creditor holds a security interest in the debtor’s home that is fully or partially secured, the claim cannot be modified in a Chapter 13 plan; it must be paid in full. For bankruptcy purposes, a claim is “secured” if there is some value in the property to secure the claim. Here, since the home was worth $170,000, there is only value to secure the $1,494 six month priority lien and part of the first mortgage.

The bankruptcy court found that the six month priority claim was entitled to “payment priority” (not lien priority) and had to be paid in full, but the balance of the Condo Association’s claim was unsecured and could be modified (ie. treated as an unsecured claim). The Condo Association disagreed and appealed. In order to advance the rights of all condominium associations, the CAI sought leave of court to file its own brief in an effort to assist the District Court in understanding the impact of the decision on the public.

The District Court disagreed with the Bankruptcy Court and found that the Condo Association held one lien, with limited priority, and the lien could not be modified in the bankruptcy case because the lien, as a whole, was partially secured. As a result, the condominium lien must be paid in full.

This is a great victory for all condominium associations in New Jersey.

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