In re Makowka

• Decision Date: 27 May 2014
• Docket Number: No. 13–3469.,13–3469.
• Citation: 754 F.3d 143
• Parties: In re Kelly L. MAKOWKA, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

754 F.3d 143

In re Kelly L. MAKOWKA, Appellant.

No. 13–3469.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit

LAR 34.1(a) May 27, 2014.

Opinion Filed: June 9, 2014.

J. Zac Christman, Newman, Williams, Mishkin, Corveleyn, Wolfe & Fareri, Stroudsburg, PA, Attorney for Debtor–Appellant.

Gino L. Andreuzzi, Hazleton, PA, Attorney for Defendant–Appellee.

Charles J. DeHart, III, Hummelstown, PA, for Chapter 13 Trustee.

Before: HARDIMAN, SLOVITER and BARRY, Circuit Judges.

OPINION

HARDIMAN, Circuit Judge.

This appeal requires us to interpret a state statute—the Pennsylvania Uniform Planned Community Act (UPCA), 68 Pa. Cons.Stat. §§ 5101–414—in the bankruptcy context. Appellant Kelly Makowka seeks in Chapter 13 proceedings to avoid a portion of claims made by her homeowners association, Pocono Mountain Lake Estates Community Association (the Association). The Bankruptcy Court, in an order affirmed by the District Court, held that the Association had a valid statutory lien on Makowka's residence pursuant to the UPCA, which the Association had enforced by obtaining judgments in debt against Makowka in state court. For the reasons that follow, we will vacate the District Court's judgment and remand for further proceedings.

I

Makowka owns a home in Pocono Mountain Lake Estates in Pike County, Pennsylvania, a planned community as defined under the UPCA. In 2005, she fell behind on her homeowners association dues, which began to accrue late charges. In April 2008, the Association sued Makowka in the Pike County Magisterial District Court to collect a portion of the unpaid dues and obtained a default judgment of $2,436.70. As additional dues went unpaid, the Association sued Makowka again in April 2010 and obtained another default judgment, this time worth $3,599.08. Both judgments were transferred to the Court of Common Pleas of Pike County, which issued a writ of execution and attachment. Pursuant to that writ, a sheriff's sale of Makowka's property was scheduled for September 14, 2011.

Two days before the sheriff's sale, Makowka filed a Chapter 13 petition in the United States Bankruptcy Court for the Middle District of Pennsylvania. In her proposed bankruptcy plan,¹ Makowka moved to avoid the Association's claims under 11 U.S.C. § 522(f), which releases a debtor from obligations imposed by judicial liens ( i.e., money judgments) as well as non-possessory, non-purchase money security interests. Although Makowka acknowledged that Section 5315 of the UPCA granted the Association a self-executing statutory lien on her residence in the amount of the unpaid dues, she claimed that a portion of that lien had been extinguished by law because the Association had failed to foreclose on the lien within the statutory period of three years. Therefore, to the extent the Association's claims represented fees due before September 12, 2008, i.e., three years before the date of her bankruptcy petition, Makowka contended that the Association had obtained dischargeable money judgments.

The Bankruptcy Court denied Makowka's motion, ruling that the Association had preserved its statutory lien. In an oral opinion, the Bankruptcy Court noted that it was “bound by Pennsylvania [a]ppellate decisions construing” the UPCA. These included the Pennsylvania Superior Court's decision in Forest Highlands Community Association v. Hammer, 903 A.2d 1236 (Pa.Super.Ct.2006), which the Bankruptcy Court read to enable “an association ... [to] perfect or enforce the lien for the unpaid assessments in a variety of manners, ... [including] an action in debt.” App. at 56 (discussing Hammer, 903 A.2d at 1240). The Bankruptcy Court also opined that a foreclosure action would be “odd” in the UPCA context, as the Association did not hold a mortgage upon which it could foreclose. It thus “reject[ed] the debtor's argument that the mortgage foreclosure action would be the exclusive remedy.” Id. As a result, the Bankruptcy Court allowed the Association's unavoidable claim of $7,835.82, which represented the value of the money judgments, accrued unpaid debts, and interest at the time of the order. Makowka moved for reconsideration. When that motion was denied, she timely appealed to the United States District Court for the Middle District of Pennsylvania.

The District Court affirmed. Turning first to the text of Section 5315, the District Court agreed that it supported Makowka's position that foreclosure was the exclusive method to enforce the statutory lien. After noting that the Pennsylvania Supreme Court had not yet addressed the question on appeal, the Court considered the relevant state intermediate court decisions—the Pennsylvania Commonwealth Court's decision in London Towne Homeowners Association v. Karr, 866 A.2d 447 (Pa.Commw.Ct.2004), and the Pennsylvania Superior Court's decision in Hammer—for guidance as to how the Pennsylvania Supreme Court would rule.

The District Court adopted a narrow interpretation of Karr, reading the opinion to hold “that while an association may pursue an action in debt or contract against a tenant under 5315(f) to recover sums under a lien, ‘[t]he first step to enforcing an assessment lien is the filing of a foreclosure complaint.’ ” App. at 6 (quoting Karr, 866 A.2d at 453) (emphasis in original). It then found that Hammer “expand[ed] upon the rationale of Karr ” and “clearly held that by filing an action in debt or contract, an association was enforcing its lien under the UPCA.” App. at 7 (discussing Hammer, 903 A.2d at 1241). The District Court criticized the Superior Court's decision, opining:

The Hammer court, in holding that the action in debt to collect unpaid assessments ... satisfied the [enforcement] requirement in Section 5315(e) ... ignored the well-established and fundamental distinction between proceedings in rem and those brought in personam. It is difficult for this Court to understand how an action brought under Section 5315(f) “to recover sums for which subsection (a) creates a lien” can be considered a “proceeding [ ] to enforce the lien” for those unpaid assessments.

App. at 8. Despite its disapproval, the District Court thought it bound by Hammer because the decision “presents the latest and most definitive ruling by the intermediate courts of Pennsylvania with respect to the interpretation of Section 5315.” Id. “[B]ecause the issue before this Court is unquestionably a matter of Pennsylvania law, it will give Hammer the binding effect that it must.” Id. (emphasis added). For that reason alone, the District Court predicted that “[b]ecause the Pennsylvania Superior Court was clear in its holding and there appears to be no authority contrary to Hammer,” the Pennsylvania Supreme Court would not overturn Hammer. App. at 8 n. 5.

Following the District Court's order, Makowka filed this timely appeal.

II

The Bankruptcy Court had jurisdiction pursuant to 28 U.S.C. § 1334, and the District Court reviewed the Bankruptcy Court's order under 28 U.S.C. § 158(a)(1). We have jurisdiction over this appeal pursuant to 28 U.S.C. §§ 158(d) and 1291.

Because the District Court sat as an appellate court reviewing the Bankruptcy Court's order, we exercise plenary review over its decision. In re Continental Airlines, 125 F.3d 120, 128 (3d Cir.1997). Like the District Court, we review the Bankruptcy Court's legal determinations—such as the matter of statutory interpretation before us—de novo. See In re Heritage Highgate, Inc., 679 F.3d 132, 139 (3d Cir.2012).

III

Under the UPCA, an “association has a lien on a unit for any assessment levied against that unit or fines imposed against its unit owner from the time the assessment or fine becomes due. The association's lien may be foreclosed in a like manner as a mortgage on real estate.” 68 Pa. Cons.Stat. § 5315(a). The lien does not exist in perpetuity, however, because the statute provides that “[a] lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within three years after the assessments become payable.” Id. § 5315(e). Even if the lien is extinguished, “[n]othing in [Section 5315] shall be construed to prohibit actions or suits to recover sums for which subsection (a) creates a lien or to prohibit an association from taking a deed in lieu of foreclosure.” Id. § 5315(f).

The question sub judice is whether the Association enforced its statutory lien against Makowka when it sued her in debt. The parties agree that Makowka's unpaid dues gave rise to a self-executing lien, and that the lien would have been extinguished by law absent any action by the Association within three years. But they disagree as to what actions qualify as “proceedings to enforce the lien” under subsection (e) of the statute. Makowka contends that there is only one way to enforce the lien: by filing a foreclosure complaint. If she is correct, she is subject only to the portion of the Association's lien for unpaid dues that has not been extinguished—namely, for the fees that came due after September 12, 2008, three years before her Chapter 13 petition was filed. The Association, in contrast, argues that the UPCA permits multiple methods of enforcement under subsection (e). If that is so, its state court actions tolled the extinguishment period, and it holds a statutory lien for the total sum of the unpaid dues, plus late fees and interest.

A

We begin by noting that although the issue on appeal is a matter of state law, it has practical import in bankruptcy. As the Association correctly notes, an action to enforce the statutory lien through foreclosure generally has the same effect as a judgment in debt or contract, insofar as both enable an association to collect unpaid dues from a delinquent homeowner. In bankruptcy, however, the debtor may modify her obligations for certain categories of claims. In this context, the often inconsequential distinction between enforcement and alternate remedies under Section 5315 determines whether an...