In re Montalvo

• Decision Date: 25 February 2016
• Docket Number: Case No. 6:10–bk–08338–KSJ
• Citation: 546 B.R. 880
• Parties: In re Federico Augusto Montalvo, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Florida

546 B.R. 880

In re Federico Augusto Montalvo, Debtor.

Case No. 6:10–bk–08338–KSJ

United States Bankruptcy Court, M.D. Florida, Orlando Division.

Signed February 25, 2016

Camille Sebreth, Law Office of Camille Sebreth, PLLC, Lawrence M. Kosto, Kosto & Rotella PA, Orlando, FL, for Debtor.

MEMORANDUM OPINION DENYING DEBTOR'S MOTION FOR SANCTIONS AND GRANTING DECLARATORY RELIEF

Karen S. Jennemann

, United States Bankruptcy Judge

Debtor previously owned two condominiums requiring him to pay periodic assessments to the Villa Medici's Condominium Association (the "Association"). Debtor stopped paying these assessments, filed a Chapter 13 bankruptcy case, and surrendered his interest in the condominiums. The Association, through a receiver, then collected rents on the surrendered condominiums and applied the monies to the oldest assessments due, all pre-petition. Debtor now seeks sanctions¹ against the Association making two arguments—that the Association violated the discharge injunction and the automatic stay, first, by applying the collected rents to discharged pre-petition assessments and, second, by attempting to collect "discharged" postpetition assessments he has no liability to pay. Because the Debtor's liability to the Association arises from a covenant running with the land as opposed to a contractual obligation, the Court rejects the Debtor's arguments finding that the Association did not violated neither the discharge injunction nor the automatic stay and that the Debtor remains liable for all post-petition assessments until legal title to the condominiums transferred to a third party. Debtor's motion for sanctions is denied.

When Debtor, Federico Montalvo, filed his Chapter 13 petition,² he owned two condominium units at Residences at Villa Medici.³ Debtor did not reside in either unit and surrendered his interest in both units during his bankruptcy case.⁴ Both units were subject to mortgages⁵ and to a Declaration of Condominium.⁶ Debtor listed the Association twice on his schedules as a secured creditor valuing its claims as $0.00 or unknown.⁷ The Association filed no claim in the case.

The Court confirmed Debtor's Second Amended Chapter 13 Plan⁸ that provided "[t]he debtor is responsible for paying all post-petition ongoing homeowners assessments, homeowners' dues, and/or property taxes; the automatic stay shall not apply to these debts."⁹ The Association however received no payments from the Debtor either under the confirmed plan or outside of his Chapter 13 case. Debtor essentially just stopped paying all assessments due or accruing to the Association. Debtor made all payments due to his other creditors under his Chapter 13 Plan and later received his discharge.¹⁰ The Discharge Order provided "a creditor may have the right to enforce a valid lien ... against the debtor's property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case."¹¹

Because many unit owners in the Villa Medici neighborhood also were not paying condominium assessments, the Association convinced the state court to appoint a receiver to rent empty units and use the collected rent monies to pay outstanding assessments associated with each unit.¹²

The receiver rented at least one of Debtor's units and collected $9,290.39.¹³ The Association then applied the monies to the fees owed on the unit—the fees due before the Debtor filed bankruptcy totaling $2,474.81.¹⁴

Debtor later reopened this case¹⁵ and seeks sanctions against the Association. Debtor argues that the Association violated the automatic stay and the discharge injunction by applying the rent monies to the pre-petition assessments and that he has no liability for post-petition assessments because the fees "emanate" from a pre-petition contract between the Association and the Debtor.¹⁶ The Association responds¹⁷ that it did not violate the automatic stay or the discharge injunction by applying the rent monies to the pre-petition assessments because it was only taking in rem action against the property and was not collecting a debt against the Debtor. The Association also argues the Debtor is liable for post-petition assessments because the confirmation order directs the Debtor to pay the fees, which he failed to pay, and the Declaration creates a covenant that runs with the land unaffected by the Debtor's bankruptcy or his discharge.¹⁸

The Declaration supports the position of the Association and provides "[t]he Association is hereby granted a lien on each Unit, which lien shall secure the payment of all assessments, interests thereon, and reasonable attorneys' fees incurred as an incident to the enforcement of said lien.... The lien shall be effective, have priority and be collected as provided by the Act."¹⁹ The "Act" is defined as "the Condominium Act of the State of Florida in effect on the date of recordation of this Declaration of Condominium."²⁰ The Condominium Act²¹ , in turn, provides "[t]he association has a lien on each condominium parcel to secure the payment of assessments."²² The Declaration similarly provides "[a]ll of the restrictions, reservations, covenants, conditions and easements contained herein shall constitute covenants running with the land."²³ The Declaration then provides "[l]iability for assessments may not be avoided by abandonment of a Unit."²⁴

The legal issue is whether the obligations created by this Declaration "run with the land" and are non-dischargeable liens secured by the real property or, instead, mere contractual obligations between an association and a real property owner. Looking to Florida law, I hold that the Association's assessments are covenants running with the land. They remain enforceable liens post-discharge until liability shifts to a new property owner upon a formal transfer of title to the land.

" ‘Property interests are created and defined by state law.’ "²⁵ The Court therefore must look to Florida property law to analyze the Declaration's legal effect. The Florida Supreme Court stated "[c]ovenants are loosely defined as ‘promises in conveyances or other instruments pertaining to real estate.’ "²⁶ The Florida Supreme Court also cited a Florida District Court of Appeal for a definition of covenants running with the land:

‘A covenant running with the land differs from a merely personal covenant in that the former concerns the property conveyed and the occupation and enjoyment thereof, whereas the latter covenant is collateral or is not immediately concerned with the property granted. If the performance of the covenant must touch and involve the land or some right or easement annexed and appurtenant thereto, and tends necessarily to enhance the value of the property or renders it more convenient and beneficial to the owner, it is a covenant running with the land.’²⁷

"The declaration, which some courts have referred to as the condominium's ‘constitution,’ strictly governs the relationships among the condominium unit owners and the condominium association."²⁸ Indeed, "[a] declaration of a condominium is more than a mere contract spelling out mutual rights and obligations of the parties thereto-it assumes some of the attributes of a covenant running with the land, circumscribing the extent and limits of the enjoyment and use of real property."²⁹ The Condominium Act similarly provides "[t]he declaration ... may include covenants and restrictions concerning the use, occupancy, and transfer of the units"³⁰ and "[a]ll provisions of the declaration ... run with the land, and are effective until the condominium is terminated."³¹ Under Florida law, obligations imposed by declarations encumbering real property are more akin to covenants running with the land than contractual obligations detached and separate from real property ownership.

Granted, courts in other jurisdictions are split on whether post-petition assessments are dischargeable in bankruptcy.³²

As Judge Briskman explained noting three approaches to the issue:

One line³³ of authority has held post-petition assessments nondischargeable because the obligation to pay assessments arises from a covenant running with the land. A second line³⁴ of authority has held that post-petition assessments are dischargeable because they arose from a prepetition contract. A third line³⁵ has taken a compromise position that post-petition assessments are dischargeable unless the debtor resided in or leased the unit.³⁶

Judge Briskman explained "[i]n 1994, Congress attempted to resolve this split of authority by enacting Bankruptcy Code Section 523(a)(16)

"³⁷ However, 523(a)(16) does not apply to Chapter 13 discharges,³⁸ and "[t]he discharge does not affect a secured creditor's interest in real property." So, the contrasting conclusions in the three approaches remain relevant.

This Court agrees with Judge Briskman and the Rosenfeld

line of cases that "[t]he obligation to pay homeowners' association assessments is based on a covenant running with the land, a property right. Generally, the discharge does not modify property rights."³⁹ The Declaration here outlines the unit owner's responsibility for assessments and this responsibility, under Florida law, and is a covenant that runs with the land.

The Debtor urges this Court to treat the Association's Declaration as a pre-petition contract between the Debtor and the Association, and to follow the reasoning of non-Florida courts.⁴⁰ The Court rejects this interpretation.

Concluding that the Declaration here creates a covenant that runs with the land, the Debtor fails on both of his arguments. He is responsible for all accruing post-petition assessments unless title to the real property transfers. And, the Association did not violate the automatic stay or the discharge injunction by applying rent monies to its pre-petition lien.

The Debtor is responsible for post-petition assessments on the property until a transfer of title occurs. Debtor admittedly is relieved of any in personam liability that arose pre-petition once a discharge issue...