In re Raymond

• Decision Date: 01 July 1991
• Docket Number: Bankruptcy No. 89-30521.
• Citation: 129 BR 354
• Parties: In re Peter J. RAYMOND and Patricia M. Raymond, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

129 B.R. 354 (1991)

In re Peter J. RAYMOND and Patricia M. Raymond, Debtors.

Bankruptcy No. 89-30521.

United States Bankruptcy Court, S.D. New York.

July 1, 1991.

Thomas Genova, Klein & Genova, Poughkeepsie, N.Y., for Peter J. Raymond and Patricia M. Raymond.

Petito & LaRose, Keith V. LaRose, Poughkeepsie, N.Y., for respondent/Sutton North Condominium Ass'n.

Martin Charwat, Poughkeepsie, N.Y., trustee.

DECISION ON MOTION TO ENJOIN COLLECTION OF POST-PETITION CONDOMINIUM COMMON CHARGES

JEREMIAH E. BERK, Bankruptcy Judge.

This contested matter came on by Order To Show Cause on motion of the Chapter 7 debtors, Peter J. Raymond and Patricia M. Raymond, seeking an order pursuant to Sections 105(a) and 524(d) of the Bankruptcy Code ("Code") enforcing the discharge injunction against Sutton North Condominium Association ("Sutton"), prohibiting Sutton from attempting to recover post-petition condominium "common charges", assessments and other fees, finding Sutton in violation of the discharge injunction, and awarding damages, costs and attorney fees. Sutton is a condominium association to which the Debtors formerly belonged by virtue of their ownership of a condominium unit managed by the Association. A chronology of the pertinent facts follows.

I. FINDINGS OF FACT

The Debtors filed a joint Chapter 7 case on June 28, 1989. A Chapter 7 trustee was appointed and filed his Final Report on August 21, 1989. The Final Report stated that there were "no assets in the estate" over and above the exemptions claimed. The discharge order was entered October 17, 1989.

In the schedules annexed to their Chapter 7 petition, the Debtors listed their interest in a condominium unit at Sutton North Condominiums with a market value of $70,000.00, subject to a mortgage held by Market Street Mortgage Corporation in the amount of $62,000.00. Sutton was scheduled as an unsecured creditor with a claim of $742.27.

The Debtors purchased the condominium unit in December of 1986. Their deed was subject to the By-Laws of Sutton obligating them to make monthly payments for "common charges" and assessments. Under the Offering Plan ("Plan") pertaining to the unit, the common charges included such expenses as heat, hot water, cooking gas, insurance, garbage removal, management, pool, lawn and grounds maintenance, repairs, supplies, and legal and accounting costs. Plan at 5, 54.

The Plan described the nature of an ownership interest in a unit as follows:

The ownership of a condominium unit is similar in many respects to the ownership of a private home. Each unit owner owns title to his unit and is entitled to exclusive possession of it. Each unit owner is privileged to mortgage his unit or not, as he sees fit, and in such amount as he chooses. Each unit is separate in that it is not subject to mortgages on other units. A unit may be owned by an individual, a corporation, a partnership or a trust.

The unit owner may sell or lease his unit to anyone without restriction or limitation. He will be solely responsible for the maintenance of his unit and he may decorate it as he desires. . . . His unit will be taxed as a separate tax lot for real estate tax purposes, in a manner similar to that of a private home, and he will incur no tax liability if his neighbors fail to pay their taxes. . . .

In addition, a unit owner also owns, in common with the owners of all other units, an undivided interest in all parts of the Property other than the units. . . .

The Board of Managers will assess against every unit owner, in proportion to his interest in the common elements, charges ("common charges") for the maintenance of the common elements and for the operating costs of the Property ("common expenses"). . . . Water charges for the units and the common elements and gas for heating the units, the common elements and the hot water will be paid for by the Board of Managers as a common expense, as will the cost of repairs.

Plan at 9.

As to the common charges and expenses associated with ownership of the Sutton units, the Plan provided:

The Board of Managers shall prepare a budget for the Condominium from time to time and at least once each year. Copies of such budget shall be furnished to the unit owners and to their mortgagees. The common charges and expenses payable by each unit owner in accordance with his proportionate interest in the common elements shall be based upon such budget.

In addition to the normal operating expenses of the Condominium, the budget may, in the discretion of the Board of Managers, provide for reserves, working capital and other sums required for the affairs of the Condominium. Every unit owner shall be advised promptly after the adoption of each budget of the amount of common charges and expenses payable by him for the period covered by such budget.

Plan at 50-51.

The Plan further provided that the Board of Managers "on behalf of the unit owners shall have a lien on each unit for unpaid common charges assessed against such unit by the Board of Managers" pursuant to N.Y.Real Prop.Law § 339-z (McKinney 1989). It provided that the unit owner's liability for the common charges and expenses would terminate upon "a permissible sale, transfer or other conveyance of such unit . . . made by him in accordance with the applicable provisions of the By-Laws" or upon conveyance of the unit to the Board of Managers. Id. at 59. In the event that a mortgage foreclosure on a unit occurred, the Plan stated:

A purchaser of a unit shall be required by the Board of Managers to pay unpaid common charges and expenses assessed against his unit prior to his acquisition of such unit except that a mortgagee acquiring title to the mortgaged unit or a purchaser at a foreclosure sale shall not be liable and the unit shall not be subject to a lien for the payment of the common charges and expenses assessed prior to the acquisition of title to such unit by a mortgagee or purchaser at a foreclosure sale, but such mortgagee or purchaser at a foreclosure sale shall be liable for payment of all common charges and expenses after the acquisition of title.

Id.

After the Debtors filed their Chapter 7 case on June 28, 1989, they continued to reside in the unit during the pendency of the case and subsequent to the entry of their discharge on October 17, 1989. The Debtors vacated the unit in July, 1990 upon the foreclosure sale by their mortgagee.

Thereafter, Sutton filed a notice of lien against the condominium unit in the amount of $3,173.17. It also commenced suit against Peter J. Raymond, one of the Debtors, for unpaid common charges, assessments and late fees accrued subsequent to the entry of his discharge, from October 17, 1989 through August, 1990.¹ Respondent's Affirmation in Opposition by Attorney Keith LaRose at 1-2 (filed December 10, 1990).

II. DISCUSSION

The issue presented is whether the Debtor is liable for the condominium common charges accrued post-petition. We first consider whether the pre-petition obligation to pay common charges is an executory contract in bankruptcy. We also consider the dischargeability of the obligation under Code § 727(b).

A. Executory Contract

An executory contract in its most fundamental construct is "nothing more than mixed assets and liabilities arising out of the same transaction." T. Jackson, The Logic and Limits of Bankruptcy Law 106 (1986). The Code, however, makes "no attempt" to define the term. 2 L. King, Collier on Bankruptcy ¶ 365.02 (15th ed. 1991). Nevertheless, the legislative history reflects an intent to adopt the principle of mutuality by referring to executory contracts as:

contracts on which performance remains due to some extent on both sides. A note is not usually an executory contract if the only performance that remains is repayment. Performance on one side of the contract would have been completed and the contract is no longer executory.

Report of Senate Comm. on the Judiciary, S.Rep. No. 989, 95th Cong., 2d Sess. 58 (1978), U.S.Code Cong. & Admin.News 1978, 5787, 5844.

Despite the seeming simplicity of the term, the definition of an "executory contract" has "preoccupied modern . . . jurisprudence". Andrew, Executory Contracts in Bankruptcy: Understanding "Rejection", 59 U.Colo.L.Rev. 845, 889 (1988); In re Norquist, 43 B.R. 224, 225 (Bankr. E.D.Wash.1984) ("Of all the issues in bankruptcy, the `executory contract' remains in the forefront.").

An often cited definition of executory contract is that of Professor Countryman: "a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Countryman, Executory Contracts in Bankruptcy (Pt. 1), 57 Minn. L.Rev. 439, 460 (1973). Thus, a contract is executory if: (1) there are obligations on both sides, and (2) the nature of these obligations is such that non-performance of either would constitute a material breach of the underlying contract.

The significance of the executory nature of a contract involves the concept of rejection. If a contract is not executory, it cannot be rejected and the parties remain obligated notwithstanding the intervention of bankruptcy. If a contract is executory, it can be rejected.

At first blush, the Countryman definition would appear to include the common-charges agreement at issue in our case. The Debtor and Sutton each had outstanding unperformed obligations; the Debtor had a continuing obligation to pay the common charges and Sutton had a corresponding obligation to provide the itemized services. A failure to perform by either would be a material breach of the underlying agreement. And, as the Chapter 7 trustee did not assume the Debtor's interest in the unit and the attendant contractual obligation to pay common charges, the obligation was arguably rejected under Code § 365(d)(1) and the rejection would thereby constitute a breach...