Section 523(a)(16) of the Bankruptcy Code excepts from discharge condominium fees and expenses that accrue postpetition for so long as the debtor maintains a “legal, equitable or possessory ownership interest” in the condominium unit.
Question: What happens to the individual debtor who (a) abandons use and occupancy of the condo before the petition, (b) surrenders possession of the unit to the secured lender contemporaneously with the petition filing, (c) consents to relief from the automatic stay to enable the secured lender to resume foreclosure proceedings, (d) has no way to accelerate foreclosure, and (e) cannot convey the unit by deed in lieu of foreclosure because either, the debtor’s estranged, non-debtor wife is on the deed but not the mortgage and won’t sign anything for fear of becoming obligated on the mortgage, or the lender won’t accept the deed in lieu?
Most Unfortunate Answer: The hapless debtor in this circumstance remains liable for postpetition HOA fees and assessments until the lender, at its whim and caprice, decides finally to foreclose on the condo unit. In other words, the debtor’s chapter 7 discharge is, for all intents and purposes, illusory because the debtor remains obligated for condo fees and assessments, potentially in perpetuity.
I recently represented pro bono a debtor seeking to establish that his chapter 7 discharge released him of all obligations for postpetition condo fees and assessments. The debtor’s circumstances were identical to those identified above.
Recognizing that the statutory language was at best problematic, I focused on what an “interest” actually is within the meaning of section 523(a)(16). The Bankruptcy Code does not define “interest,” but under New York law a condominium is real property and I reasoned that resort to the Restatement (First) of Real Property might advance the inquiry.
Section 5 of the Restatement was helpful. An “interest” under the Restatement is effectively an amalgamation of “rights,” “powers,” “privileges” and “immunities,” each of which is in turn defined by the Restatement.
Without prolonging this recitation, I argued that because the debtor’s rights, powers, privileges and immunities were so attenuated in light of his abandonment, surrender, consent to automatic stay relief, and inability to cause the secured lender to complete the foreclosure process or convey any interest in the condo unit, he had no legally cognizable “interest” that would implicate the exception to discharge in section 523(a)(16).
Although the bankruptcy judge was sympathetic to the debtor’s plight, he felt constrained by the statutory language to rule that the debtor’s chapter 7 discharge did not release him of liability for condo fees and expenses that accrued and continued to accrue after the petition date.
In effect, the court found that because it was theoretically possible for the debtor to win the lottery, and use the winner’s proceeds to exercise his equity of redemption before the secured lender completed the foreclosure, the debtor’s bare “legal” title was sufficient to implicate the exception to discharge under section 523(a)(16) of the Bankruptcy Code.
The key takeaway? Debtors and counsel should be aware of the 523(a)(16) pitfall and either convey, to the extent possible, legal title to the condo contemporaneously with the petition date, or explore discharge options under chapter 13.
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