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Stay-Not Pay? That Is the Question!

How the Goudelock Decision Impacts Owners, HOAs, and Foreclosing Lenders

Published: Fall 2018

The following article was first published in the American College of Mortgage Attorneys' journal, “The Abstract”, Fall 2018

In 1994, Congress reformed the bankruptcy code to make it clear that owners who filed Chapter 7 bankruptcy petitions must pay homeowner (HOA) assessments that come due after the filing of the petition in bankruptcy. Congress failed, however, to clarify if that obligation extends to owners who file for Chapter 13. Courts through out the country have been split on this issue. Some courts have taken the position that the HOA's only remedy is to enforce its lien for post-petition assessments through foreclosure. Other courts take the position that in addition to foreclosure, HOAs (or the foreclosing lender) may also bring an action against the owner for the unpaid post-petition assessments.

The ability to pursue an owner for unpaid post-petition assessments due and owing after the petition is filed until foreclosure by a lien holder has plagued debtors for years. Many debtors have ended up owing significant post-petition HOA fees on property they do not reside in that remains unforeclosed on for years. Sale or foreclosure can take a significant period of time depending upon where the property is located, and a debtor can do little but wait for a lienholder to complete its foreclosure.

The failure to foreclose was addressed in HSBC Bank USA, N.A. v. Zair, 550 B.R. 188, 200 (E.D.N.Y. Apr. 12, 2016) (Zair). In Zair, a couple's home was destroyed by Hurricane Sandy. Falling on hard times, the couple eventually filed a Chapter 13 bankruptcy petition. The homeowners decided they did not want the property and elected to surrender it. The bank determined it did not want the property. Over the objection of the lender, the bankruptcy court approved a plan that vested title in the property in the lender. The lender appealed, arguing that approval of the plan does not vest legal title and responsibility to maintain the property in the creditor/lienholder. The homeowners argued that without being able to vest title in the property in the lender, debtors are at the mercy of the banks and will be incurring expenses associated with the property until the creditor/lienholder completes its foreclosure.

The federal district court, in reversing the bankruptcy court's decision, held that under 11 USC § 1327(b), “the confirmation of a plan vests all of the property of the estate in the debtor.” Checking the box “surrender” does not obligate the debtor to do anything, nor does it allow or enable the creditor to do anything. The unfortunate situation is that “[w]here property is surrendered in a Chapter 13 plan, there is often an 'expectation' that the creditor will promptly enforce its rights… at times, creditors may fail to exercise these rights, leaving debtors stuck with the collateral and responsible for the maintenance, taxes, and other obligations that come with owning property.” It explained that “the Bank is entitled to the full array of property rights that accompany its position as first-priority lienholder, including and especially the right to foreclose its security interest, or to refrain from doing so.” The concept of surrender necessarily contemplates permit[ting] the creditor to exercise its property rights “to do nothing to recover its collateral”); HSBC Bank USA, N.A. v. Zair, (supra.) 550 B.R. at12.

Balancing the needs of debtors in their search for a “fresh start” and the rights of creditors to enforce their contracts as permitted under state law has become a little more complicated in the Ninth Circuit. The recent ruling in Goudelock v. Sixty-01 Ass'n of Apartment Owners, No. C15-1413-MJP, 2016 WL 1365942 (W.D. Wash. Apr. 6, 2016) (Goudelock), although offering relief for some property owners, shifts post-petition burdens of homeownership to creditors/lienholders. This decision will certainly impact how and when an HOA enforces its lien and will certainly cause lenders to reconsider (i) how they price their loans and (ii) accelerating their foreclosure and disposal actions.

Brief History of the Case

Penny Goudelock purchased a condo unit in 2001 in Redmond, Washington. Her deed was subject to a declaration of covenants and restrictions, which provides, among other things, that Sixty-01, a condo association, may charge property owners assessments for monthly fees and for maintenance, repairs, and capital improvements, and that unpaid assessments as well as costs and reasonable attorneys' fees incurred in collection were a lien on the property.

In 2009, Ms. Goudelock stopped paying her condominium association payments, and Sixty-01 initiated foreclosure proceedings. In March 2011, Ms. Goudelock moved out of her condominium and filed a petition in bankruptcy under Chapter 13. In June 2011, Ms. Goudelock proposed an amended plan that surrendered the property. The proposed plan was confirmed by the bankruptcy court in October 2011. Sixty-01 filed a proof of claim for $18,780.35 for unpaid pre-petition assessments and noted that the assessments continued to accrue at $388.46 per month. The condo unit sat unoccupied until the mortgage lender foreclosed on the property in February 2015.

Ms. Goudelock successfully completed her plan in July 2015 and received a discharge pursuant to 11 U.S.C. §1328(a). Meanwhile, in April 2015, Sixty-01 petitioned the bankruptcy court for a determination that the dues accumulated after Ms. Goudelock filed for Chapter 13 should not be discharged and that they constituted a personal obligation of Ms. Goudelock. Relying principally on In re Foster, 435 B.R. 650 (B.A.P. 9th Cir. 2010), the bankruptcy court found that the post-petition HOA dues were not dischargeable because they arose at the time of their assessment and were an incidence of legal ownership of the burdened property. (Dkt. No. 5-1 at 186-87, 196-204.) The bankruptcy court granted summary judgment in favor of Sixty-01 and the district court affirmed. Ms. Goudelock appealed the decision to the Ninth Circuit.

Ninth Circuit Decision

Noting that the issue of whether post-petition condominium association assessments are dischargeable in bankruptcy has not been addressed by any circuit court in the context of a Chapter 13 case, the Ninth Circuit decided to take the case. The court looked at two Chapter 7 cases in which the courts reached opposite conclusions: Matter of Rosteck, 899 F.2d 694 (7th Cir. 1990) (finding that post-petition assessments are dischargeable, unmatured contingent debts, based on the homeowner's contract), and In re Rosenfeld, 23 F.3d 833 (4th Cir. 1994) (condominium association assessments run with the land and create new, nondischargeable debt as they accrue).

The Ninth Circuit agreed with the Seventh Circuit. It was persuaded by the plain language of the code and operation of Ninth Circuit law. Starting with section 101(5)(A), the court found that a “claim” is broadly defined to include an unmatured, contingent right to payment. The court turned to Ninth Circuit jurisprudence to determine the issue of when Sixty- 01's claim arose.

The Ninth Circuit applies a “fair contemplation” test, under which a claim is found to arise “when a claimant can fairly or reasonably contemplate the claim's existence even if a cause of action has not yet accrued under nonbankruptcy law.” Under that test, the court reasoned that when Ms. Goudelock entered into the condominium agreement upon purchase of her unit, Sixty-01 could contemplate that she would accrue liability for monthly assessments. The court thus found that her in personam obligation to pay the assessments arose at the time she bought the condominium and matured monthly as long as she continued to own the unit.

Ignoring statutory law, (Washington RCW 64.34.364 (1), (11), which states that the association has a lien on the unit from the time the assessment is due and limits the obligation of secured lenders to pay assessments coming due prior to the lender obtaining title or possession of the property,1 as unmatured, contingent debts, the court found the assessments were dischargeable under section 1328(a) unless they fell under one of the exceptions to discharge listed in Section 1328(a)(1)–(4).

Because Congress did not include assessments in the list of debts that are excepted from a Chapter 13 discharge, Sixty-01 argued that Congress's silence was inadvertent and that the court should find them nondischargeable. The court disagreed, finding that even it were true that the omission of assessments from the exceptions-to- discharge provision was congressional error, it was up to Congress, not the courts, to correct the error.

The court went on to reject Sixty-01's argument that permitting discharge of the post-petition condominium association assessments amounted to a violation of the Fifth Amendment's Takings Clause. The court found that the Takings Clause pertains to in rem rights and, as Sixty-01 retained those rights with respect to the property, that clause was inapplicable.

Finally, the court addressed Sixty-01's argument that as a court of equity, the bankruptcy court was in a position to prevent the unfair result of a debtor being allowed to live rent free in her condominium. In this case, the debtor surrendered the property and moved out, but the court found that was not dispositive of the issue, as its holding would apply to a debtor who remained on the property. Rather, the court acknowledged the existence of the equitable quandary but concluded that the bankruptcy code resolved the issue in favor of the debtor. “The legislative branch, not the courts, is the appropriate place to balance conflicting policy interests.” If Congress wishes to prevent the discharge of post-petition HOA assessments in Chapter 13 cases, it is free to do so.

How Does This Ruling Affect the Owner?

Prior to this ruling, homeowners in the Ninth Circuit were held personally responsible for any accrual of HOA dues or assessments, even if they no longer lived in the unit, until such time as they no longer held a legal or equitable interest in the property. Under the ruling in Goudelock, it is highly likely that owners will reconsider paying post-petition liens while they make their payments under the plan. If they elect to keep the property, they can simply bring the debts current before the HOA forecloses. While they decide whether to keep the property or not, they reside rent and assessment free. Notably, the internet is full of attorney advertisements advising clients to come see them before making any post-petition payments.

Similarly, tenants in a commercial property who file a Chapter 13 petition may also argue that post-petition rent, common area maintenance assessments, and property taxes should be dischargeable because such debts would also fall under the broad definition of a claim under 101(5)(A). Although no case has yet applied the reasoning in Goudelock to contingent unmatured obligations owed by tenants on commercial property, counsel should assume the argument will be made, taking note, however, of the cap on a landlord's lost rental income damages (i.e., for future rent) under 11 U.S.C. § 502(b)(6) from a prepetition termination of a lease (see, In re Kupfer, 852 F.3d 853, 855–858 (9th Cir. 2016) or from “rejection” of the lease by a failure to assume the lease under 11 U.S.C. §§ 365(g)(1) and 502(g)(1)).

What Does This Ruling Mean for a Homeowner Association?

Community association documents and state legislation often contain provisions that state that the owner of a property may not exempt himself from liability for his contribution to the common expenses by waiving or disclaiming his rights or enjoyment of common areas, or by abandoning the relevant property. Courts have generally upheld these provisions. See, e.g. Glen v. June, 344 N.J. Super. 371,376 (App. Div. 2001); In re Raymond, 129 B.R. 354,362 (Bankr. S.D.N.Y. 1991); San Antonio Villa Del Sole Homeowners Ass'n v Miller, 761 S.W.2d 460,464 (Tex. App. 1988).

The decision in Goudelock ignores these rulings. The decision in Goudelock means that if an owner receives a discharge in a Chapter 13 bankruptcy case filed in Washington, Oregon, Alaska, Arizona, California, Hawaii, Idaho, Montana, or Nevada, that owner is not personally obligated to pay any post-petition assessments.

Unfortunately, any attempt to request payment of assessments from an owner during a Chapter 13 bankruptcy case is likely a violation of the automatic bankruptcy stay, and any attempt to do so after the owner receives a discharge will now be a violation of the Chapter 13 bankruptcy discharge injunction. If a notice of Chapter 13 bankruptcy is received, it is crucial that the association and its managing agent appropriately flag or note the file to ensure that all statements and notices are reviewed carefully by counsel for demands or language that could violate federal law.

Questions also arise as to whether an association can enforce other covenants contained in its governing documents. If the owner is no longer obligated to pay assessments, are they obligated post-petition to submit all architectural plans for approval? Can they ignore pet restrictions or STR restrictions? Does the HOA have to obtain relief from stay to enforce any covenant in the governing documents after the offending owner files a Chapter 13 petition?

The opinion also does not address RCW 64.34.364 (11), which limits the liability of lenders for assessments that become due prior to the mortgagee obtaining title, essentially leaving the HOA with no party to collect from other than spreading the “pain” to all the owners in the development through increased assessments. Volunteer HOA boards are typically loath to foreclose and own and maintain property. In Washington, at least, this decision will certainly change that viewpoint! Associations will have no choice but to seek relief from the automatic stay and foreclose as quickly as possible.

How Does This Ruling Impact Lenders?

Depending on the amounts owed to the HOA, the decision in Goudelock will make some creditors reluctant to foreclose and assume the obligation of bringing HOA assessments current, especially if the HOA's lien is superior to the creditor/lienholder's claim of lien.2

If the lender's lien is superior to the HOA's lien, and the HOA's lien is extinguished by foreclosure, it goes without saying that lenders who have liens on property in a Chapter 13 proceeding in Washington, Oregon, Alaska, Arizona, California, Hawaii, Idaho, Montana, or Nevada should promptly seek relief from stay and foreclose if it has any concern that post-petition secured contingent debts are not being paid by the property owners. Lenders may also be less likely to accommodate modifications to loans if they are unable to assure themselves that post-petition assessments will be paid.

Although Ms. Goudelock quit paying her association dues in 2009, the lender did not foreclose until 2015! Since the facts of the case indicate that the lender brought the dues current before the plan was confirmed, one can assume that (i) that the lender's lien was junior to the HOA's lien, and (ii) the lender brought the action against the owner in the name of the HOA under a subrogation theory. Had the HOA's lien been subordinate to the lender's lien, it is doubtful that the lender would have brought the assessments current. Lenders should make sure they know “who is in first” before they pay post-petition assessments or delay foreclosing!

Lastly, since only individuals and those filing jointly can file for Chapter 13, it might be advisable to consider requiring borrowers to form a legal entity to hold title to property that is subject to association dues and liens. Under 11 U.S.C. § 523(a)(16), post-petition assessments liens are excepted from discharge for petitions filed under Section 1141 (Chapter 11) and Sections 1228(a) and (b) (Chapter 12).


There is a substantial period of time between the filing of the Chapter 13 bankruptcy petition and discharge of the debtor. Apart from statutory deadlines, it is commonplace for plans to be proposed, amended, and withdrawn, and for numerous confirmation hearings to be held, resulting in months long delays before a plan is confirmed, if ever. Absent a change in the bankruptcy code, during that period of time, property owners will enjoy all the benefits of homeownership without all of the burdens. This ruling will certainly lead to increased litigation between lenders and HOAs as they struggle to determine who will assume the owners' burdens and an increase in the price (and availability) of condominium mortgage loans.

  1. See California's Davis-Sterling Act, at Ca Civ Code § 5650, which states that assessments are a debt of the owner as of the time the assessment is levied, and Ca Civ Code §5720(b), which restricts the amounts the HOA can collect through foreclosure.
  2. See for instance, Ca Civ Code 5680, which holds that assessment liens are prior to all other liens recorded subsequent to a notice of assessment, except that the association declaration may provide for subordination of its lien to any other liens or encumbrances (the mortgage instrument); Thaler v. Household Finance Corp. (2000) 80 Cal App.4th 1093.
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