GIAIMO AND ASSOC. THE OAKS AT NORTH BRUNSWICK CONDO ASSOC, INC. et al v. SPRADLEY

Filing 12

MEMORANDUM and ORDER that this matter is hereby Remanded to the Bankruptcy Court. Signed by Judge Peter G. Sheridan on 2/6/2019. (km)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

In Re: GIANNI N. SPRADLEY,

Civil Action No.: 18-cv-263 (PGS)

Debtor

GIAMIO AND ASSOC. THE OAKS
AT NORTH BRUNSWICK CONDO
ASSOC. INC.,
Appellant,

MEMORANDUM AND
ORDER

V.

GIANNA N. SPRADLEY,
Appellee.

This matter comes before the Court on appeal from the Bankruptcy Court for the District
of New Jersey (“Bankruptcy Court”). Appellant-Creditor, the Oaks at North Brunswick
Condominium Association, Inc. (“Oaks” or “Appellant”), appeals from the Bankruptcy Court’s
December 26, 2017 Order to strip down Oaks’ claim from the Chapter 13 bankruptcy plan of
Appellee-debtor Gianni Spradley (“Appellee” or “Spradley”). For the reasons set forth below,
the case shall be remanded back to the Bankruptcy Court for additional fact finding to certify
Oaks fulfilled all the necessary conditions to perfect its lien to an elevated priority over the first
mortgage.

Factual History
The factual history and finer details of this dispute were set forth before the Bankruptcy
Court. This Court therefore reiterates only the facts relevant to the present appeal.
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Oaks was established pursuant to the Master Deed and Declaration of Restrictive and
Protective Covenants, Easements, Charges, and Liens for the Oaks at North Brunswick, A
Condominium (“Master Deed”) and the By-Laws for the Oaks at North Brunswick
Condominium Association, Inc. (“By-Laws”) (collectively as “the Governing Documents”).
(Appellant Brief at 2-3, ECF No. 4). The Governing Documents were dated November 13, 1980
and recorded in the Office of the Middlesex County Clerk on November 13, 1980. Id. at 3.
Spradley owns and resides in a unit within Oaks. Id. By accepting title to the property,
Spradley joined Oaks’ Association and agreed to be bound by the Governing Documents while
holding title to the property. Id.
Pursuant to its Governing Documents, as well as New Jersey law, Oaks is responsible for
clearing snow, maintaining streetlights, disposing of garbage, and other assorted maintenance
duties associated with the common grounds its members share. Id. at 15. To fund these services,
Oaks collects a monthly maintenance charge from each member of the Association, as provided
in the Governing Documents. (Appellant Appendix at 55, ECF No. 4-1). The Governing
Documents further state that any unpaid monthly maintenance charge may constitute a lien if
filed with the County Clerk. More precisely, it states:
[A]ll charges, expenses and assessments chargeable to any unit shall
constitute a lien against said unit in favor of [the Oaks], which lien shall be prior
to all other liens except: (1) assessments, liens and charges for taxes past due and
unpaid on the unit, and (2) bona fide mortgage instruments, duly recorded, and (3)
the [Oaks]’s lien shall be recorded in the Clerk’s Office of Middlesex County
pursuant to the Condominium Act. The charges and expenses represented in the
usual monthly maintenance charge shall become effective as a lien against each
unit on the first day of each month; additional or added assessments, charges and
expenses, if any, chargeable to units and not covered by the usual monthly
maintenance charge, shall become effective as a lien against each unit as of the
date when the expense or charge giving rise to such additional or added
assessment was incurred by the [Oaks].
In addition, such charges and
expenses shall bear interest from the due date as set by the [Oaks] at such rate not
.

.

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.

exceeding the legal interest rate as may be established by the [Oaks] or, if no rate
is established, at the legal rate.
Id. at 55-56.
Due to failure to pay monthly maintenance charges, Spradley was referred to collections
on or around October of 2008. (Appellant Reply Brief at 8, ECF No. 6). The Oaks subsequently
recorded four liens totaling $33,211.62 against Spradley’s property: January 21, 2009, August
14, 2013, November 18, 2014, and May 28, 2015. (Appellant’s Appendix at 13, 30-43, ECF No.
4-1). Additionally, a foreclosure complaint was filed on July 19, 2012 by Greentree Servicing
against Spradley. Id. at 26.
On March 28, 2017, Spradley filed for Chapter 13 bankruptcy, valuing his unit at
$169,000 and subject to a first mortgage of$172,000. (Appellee’s Brief ECF No. 5, at 2). In
addition to the liens filed, the Oaks submitted an unsecured claim of $7,509.59 against the
property. (Appellee Brief at 3 n.4).
II.
In New Jersey, liens held by condominium associations for unpaid maintenance fees are
given limited priority over previously recorded mortgages by the New Jersey Condominium Act
(“the Condominium Act”). See N.J. Stat. Ann.

§ 46:8B-2l.

Specifically, such maintenance liens

may be granted limited priority over the first mortgage in an amount that equals six (6) months
of maintenance fees so long as certain conditions are met. N.J. Stat. Ann.

§ 46:8B-2l(b).

Spradley’s proposed Chapter 13 plan included a Motion to Cram-Down the Oaks’
maintenance lien of$33,2l 1.62 by bifurcating the lien into a secured lien of$l,920 (six (6)
months of the maintenance lien), and an unsecured claim of $31,291.62. (Appellant Brief at 4).
The Oaks filed an objection with the Bankruptcy Court, arguing that its lien was
protected from bifurcation by statute (11 U.S.C.

§
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1322(b)(2)). The statute prevents modification

to claims when the claim is a security interest in real property that also serves as the debtor’s
principle residence. Id. (hereinafter, anti-modification provision).
On December 26, 2017, the Bankruptcy Court granted Spradley’s Motion to Cram-Down
because the Condominium Act created an independent statutory lien that barred invocation of the
anti-modification provision (11 U.S.C.

§

1322(b)(2)). (Notice of Appeal from Bankruptcy Court,

ECF No. 1, Exhibit A at 2). Oaks subsequently appealed.
III.
In reviewing appeals from Bankruptcy Court, this Court reviews findings of fact under a
standard of clear error and legal conclusions under a de novo standard. See In re Sharon Steel
Corp., 871 F.2d 1217, 1223 (3d Cir. 1989). “A factual finding is clearly erroneous when ‘the
reviewing court on the entire evidence is left with the definite and firm conviction that a mistake
has been committed.” In re Ceilnet Data Systems, Inc., 327 F.3d 242, 244 (3d Cir.
2003) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S. Ct. 525, 92
L. Ed. 746 (1948)). This Court must accept the Bankruptcy Court’s findings of historical or
narrative facts unless clear error is found, but also exercises “plenary review of the trial court’s
choice and interpretation of legal precepts and its application of those precepts to the historical
facts.” See Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 103 (3d Cir. 1981).
Questions of law are reviewed under a de novo standard. IF. Fyfe, Inc., ofFlorida v.
Bradco Supply Corp, 891 F.2d 66, 69 (3d Cir. 1989); Universal Minerals, Inc. v. C.A. Hughes &
Co., 669 F.2d 98, 102 (3d Cir. 1981). For determinations that involve mixed questions of law and
fact, a district court must apply a mixed standard of review. Mellon Ban/c N.A. v. Metro
Commc ‘n, Inc., 945 F.2d 635, 642 (3d Cir. 1981). Additionally, the Bankruptcy Court’s exercises

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of discretion are reviewed for abuse thereof. Kool, Mann, Coffee & Co. v. Coffey, 300 F.3d 340,
353, 44 V.1. 419 (3d Cir. 2002).
Analysis

In the past, in cases similar to this, the District Courts have focused its analysis on
whether the Condominium Act (N.J. Stat. Ann.

§

46:8B-21) creates a statutory lien independent

of the consensual lien1 arising out of the Governing Documents, thereby preventing the
invocation of the anti-modification provision (11 U.S.C.

1322(b)(2)) to cram down the Oaks’

§

limited priority claim. In reHolmes, 573 B.R. 549 (Bankr. D.N.J. 2017); In re Smiley, 569 B.R.
377 (Bankr. D.N.J. 2017); In reRones, 531 B.R. 526 (Bankr. D.N.J. 2015), rev’d in part, 551
B.R. 162 (D.N.J. 2016); In ReKeise. 564 B.R. 255, 256 n. 2. (Bankr. D.N.J. 2017), rev’d, 17CV-1832, 2018 WL 624105 (D.N.J. Jan. 30, 2018). Herein, the Court enforces the
Condominium Act as it is written. The relevant portion of the Condominium Act reads as
follows:
a. The association shall have a lien on each unitfor any unpaid
assessment duly made by the association for a share of common
expenses or otherwise, including any other moneys duly owed the
association, upon proper notice to the appropriate unit owner,
together with interest thereon and, if authorized by the master deed
or bylaws, late fees, fines and reasonable attorney’s fees; provided
however that an association shall not record a lien in which the
unpaid assessment consists solely of late fees. Such lien shall be
effective from and after the time of recording in the public
records of the county in which the unit is located of a claim of
lien stating the description of the unit, the name of the record
owner, the amount due and the date when due. Such claim of lien
shall include only sums which are due and payable when the claim
of lien is recorded and shall be signed and verified by an officer or
agent of the association. Upon full payment of all sums secured by
the lien, the party making payment shall be entitled to a recordable
“A consensual lien is a security interest under the Bankruptcy code. (defining ‘security interest’ as a ‘lien
created by agreement’).” In re Keise, 564 B.R. 255, 256 n. 2 (Bankr. D.N.J. 2017), rev’d, 17-CV-1832, 2018 WL
624105 (D.N.J. Jan. 30, 2018); see also 11 U.S.C. § 101(51). By taking title to the property at Oaks, Spradley agreed
to the terms of the Governing Documents and the prospective lien within, thus creating a security interest.
.

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.

satisfaction of lien. Except as set forth in subsection b. of this
section, all such liens shall be subordinate to any lien for past due
and unpaid property taxes, the lien of any mortgage to which the
unit is subject and to any other lien recorded prior to the time of
recording of the claim of lien.
b. A lien recorded pursuant to subsection a. of this section shall
have a limited priority over prior recorded mortgages and other

liens, except for municipal liens or liens for federal taxes, to the
extent provided in this subsection. This priority shall be limited as
follows:
(1) To a lien which is the result of customary
condominium assessments as defined herein, the amount
of which shall not exceed the aggregate customary
condominium assessment against the unit owner for the
six-month period prior to the recording of the lien.

(2) With respect to a particular mortgage, to a lien recorded
prior to: (a) the receipt by the association of a summons
and complaint in an action to foreclose a mortgage on that
unit; or (b) the filing with the proper county recording
office of a lis pendens giving notice of an action to
foreclose a mortgage on that unit.
(3) In the case of more than one association lien being filed,
either because an association files more than one lien or
multiple associations have filed liens, the total amount of
the liens granted priority shall not be greater than the
assessment for the six-month period specified in paragraph
(1) of this subsection. Priority among multiple filings shall
be determined by their date of recording with the earlier
recorded liens having first use of the priority given herein.
(4) The priority granted to a lien pursuant to this subsection

shall expire on the first day of the 60th month following the
date of recording of an association’s lien.
(5) A lien of an association shall not be granted priority
over a prior recorded mortgage or mortgages under this
subsection if a prior recorded lien of the association for
unpaid assessments has obtained priority over the same
recorded mortgage or mortgages as provided in this
subsection, for a period of 60 months from the date of
recording of the lien granted priority.

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(6) When recording a lien which may be granted priority
pursuant to this act, an association shall notify, in writing,
any holder of a first mortgage lien on the property of the
filing of the association lien. An association which
exercises a good faith effort but is unable to ascertain the
identity of a holder of a prior recorded mortgage on the
property will be deemed to be in substantial compliance
with this paragraph.
For the purpose of this section, a “customary condominium
assessment” shall mean an assessment for periodic payments, due
the association for regular and usual operating and common area
expenses pursuant to the association’s annual budget and shall not
include amounts for reserves for contingencies, nor shall it include
any late charges, penalties, interest or any fees or costs for the
collection or enforcement of the assessment or any lien arising
from the assessment. The periodic payments due must be due
monthly, or no less frequently than quarter-yearly, as may be
acceptable to the Federal National Mortgage Association so as not
to disqualify an otherwise superior mortgage on the condominium
from purchase by the Federal National Mortgage Association as a
first mortgage.
N.J. Stat. Ann.

§

46:8B-21 (emphases added).

Here, the Court follows the analysis of In re Rones. In that case, the debtor, owner of a
condominium within the Whispering Woods Condominium Association, filed a Chapter 13 plan
after failing to pay certain fees and charges as required by the association’s by-laws. In re Rones,
551 B.R. at 165. The debtor’s property was valued at $170,000 and there was a $288,063.37
mortgage on the property. Id. The association held a lien against the property in the amount of
$18,761.76, but the debtor’s proposed only paying $1,494, citing the Condominium Act. Id. The
Bankruptcy Court overruled the association’s objection, finding that aside from the six-month
fee accrual, the remainder of the lien was unsecured and could therefore be stripped off. Id.
On appeal, Judge Wolfson found that the Condominium Act “does not apply only to
‘payment’ of those liens” but rather provides “that ‘a lien recorded pursuant to subsection a. of
this section shall have a limited priority over prior recorded mortgages and other liens.” Id. at
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170 (quoting N.J. Stat. Ann. 46:8B-21(b)(l) (emphasis added)). To that end, the Condominium
Act actually elevates a portion of the lien above other claims, including limited priority over
mortgages. Id. at 170-7 1. The association’s maintenance lien was therefore partially secured and
none of the lien could be stripped off per 11 U.S.C.

§

1322(b)(2). Id. at 171. The case was then

remanded back to the bankruptcy court.
Consistent with In re Rones, the six months of maintenance fees shall be given priority
over the first mortgage so long as other conditions of the Condominium Act are met. The Court
notes that the Condominium Act authorizes a lien for the entire amount of assessments set forth
in the recording; but it elevates only a portion of said lien, the six months of assessment fees,
above other liens and recorded mortgages so long as certain conditions are met. Hence, the
remainder of the lien (after elevating the six months of the maintenance liens) is still a valid lien
under the statute.
A bankruptcy court has the authority to “cram down” a lien to unsecured status in most
situations except if it is a “claim secured only by a security interest in real property that is the
debtor’s principal residence.” See 11 U.S.C.

§

1322(b)(2). Here, the remainder of the lien under

the Condominium Act is a security interest in real property and the unit is Spradley’s primary
residence. As such, the remainder of the lien would ordinarily not be subject to the cram down
provision due to the language of the anti-modification provision. See Id.
As noted above, the Condominium Act elevates priority of the amount equaling six
months of the maintenance lien when other statutory conditions are met, such as whether the
condominium lien was recorded prior to the association receiving a summons and complaint in a
foreclosure action or a lis pendis filed as notice of the foreclosure action as well as other
conditions. See N.J. Stat. Ann.

§

46:8B-14(b)(2); N.J. Stat. Ann.

8

§ 46:8B-14(b)(6).

In this case, there are no factual findings as to whether Oaks fulfilled the statutory
conditions. As such, the matter is remanded to determine whether the Condominium Act’s
mandate to elevate the priority of a maintenance lien is perfected under the statutory conditions.
For that reason, the Bankruptcy Court should determine whether the statutory conditions
in elevating a portion of the maintenance lien were met, N.J.S.A. 46:8B-14(b), and determine the
priority of the maintenance liens in accordance with this decision.
ORDER
IT IS ON THIS

6TH

day of February, 2019;

ORDERED that this matter is remanded to the Bankruptcy Court to determine whether
the statutory conditions under N.J.S.A. 46:8B-14(b) are satisfied, and to determine the priority of
the maintenance lien in accordance with the decision.

A2ni
(1}IkL.Q.
PETER G. SHERIDAN, U.S.D.J.

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