Meritage Homeowners' Association v. Watt et al

Filing 33

ORDER AND OPINION: Denying Motion for Partial Summary Judgment 17 . See, formal Opinion. It is further ORDERED that this matter is referred to Magistrate Judge Thomas M. Coffin for settlement conference. The parties shall contact Paul Bruch, Judge Coffin's courtroom deputy, at 541-431-4111 or by 4/26/2017 to schedule a settlement conference. Signed on 4/12/2017 by Judge Ann L. Aiken. (rdr) Modified on 4/12/2017 to correct typographical error. (rdr)

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF OREGON PORTLAND DIVISION MERITAGE HOMEOWNERS' ASSOCIATION, Case No. 3:17-cv-00267-AA OPINION AND ORDER Plaintiff, v. NICHOLAS LEE WATT and PATRICIA MOUDY WATT, Defendants. AIKEN, Judge: Plaintiff Meritage Homeowners' Association ("Meritage") filed this action against defendants Nicholas Lee Watt and Patricia Moudy Watt ("the Watts"), asserting that the Watts owe Meritage dues, assessments, interest, and fees in connection with a vacation propetiy on the Oregon coast. Meritage now moves for partial summary judgment. For the reasons set forth below, Meritage's motion is denied. Page l - OPINION AND ORDER BACKGROUND 1 I. General Factual Background In 2006, the Watts took out a Joan to purchase a second residence in Newport, Oregon ("prope1iy"). The property was one of eighteen townhouse units within a planned community that is subject to a series of covenants and restrictions enforced by Meritage. The original lender, Mortgage Trust, Inc., obtained a security interest in the prope1iy pursuant to a promissory note and deed of trust. In 2012, M01igage Trust, Inc., assigned its interest in the deed of trust to Bank of New York Mellon ("BNYM"). Later that year, the Watts defaulted on their payment obligations and BNYM commenced foreclosure proceedings. In March 2014, defendants filed a petition for relief under Chapter 13 of the Bankruptcy Code, staying BNYM' s foreclosure effo1is. In June 2014, the Watts proposed a second amended Chapter 13 plan.2 The second amended plan included a nonstandard provision purpotiing to vest the property in BNYM upon confirmation. BNYM objected to the second amended plan because it did not want to take title to the property. BNYM found taking title objectionable, in pati, because it would make BNYM responsible for ongoing obligations associated with the property - including dues and assessments. Those obligations were substantial. Dues for the prope1iy exceed $15,000 per year. In addition, the property contains defective windows that the Watts have not replaced. Under a special assessment levied in late 2013, unit owners were liable for up to $5,000 per month for failure to replace the defective windows. Comp!.~ 19 (doc. 1-1). 1 Unless otherwise noted, the facts are drawn from this Cowi's decision in Bank of New York Mellon v. Watt, 2015 WL 1879680 (D. Or. Apr. 22, 2015). 2 Meritage objected to the Watts' first two proposed plans. Page 2 - OPINION AND ORDER On October 15, 2014, the bankruptcy comt confirmed the plan over BNYM's objection. BNYM appealed. On April 22, 2015, this Court vacated and remanded, holding that the bankruptcy court lacked statutory authority to force an objecting creditor to assume a debtor's interest in and ongoing liabilities associated with a piece of property. On August 27, 2015, the prope1ty was reconveyed to BNYM through a sale under 11 U.S.C. § 363. The practical effect of this complex history is that, after they filed for bankruptcy, the Watts were the owners of the property for two periods of time: from March 13, 2014 (the date of the Chapter 13 filing) to October 17, 2014 (the date of the plan confirmation, when BNYM took title) ("first post-petition ownership period") and again from April 22, 2015 (the date of this Court's order vacating the order confirming plan) to August 27, 2015 (date of the§ 363 sale to BNYM) ("second post-petition ownership period"). 11. Debts at Issue in the lvfotionfor Summmy Judgment Meritage seeks summary judgment with respect to two separate debts, as well as interest and fees associated with those debts. First, Meritage seeks to recover a special assessment levied during the first post-petition ownership period. Second, Meritage seeks to recover HOA dues for the second post-petition ownership period. A. Special Assessment In 2011, the Watts and other unit owners sued Meritage in Lincoln County Circuit Court ("HOA litigation"). agreement. Id.~ Id.~ 11. In July 2012, the patties to the HOA litigation reached a settlement 15. After the settlement, Meritage's insurance company refused to pay a claim for a portion of attorney's fees incurred in the HOA litigation. Id. ~ 25. Meritage levied a special assessment to recoup the unreimbursed fees ("first special assessment"). In accordance with the terms of a settlement agreement reached in the HOA litigation, Meritage levied the first Page 3 - OPINION AND ORDER special assessment only against the plaintiffs in the HOA litigation rather than against all unit owners. Also in 2011, Meritage filed collection actions against the Watts and several other unit owners. Before the Watts filed for bankruptcy, they entered into a stipulated judgment obligating them to pay Meritage $175,504. 3 The amount owed under the stipulated judgment included the first special assessment. Companion collection actions against two other unit owners did not settle and proceeded to summary judgment in September 2014, about six months after the Watts filed for bankruptcy. Id. ~ 26. In those companion actions, the Lincoln County Circuit Court ruled that the first special assessment violated Oregon law because it had been assessed against only a subset of unit owners without a determination that those unit owners were at fault. In response to the Lincoln County Cil'Cuit Court's decision, Meritage rescinded the first special assessment. In the Watts' case, Meritage applied a credit in the amount of the first special assessment to the $175,504 stipulated-judgment debt, which was by then a pati of the Watts' bankruptcy proceeding. Pl.'s Am. Concise Statement Material Facts~ 14 (doc. 18). During the fomih quarter of 2014, Meritage found that the Watts (and others) were at fault with respect to the unreimbursed attorney's fees in the HOA litigation. It then levied a new special assessment ("second special assessment") against the Watts in the amount of$26,316.25. ~~ Comp!. 21 & 29; Freitag Deel. Ex. 1 Dec. 30, 2016. Meritage seeks a summary judgment order directing the Watts to pay the second special assessment plus interest. Freitag Deel. Ex. 1 Dec. 30, 2016. 3 A declaration accompanying the motion for summary judgment states that the stipulated judgment was entered in February 2013. Freitag Deel. ~ 15 Dec. 30, 2016 (doc. 15). The complaint states that the stipulated judgment was entered in February 2014. Comp!.~ 21. For the purposes of this motion, the precise date does not matter because it is undisputed that the judgment was entered before the Watts filed their bankruptcy petition. Page 4 - OPINION AND ORDER B. Dues In the second post-petition ownership period, HOA dues associated with the property totaled $7,100.80. Id. Meritage seeks a summary judgment order directing the Watts to pay those dues plus interest and late fees. Id. C. Total Amount Sought and Offset The Watts tendered $14,969.79 to Meritage in October 2015, purpo1iedly to settle in full Meritage's claim for unpaid dues, interest, and fees. Id. '1f 29. Meritage accepted that payment as a partial payment. Meritage has calculated interest and fees on both the second special assessment and dues through December 15, 2016, for a total alleged liability of $43,996.23. Id. Ex. I. Crediting the Watts' payment against that amount, Meritage now seeks $29,026.47. Id. III. Procedural Hist01y In June 2016, Meritage initiated this action as an adversary proceeding in bankruptcy comi. Pursuant to 28 U.S.C. § 157(d) and Local Rule 2100-4, Judge Dunn sua sponte issued a rep01i and recommendation asking this Court to withdraw the reference with respect to the adversary proceeding. Doc. 1-2 at 38. Judge Dunn's recommendation rested on his determination that state law issues predominate over bankruptcy issues in this case and on the relationship between Meritage's claims in this action and its claims against BNYM in another case already pending in this Court. Id. at 53. Judge Dunn also questioned whether the bankruptcy comi had authority to adjudicate Meritage's claims under recent Supreme Court precedent. Id. at 53-54. The case was assigned to Judge Hernandez, who adopted Judge Dunn's report and recommendation and withdrew the reference. Doc. 25. The case was then reassigned to me Page 5 - OPINION AND ORDER based on its close factual connection to Meritage Homeowners' Association v. The Bank of New York Mellon, Case No. 6:16-cv-00300. Doc. 27. STANDARD OF REVIEW Summaiy judgment is appropriate if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving party has the burden of establishing the absence of a genuine issue of material fact. Id.; Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving patty shows the absence ofa genuine issue of material fact, the nonmoving patty must go beyond the pleadings and identify facts which show a genuine issue for trial. Id. at 324. "Summary judgment is inappropriate if reasonable jurors, drawing all inferences in favor of the nonmoving party, could return a verdict in the nonmoving party's favor." Diaz v. Eagle Produce Ltd. Partnership, 521 F.3d 1201, 1207 (9th Cir. 2008). DISCUSSION A Chapter 13 bankruptcy, "often called a reorganization, is designed to encourage financially overextended debtors to use current and future income to repay creditors in part, or in whole, over the course of a three- to five-year period." In re Blendheim, 803 F.3d 477, 485 (9th Cir. 2015) (internal quotation marks omitted). "Unlike Chapter 7 proceedings, where a debtor's nonexempt assets are sold to pay creditors, Chapter 13 permits debtors to keep assets such as their home and car so long as they make the required payments and otherwise comply with their obligations under their confirmed plan of reorganization." Id. One of the "tools" available in Chapter 13 reorganization is discharge. Id. at 486. Upon completion of payments under a confirmed Chapter 13 plan, the debtor is entitled to "a discharge of all debts provided for by the plan." 11 U.S.C. § 1328(a). "The discharge eliminates the creditor's ability to proceed in Page 6 - OPINION AND ORDER personam against the debtor whether the debt is secured or unsecured[.]" Blendheim, 803 F.3d at 486. Although one purpose of Chapter 13 is "to enable a debtor to make a fresh statt," the debtor does not have the right to emerge from bankruptcy "completely free of all debt." In re Sperna, 173 B.R. 654, 659 (9th Cir. B.A.P. 1994). In particular, Chapter 13 bankruptcy does not discharge personal liability for post-petition debts - those obligations incurred after the debtor files for bankruptcy. HOA dues and assessments that arise after the Chapter 13 filing are postpetition debts. In re Foster, 435 B.R. 650, 660-61 (9th Cir. B.A.P. 2010) ("It follows that debtor's liability [for HOA dues] is not rooted in the pre-bankruptcy past, but rather is rooted in the estate in property itself.") (quotation marks omitted and alterations normalized). That is so because under Oregon law, the obligation to pay dues and assessments to an HOA is not merely a contractual obligation. Instead, the requirement to pay HOA dues and assessments is a covenant that runs with the land, binding on the debtor so long as she retains ownership of the property. Or. Rev. Stat.§ 94.712(1); BankofN.Y. lvfellon, 2015 WL 1879680 at *3. I. Obligation to Pay the Second Special Assessment The parties disagree over whether the second special assessment is a pre-petition debt, subject to discharge upon plan completion, or a post-petition debt, for which the Watts remain personally liable. Meritage argues that the second special assessment is a post-petition debt because it was levied after the Watts filed for bankruptcy. The Watts respond that the second special assessment is merely a recycled version of the first special assessment, which was a prepetition debt. Whether the second special assessment is subject to discharge hinges on whether it is a debt "provided for by the plan." 11 U.S.C. § 1328(a). It is undisputed that (1) the second special Page 7 - OPINION AND ORDER assessment was not expressly part of the plan and (2) the first special assessment, which was pait of the stipulated judgment, was a debt provided for by the plan. So the question is whether the first and second special assessments should be treated as the same debt or as different debts. The authorities cited by the parties do not resolve that question. For example, both patties rely on 11 U.S.C. § 523(a)(l6). But that provision is inapplicable on its face to discharges under 11 U.S.C. § 1328(a). Foster, 435 B.R. at 658. And even if it did apply, it would not settle the patties' dispute. Section 523(a)(l6) provides that a discharge under certain provisions of the Bankruptcy Code does not extend to a debt for any HOA fee or assessment that "becomes due and payable after the order for relief." To decide whether the second special assessment fell within the scope of section 523(a)(l6)'s exclusion, I would first have to determine when that assessment became "due and payable" within the meaning of the statute. For present purposes, that inquiry is indistinguishable from the question whether the first and second assessments are the same debt. Meritage's reliance on In re Rosenfeld, 23 F.3d 833 (4th Cir. 1994), is similarly misplaced. Meritage cites Rosenfeld for the proposition that "an association's claim for postpetition dues does not arise until the dues are assessed." Pl.'s Reply Defs.' Resp. Pl.'s Am. Mot. Pmtial Summ. J. 9 (doc. 23) (quoting Rosenfeld, 23 F.3d at 837). Meritage takes that quote out of context and misconstrues the Fourth Circuit's holding. In Rosenfeld, the Fou1th Circuit faced a split of authority on the character of post-petition HOA dues in the bankruptcy context. 23 F.3d at 836. One line of cases held that any obligation to pay post-petition HOA dues is a prepetition debt subject to discharge because such obligations arise from a pre-petition contract. Id. at 836-37. Another line of cases held that post-petition HOA dues are not dischargeable where, under state law, the obligation to pay such dues is "a function of owning the land with which the Page 8 - OPINION AND ORDER covenant runs." Id. at 837. The Fourth Circuit adopted the reasoning of the second line of cases. When it stated that the obligation to pay dues "does not arise until the dues are assessed," the court simply meant that the obligation to pay did not arise from the pre-petition contract between the debtor and the HOA. That holding, which has been adopted by the Ninth Circuit Bankruptcy Appellate Panel, Foster, 435 B.R. at 658-59, and this Collli, Bank of N.Y. A1ellon, 2015 WL 1879680 at *3, does not address how to characterize an assessment when the debt arises from pre-petition events but is levied post-petition. From a pragmatic perspective, the first and second special assessments appear to be the same debt. Both assessments are an attempt to collect the unreimbursed attorney's fees from the HOA litigation. Both assessments thus arose out of the same pre-petition conduct: the Watts' participation in the HOA litigation. The only difference between the first and second special assessments is the finding that the Watts were at fault with respect to the unreimbursed fees. That finding, too, rests on the Watts' pre-petition decision to pursue the HOA litigation. The fact that the first and second special assessments are attempts to obtain reimbursement for the same expenses associated with the same pre-petition conduct suggests that the second special assessment is a debt provided for by the plan. In re Ybarra, 424 F.3d 1018 (9th Cir. 2005), fllliher supports that conclusion. Ybarra was a Chapter 7 bankruptcy case. The Chapter 7 and Chapter 13 discharge provisions differ significantly. In a Chapter 7 bankruptcy, the debtor receives a broad discharge "from all debts that arose before the date of the order for relief{.]" 11 U.S.C. § 727(b). In a Chapter 13 bankruptcy, by contrast, the discharge extends only to "all debts provided for by the plan." Id. § 1328(a). Despite those differences, Ybarra is instructive because it explains when a debtor's Page 9 - OPINION AND ORDER post-petition conduct can render a debt non-dischargeable even when it is connected to prepetition events. In Ybarra, the Ninth Circuit had to determine whether cettain attorney's fees incurred post-petition were discharged in bankruptcy. 424 F.3d at 1023. The comt summarized case law on post-petition attorney's fees by stating that "post-petition attorney fee awards are not discharged where[,] post-petition, the debtor voluntarily pursued a whole new course of litigation, commenced litigation, or returned to the fray voluntarily." Id. at 1024 (citations and quotation marks omitted, alterations normalized). The comt then turned to the facts of the case. Ybarra had argued that a state-court employment discrimination lawsuit she had filed should be categorized as exempt propetty in her bankruptcy proceeding. Id at 1027. After she prevailed in that argument, she had a choice between accepting a lump-sum settlement or reinitiating the lawsuit. She chose the latter. The Ninth Circuit held that choice was "sufficiently voluntary and affirmative to be considered returning to the fray" and held that the attorney's fees incurred post-petition were not discharged in the bankruptcy. Id. at I 027 (quotation marks omitted). Ybarra thus stands for the proposition that courts may consider a debtor's post-petition conduct in determining whether a debt was discharged. Impmtantly, the focus is on the actions of the debtor, not the actions of the creditor or some third patty. Unlike the debtor in Ybarra, the Watts took no action post-petition that can fairly be characterized as voluntarily reentering the fray. The Watts had already settled their collection action before they filed for bankruptcy. The invalidation of the first special assessment, the rescission of that assessment, and the timing of the second special assessment were all completely out of the Watts' control. Page I 0 - OPINION AND ORDER Meritage advances a bright-line rule that assessments and dues are always tied to the date they are levied. But such a rule would allow homeowners' associations to circumvent the intent of the Bankruptcy Code. A homeowners' association that was dissatisfied with its right to payments under a Chapter 13 plan could simply rescind assessments, apply a "credit" (which Meritage correctly notes provides no benefit to a debtor who completes her plan and obtains a discharge), and levy "new" post-petition assessments in the same amount. In view of that possibility of manipulation and relying on Ybarra, I reject a rigid rule regarding the characterization of HOA assessments. In each case, the court must undertake a fact-specific inquiry to discern the true nature of the debt at issue and consider the debtor's role, or lack thereof, in the post-petition events. On the paiticular facts presented here, I conclude that the second special assessment is simply the first special assessment in a new form. Because the Watts' obligation to pay both the first and second special assessments arose from the same pre-petition conduct, and because the Watts played no affirmative role in the post-petition events that required the first special assessment to be rescinded, the second special assessment is patt of a debt "provided for by the plan" and subject to discharge under § 1328(a). Meritage's motion for summary judgment is denied with respect to the second special assessment. II. Obligation to Pay Dues It is undisputed that the dues incurred in the second post-petition ownership period are post-petition debts that the Watts are obligated to pay. The Watts, however, argue that their payment of $14,969.79 more than satisfied that obligation. Meritage asse1ts the Watts owe (1) $7,100.80 in dues; (2) $322.16 in interest from the second post-petition ownership period; (3) $1,302.66 in interest from the period between August Page 11 - OPINION AND ORDER 27, 2015 (the date of the § 363 sale) and December 15, 2016; and (4) $800.00 in late fees. I agree that the Watts were obligated to pay the $7,100.80 in dues and $322.16 in interest that accrued before the § 363 sale, for a total of $7,422.96. The Watts are also liable for any portion of the remaining interest and late fees attributable to the time period before the date of the settlement payment in October 2015. Although it is not clear from the summary judgment record precisely how much the Watts owed at the time of the settlement payment, it is clear that the settlement payment more than satisfied their obligation to pay dues, interest, and fees. Meritage's motion for summary judgment is denied with respect to unpaid dues. 4 CONCLUSION Plaintiffs Amended Motion for Pattial Summary Judgment (doc. 17) is DENIED. IT IS SO ORDERED. II {v~ Dated this __ day of April 2017. -) {,l< /:)'9 lL{ l,<,cJ:o ,~ AnnAiken United States District Judge 4 Meritage states it intends to file a motion seeking attorney's fees. It is possible that Meritage would be entitled to attorney's fees and costs to extent they (1) are attributable to effotts to collect the unpaid dues only and not the second special assessment and (2) took place before the date of the settlement payment. However, any such entitlement would be offset by the amount of the settlement payment that exceeded the Watts' dues, interest, and fees obligation. Page 12 - OPINION AND ORDER

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