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 [e-mail] 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)

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.

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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