Most bankruptcy cases are of short duration, with definitive ends, particularly chapter 7 cases, which can usually be resolved within four months or less. Every once in a while, however, a bankruptcy can take on new life in unexpected way. Such is the matter I'm now involved with.
Several years ago I managed a chapter 7 case for a New Jersey couple who owned property in a managed community. The housing crisis was in full swing at the time, and because the property was under water, I recommended that they not reaffirm the mortgage, but just pay it through the bankruptcy, as can be done with secured real property. But several years later, they decided they could no longer keep paying the mortgage, for several good reasons, and they notified the current mortgage company (who had come to administer the loan through the consolidation of several lenders) that they were vacating the property and would make no more payments. Nevertheless, they kept in the back of their mind that they might try to put it on the market, so they regularly returned to check up on the property, maintained the area, and generally made sure the property was maintained. They also made regular payments to the home owner's association.
Almost a year into this arrangement, the couple showed up at the house one day to find the locks on the door had been changed, and a no trespassing notice had been attached to the property. Well, at this point, the they decided that the mortgage company could have at it, and ceased making any effort at maintenance or keeping up with any accounts associated with the property. Two months later, foreclosure was filed, which was the mortgage company's right, and a default was entered against the couple eleven months later.
However, two months following the entry of default, the couple was served a complaint filed by the home owners association seeking all the association fees due since the couple was locked out. This is where I got involved. Normally, only HOA fees that have accrued prior to the filing date are discharged in bankruptcy, and any assessed fees that become due after the filing date are not discharged. I felt this was a special case, though, because the couple had been put out of possession by the mortgage company, and I agreed to defend against the HOA suit.
In the couple's defense, we raised the defense that when they had been locked out, they were no longer members of the association and thus, not subject to the association due. Additionally, we raised an affirmative defense to the effect that a third party, i.e., the mortgage company, who not part of the suit, was liable over to the couple for payment of the fees, because they had taken possession of the property. Ultimately, we came to the conclusion that it might be better if we simply pled the mortgage company into the case as a third-party defendant, so we did, and served our third-party complaint on their headquarters out in the Midwest.
The mortgage company was not amused. In response to our complaint, it filed a motion to dismiss, arguing that the case was a matter of contract, and that the couple had agreed to pay all the HOA fees as part of the mortgage documents, and the matter of liability was open and shut. In response, we argued that New Jersey case law has clearly established that a mortgagee who takes possession of a property in default has a duty to act as any prudent owner would, and there is a duty to maintain property, pay taxes, etc. It just wasn't clear whether HOA fees were covered under that general policy, even as we argued that a lockout is nothing less than total control and possession over the property, and such expenses should be included.
The judge agreed with us, and explained his reasons in an detailed attached opinion.
Now, I do very little HOA or condo law, but I've been told by others that this ruling is a Big Deal, because no other opinion has held just this. Just imagine how many people get turned out of their homes because of economic reversals -- only to be faced with further expense from the condo association because the mortgage company drags its feet through the foreclosure process. And if mortgage companies continue to do as they do, they may, under the right circumstances, face the prospect of extra liabilities and expenses resulting from their lackadaisical attitudes. After all, HOAs seeking compensation for service would have much deeper pockets than those of bankrupt homeowners to dig into.
I do not know yet how the rest of the case will proceed from this point forward, what final judgment will be entered and whether this particular decision goes up on appeal. But it is somewhat humbling when you realize just what potential impact a $4,100 claim filed in the Special Civil Part may have.