HOAs’ Secured Claims Are Limited to Amounts Stated in Lien

If a person files a Chapter 13 bankruptcy case (or a Chapter 7 case where there is a distribution to creditors), creditors must file claims with the court in order to receive any money from the trustee.  Such claims are categorized as secured, unsecured, or some of each.  Claims such as mortgages, car loans, and tax liens are secured and will have to be paid in full.  Credit cards and medical bills are unsecured and can be paid less than 100%.  (In many cases, unsecured creditors get nothing.)

It is not uncommon for people to file bankruptcy cases where there are unpaid HOA dues/assessments, and where the HOA has recorded a lien.  Homeownership issues and foreclosure prevention are, after all, primary reasons why people file bankruptcy cases.  In such cases, the HOA will typically file a claim asserting that the secured portions of such claims consist of not just the amount listed on the recorded lien that they recorded, but of the entire amount that the homeowner owes to the HOA.  Such claims are based on the notion that their liens secure future amounts that come due. This notion is simply not correct under California law.

The District Court for the Southern District of California weighed in on this question back in 1993 (In re Henderson, 155 B.R. 10, 12 (Bankr. S.D.Cal. 1993)), and now so too has the Northern District in In re Warren (N.D. Cal., 2016), bankruptcy case no. 14-31236.

The facts the Warren case are these:  Angela Warren the homeowner failed to make seven HOA payments from December 2007 through June 2008.  The HOA then recorded an assessment lien against the property for those unpaid dues, specifying an amount of $5,865.  The lien also contained language claiming to include other fees, costs, and interest “as may become due to with respect to the Property subsequent to the typed dates set forth above”.  Ms Warren filed a Chapter 13 case in August 2014, then converted it to Chapter 7 in September 2014.  The HOA filed a claim in a total amount of $88,796, with a secured portion of $31,406.  The Bankruptcy Court disagreed and limited the HOA to a secured portion of the $5,865 listed in the lien.

On appeal, the District Court affirmed the Bankruptcy Court’s Decision.  The reasoning is simple: §5650(a) of the California Civil Code requires an HOA to give at least 30 days’ notice before filing a lien to collect “a past due assessment” and that the notice must include, among other things, a statement of the charges owed.  Further, the HOA can only impose liens after a vote by the directors.  The Court noted that the Code’s HOA provisions “reflect the legislature’s intent to impose and rigorously enforce its procedural requirements to protect the interest of the homeowner.”  Therefore, the language purporting to secure future assessments was not permissible under the Code, and therefore the secured portion of the claim was limited to the amount originally listed.  The Court pointed out that the HOA could have continued recording additional liens when new amounts came due, but they didn’t do that.

This is a much-misunderstood area of bankruptcy law, a state of affairs that isn’t helped much by the HOA industry’s continued insistence that their claims are fully secured.  I myself wouldn’t have been aware of these developments if I hadn’t recently heard Oakland’s Judge Novack discussing them from the bench recently.  I hope this information will become more widely known among the debtors’ bar, and you can bet I will be on the lookout for this in future cases with HOA issues.