This appeal arises out of a Bankruptcy Court decision which held that the Anti-Modification Clause did not apply to the lien filed by the Association on the debtors' principal residence. By way of background, the debtors' Chapter 13 plan alleged that the value of the unit was less than the amount of the first mortgage and proposed to pay the Association six months of maintenance fees in full satisfaction of the Association's secured claim.
The Association filed an objection to the plan opposing the debtors' motion to modify its secured claim based upon the fact that a portion of the Association's lien was elevated above the first mortgage by the six-month lien priority of N.J.S.A. 46:8B-21 and was thus attached to equity in the unit. The specific provision of the Association's governing documents providing the basis for a consensual lien was presented to the Court. The Association argued that the Anti-Modification Clause prohibited modification of the Association's secured claim because it was attached to equity in the unit. Moreover, the Association argued that the public policy underlying the bankruptcy code prohibits the Association from being treated worse in this Chapter 13 than it was in the debtors' prior Chapter 7 case, where the lien at issue remained intact.
The debtors argued that the lien is statutory in nature and is therefore subject to modification under 1322(b)(2) and that the New Jersey priority lien statute does not afford the Association priority, but rather a right to payment. Additionally, the debtors argued that the statute bifurcates the lien and creates two separate liens: one with priority and the other subordinate to the first mortgage.
In overruling the Association's objection and supporting confirmation of the debtors' plan, the Court erroneously reasoned that the six-month lien priority created by New Jersey statute creates an entirely separate lien that is statutory in nature and thus outside the purview of the Anti-Modification Clause. In attempting to create the legal fiction of two separate liens where only one lien actually exists, the Court ignored the definition of "statutory lien" 11 U.S.C. 101 (53), which expressly states that the basis of the lien must arise "solely by force of a statute ... and does not include security interest or judicial lien.") (emphasis added). The Court also ignored the obvious fact that the Association could not have taken advantage of the six-month lien priority provision of the Condominium Act if its governing documents had not been recorded first and despite that the Association's governing documents predated the 1996 Amendment to the New Jersey Condominium Act establishing the six-month lien priority
If not overturned, this decision will have extraordinarily adverse effects on the community association industry. The Court appears to have preselected a desired outcome of this case and chose to take whatever meandering or erroneous legal pathway was required to reach that decision.
Amicus Brief: Pending
Prior Rulings: United States Bankruptcy Court District of New Jersey Memorandum Decision
Brief Author: Mr. Timothy Duggan, Esq.
CAI Amicus Review Committee: Robert Diamond, Esq., Chair of Amicus Committee; Mr. James Strichartz, Esq., Ms. Laurie Poole, Esq.,Mr. Steven Sugarman, Esq.