Opinion
Case No. 17-08957-JMC-13
09-17-2019
IN RE: ANNAHSTACIAH LYNN BOYKINS, Debtor.
ORDER SUSTAINING IN PART AND OVERRULING IN PART OBJECTION TO CONFIRMATION OF PLAN
THIS MATTER comes before the Court on the Objection to Second Amended Plan filed by Arbor Village Homeowners Association, Inc. ("Creditor") on March 27, 2019 (Docket No. 71) (the "Objection"). The Court, having reviewed the Objection, the Chapter 13 Plan, Amended Plan #2 filed by Annahstaciah Lynn Boykins ("Debtor") on March 12, 2019 (Docket No. 65) (the "Plan"), the Brief in Support Objection to Confirmation of Plan filed by Creditor on May 23, 2019 (Docket No. 82), and the Brief in Support of Debtor filed by Debtor on June 12, 2019 (Docket No. 90), having heard the representations of counsel for Creditor and counsel for Debtor at a hearing on April 23, 2019 (the "Hearing") and being otherwise duly advised, now SUSTAINS IN PART AND OVERRULES IN PART the Objection. Background
Since December 2006, Debtor has continuously owned residential real property located at 4907 Lewiston Drive, Indianapolis, IN 46254 (the "Property"). The Property is subject to the Declaration of Covenants, Conditions and Restrictions and Grant and Reservation of Easements for Arbor Village recorded on March 4, 1998 with the office of the Marion County Recorder, as subsequently amended (the "Declaration"). The Declaration establishes Debtor's obligation to pay assessments to Creditor on an ongoing basis. The Declaration also contains language that purports to provide for a grant by Debtor to Creditor of a lien on the Property to secure unpaid assessments from the time such assessments become due. Declaration, Art. V, § 5.10.
On January 16, 2013, the Marion Superior Court awarded Creditor a default judgment (the "Judgment") in an action styled Arbor Village Homeowners Ass'n, Inc. v. Boykins, Cause Number 49D07-1207-CC-027845, in the amount of $10,550 for unpaid assessments, fees and costs with respect to the Property. On September 17, 2013, pursuant to the Declaration and Ind. Code § 32-28-14-5, Creditor recorded an Amended Notice of Lien for Unpaid Assessments (the "Notice"), by which Creditor asserted and perfected a lien (the "Lien") against the Property in the amount of $11,111.26, which included the Judgment amount plus subsequent assessments.
On November 30, 2017, Debtor filed her chapter 13 bankruptcy petition. On February 8, 2018, Creditor filed proof of claim no. 3 (the "Claim") asserting a secured claim in the amount of $20,602.69, which includes the amounts that were subjects of the Notice plus amounts owed with respect to subsequent assessments and related obligations. In Section 7 of the Plan, Debtor proposes to treat Creditor as holding a secured claim with estimated arrears in the amount of $11,111.26 which will be paid in equal monthly installments of $125. In Section 12 of the Plan, Debtor notes her intent to file a motion to avoid Creditor's Lien against the Property. In Section 15 of the Plan, Debtor includes the following "nonstandard provision": "The Trustee shall pay The Arbor Village Homeowners Association, Inc.'s secured claim of $11,111.26 through the Chapter 13 plan, the remaining balance of the claim, which is based on a Judgment lien, shall be paid as an unsecured claim and Debtor shall file a motion to avoid said lien." Among other reasons, Creditor objects to the Plan because the Plan (1) is not feasible; (2) proposes to pay less than the full amount of the Claim; and (3) mischaracterizes the Lien as a judgment lien.
As of the date of this order, Debtor has not filed such motion.
At the Hearing, the parties identified the central issue as the amount of the Claim that is secured. Creditor contends the Claim is fully secured by the filing of the Notice for both (1) the Notice amount; and (2) the amount of all subsequent unpaid assessments and related obligations. Debtor believes the Claim is secured only to the extent of the Notice amount, with the remaining balance of the Claim being unsecured. Discussion
Amount of Secured Claim
Generally, a consensual lien is created pursuant to an applicable statutory scheme. So, in Indiana, (1) consensual liens on personal property ("security interests") are generally created pursuant to Article 9 of the Uniform Commercial Code ("UCC"), Ind. Code §§ 26-1-9.1-101 et seq.; and (2) consensual liens ("mortgage liens") on real property are generally created and perfected under provisions of Article 29 of Title 32 of the Indiana Code. Homeowners association ("HOA") consensual liens are created and perfected pursuant to Ind. Code §§ 32-28-14-1 et seq. Under the statutory schemes alluded to above, statutes generally govern when a lien (1) attaches to the collateral (personal or real property); and (2) is perfected for purposes of establishing priority between the lienholder and others claiming an interest in the collateral.
The concepts of attachment of a lien and the lien's perfection are distinct and are used for very different purposes under Indiana's statutory schemes relating to liens. For example, under Article 9 of the UCC, a security interest (e.g. lien) provided for under a security agreement attaches to the collateral pursuant to Ind. Code § 26-1-9.1-203. However, an attached enforceable security interest is generally not fully enforceable against a third party claiming an interest in the collateral absent perfection. Perfection in personal property is generally accomplished under Article 9 of the UCC by the proper recording of a financing statement or UCC-1. See Ind. Code § 26-1-9.1-310.
In the statutory scheme established to govern liens that are subjects of declarations binding upon HOAs and homeowners, (1) effectiveness and attachment of a lien are governed by Ind. Code §§ 32-28-14-5(a) and -6; and (2) perfection establishing rights and priorities vis-a-vis third parties is governed by Ind. Code §§ 32-28-14-5(b) and -7. Sections 5(a) and 6 clearly provide that an HOA lien does not attach or become "effective" as to anyone (including the homeowner) unless and until the HOA properly records a notice described by section 5(c), which expressly requires the notice to set forth the amount of the lien.
Bankruptcy Code § 502(b)(1) provides that a claim will be disallowed to the extent it "is unenforceable against the debtor and property of the debtor under ... applicable law ...". Here, the Lien has not attached or become effective as to the Property except to the extent of the debt owing and described in the properly-recorded Notice. Therefore, $11,111.26 of the Claim is secured. The remainder of the Claim is disallowed as a secured claim and allowed as a general unsecured claim to the extent owing under the Declaration.
Alternatively, the Court would reach the same conclusion on the theory that a trustee has the power as a hypothetical bona fide purchaser (see Ind. Code § 32-28-14-7(b)(2)) to avoid an unperfected lien under Bankruptcy Code § 544(a)(3). In that case, the unperfected lien claim would be disallowed under Bankruptcy Code § 502(d).
Said another way, although the Declaration purports to grant a lien upon assessment without the need to file a notice, Indiana's statutory scheme for HOA liens clearly and expressly provides that any such lien does not become effective or attach unless and until a proper notice is recorded. Recordation of the notice is not solely done to establish priority vis-a-vis third parties; it is necessary to create a lien on a homeowner's property.
The Plan correctly treats the Claim as being secured only up to the amount included in the Notice. Therefore, on this issue, Creditor's Objection is OVERRULED.
Avoidance of Creditor's Lien
Debtor asserts that the Lien is a judicial lien that can be avoided pursuant to Bankruptcy Code § 522(f), while Creditor asserts that the Lien is not a judicial lien subject to avoidance. Debtor's proposed avoidance of Creditor's Lien is dependent upon the nature of the Lien. The Bankruptcy Code provides for the treatment of at least three general types of liens: judicial, statutory, and consensual. In re Cunningham, 478 B.R. 346, 348 (Bankr. N.D. Ind. 2012). A judicial lien is a "lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." Bankruptcy Code § 101(36). A consensual lien is a "lien created by an agreement." Bankruptcy Code § 101(51); see also Cunningham, 478 B.R. at 348-49 (using "consensual lien" and "security interest" interchangeably). Deciding if a lien is consensual or judicial depends on "whether the lien arose by agreement or by a nonconsensual legal or equitable process." In re Haynes, 157 B.R. 646, 648 (Bankr. S.D. Ind. 1992).
As stated above, Creditor's Lien arose from (1) the Declaration, a consensual contractual agreement between Debtor and Creditor (see Columbia Club, Inc. v. Am. Fletcher Realty Corp., 720 N.E.2d 411, 418 (Ind. Ct. App. 1999) (declaring that covenants are express contracts)); and (2) the Indiana statutory scheme governing such liens. The Lien did not arise from the Judgment; the Judgment was the chosen method for enforcing the Lien. Enforcing a consensual lien through a legal action does not change the underlying consensual nature of a lien. In re Goodwin, 133 B.R. 141, 143 (Bankr. S.D. Ind. 1990). Therefore, the Lien is consensual and not avoidable under § 522(f).
On this issue, Creditor's objection is SUSTAINED.
IT IS SO ORDERED.
SO ORDERED: September 17, 2019.
/s/ _________
James M. Carr
United States Bankruptcy Judge