Opinion
Case No. 18-55938
2019-07-26
IN RE: Kelly Louise TERRELL, Debtor.
Mark George Kafantaris, Kafantaris Law Offices, Columbus, OH, for Debtor.
Mark George Kafantaris, Kafantaris Law Offices, Columbus, OH, for Debtor.
MEMORANDUM OPINION AND ORDER OVERRULING DEBTOR'S OBJECTION TO CLAIM OF WYNDHAM RIDGE HOMEOWNERS ASSOCIATION INC. (Doc. #27)
C. Kathryn Preston, United States Bankruptcy Judge
Under Ohio's Planned Community Act ("PCA"), Ohio Rev. Code § 5312, et seq . (2010), homeowners associations ("HOAs") are required to file certificates of lien with the county recorder in order to perfect liens for unpaid assessments. Ohio Rev. Code § 5312.12(B)(1). In the instant case, the Wyndham Ridge Homeowners Association, Inc. (the "Association") claims it holds a lien for unpaid assessments against Kelly Louise Terrell's ("Debtor") real property, but it did not file a certificate of lien (or similar document). Because of this, Debtor argues that the Association's lien is unperfected and seeks to avoid it pursuant to 11 U.S.C. § 544(a)(3). The Association argues otherwise, and points to its governing document: a declaration of covenants, conditions, assessments, and restrictions (the "Deed Restrictions"), which, among other things, regulates the creation and perfection of the Association's liens for unpaid assessments. The Association contends that, pursuant to Ohio Rev. Code § 5312.15, it is exempt from the PCA's filing requirements. Thus, says the Association, Debtor's claim under 11 U.S.C. § 544(a)(3) fails because a bona fide purchaser for value (a "BFP") would have constructive notice of the Association's lien. The Court agrees with the Association and will therefore deny Debtor's request.
This memorandum opinion and order constitutes the Court's findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure, which applies to adversary proceedings and contested matters. Fed. R. Bankr. P. 7001 ; 9014(c).
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (K). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Factual and Procedural Background
The facts relevant to this matter are not contested and may be summarized as follows: Wyndham Ridge is a residential community located in Westerville, Ohio. The community is subject to the Deed Restrictions, which were recorded with the Franklin County Recorder's Office in 2004. The Association is responsible for administering and enforcing the Deed Restrictions. Debtor's residence is located at 4632 Kenross Drive, Columbus, Ohio 43207 (the "Property") and is one of the properties situated within the Wyndham Ridge community. The Property was conveyed to Debtor by general warranty deed (the "General Warranty Deed") in 2007.
The General Warranty was recorded with the Franklin County Recorder's Office in 2007 as instrument number 200709260169023.
Debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code on September 19, 2018. The Association timely filed a proof of claim (the "Claim") in the amount of $4,045.32. The Claim is based on unpaid assessments owed to the Association—which Debtor admits she has not paid—and asserts that the Claim is fully secured by a lien on the Property. As the basis for its lien and perfection thereof, the Association points to a quitclaim deed (the "Quitclaim Deed") in the chain of title of the Property, which imposes the Deed Restrictions. The Deed Restrictions provide that the Association has a continuing lien on the Property for unpaid assessments, and there is no requirement in the Deed Restrictions that the Association file a certificate of lien or any other document with the county recorder in order to perfect its lien.
The Quitclaim Deed was recorded with the Franklin County Recorder's Office in 2004 as instrument number 200407210169413. The Quitclaim Deed states that the Property is subject to the attached Deed Restrictions.
Debtor filed an Objection to Claim of Wyndham Ridge Homeowners Association, Inc. (Doc. #27) (the "Objection") on December 20, 2018. In the Objection, Debtor argued that the Association's lien is not valid because the Association never filed a certificate of lien or similar document with the Franklin County Recorder's Office. Debtor asked the Court to treat the Claim as wholly unsecured. The Association timely filed a Response to Debtor's Objection (Doc. #44) (the "Response"), and Debtor filed a Reply to Creditor Wyndham Ridge Homeowners Association, Inc.'s Response to Claim Objection (Doc. #45) (the "Reply").
A hearing on this matter was held on April 5, 2019. Appearances were made by Mark Kafantaris on behalf of the Debtor, and David Dye on behalf of the Association. The parties stipulated to relevant facts and to the admission into evidence of the Quitclaim Deed, the Deed Restrictions, the General Warranty Deed, and the Claim.
Rule 3012 of the Federal Rules of Bankruptcy Procedure authorizes a debtor to object to a proof of claim for purposes of determining the amount of a secured claim (among other things), but does not authorize a debtor to avoid a lien through an objection to claim. See Fed. R. Bankr. P. 3012 ; 3007(b) ("A party in interest shall not include a demand for relief of a kind specified in Rule 7001 in an objection to the allowance of a claim, but may include the objection in an adversary proceeding."). Debtor's request for relief was essentially a lien avoidance action under 11 U.S.C. § 544, and therefore Debtor must file an adversary proceeding unless the Association waived this procedural requirement. See Fed. R. Bankr. P. 7001(2) (in general, "a proceeding to determine the validity, priority, or extent of a lien or other interest in property" requires the filing of an adversary complaint); see also In re Pence , 905 F.2d 1107, 1109 (7th Cir. 1990) (noting that parties can waive the requirement to file an adversary proceeding). The Association waived its right to an adversary proceeding on the record.
III. Law & Analysis
Debtor seeks to avoid the Association's lien under the so-called "strong-arm" provision in 11 U.S.C. § 544(a)(3), which provides in pertinent part:
The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by ... (3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544(a)(3). Debtor, as the party seeking to utilize the trustee's strong-arm powers in § 544(a)(3), "bears the burden of demonstrating the invalidity or imperfection" of the Association's lien. In re Bergsieker , 30 B.R. 757, 760 (Bankr. W.D. Mo. 1983) (citing Matthews v. James Talcott, Inc. , 345 F.2d 374, 380 (7th Cir. 1965) ).
Although the statute only mentions the trustee as having certain avoidance powers, the mandatory Chapter 13 form plan in this District provides Chapter 13 debtors with standing to pursue such avoidance actions on behalf of the bankruptcy estate. See Mandatory Form Plan, Section 5.4.4, available at https://www.ohsb.uscourts.gov/mandatory-chapter-13-form-plans ("To the extent that the Trustee has standing to bring [an adversary proceeding under 11 U.S.C. § 544 ], standing is hereby assigned to the Debtor, provided a colorable claim exists that would benefit the estate."). In addition, the Court notes that the Bankruptcy Appellate Panel for the Sixth Circuit has explained that Chapter 13 debtors can have derivative standing to prosecute lien avoidance actions on behalf of the estate. See Countrywide Home Loans v. Dickson (In re Dickson) , 427 B.R. 399, 405-06 (6th Cir. BAP 2010), aff'd on other grounds , 655 F.3d 585, 593 (6th Cir. 2011).
Debtor argues that the Association's lien is not perfected—and is therefore avoidable under 11 U.S.C. § 544(a)(3) —because the Association never filed a certificate of lien with the county recorder in accordance with Ohio Revised Code § 5312.12(B)(1). In response, the Association points to Ohio Revised Code § 5312.15, which provides that, in the event there is a conflict between the PCA's requirements and an HOA's governing document in existence prior to the enactment of the PCA, the governing document shall control. Ohio Rev. Code § 5312.15. The Association claims that the PCA does not apply because the Deed Restrictions conflict with the PCA. The Court agrees with the Association.
The PCA became effective on September 10, 2010, and is codified in Chapter 5312 of the Ohio Revised Code. The purpose of the act is to establish uniform requirements governing the operation and formation of HOAs and planned communities. See Lake Milton Estate Prop. Owners Ass'n v. Hufford , No. 17 MA 0163, 2018 Ohio App. LEXIS 55122, at *9 (7th Dist. App. Nov. 30 2018); see also Ohio Rev. Code § 5312.15. Among other things, the PCA provides that an HOA has a lien "upon the estate or interest in any lot" for unpaid assessments levied in accordance with the HOA's declaration. Ohio Rev. Code §§ 5312.11(A), 5312.12(A). And in order to perfect its lien, an HOA must file a certificate of lien with the county recorder. Ohio Rev. Code § 5312.12(B)(1) ("The [HOA lien for unpaid assessments] is effective on the date that a certificate of lien is filed for record in the office of the recorder of the county or counties in which the lot is situated, pursuant to authorization by the board of directors of the owners association.").
The statute uses the word "effective" instead of "perfected," however, the Legislative Service Commission indicated in its analysis of the PCA that filing a certificate of lien is required to perfect an HOA lien. See LSC Bill Analysis of Am. Sub. S.B. 187, at 11 [hereinafter "LSC Bill Analysis of PCA"], available at https://www.lsc.ohio.gov/documents/gaDocuments/analyses128/10-sb187-128.pdf ("The act sets forth requirements to perfect and enforce such liens. The lien is effective on the date that a certificate of lien is filed for record in the office of the county recorder pursuant to authorization by the board of directors."). The Supreme Court of Ohio has held that courts may refer to the Legislative Service Commission's bill analyses if they are "helpful and objective." Meeks v. Papadopulos , 62 Ohio St. 2d 187, 191, 404 N.E.2d 159 (1980) ; see also State ex rel Cincinnati Enquirer v. Jones-Kelley , 118 Ohio St. 3d 81, 92, 886 N.E.2d 206 (2008).
But the PCA is not retroactive: Planned communities established prior to the enactment of the PCA are not required to file their existing declarations with the county recorder and may rely on governing documents created before the PCA's effective date. Section 5312.15 of the Ohio Revised Code, titled "Construction of Chapter," provides:
This chapter shall be construed to establish a uniform framework for the operation and management of planned communities in this state and to supplement any planned community governing document that is in existence on the effective date of this chapter. In the event of a specific conflict between this chapter and express requirements or restrictions in such a governing document, the governing document shall control. This chapter shall control if any governing document is silent with respect to any provision of this chapter.
Ohio Rev. Code § 5312.15 (emphasis added). In addition, Ohio Revised Code § 5312.02(C) states that "[n]othing in this chapter invalidates any provision of a document that governs a planned community if that provision was in the document at the time the document was recorded and the document was recorded prior to the original effective date of this chapter." Ohio Rev. Code § 5312.02(C). Ohio Revised Code §§ 5312.15 and 5312.02(C) evidence an intent by the Ohio General Assembly to preserve existing HOAs' rights and authority granted by their governing documents to the extent they conflict with or would be effectively invalidated by the PCA's requirements.
In the instant case, there is no question that the Deed Restrictions—the governing document for the Wyndham Ridge community and the Association—existed and were recorded in the public records in 2004, prior to the effective date of the PCA. The Deed Restrictions provide that the Association has a continuing lien on the Property that applies "both prior to and after each yearly assessment, together with the continuing obligation to pay all future Annual Charges assessed in future years ...." However, there is no requirement in the Deed Restrictions that the Association file a certificate of lien or any other instrument with the county recorder in order to further perfect its lien for unpaid assessments. Recordation of the Deed Restrictions constitutes notice to the world of the Association's liens. Article 7 of the Deed Restrictions, titled "Imposition of Charge and Lien Upon the Property," provides:
In the Response, the Association claims that the Deed Restrictions constitute the "governing document" as that term is used in Ohio Revised Code § 5312.15 for the Wyndham Ridge community and the Association. Debtor does not dispute this characterization. The parties also do not dispute that (i) the Association is an "owners association," and that (ii) the Wyndham Ridge community is a "planned community" as defined under the PCA. See Ohio Rev. Code § 5312.01(L), (M).
The Annual Charge, both prior to and after each yearly assessment, together with the continuing obligation to pay all future Annual Charges assessed in all future years and all installments thereof, shall be and remain a first charge against, and a continuing first lien upon, the Lot related to such Annual Charge. The charge and lien imposed hereunder shall bind such property in the hands of the then Owner, his or its heirs, executors, administrators, successors and assigns, and said charge and lien shall be superior to any and all other charges, liens or encumbrances which may hereafter in any manner arise or be imposed upon the Lot whether arising from or imposed by judgment or decree by any agreement, contract, mortgage or other instrument, saving and excepting only such liens for taxes or other public charges as are by applicable law made superior thereto, and any mortgage liens which enjoy priority over the lien for assessments, pursuant to Article 13, below.
Article 11 of the Deed Restrictions, titled "Constructive Notice and Acceptance," reinforces the effect of Article 7, stating:
Every person who now or hereafter owns or acquires any rights, title or estate in any portion of the Initial Property is and shall be conclusively deemed to have consented and agreed to every covenant, condition, assessment, charge, lien and restriction contained herein whether or not a reference to these Restrictions is contained in the instrument by which such person acquired an interest in said property.
Debtor's Property is encompassed in the "Initial Property" as that term is defined in the Deed Restrictions.
The Court finds that the PCA conflicts with the Deed Restrictions to the extent it requires an HOA to file certificates of lien to perfect liens for unpaid assessments. The Deed Restrictions clearly provide that (i) the Association has an existing and continuing lien that secures debts that arise from unpaid assessments and the obligation to pay future assessments, (ii) recordation of the Deed Restrictions constitutes constructive notice of the Association's lien, and (iii) the Association is not required to file any documentation in order to perfect its lien. Because the Deed Restrictions were in existence and recorded prior to the effective date of the PCA, and because the PCA conflicts with the Deed Restrictions as to requirements for a perfected lien, the PCA is inapplicable. See Ohio Rev. Code § 5312.15. But even if there is not a "specific conflict" with the PCA and the Deed Restrictions, the Court cannot construe the PCA as requiring the Association to file a certificate of lien for unpaid assessments, as this would effectively invalidate Articles 7 and 11 of the Deed Restrictions. See Ohio Rev. Code § 5312.02(C). The Court concludes that the Association was not required to file a certificate of lien in order to perfect its lien for unpaid assessments.
Debtor relies heavily on a decision by the Twelfth District Court of Appeals in Settlers Walk Home Owners Ass'n. v. Phoenix Settlers Walk, Inc. , 2015 WL 7430296, 2015 Ohio App. LEXIS 4709 (12th Dist. App. Nov. 23, 2015), which involed a pre-PCA HOA. The court held that an HOA's lien for unpaid assessments is ineffective absent the filing of a certificate of lien. In Settler's Walk , an HOA filed a complaint against a landowner, seeking to recover unpaid assessments. The HOA asserted that it held a lien over the landowner's property and that its lien was perfected pursuant to a declaration which had been recorded prior to the enactment of the PCA. The HOA's declaration provided that the HOA "shall have a lien for any Assessment levied against a Unit, for fines imposed against an Owner or Occupant, and for interest, costs, and reasonable attorney fees ... [t]he lien for Assessments is created by this Declaration and shall be a charge and a continuing lien on each Unit which shall run with the land." Settler's Walk , 2015 WL 7430296, at *1, 2015 Ohio App. LEXIS 4709, at *2. The court, noting this issue as one of first impression in Ohio, held that "recording the Declaration itself without ever recording a separate instrument notifying any potential bona fide purchaser that [the HOA] had a lien on the property resulting from the unpaid assessments" was not enough to perfect an enforceable lien. Id. at *5, 2015 Ohio App. LEXIS 4709, at *13. The court reasoned that "a lien cannot exist in the absence of the debt, the payment of which it secures." Id. at *6, 2015 Ohio App. LEXIS 4709, at *15 (quotation marks and citations omitted). Thus, the HOA did not perfect an enforceable lien on the property "merely by saying so as part of the recorded Declaration ... [O]nce the assessments went unpaid and a debt was established, [the HOA] should have recorded a separate instrument with the county recorder to perfect its lien and provide notice to any subsequent bona fide purchaser that it had a lien on the subject property." Id. at *6, 2015 Ohio App. LEXIS 4709, at *15, 16.
This Court is not persuaded by the decision in Settler's Walk . As a starting point, the declaration in that case provided that the HOA has a continuing lien for assessments already levied or fines imposed against a unit, but did not have such a provision for future charges. Settler's Walk , 2015 WL 7430296, at *, 2015 Ohio App. LEXIS 4709, at *2. In the instant case, the Deed Restrictions provide that the Association has a continuing lien on the Property that applies "both prior to and after each yearly assessment, together with the continuing obligation to pay all future Annual Charges assessed in future years ...." Stated another way, the Association has a continuing lien on the Property that secures debts that arise from unpaid assessments and the obligation to pay future assessments. Thus, the rationale utilized by the court in Settler's Walk , that a "lien cannot exist in the absence of the debt," does not apply in this case. Additionally, even though the court in that case found that the PCA did not apply, it nonetheless held that the HOA was obligated to do something in order to perfect its lien: record an instrument with the county recorder. Id. at *6, 2015 Ohio App. LEXIS 4709, at *15, 16. This rule effectively ignores Ohio Revised Code §§ 5312.02(C) and 5312.15, both of which defer to an HOA's governing document in the event the governing document conflicts with the PCA's requirements.
When a federal court is interpreting state law and the highest court of the state has not decided the specific issue presented, the federal court is permitted to determine the issue of state law as it believes the highest court of the state would. Kirk v. Hanes Corp. of North Carolina , 16 F.3d 705, 707 (6th Cir. 1994) ; Roberds, Inc. v. Broyhill Furniture (In re Roberds, Inc.) , 313 B.R. 732, 736 (Bankr. S.D. Ohio 2004). The Supreme Court of Ohio has not spoken on the issue before this Court; however, it has held that courts "cannot simply ignore or add words" when interpreting an unambiguous statute. Portage Cty. Bd. Of Comm'rs v. City of Akron , 109 Ohio St. 3d 106, 116, 846 N.E.2d 478 (2006) (citations omitted). Sections 5312.02(C) and 5312.15 of the Ohio Revised Code quite clearly give deference to an HOA's governing document that conflicts with the PCA and is in existence prior to the PCA's effective date.
Moreover, the Ohio General Assembly did not intend to burden existing HOAs with obligations inconsistent with those contained in their governing documents. See Ohio Revised Code §§ 5312.15 and 5312.02(C). It appears from the Court's research that HOAs typically did not file anything with the county recorder in order to perfect their liens for unpaid assessments prior to the enactment of the PCA (unless such filing was mandated by their governing document). Presumably, the Ohio General Assembly was aware of this; yet the PCA did not compel existing HOAs to file certificates of liens to perfect existing liens on the PCA's effective date. In contrast, it did require HOAs to file and record their bylaws in existence on the PCA's effective date. See Ohio Revised Code § 5312.02(D) ; see also LSC Bill Analysis of PCA at 1, 3. This is significant, as it shows that the legislature intended to cause as little disruption as possible to existing HOA practices while also creating a prospective uniform procedure for perfecting HOA liens going forward. If the decision in Settler's Walk is correct, then (i) all HOAs existing prior to the PCA will have to immediately prepare and file a certificate of lien for all outstanding dues as well as every subsequent time a resident becomes delinquent on dues (or other obligations)—which of course, happens all the time—and (ii) everyone's HOA fees are going to rise due to increased costs to the HOA for filing fees and legal fees in connection with the recording and releasing the certificates of lien. The end-result would be costly and inefficient, not to mention inconsistent with Ohio Revised Code §§ 5312.02(C) and 5312.15. Thus, this Court will not follow the decision in Settler's Walk .
But the inquiry does not end here. The Court must still determine whether a BFP of the Property would have constructive notice of the Association's lien. The rights of a BFP are determined by the law of the state in which the property is located. Owen-Ames-Kimball Co. v. Mich. Lithographing Co. (In re Mich. Lithographing Co.) , 997 F.2d 1158, 1159 (6th Cir. 1993).
In Ohio, a bona fide purchaser for value is a purchaser who takes in good faith, for value, and without actual or constructive knowledge of any defect. A bona fide purchaser for value is bound by an encumbrance upon land only if he has constructive knowledge of the encumbrance. But, a purchaser will be charged with knowledge of a previous encumbrance upon real property when he has knowledge of facts which would induce a prudent person to make an inquiry by which he would have or could have obtained knowledge of a prior encumbrance.
Stubbins v. Conseco Fin. Servicing Corp. (In re White) , No 11-2375, 2012 Bankr. LEXIS 4475, at *14 (Bankr. S.D. Ohio Aug. 30, 2012) (alterations, citations, and internal quotation marks omitted). "Ohio law deems any purchaser – including bankruptcy law's hypothetical BFP – to have constructive notice of all instruments executed by the current owner of the land that are properly recorded." Argent Mortg. Co., LLC v. Drown (In re Bunn) , 578 F.3d 487, 489 (6th Cir. 2009) (alterations, citations, and internal quotation marks omitted). And "[t]he law assumes that any purchaser of [the land] has searched the relevant title indexes and examined the deeds in the chain of title." Bunn , 578 F.3d at 489 (citation omitted).
Here, a BFP would have constructive notice of the General Warranty Deed and its contents. See Bunn , 578 F.3d at 489. A BFP would also have constructive notice of the Quitclaim Deed—and the attached Deed Restrictions—as the Quitclaim Deed was properly recorded and in the chain of title of Debtor's Property. See id. One of the objectives of filing documents in public records is to notify the world of the existence of a lien. That objective is met in this case by the Association's Deed Restrictions, which were filed in the public records of Franklin County. Of particular relevance, the Quitclaim Deed reads: "By this Deed, the Developer submits the Initial Property to the covenants, conditions and restrictions set forth herein, and imposes upon the Initial Property the obligation to pay to the Association certain assessments as further set forth herein." The Court finds that this language would induce a prudent person to examine the Deed Restrictions, which are attached to the Quitclaim Deed. As noted above, the Deed Restrictions state that the Association has a continuing lien on the Property that applies "both prior to and after each yearly assessment, together with the continuing obligation to pay all future Annual Charges assessed in future years ...." In other words, the Association's lien secures (i) debts that arise from unpaid assessments, and (ii) the obligation to pay future assessments. Although a BFP might not know the balance owed on the lien at any given time, a BFP would have constructive notice of the Association's lien. Therefore, Debtor's theory under 11 U.S.C. § 544(a)(3) fails.
This is somewhat analogous to an open-end mortgage, which is a type of mortgage that can secure future unpaid advances as well as other debts or obligations. See Ohio Rev. Code § 5301.232(A) ; see also In re Presser , 504 B.R. 452, 456 (Bankr. S.D. Ohio 2014) (an open-end mortgage is a mortgage that " ‘provides for future advances on the given mortgage and increases the amount of the existing mortgage.’ " (quoting Black's Law Dictionary 1091 (6th ed. 1990)).
IV. Conclusion
For the foregoing reasons, the Court finds that Debtor's request to avoid the Association's lien is not well-taken. Accordingly, it is hereby ORDERED that the Objection is OVERRULED.