‘Lien stripping’ can be used in Chapter 11 bankruptcy

Q: We’re battling with a homeowner involved in a chapter 11 bankruptcy. Her attorney maintains the pre-petition amount owed to the homeowners association is subject to superlien rules. Really? This is the first time we’ve heard superliens associated with anything other than foreclosures.

The attorney does state the HOA owes the full post-petition amount and will pay it ASAP. And just who decides when ASAP is? Care to weigh in on this one?

A: This is a hard one to provide a quick written response. But in essence what the debtor’s attorney is talking about is a “lien stripping” and “cram-down” procedure only available in bankruptcy.

In this situation, that basically means if the property is worthless than the total encumbrance, then the debtor can propose a Chapter 11 plan that removes all liens down to the current value of the real estate. Thus, if the current value of the real estate is not enough to satisfy the first deed of trust, or FDOT lien, then the debtor can propose a plan that strips/removes the lien down to only the FDOT lien.

This type of lien stripping impairs the HOA’s claim. However, the plan can be approved over the HOA’s objection through a “cramdown” procedure that requires one consenting, impaired class.

Since the HOA’s lien has a “superpriority” over the FDOT, the debtor has to account for that lien prior to the FDOT when stripping down liens to the current value of the real estate.

Thus, if the property is not worth more than the FDOT lien, the debtor can strip the entirety of the HOA lien except for the superpriority, meaning the FDOT is also not paid in full and is impaired.

That background/explanation is likely why the debtor’s attorney is maintaining the HOA is only entitled to a superpriority lien (i.e. due to the lien stripping and cramdown procedures in a bankruptcy when the value of the real estate is less than the FDOT lien amount).

However, even if the debtor strips the HOA’s lien except for the superpriority, it only results in removing the lien as a property encumbrance.

The debtor still owes the debt, but now it is converted into an unsecured claim in the bankruptcy, to be paid consistent with other unsecured claimants.

Unfortunately, in most Chapter 11 bankruptcies, unsecured creditors receive $0 on their claims or a very small percentage.

Q: I saw your article and it looks like there is a statute repayment of HOA fees due from a new buyer of a property in Clark County Nevada. Does the rule of nine months payment of past HOA by the buyer apply to property that is bought in a county tax deed auction?

I would appreciate hearing from you. Thanks so much in advance

A: A property tax lien is superior to an association’s lien. If the home within the association was purchased through a county tax deed auction, it would appear to me that the association lost its position and would not be able to collect the nine-month payment of pass association assessments.