IN RE: ELIZABETH JANE BORRONE
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
ELIZABETH JANE BORRONE
DEBTOR CASE NO. 94-50368
This case is before the court on the chapter 7 trustee's objection to allowance of the claim of Harbour Heights Association of Apartment Owners ("the Association"), as amended, as a first priority administrative expense of the bankruptcy estate.
FINDINGS OF FACT:
The debtor, a physician, relocated from Seattle, Washington to Kentucky to accept employment with the Commonwealth of Kentucky. She filed a petition for relief under chapter 13 of the Bankruptcy Code in this court on March 11, 1994. The case was converted to a case under chapter 7 on June 3, 1994.
At the time of bankruptcy the debtor owned a condominium located at 2621 Second Avenue, No. 1402, Seattle Washington from which she had received rental income. The conversion of the debtor's case from a case under chapter 13 to a case under chapter 7 was occasioned in part by the fact the rental income from the condo had ceased. The chapter 7 trustee received no rental income from the condo. The condo, which was valued in the schedules to the debtor's petition at $145,000, was subject to a mortgage in the amount of $107,274.62 in favor of KeyCorp Mortgage, Inc. Subsequently, Nationsbank, as successor in interest to KeyCorp Mortgage, Inc., by merger became the holder of the mortgage.
The chapter 7 trustee, pursuant to order of this court, and without objection of the mortgage holder, caused the condo to be sold at public auction for a high bid of $120,000, which after deduction of the expenses of sale and the trustee's commission left an amount not quite sufficient to pay off the mortgage indebtedness of Nationsbank.
The purchaser at the auction sale defaulted and refused to close on the sale. Thereafter, the trustee abandoned interest in the condo.
The mortgage held by KeyCorp/Nationsbank contains a rider signed by the debtor which obligated her to pay all dues and assessments imposed pursuant to the Condominium Project's Constituent Documents. The rider further provides that if the Borrower does not pay condominium dues and assessments when due, then the Lender may pay them, in which event such amounts disbursed by the Lender shall become an additional debt of the Borrower secured by the mortgage. There is no evidence that the mortgage holder has paid any of the dues and assessments in question. It is unlikely a mortgage holder would pay such dues or assessments because the Association's lien therefor is inferior to a previously recorded mortgage. RCW 64.32.200(2).
One of the Condominium Project's Constituent Documents, attached as exhibit to the Association's initial proof of claim, claim No. 16, filed herein as a secured claim, provides that "all Owners are required to pay assessments imposed by the Association of Apartment Owners to meet all common expenses of the property...." Common expenses include costs of administration and furnishings, maintenance, repair and improvement of common areas, insurance, utilities, and other expenses agreed upon as common by the Association of Apartment Owners.
The Constituent Document on which the Association relied in asserting its claim as a secured claim provides that the unpaid amount of any monthly or special assessment for an apartment shall be a lien upon the apartment and the limited common areas reserved to the apartment to the same extent as a mortgage on real property. The document provides that the lien for payment of assessments shall have priority over all other liens and encumbrances, recorded or unrecorded, except such priority shall be limited as provided in RCW 64.32.200(2). This statute subordinates the lien to tax liens on the apartment and to all mortgages of record. When the mortgagee of a mortgage of record or other purchaser of an apartment obtains possession as a result of foreclosure of the mortgage such possessor, his successors and assigns are not liable for a previous assessment such as is owed in this case. RCW 64.200(3).
The secured claim of the Association apparently was extinguished by the foreclosure action of Nationsbank following abandonment of the apartment by the trustee.
The Association has filed an amended claim, claim No. 17, as a priority claim in the amount of $5,024.00 for monthly assessments and late fees from August 1, 1994 through September of 1995. The assessments total $2749 and the late fees, $2275. These changes represent a postpetition unsecured claim that commenced to accrue approximately two months after this case was converted to a case under chapter 7 of the Bankruptcy Code.
The Association's claim in the amount of $5024 is for postpetition "Maintenance Fees and Late Charges" against the bankruptcy estate as owner of the condo, as successor in interest by operation of law to the debtor.
The trustee has on hand in the estate for distribution to creditors approximately $17,500 representing the proceeds of bank accounts and tax refunds of the debtor. If estate funds are used to pay the Association's claim for postpetition condominium assessments and late charges as a first priority administrative expense such expenses will in effect be born by other creditors holding unsecured claims who in no way benefitted from the Association's expenditures, if any, on the condominium.
CONCLUSIONS OF LAW:
The question presented is whether the monthly assessment charge and late fees as set out in claim No. 17 filed by the Association qualify as administrative expenses. Under 11 U.S.C. § 503(b)(1)(A) "the actual, necessary costs and expenses of preserving the [bankruptcy] estate" may be allowed as an administrative expense, which, in turn, entitles such expenses to first priority treatment under 11 U.S.C. § 507(a)(1).
Obviously the late charges included in the Association's claim do not represent actual or necessary expenses of preserving the estate. Such late charges in no way represent either actual or necessary expenses. In fact the record is devoid of evidence that the Association made any expenditures for the purpose of preserving the condominium as an asset of the estate. The assessments set out in exhibits to the proofs of claim filed by the Association are evidence of income lost rather than expenditures made by the Association.
Treating claim No. 17 filed by the Association as a request for payment of an administrative expense, and as superseding claim No. 16 previously filed by the Association as a secured claim, the burden is on the Association to establish that it incurred actual and necessary expenses which benefitted the estate. The Association has not met that burden. To the extent that the Association may have made expenditures with respect to the condo in question those expenditures benefitted the mortgage holder and not the bankruptcy estate. Under the law of the state of Washington the mortgage holder or any purchaser at the foreclosure sale are absolved of such expenses. If the entity that most benefitted from preservation of the condo is not responsible to the Association for the assessments and late charges in question it is not clear why the bankruptcy estate should be, especially when there is no evidence the Association actually made expenditures that benefitted the bankruptcy estate. In re Butcher, 108 B.R. 634 (Bankr. E.D.Tenn. 1989).
Accordingly, the trustee's objection to the allowance of the claim of the Association as a first priority administrative expense shall be sustained. The claim of the Association evidenced by claim No. 16, as amended and superseded by claim No. 17, shall be disallowed for purposes of distribution in this case.
By the court -
Stephen Palmer, Esq., attorney for the trustee
Laurin S. Schweet, Esq. and
Norman G. Golibersuch, Esq., attorneys for
Harbour Heights Association of Apartment Owners
W. Thomas Bunch, Esq., attorney for the debtor