In re: MARIA A. BASAVE DE GUILLEN, Debtor. HIGHLAND GREENS HOMEOWNERS ASSOCIATION OF BUENA PARK, Appellant, v. MARIA A. BASAVE DE GUILLEN, Appellee.
BAP No. CC-18-1248-LSTa; BAP No. CC-18-1242-LSTa (consolidated appeals); Bk. No. 8:18-bk-10693-CB
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
August 26, 2019
ORDERED PUBLISHED; Argued and Submitted on May 23, 2019 at Pasadena, California; Appeal from the United States Bankruptcy Court for the Central District of California; Honorable Catherine E. Bauer, Bankruptcy Judge, Presiding
Appearances: Erin A. Maloney of Fiore, Racobs & Powers argued for Appellant; Charity Manee argued for Appellee.
Before: LAFFERTY, SPRAKER, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Highland Greens Homeowners Association (“Highland Greens“) appeals the bankruptcy court‘s order sustaining in part Debtor Maria Basave de Guillen‘s objection to Highland Greens’ proof of claim. The bankruptcy court found that, under California law, Highland Greens’ recorded notice of lien for delinquent homeowners assessments on Debtor‘s condominium did not secure amounts accruing after the recordation of the lien. Accordingly, the bankruptcy court limited Highland Greens’ secured claim to the amount of its recorded pre-petition state court judgment, classifying the remainder of the claim as unsecured.
We AFFIRM.
FACTUAL BACKGROUND
Pre-petition, Debtor fell behind on the homeowners association (“HOA“) dues on her condominium in Buena Park, California (the “Property“). As a consequence, Highland Greens recorded a Notice of Delinquent Assessment Lien (the “Notice“) against the Property on December 1, 2008.1 Highland Greens recorded an amendment to the Notice in April 2011 (the “2011 Amendment“). Both the Notice and the 2011 Amendment purported to include, in the amount subject to the lien, unpaid assessments and charges accruing after the date of the notice.
In August 2011, Highland Greens sued Debtor in state court to enforce its lien and, in April 2012, obtained a default judgment for foreclosure and a money judgment of $21,398.02 (consisting of $10,140 principal, attorney‘s fees of $10,273.12, and collection costs of $2,885, minus a $1,900.10 payment). The money judgment was subsequently recorded, and Highland Greens began the foreclosure process, but no sale was ever conducted.
Debtor filed a chapter 132 case on February 28, 2018.3 On Schedule D, she listed two debts to Highland Greens secured by the Property, one for $8,000, described as “interest on claim,” and another for $40,000, described as “assessments and attorney‘s fees.” Her proposed plan provided for payment of both claims in full, with interest at ten percent on the $40,000 claim.
Highland Greens then filed a proof of claim for $64,137.20, purportedly secured by the Property, with interest at twelve
Highland Greens attached eight pages of the CC&Rs to its proof of claim. The relevant provision (paragraph 12(b)) provides, among other things, that if a delinquency in assessments is not paid within ten days after delivery of a notice of default, the Board of Governors may file a claim of lien; the provision then lists the information that must be included in such claim of lien. The paragraph continues, “[u]pon recordation of a duly executed original or duly executed copy of such claim of lien by the Recorder of the County of Orange the lien claimed therein shall immediately attach and become effective, subject only to the limitations hereinafter set forth. Each default shall constitute a separate basis for a claim of lien or a lien.”
Debtor filed an objection to Highland Greens’ claim. She argued: (1) the claim should be disallowed in its entirety for lack of supporting documentation; (2) most of the claim should be reclassified as unsecured because Highland Greens did not comply with the procedures set forth in the Davis-Stirling Common Interest Development Act (“Davis-Stirling Act” or the “Act“), specifically,
Highland Greens filed an opposition in which it asserted: (1) the Notice recorded in 2008 complied with all procedural requirements and in any event had been adjudicated valid by the state court in the foreclosure lawsuit; (2) Debtor was barred by issue preclusion from challenging the validity of the lien; (3) Highland Greens was entitled under
Debtor filed a reply in which she argued that the Davis-Stirling Act prohibited Highland Greens from asserting a continuing lien. She contended that Bear Creek was not binding on the bankruptcy court and that federal courts in California had held to the contrary, citing In re Warren, No. 15-CV-03655-YGR, 2016 WL 1460844 (N.D. Cal. Apr. 13, 2016), and In re Guajardo, No. 15-31452 DM, 2016 WL 943613 (Bankr. N.D. Cal. Mar. 11, 2016).
At the final hearing on the claim objection, the bankruptcy court did not rule on the reasonableness of the attorney‘s fees or any of the other arguments raised by Debtor. But it ruled that under applicable law there was no continuing lien based on the Notice. As such, the only basis for Highland Greens’ security interest was its judgment lien.4 Accordingly, the court sustained Debtor‘s objection in part, allowing Highland Greens’ claim in full but reclassifying it as $29,970.65 secured (principal of $21,398.02 plus pre-petition interest of $8,572.63) and the $34,166.55 balance as unsecured. Shortly thereafter, the court entered its order on the Debtor‘s claim objection, and Highland Greens timely appealed.5
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUE
Did the bankruptcy court err in sustaining in part Debtor‘s objection to Highland Greens’ claim?
STANDARD OF REVIEW
This appeal involves issues of statutory and contract interpretation, which we review de novo. See Veal v. Am. Home Mortg. Serv., Inc. (In re Veal), 450 B.R. 897, 918 (9th Cir. BAP 2011) (citations omitted) (an order sustaining or overruling a claim objection “can raise legal issues (such as the proper construction of statutes and rules) which we review de novo . . . .“); Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1064 (9th Cir. 2002) (“Under California law, the interpretation of a contract is a question of law which the court reviews de novo.“).
DISCUSSION
This appeal requires us to determine whether, under California law, Highland Greens’ assessment lien was a continuing lien on the Property such that it secured amounts that became delinquent after Highland Greens recorded its Notice. This is a question of first impression for this Panel, and it presents some challenges. First, the statute in question does not expressly address the issue of an HOA‘s right to a continuing lien. Second, the statute references the governing documents (the CC&Rs), which may or may not create a contractual basis for a continuing lien. Third, California Courts of Appeal have differed significantly in their assessment of the policy to be enhanced by the Davis-Stirling Act, i.e., is the purpose of the Act to facilitate the expeditious collection of HOA assessments or to safeguard the notice rights of homeowners?
As discussed below, we conclude that there are two independent bases on which to affirm the bankruptcy court‘s order sustaining Debtor‘s objection in part. First, the language of the Notice and 2011 Amendment conflicts with the applicable CC&Rs, which do not authorize a continuing lien. Second, the Davis-Stirling Act does not authorize a continuing lien. In reaching this latter conclusion, we agree with the reasoning of the other federal courts to consider this issue that a continuing lien is inconsistent with the Act‘s notice provisions and the expressed legislative purpose of the Act.
A. The Davis-Stirling Act
We begin, as we must, with the language of the relevant statutes. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989); Lee v. Hanley, 61 Cal. 4th 1225, 1232-33 (2015). The Davis-Stirling Act, enacted in 1985, authorizes condominium homeowners associations to levy assessments. Subject to certain limitations, a homeowners association “shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this act.”
(a) A regular or special assessment and any late charges, reasonable fees and costs of collection, reasonable attorney‘s fees, if any, and interest, if any, as determined in accordance with subdivision (b), shall be a debt of the owner of the separate interest at the time the assessment or other sums are levied.
(b) Regular and special assessments levied pursuant to the governing documents are delinquent 15 days after they become due, unless the declaration provides a longer time period, in which case the longer time period shall apply.
(a) The amount of the assessment, plus any costs of collection, late charges, and
interest assessed in accordance with subdivision (b) of Section 5650, shall be a lien on the owner‘s separate interest in the common interest development from and after the time the association causes to be recorded with the county recorder of the county in which the separate interest is located, a notice of delinquent assessment, which shall state the amount of the assessment and other sums imposed in accordance with subdivision (b) of Section 5650, a legal description of the owner‘s separate interest in the common interest development against which the assessment and other sums are levied, and the name of the record owner of the separate interest in the common interest development against which the lien is imposed.
In applying these statutes, we are guided by (1) the plain language of the Davis-Stirling Act as interpreted by California federal and state courts; (2) the public policy behind the Act; and (3) principles of statutory construction. And, given that the Act references the “governing documents,” we also consider the terms of the applicable CC&Rs.
B. California Federal Cases Interpreting the Davis-Stirling Act
The Davis-Stirling Act itself does not provide for a continuing lien, and case law is scant regarding whether the Act may be fairly interpreted as so providing. Two federal courts in the Northern District of California have held that adding future assessments to a recorded lien securing delinquent assessments without recording a new lien is impermissible under the Davis-Stirling Act. In re Warren, 2016 WL 1460844; In re Guajardo, 2016 WL 943613.
In Guajardo, the bankruptcy court was tasked with determining the priorities between an HOA‘s assessment lien and a federal tax lien for purposes of distributing the proceeds of a sale of property of the estate. The notice of delinquent assessment at issue in that case provided, “Additional monies shall accrue under this claim at the rate of the claimant‘s regular monthly or special assessments, plus permissible late charges, costs of collection and interest, accruing subsequent to the date of this notice.” 2016 WL 943613, at *1. The court held that this language was ineffective under both California contract law and the Davis-Stirling Act, for two reasons.
First, the CC&Rs at issue in that case provided that each “lienable default shall constitute a separate basis for a lien.” Id. at *3. The court found that the language of the notice that provided for the lien to include subsequent assessments and related charges was inconsistent with this provision. Id. at *3.7
Second, and importantly, the court interpreted the language of
The bankruptcy court distinguished Bear Creek. As discussed below, in that case, the California Court of Appeal held that homeowners assessments that became due after the recordation of a lien notice were properly included in a judgment for lien foreclosure and breach of contract, based on the applicable CC&Rs and the provisions of the Davis-Stirling Act that, in turn, referenced the HOA‘s governing documents. The Guajardo court noted that the CC&Rs in Bear Creek were much more specific as to future accruals than those at issue in the case before it, but the court also held that “the general imposition of a ‘present’ lien at the time of and by operation of the CCRs with respect to all future and potentially unknown assessments does not satisfy the notice and lien provisions of the Civil Code.” Id.
In Warren, the district court affirmed the bankruptcy court‘s order sustaining a debtor‘s objection to the secured claim of an HOA on grounds that the HOA‘s lien was limited to the amounts stated in its notice of lien assessment. 2016 WL 1460844 at *1. As in Guajardo, the lien notice in that case contained language that purported to constitute a prospective charge for future assessments and related costs. And like the bankruptcy court in Guajardo, the district court held that this language was impermissible under the Davis-Stirling Act. The court noted that the procedural notice requirements of the Davis-Stirling Act are to be strictly construed, citing Diamond, 217 Cal. App. 4th at 1191, and found that “[t]he Davis-Stirling Act limits the lien to the amount specified in the notice . . . .” Id. at *3-*4. The court went on: “Claimant should have filed additional liens to secure its interest in future unpaid assessments. To hold otherwise would offend the comprehensive notice scheme and homeowners’ rights to contest delinquent assessments as established in the Davis-Stirling Act.” Id. at *4.
C. California State Cases Interpreting the Davis-Stirling Act
In Bear Creek, the California Fourth District Court of Appeal affirmed a judgment for lien foreclosure and breach of contract based on a condominium owner‘s failure to pay assessments. 130 Cal. App. 4th at 1472. The primary issue before the court of appeal was whether an HOA may charge an owner assessments for lots on which condominium units were planned but had not yet been built. Id. In affirming the trial court‘s foreclosure judgment, the court of appeal held that the definition of “condominium” in the Davis-Stirling Act included unbuilt lots in a qualifying condominium plan. Id. at 1481-82. The court of appeal also affirmed the trial court‘s finding that the HOA had properly served lien notices on the owner. Id. at 1488. Finally, the court of appeal considered the appellant‘s argument that the trial court had improperly determined the amount of the lien assessments because it included amounts that came due after the recordation of the lien notice; it found that those amounts were properly included. Id. at 1489.
The court
Specifically,
The court next looked to the governing documents, specifically, the CC&R‘s. The CC&Rs provided that “any demand or claim of lien or lien on account of prior delinquencies shall be deemed to include subsequent delinquencies and amounts due on account thereof.” Id. Further, the recorded lien notices provided that “[a]dditional monies shall accrue under this claim at the rate of the claimants’ regular monthly or special assessments, plus permissible late charges, costs of collection and interest, accruing subsequent to the date of this notice.” Id. Based on this language, the court of appeal held that “all of the sums included on the liens and lien notices are authorized by the CC & R‘s and statutory law. The amounts here determined by the court to be owing as liens are no more than the amounts authorized by the governing documents and statutes.” Id.
The court of appeal opined that its holding was consistent with the legislative purpose of providing homeowners associations a quick and efficient means of seeking relief against a nonpaying owner:
Were the relevant provisions to be construed as [the owner] suggests, the described statutory purpose of providing for a quick and efficient means of enforcing the CC & R‘s would be seriously undermined; each month, or at such other intervals as the assessments are charged under a given set of CC & R‘s, the association would be required to record successive liens. A successive recordation requirement would impose a heavy—and needless—burden upon homeowners’ associations, fraught with risk to the association, and undue windfall to the delinquent homeowner, should any installment be overlooked. We are unwilling to construe Civil Code section 1367 to require such an oppressive burden. Both delinquent homeowners and the public at large are placed on notice, with the recordation of the initial assessment lien, that subsequent regularly and specially levied assessments, if they continue unpaid, will accrue in due course. The purpose of the lien notice and recordation will have been served, and the
association‘s remedy justly preserved, by the initial recordation of lien.
Two years after the decision in Bear Creek, the California Sixth District Court of Appeal held that the notice provisions of the Davis-Stirling Act are to be strictly construed. Diamond, 217 Cal. App. 4th at 1189. The issue in Diamond was whether “substantial compliance” with the pre-lien and pre-foreclosure notice requirements of the Davis-Stirling Act was sufficient to permit an HOA to proceed with foreclosure. The court of appeal held that it was not. In its opinion, the court of appeal examined the legislative history of the Act and concluded that it was intended to “protect the interest of a homeowner who has failed to timely pay an assessment levied by a homeowners association.” Id. at 1190-91. As such, the notice requirements were intended to be mandatory. Id.
The court of appeal noted that its conclusion was supported by California Supreme Court precedent, including Li v. Yellow Cab Co., 13 Cal. 3d 804, 815 (1975) (“If a provision of the [Civil] [C]ode is plain and unambiguous, it is the duty of the court to enforce it as it is written.“); Chase v. Putnam, 117 Cal. 364, 367–368 (1897) (“a lien which is the creature of statute can be enforced only in the manner prescribed by the statute.“). Diamond, 217 Cal. App. 4th at 1192-93.
D. Bear Creek does not control the outcome of this appeal.
Highland Greens argues that we must follow Bear Creek because there are no other California state court decisions on point. It points out that in the absence of a state supreme court decision on the issue, a federal court is obligated to follow a decision of an intermediate court of appeal unless there is convincing evidence that the highest court of the state would decide differently. Sec. Pac. Nat‘l Bank v. Kirkland (In re Kirkland), 915 F.2d 1236, 1238-39 (9th Cir. 1990) (citing American Triticale, Inc. v. Nytco Services, Inc., 664 F.2d 1136, 1143 (9th Cir. 1981); Stoner v. New York Life Ins. Co., 311 U.S. 464, 467 (1940)).
In predicting how the state‘s highest court would decide the issue, we look to “intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance.” In re Kirkland, 915 F.2d at 1239 (citations omitted). Bear Creek appears to be the only California intermediate appellate decision addressing the propriety of continuing liens under the Davis Stirling Act. Nevertheless, for the reasons discussed below, we conclude that Bear Creek is factually distinguishable and that the California Supreme Court would not likely decide the issue in accord with Bear Creek.
In determining that delinquent HOA assessments which came due after the recordation of the lien notices were properly included in the amount secured by the lien, the court of appeal in Bear Creek relied primarily on the language of the CC&Rs and the lien notices, all of which provided that any lien for delinquent HOA assessments would be deemed to include subsequent delinquencies. Because certain provisions of the Act referred to the HOA‘s governing documents, and those documents provided for a continuing lien, the Bear Creek court concluded that the continuing lien was consistent with the Act.
Here, however, the CC&Rs do not provide for a continuing lien; as such, Bear Creek is factually distinguishable in a critical respect, and we may ignore it. Further and importantly, relevant
Although Diamond did not involve the identical issue raised here, the opinion‘s thorough analysis of the legislative history and citations to precedent all supported its determination that the requirements of the Davis-Stirling Act must be strictly construed, and support the conclusion that the California Supreme Court would not follow Bear Creek. This conclusion is bolstered by the analysis in Guajardo and Warren. As noted by the District Court for the Northern District of California:
The Davis-Stirling Act reflects the legislature‘s intent to impose and rigorously enforce its procedural requirements to protect the interest of the homeowner. See Diamond v. Superior Court, 217 Cal. App. 4th 1172, 1191 (2013) (the procedural notice requirements prescribed in the Davis-Stirling Act must be “strictly construed” such that “substantial compliance is insufficient“). Accordingly, the Court finds that the language of the 2008 Lien purporting to secure future assessments is not permissible under the Davis-Stirling Act.
In re Warren, 2016 WL 1460844, at *4.
Applying these principles to the matter before us, we conclude that here, the Notice and 2011 Amendment, which purported to secure future assessments, were (1) inconsistent with the applicable CC&Rs; and (2) impermissible under the Davis-Stirling Act, which limits the lien to the amount specified in the notice, see
E. Highland Greens’ arguments in support of its interpretation of the Davis Stirling Act are inconsistent with established principles of statutory construction.
In the absence of evidence of contrary legislative intent, courts are to follow
Highland Greens argues that certain provisions of the Davis-Stirling Act support its contention that a continuing lien is permitted under that Act. First, it notes that
Despite the above argument, Highland Greens also contends that, if we affirm the bankruptcy court‘s ruling, it would mean that a delinquent owner would be able to stop a foreclosure sale by paying only the face amount of the lien without paying the costs of enforcing the lien, apparently assuming an HOA would need to record separate liens to secure collection costs. But, as Highland Greens points out, the statute explicitly provides that the lien may include collection costs.
Second, Highland Greens cites
Section 5720(b)(2) simply provides an association with the option to wait to record the lien until delinquent assessments exceed $1,800. Alternatively, the association may record the lien and wait a year to foreclose thereon. . . . Section 5720(b)(2) does not allow an association to bypass the notice and recording requirements in Sections 5660, 5670, and [5675] merely because the initial lien secures an amount below the $1,800 threshold to initiate foreclosure proceedings.
In re Warren, 2016 WL 1460844, at *4 (footnote omitted).
F. Highland Greens’ policy arguments are contradicted by the California Court of Appeal‘s holding in Diamond.
Finally, Highland Greens, (joined by amicus curiae Community Associations Institute), urges us to follow Bear Creek and reverse the bankruptcy court because to do otherwise would negatively impact all California HOAs and their members. Highland Greens contends that HOAs would have to record liens for delinquent assessments on a monthly basis to secure all amounts owed, and that doing so would result in higher collection costs that would then be passed on to the delinquent owner.
This argument is certainly consistent with the court of appeal‘s comments in Bear Creek, 130 Cal. App. 4th at 1489. But it ignores the fact that the Davis-Stirling Act “reflects the legislature‘s intent to impose and rigorously enforce its procedural requirements to protect the interest of the homeowner.” In re Warren, 2016 WL 1460844, at *4 (citing Diamond, 217 Cal. App. 4th at 1191). While we acknowledge that requiring HOAs to file “successive liens” imposes a burden, that is an issue for the legislature to address.
CONCLUSION
Because we find no error in the bankruptcy court‘s interpretation of California law, we AFFIRM.