1. Collection of Assessments by Association 1 When Unit Owner is a Debtor in a Chapter 7, 11, or 13 Bankruptcy Code Proceeding.

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1 Certain Bankruptcy Considerations Incident to Enforcement of Assessment Obligations and Other Covenants By Marvin Garfinkel 1. Collection of Assessments by Association 1 When Unit Owner is a Debtor in a Chapter 7, 11, or 13 Bankruptcy Code Proceeding. 1.1 Assessment for Pre-petition Period Assessment Lien. (a) The association lien for assessments accrued prior to the filing of the petition will not be divested by the filing of a proceeding under Chapter 7, 11 or 13 where the debtor is the owner of the unit. 2 (b) A valid lien passes through a Chapter 7 case unaffected and remains enforceable in rem after the debtor's discharge. Unless the lien is disallowed as a secured claim or is subject to challenge under an avoiding provision of the code. A condominium assessment lien has been held to be a statutory lien of the type provided for by Sec. 545(2) that is not subject to the 90 day prepetition avoidance powers under section 522(h).3 ( c) The lien for assessments previously imposed by the association may be divested upon a free and clear sale by the Bankruptcy Court pursuant to Section 363(f) of the Bankruptcy Code. 4 The interest of the association as the beneficiary of a real covenane should properly be classified as a "property interest" and not be divested in a section 363(f) sale or a plan or reorganization to which the benefitted party has not consented. Under the formative document,6 or the applicable statute (other than in a super lien state 7) the association's lien is generally subordinate to the lien of a first mortgage either pursuant to a specific provision of the declaration or Copyright 1993 By Malvin Garfmkel AU Right:; RG'Grvwd 1 March 17,1993 FSI-77575_2

2 by statute or case law. Under such circumstance, the association will not recover its assessment if the foreclosure or sale proceeds are not adequate to pay the amount due the mortgagee and costs of the proceeding. (d) To the extent, if any, the assessment lien primes the mortgage lien, the association lien will, of course, be satisfied out of the any such proceeds. The association lien may also be divested in the case of a Chapter 11 or 13 proceeding if the stay is lifted to permit a foreclosure by the mortgagee or in a Chapter 7 proceeding upon abandonment of the property by the Trustee, if, in any such eventuality, there is no realizable equity in the unit after satisfying the prior mortgage. If there is a superpriority in favor of the association, then the amount of the super-priority should be realized by the association upon a foreclosure or sale. ( e) The association may have the right under Code 546(b)8 notwithstanding the Automatic Stay to perfect a statutory inchoate lien after the filing of the petition. (f) If there is equity in the unit after the first mortgage or if the lien to any extent primes the first mortgage, commencement of a foreclosure by the association may under certain circumstances accelerate proceedings by the first mortgagee to acquire ownership of the unit and thus become responsible for future assessments Personal Liability of Unit Owner. The personal liability of the debtor unit owner for assessments attributable to the period prior to the commencement of the Code proceeding will usually be discharged either as a part of a Chapter 11 plan, pursuant to 1141(d) or, in the case of a Chapter 7 or 13 proceeding pursuant to 727, 1141, Assessment Accrued Post-Petition Prior to Abandonment 10 by Trustee in Chapter 7 or by a Debtor or Trustee ll in a Chapter 11 Proceeding. Copyright 1993 By Marvin Galfmkel All Rights Reserved 2 March 17, 1993 FSI-77575_2

3 1.2.1 Assessment Lien. Except as may be specifically provided by the Code a lien on real property of the debtor is not disturbed by the Bankruptcy Code proceeding since the trustee succeeds under Section 541 only to the interest of the debtor in property and (subject to exceptions, such as for preferences under 547 and fraudulent transfers under 548) such interest is subject to liens that attach prepetition Personal Liability of Debtor (a) Any association ass~ssment accrued after commencement of a Chapter 7 (liquidation) or 11 (arrangement) proceeding but prior to the abandonment or sale of the unit will not be a personal obligation of the debtor individually, although if the expense is incurred in the preservation of the unit as an asset of the estate or the estate is otherwise benefited, such assessments may be collectable by the association as an administrative expense under 503(b )13. (b) Because of the possibility that the estate may not, at the end of the proceeding, have funds available to pay all administrative expenses in full, the association should consider seeking a court order which lifts the automatic stay so as to permit the association to foreclose on its lien unless the assessments attributable to the post petition period are currently paid by the trustee or debtor in possession. The in rem lien right of the association continues to accrue during this period and if the estate has no assets to pay the administrative claim of the association for assessments accrued while the unit was held -by the trustee, then the association may not realize anything for this period unless it can realize on its lien. 1.3 Assessment for Post-Petition Period After Abandonment of the Unit by the Trustee But Prior to Completion of Foreclosure by a Mortgagee Assessment Lien. Unless a lien has been avoided, Code sections 727, 944, 1141, 1228 and 1328 discharge only the debtor's personal liability for covered prepetition debts and the discharge injunction of sections 524(a)(i) and (2) is applicable only to such personal liability and TO attempts to reduce any such liability to Copyright 1993 By Marvin Garfinkel All Rights Reserved 3 March 17, 1993 FSI-77575_2

4 judgment or execute on any personal judgment. 14 Often the assessment lien is of little value to the association, especially where the obligation on the first mortgage exceeds or is close to the value of the unit. 1S Personal Liability of Debtor There is a split of authority on whether the debtor is liable post discharge for the assessments that accrue after the ownership of the unit is revested in the debtor in the debtor's individual capacity. ( a) Cases Holding That Discharged Debtors Are Relieved from Paying Post Proceeding Assessments. One group of cases 16 views the personal obligation to pay assessments as being based on a rejected prepetition executory contract. Under this approach, the obligation to pay post abandonment association assessments becomes an item of estimated future damages 17 of the general creditor claim of the association. It is discharged with all other prepetition claims. This principle is generally applied by these cases without regard as to whether or not the debtor continues to occupy the unit. IS Obligations arising out of prepetition contracts, but due post petition are prepetition debts. 19 (b) Cases Sustaining Personal Obligation of Discharged Debtor to Pay Assessment on Retained Unit After it Reverts to the Debtor. (i) Another group of cases treat the association assessment as a post petition claim 20, especially where the debtor remains in possession of the unit. 21 There are cases that indicate that the debtor will be liable for assessments on a unit abandoned by the trustee from the time control reverts to the debtor until the Debtor divests himself of ownership of the unit. 22 Such divestment usually occurs as a result of a foreclosure or conveyance in lieu of foreclosure. It is not clear that an individual can just abandon a unit to terminate the personal liability for assessments. Copyright 1993 By Marvin Garfinkel AU Right> Rc;sc;rvcd 4 March 17, 1993 FS1-77S7S_2 San Anlollio - ACREL

5 The law appears to be that for a deed to be effective to divest the grantor of ownership the deed must be accepted by the grantee. It is not unusual for mortgagees to defer foreclosure on units to avoid the assessment obligation that will shift from either the trustee or the debtor to the mortgagee upon completion of the foreclosure. (ii) In at least one case 23 the court first concluded that the agreement of a condominium unit owner to pay assessments is not an executory agreement deemed rejected pursuant to 365(d)(1) of the Code and even if it were, such rejection is by the estate and related only to its obligation and not to the debtor as to the debtor's obligation individually to pay assessments after the unit reverts to the debtor individually upon abandonment by the Chapter 7 trustee. Occupy Unit. 1.4 Personal Liability of Debtor Post-petition if Debtor Continues to The retention of ownership and occupancy of the unit post discharge has been held by some cases to be a basis to attach liability upon the debtor for post discharge assessments. 24 In his article on successor liability in bankruptcy,25 Prof. Carlson first defines 26 a servitude to include contractually created duties that become binding on possessors of burdened land. In the case of such real covenants that are not interests in land itself, possession of the land takes the place of express assumption of liability to subject the possessor by reason of mere possession to personalliability.27 Thus, viewing the personal obligation of a unit owner for association assessments as a real covenant that runs with the land provides a basis to support those cases that impose a post discharge liability for association assessment upon the discharged debtor. Such liability is based on the real covenant that runs with ownership of the condominium unit and not upon a pre bankruptcy undertaking by the discharged debtor. As a real covenant the assessment right of the association should not be discharged in bankruptcy since, to use Professor Powell's phrase,28 the real covenant runs with the land "like a bird on a wagon". 2. Applications of 362 Automatic Stay and 524(a) Discharge Stay. Copyright 1993 By Marvin Garfinkel All Righls Reserved 5 March 17, 1993 FSI-77575_2 San Antonio - ACREL

6 2.1 Unless it is clear that either the automatic stay under Section 362 or the discharge stay under 524(a), 727, 1141 or 1328 is not applicable, the Association should consult with counsel prior to seeking to enforce an assessment obligation of a unit owner who, after acquiring the unit, was the subject of a bankruptcy code proceeding. For this purpose, "enforcement" includes not only litigation but also denying services or use of facilities to such a parson by reason of failure to pay assessments. Section 524(a)(1) and (2) provide that ( a) A discharge in a case under this title -- (1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228 or 1328 of this title, whether or not discharge of such debt is waived; (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; The automatic stay would, in all likelihood, be construed to preclude an association from barring a debtor's use of recreational areas solely on the basis of prepetition assessment payment defaults since it is clear that the discharge will apply to the debtor's personal liability for such assessments. 3. Section 365 Rejection of Allor Portions of Covenants That Run With the Land. The subject matter of this section is considered in depth in the context of Shopping Center Reciprocal Easement Agreements ("REAs") in an article Copyright 1993 By Marvin Garfmkel All Rights Reserved 6 March 17,1993 FSI-77575_2

7 tentatively titled "May Allor Portions of Recorded Shopping Center Reciprocal Arrangements Be Rejected as Executory Agreements under Section 365 of the Bankruptcy Code" scheduled for publication in the Winter 1993 issue of the Real Property, Probate and Trust Journal. 3.1 Introduction to Issue The issue considered in this section is whether, if a parcel owner or ground lessee becomes a debtor in a bankruptcy court proceeding, may such debtor effectively reject all or certain of the obligations under covenants that run with the land which burden the parcel while at the same time retaining ownership of the parcel. Such rejection would be effectuated pursuant to Section 365 of the Bankruptcy Code,29 which provides for the rejection or assumption of executory contracts by a debtor. 30 A threshold issue may be whether covenants running with the land are "executory contracts" for purposes of Section 365 of the Bankruptcy Code. 3.2 Rejection Under Section 365. provide as follows: Insofar as relevant to this discussion section 365 may be condensed to The Trustee 31 may reject an executory contract of the debtor 2. The rejection of an executory contract of the debtor constitutes a breach of the executory contrace 3 and the damage obligation arising from such breach is treated as having been incurred immediately prior to the filing of the petition 34, provided the rejected executory contract had not been previously assumed in the proceeding. 35 Thus, a debtor may reject an "executory contract" and if it does, the debtor is relieved of any performance obligation under the contract, the contract is treated as having been breached by the debtor and the damage arising from such breach is treated as a pre-petition obligation - usually, but not necessarily, a general creditor Copyright 1993 By Marvin Garfmkel All Rights Reserved 7 March 17,1993 FSI-77575_2 San Antooio - ACREL

8 claim 36. If covenants that run with the land are "property interests" they should not be subject to the Section 365 rejection provisions since these provisions deal with "contract rights" and not "property rights." Section 365 of the Bankruptcy Code dealing with executory contracts and unexpired leases does not specifically refer to or covenants that run with the land 37 or to servitudes. 3.4 Professor Countryman's Defmition of "Executory Contract". Since the Bankruptcy Code intentionallf8 does not define the term "executory contract", one must look to the literature, legislative history and case law to develop an understanding of the concept. In his comprehensive two part 140 page 1974 article Professor Vern Countryman proposed to define the term "executory contract" for purposes of Section 63a and 70b of the 1938 Chandler Act revision to the Bankruptcy Ace 9 as one under which "... the obligations of the debtor and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other."40 This definition is based on 41 the purpose for which the bankruptcy trustf.;e is given the option to assume or reject. 42 Professor Countryman considers in his articles situations involving dependent covenants and not those involving independent covenants. 43 Professor Countryman's analysis is first, that if the other party has fully performed and the debtor has not performed, all that the other party has is a claim against the estate. This is the same right as any other creditor. There is thus no need for special treatment and if the nonbankrupt party has "so nearly performed [the contract] that failure to complete performance would not be sufficiently material to excuse performance by the bankrupt", the contract should not be treated as an "executory contract".44 Under such circumstances all that is involved is a claim by the non-bankrupt party against the estate subject to an offset for the nominal amount involved in the remaining performance the other party owed the bankrupt at the time of commencement of the case. It is on the basis of this analysis that the "material breach excusing performance" qualification entered the Countryman definition. Copyright 1993 By Marvin Garfmkel AU Rights Reserved 8 March 17, 1993 FSI _2 San Antolli.o - ACREL

9 Professor Countrymen then considers the situation in which the bankrupt has fully performed. In that case there is no reason for rejection, since the "... bankrupt's claim to further performance under such a contract is an asset which in most instances will pass to the trustee...'t45 Then, as Professor Countrymen explains, he approaches the definition of an executory contract within the meaning of the Bankruptcy Act "by a process similar to one method of sculpting an elephant"46 Since the covenants of an CC&R are generally to be performed over an extended and often indefinite period of time, the usual criteria for determining that covenants are intended to be mutual or dependent is probably not applicable, i.e whether one party must prove performance or tender of performance to be able to demand performance by the other. 47 Also, since shopping center and residential development CC&Rs benefit and burden owners of various parcels and perhaps even a number of tenants of various parcels the breach by one of a number of parties having rights and obligations under the CC&R should not excuse performance by the others. The sole remedy should be by way of a suit for damages or equitable enforcement by creation of a lien against the burdened property of the breaching party. 3.4 The Unconstitutional Impairment Issue Although congress may limit remedies in establishing uniform laws of bankruptcy,48 the congressional power under the bankruptcy clause does not probably extend to overriding both the Due Process and Just Compensation provisions of the Fifth Amendment. This is the so-called "Unconstitutional Impairment Thesis" that the Fifth Amendment overrides the bankruptcy power. The courts have indicated that a secured creditor may not be denied property rights without just compensation. 49 It has been argued that in the analogous situation of the cram down of a secured creditor in conjunction with a Chapter 11 Reorganization Plan under Section 1129 of the Bankruptcy Code, the Bankruptcy Clause primes the Fifth Amendment to the Constitution. On the other hand, in Louisville Joint Stock Land Bank v. Radford 50 Justice Brandeis concluded that the bankruptcy power was subject to the Fifth Amendment. 51 Copyright 1993 By Marvin Garfinkel All Rights Reserved 9 March 17,1993 FSI _2 San Antonio - ACREL

10 This broad defiirition of claim 11 U.S.c. 101(4) under the Code is intended to result in all legal obligations of the debtor being dealt with in the bankruptcy case. Under Butner v. United States 52 state law will probably determine whether an interest is a property right. As has been noted by at least one commentator, the Countrymen definition should not be applied out of context. It has been suggested that a court should not so emphasize the Countrymen definition of executory contracts so as to deal with a contract as a single entity "... rather then as a bundle of rights and interests that can be classified under the Bankruptcy Code."53 Since the existence of restrictions and easements that burden a debtor's estate in land reduces the quality of the fee interest S4 the creation by way of a CC&R of such rights in favor of a third party should be treated as a pre-bankruptcy conveyance that cannot be disturbed by the bankruptcy court unless it was a fraudulent conveyance or a preference that occurred within the applicable bar periods. 55 It is not clear whether a distinction should be made on the basis of whether the easement is contained as an exception or "subject to" in a deed of conveyance or is contained in an CC&R recorded in conjunction with the conveyance of a parcel or an CC&R entered into by the owners of the several parcels after the separate ownership has been established. By subjecting its property to a CC&R the owner of a fee interest in real estate has in effect conveyed to the dominant tenement a portion of its fee interest and thus the rights of the benefited property under the CC&R should be treated as a "property interest" rather than as a "contract right" The problem is to differentiate between "contract rights" which may be rejected under section 365 and "property rights" which should not be subject to Section 365 rejection. 58 The ownership of land subject to an affirmative covenant may truly be a burden to a debtor's estate and if it be, the Gwner-debtor should be able to abandon the property. This is the fundamental concept upon which the right of rejection of an executory contract arose. As previously suggested a better approach would be to consider the CC&R document to be a collection of individual covenants with each set of dependent covenants, restrictions and easements being treated separately. Those that are essentially property rights would be denied Section 365 treatment. The others might be subject to Copyright 1993 By Marvin Garfinkel All Rights RcsclVcd 10 March 17,1993 FSl _2 San Antonio - ACREL

11 Section 365. Under this approach the Court would for analysis purposes first break the CC&R into separate agreements with each consisting of either a group of interrelated dependent covenants or a single independent covenant. If this approach is adopted, then in order to avoid being bound by any such separate agreement that runs with the land and is essentially a property interest in some other party the debtor would have to abandon the real estate so burdened. As to an CC&R or the portion of the CC&R that is actually an executory agreement the court would in deciding whether to approve a proposed rejection consider not only the impact upon the debtor estate but also the impact upon the other parties entitled to benefits from the CC&R including owners of other real estate entitled to enforce the CC&R, their tenants and the community. The debtor that is the owner or lessee of a parcel of property subject to a covenant running with the land should not be able to reject such covenant while at the same time retain ownership of the land which otherwise would be subject to such covenant. Copyright 1993 By MalVin Garf"mke1 All Rights Reserved 1 1 March 17,1993 FSI-77575_2

12 ENDNOTES The term "Association" as hereafter used refers to both a condominium association and a home owner's association unless otherwise stated. Stem v. Monroe, 44 B.R. 15 (Bkrtcy D. Mass 1986) is based on application of applicable state law of Massachusetts which is generally consistent with that of most states. See Stem v. Monroe, op. cite, supra. The Bankruptcy Code which replaced the 1898 Bankruptcy Act was enacted in 1978, and is codified as Title 11 of the United States Code, entitled "Bankruptcy". Each section may be cited as "11 U.S.c. " and will hereafter be referred to as the "Code". The Code has been amended on numerous occasions since Section references hereafter, unless qualified, are to the Code. Real covenants are servitudes which may be enforced by actions at law for damages and if appropriate also in equity, as for instance by imposing a lien on the burdened property. Neposit vs. Immigrant Industrial Savings Bank, 278 N.Y. 248, 15 N.E. 2d 793 (1938). A real covenant imposes a personal liability upon the owner, occupant or tenant of a parcel with respect to obligations arising while such person enjoys or suffers such status. The liability of an owner or occupant under a real covenant is dependent upon status and not upon any implied contractual undertaking incident to the acceptance of a deed, the execution of a lease or occupancy of the parce~ although a deed or CC&R will often provide that by acceptance of a deed a grantee of a parcel burdened by the CC&R shall be deemed t.o agree to be liable under the covenants contained in such instrument. CC&RS and condominium declarations will on occasion require as a condition of transfer that the transferee agree in writing to be bound by such instrument. Such a provision though is generally not essential to enfnrcement and may often be included only out of fear by the draftsperson that a judge might not understand that a real covenant in itself can subject the owner of burdened real estate to personal liability. This may be a condominium declaration, master deed or Declaration of Covenants, Conditions and Restrictions" ("CC&R"). The term "CC&R" is used in this paper to refer to recorded documents that may altematively be referred to as "Declaration of Covenants, Conditions and Restrictions" "Reciprocal Easement Agreements" ("REA"), "Operating Agreements", "Operating Covenants", Operating and Reciprocal Easement Agreement ("OREA") or "Cross Easement Agreements" and pursuant to which one or more parcels of real estate are subjected to easements, restrictions and covenants or any of them in favor of each other or one or more other parcels. For condominiums these are states with condominium acts that include provisions such as 3-116(b) of the Uniform Common Interest Ownership Act that grant priority over first mortgages for up to six (6) months of assessments. Such a super-priority lien primes the lien of a mortgage that post dates formation of the common interest community. See In Re Yobe Electric, Inc., 30 B.R. 114, (Bankr. w.n. Pa 1983) 8. For the effect of such discharge, see 524 and for exceptions to a discharge see Copyright 1993 By Marvin Garfinkel All Rights Reserved 12 March 17, 1993 FSI-77575_2

13 10. Section 554 of the Code provides: (a) After notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. (b) On request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate. (c) Unless the court orders otherwise, any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor and administered for purposes of section 350 of this title. (d) Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate. 11. Reference to "trustee" hereafter unless otherwise specified, will, as provided for by 1117 of the Code, in the case of a Chapter 11 proceeding, include a debtor-in-possession. 12. A contrary approach would raise the unconstitutional impairment issue. See Section 3.4 below. 13. In re Moore, 109 B.R. 777 (Bkrptcy E.D. Tenn 1989) is perhaps the leading case on whether association assessments attributable to the period the trustee holds the unit may be collectable as an administrative expense. In its opinion the court sets out four approaches to determining whether an expense should be collectable as an administrative expense and concludes that on the basis of these criteria, under the circumstances of that case, assessments attributable to the period the trustee held the unit should not properly be charged as an administrative expense against the estate. The approaches are (1) administrative expense premised upon debtor's (trustee's) possession of the property, (2) administrative expense premised upon benefit to the estate, (3) denial of administrative expense status where there was lack of benefit to estate, and (4) denial where creditor acted in self interest. The court, in In re Moore, concluded that approach (1) is not applicable under the circumstance of In Re Moore since the estate was in liquidation and not reorganization. It also observed that the association's claim is secured by a lien. It may be noted by the author of this paper that, as a practical matter that lien is of little value in a number of cases, since often the first mortgage exceeds the value of the unit and the six months super lien, where it exists, is of little benefit if the mortgagee does not expeditiously foreclose. The association rarely has a practical approach to forcing the mortgagee to foreclose and if there is no active market for the unit, the mortgagee may have little incentive to foreclose and incur an ongoing assessment obligation. As to the second approach the court concluded that although the association provided services to the debtor's lots the association's primary motive was to service the other lots in the community. In In re Mishkin, 85 B.R. 18, 21 (Bankr. S.D.N.Y. 1988), a Chapter 11 case, the court observed that "... an administrative expense under See should reflect actual value conferred on the bankrupt estate... ") and concluded that the condominium association has failed to establish that any common charges should be treated as an administrative expense since it failed to demonstrate that the common charges were utilized to preserve or benefit the estate. See also In re Lentz, 90 B.R. 461 (Bkrptcy D. Colo 1988), In re Butcher, Bankr E.D. Tenn, 108 B.R. 634 (1989) (denied as administrative expense), In re Cheat/e, (WL Bankr D. Colo. 1993) (applies criteria of In re Moore, supra and denies claim of administrative expense for assessments since, as the court concludes, there was no demonstration of benefit to the estate), In re Rink, 87 B.R 653 (Bankr. D. Colo 1987) (an early case which without much analysis applies the possession approach and sustains the administrative expense treatment). Copyright 1993 By Marvin Garfmke1 AU Rights Reserved 13 March 17,1993 FSl-77575_2

14 14. Prior to the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No (1984) Code Section 524(a)(2) provided that a discharge operated as an injunction against enforcement of personal liabilities of the debtor and against "property of the debtor." Elimination against the reference to "property of the debtor" in 1984 was only a clarification of prior case law such as In Re Silliani, 9 B.R. 188 (Bankr. S.D. Fla 1981), National Bank and Trust Co of Columbia v. Williams 7 B.R. 234, (Bankr MD, Ga 1980), Polk County Fed. Savings & Loan Ass'n v. Weathers, 15 B.R. 945 (Bankr D.Kan 1981). 15. See discussion of approach (1) of the In re Moore case in fn In The Matter of Rosteck, (Appeal of Old Willow Falls Condominium Association) 899 F.2d 4941 (7th cir 1990) the Rosteck's purchased the condominium in April of 1983, the court reasoned that the association may realize on its assessment by foreclosing its lien if there is equity in the unit and that any inequity under which the debtor is permitted to reside in the unit with out paying assessments will be short lived. See In re Miller, 125 B.R. 441 (Bankr.W.D.Pa. 1991) (Chapter 7 debtors permitted to reopen case to reject condominium assessment agreement as executory contract where debtors relinquished ownership of unit shortly after the bankruptcy filing). In re Tumer, 101 B.R. 751 (Bkrtcy.D.Utah 1989) (debtor vacated unit prior to filing the Chapter 7 petition). In re Elias, 98 B.R. 332 (N.D.ill 1989); Berens v. Woodhaven Assn., 87 B.R. 971 (Bankr. N.D.l1l1988); In re Montoya, 95 B.R. 511 (Bankr S.D.Ohio 1988) (unit abandoned - court holds (at 513) that debtor's right to the unit was cut-off prior to the Bankruptcy. Mere statutory right of redemption not sufficient to impose assessment liability on discharged debtor especially where bankruptcy filing indicates surrender by debtor of that right. Any other holding would in the view of the court violate public policy to encourage a fresh start for the discharged debtor). See also Smith v. Smith, 81 B.R. 888 (Bankr.W.D.Mich 1988). In Cohen v. North Park Parkside Community Association, 122 B.R. 755 (Bankrcy. S.D. Coll991) the association does not appear to have argued that the assessment obligation is an affirmative covenant that runs with the land and thus subjects each successive owner to personal liability. Instead, according to the court, the association argued that the debtors did not become liable fer assessment until they are levied and thus the assessments levied after the discharge are post disch?jge obligations. The Court considered (at 758) the critical issue to be to determine when the debt arose and concluded that the Cohens' debt for "unmatured contingent homeowner's assessment" arose when they signed the CC&R's pre-petition and agreed to be liable for future assessments. The fallacy of this reasoning may be that the liability of the Cohens is continuous as long as they own the unit. It is not based only on their having signed a document. It is a personal liability of an owner of real estate under a real covenant which burdens such real estate and that runs with the land and is not eliminated by "rejecting" an executory agreement. See n See 502(c)(1). 18. In Rosteck the debtor did not occupy the unit after the case was closed. But see In Re Ryan discu:;sed at n. 18. '.9. Household Finance Corp. v. Hansberry, 20 B.R. 870 (Ohio 1981). This approach fails to distinguish between a prepetition contract and a real covenant running with the land. See n Stre/sky v. Aleandonia Knolls West Condominium Homes Council of Co-Owners, 46 B.R. 178 (Bkrtcy E.D. Va. 1985). In re Case, 91 B.R.102 (Bankr.D.Colo. 1988) (Condominium Declaration is covenant that attaches to and runs with the land and under state law ownership of unit and common areas cannot be severed. Debtor cannot continue to own unit, have benefit of upkeep and maintenance by association and avoid paying for such benefits). In re Horton, 87 B.R. 650 (Bankr.D.Colo 1987). Copyright 1993 By Marvin Garfinkel All Rights Reserved 14 March 17,1993 FS1.77S7S_2

15 21. In Re Harvey, 88 B.R. 860 (Blatcy N.D. III 1988) (Chapter 13 - assessments attributable to postpetition occupancy not within scope of discharge under Bi8 since not included within scope of plan and was for a long term debt which exceeded length of the plan, see Harvey at ). 22. Rink v. Timbers Homeowners Association, 87 B.R. 653 (Blatcy D. Colo. 1987). 23. In re Raymond, 129 B.R. 354 (Bankr.S.D.N.Y. 1991). 24. See In Re Ryan where the court held that for postpetition condominium assessments to be discharged as contingent prepetition debts, the discharged debtor must have scheduled that contingent, unmatured debt and wittrin reasonable time before or after filing the bankruptcy petition must relinquish possession and other incidents of ownership of the unit in clear and unequivocal terms. In Re Case, 91 BR 102 (Bankr. D.Colo 1988) Debtors remained in possession of their condominium unit after the filing of their Chapter 13 Petition in September of 1987 until December of 1987 and paid assessments until they vacated. The Court concluded that even if the Declaration were considered to be an executory agreement subject to rejection, it may not be partially rejected, [citing In Re Silver, 26 B.R. 526 Bankr.E.D. Penn. 1983] and that a rejection of a condominium declaration will, under Colorado law, terminate the declaration as to the debtors' interest in the unit and thus divest the debtors of their ownership of the unit and the debtor's right to use common areas and, under Colorado law, the ownership of the unit and rights to use the common facilities are not severable. 'The debtors cannot enjoy the benefit of ownership in part" (at 104). "If the debtors desired to end the continuing obligation to pay assessments, then they needed only to divest themselves of ownership by deeding the property to the lender." In Horton v. Beaumont Place Homeowners Association, Inc., 87 B.R. 650 (Bankry D.Colo, 1987) the debtors did not abandon the unit. Unfortunately this is not always so simple. In most jurisdictions a conveyance can only be effectuated by an acceptance of the deed by the grantee and a mortgagee that does not anticipate a market for a unit may wait to complete acquisition until after it has a purchaser, since the lender as owner will be liable for common charges once it takes title. 25. Carlson, Successor Liability in Bankruptcy: Some Unifying Themes of Intertemporal Creditor Priorities Created by Running Covenants, Product Liability and Toxic Waste Clean Up, 50 Law & Contemp. Prob. 119 (Spring 1987). 26. At footnote See Georskey v. Wildflower Landing Assoc., 49 BR 246, 249 (Bankr. M.D. Fla. 1985). 28. At 5 R.Powell, Real Property ~670(2) (P.Rohan Ed. 1977) U.S.c. Sec. 365, hereinafter in this article referred to merely as "Section 365". Unless otherwise qualified reference in this article to "the Code" is to the Bankruptcy Code (11 U.S.c. Sec. 101 et. ~., as amended). 30. A debtor may seek to relieve a parcel from all or certain of the burdens of recorded covenants in order for the debtor to more advantageously utilize the real estate as part of a plan of reorganization, to permit the realization by the debtor of a better price for the real estate upon sale, or perhaps, to achieve leverage with one or more of the adjacent owners or tenants whose properties are part of an overall plan of development and who would, but for such rejection, be entitled to the benefits of the covenant. Copyright 1993 By Marvin Garfinkel AU Rights Reserved 15 Mareh 17, 1993 FSI-77575_2

16 31. Under section 1107 of the code a debtor in possession in a chapter 11 proceeding has all of the rights of a trustee other than to receive compensation. As a result the word "trustee" as used in Section 365 may be read to. include a debtor in possession in a chapter 11 proceeding. 32. Sec 365(a). 33. Sec 365(g) 34. Although it is usually treated as an unsecured claim see n.35 as to the possibility of the damage claim may be treated as a secured claim if provision is made for such damages to be secured by a lien. 35. Sec 365(g)(I) 36. Although the author of this paper believes that it would be improper for a court to permit a 365 rejection of a real covenant, never the less because a court may permit such rejection it will often be advisable for the draftsperson to seek to provide for a lien to secure damages arising from breach of such covenant. See P.S. Walden and P.M. Costello, Technology Licensing: Protecting Licensees Against the Right of the Licensor's Insolvency, 3 Calif. B.. L. Pract. 57, 69 (1988) for a discussion of the possibility of a security interest being created to protect against a rejection in an analogous situation. 37. The term "Master Agreement" which is used in Section 365(b)(3)(c) dealing with adequate assurances of performance of a shopping center lease is probably intended to refer to shopping center reciprocal easement agreement ("REAs") and the like. Such adequate protection is required where there has been a default by the debtor or the lease is to be assigned by the debtor after an assumption. The term "Master Agreement" was apparently a term coined for purposes of the 1984 amendments to the Ballicruptcy Code that include this provision. 38. The Commission 071 the Bankruptcy Laws of the United States recommended against the term "executory contract" being defined for fear that any definition of such a "well understood" term risks an unintended omission or exclusion. Report of the Commission on the Bankruptcy Laws of the United States (pt. 1), H.R. Doc. No. 137, 39th Cong., 1st Sess (1973) Stat. 873 (1938). 40. Countryman: F..xecutory Contract in Bankruptcy, 57 Minn. L. Rev. 439, 479 (1973). 41. See Andrew, Executory Contracts in Bankruptcy: Understanding "Rejection", 59 U. Colo. L. Rev. 845, 856 (1988) Sec. 70b of the Act of 1938 in providing for rejection of executory agreements thus generally r.odified the prior case law. Under the case law as it existed prior to the adoption of Section ~3a(7) to the Bankruptcy Act the discharge granted to a bankrupt tenant would not cover tbe iandlord's damages resulting from reletting the premises after the commencement of the case sincf:. the claim was not in existence prior to the case commencement. Section 63a(7), although specifically adopted to cover lease obligations of bankrupt tenants, referred to It claims for damages respecting executory contracts including future rents." 42. Countryman, Executory Contracts in Bankruptcy, Part 1, 57 Minn L. Rev. 439, 450 (1973). Copyright 1993 By Malvin Garfinkel All Rights Reserved 16 March 17,1993 FSl-77575_2

17 43. This author believes that the first step in determining whether all or any portion of a CC&R is to be treated as an executory contract is to divide the various provisions of the CC&R document in sets of dependent covenants, restrictions and easements. Each such set should then be analyzed separately from the others. In n.6 of the opinion of the Court in Nat. Labor Rei. Board v. Bildisco and Bildisco, Debtor In Possession Justice Rehnquist concludes that "... the legislative history of 365(a) indicates that Congress intended the term ("Executory Contract"] to mean a contract "on which performance remains due to some extent on both sides." The Justice does not include Professor Countryman's requirement that these remaining obligations be material and dependent so that a breach by on party excuses performance by the other. There may therefore be a significant difference between the definition of the Bildisco court and that of Professor Countryman. See Matter of Shelter Development Group, Inc., 50 B.R. 588 (Bkrtcy S.D. Fla 1985); In Re Gardinier, Inc., 831 F.2d 974 (11th Cir.1987); In Re Central Florida Fuels, Inc.89 B.R. 242 (Bkrptcy MD. Fla 1988). 44. Id at Id. at "Obtain a large piece of stone. Take hammer and chisel and knock off anything that doesn't look like an elephant." Id. at n See 20 Am Jur 2d Sec. 8, Covenants, Conditions, and Restrictions. 48. Article 1, Section 8, Clause 4 of the United States Constitution. 49. See United States Natll Bank v. Pamp, 83 F.2d 493,502 (8th Cir. 1936), In re Penn Cent. Transp. Co., 454 F.2d 9, 13 n.10 (3d Cir. 1972). This constitutional issue was mooted by Sec. 365(h)(1) of the Bankruptcy Code in the situation in which the debtor lessor rejects a lease. Rogers, The Impairment of Secured Creditors' Rights in Reorganization: A Study of the Relationship Between the Fifth Amendment and the BanJauptcy Clause, 96 Harv. L.R. 973, 997 (1983) Accord, Jackson, Avoiding Powers in BanJauptcy," 36 Stan L. Rev. 725, 736 n. 29 (1984) U.S. 555, 589 (1935). The Frazier-Lemke Act that was held unconstitutional in Radford provided for a five year stay of foreclosure proceeding during which period the owner debtor remained in possession and paid to his creditors the rental value of the property and had a right to acquire the property by paying the appraised value to be distributed among the creditors. 51. Justice Brandeis' observation in the Louisville Joint Stock Land Bank case is often used to support the so called Unconstitutional Impairment Thesis which might well be the foundation of the adequate protection (Bankruptcy Code Sees ) provisions of the Bankruptcy Code and the rather complicated cram down provisions. See In re American J(jtchen Foods, 2 Bankr. Ct. Dec. (CRR) 715 (Bankr. D. Me. June 8, 1976). Bankruptcy Code Sec. 1129(b). In United States v. Security Industrial Bank 459 U.S. 70, 75, 103 S.Ct. 407, 410, 74 L.Ed. 2d 235(1989) the banjauptcy power was treated as being subject to Fifth Amendment review U.S.48, 59 L.Ed2d 136, 995 S.Ct.914(1979). See also Lewis v. Manufacturers National Bank, 364 U.S. 603,609,81 S.Ct. 347,350,5 L.Ed.2d Julis, Classifying Rights and Interests Under the BanJauptcy Code, 55 Am. Bank. L.J. 223, 252 (1981). Copyright 1993 By Marvin Garfmkel All Rights ReselVed 17 March 17, 1993 FSI-77575_2

18 54. See Inwood North Homeowners' Association, Inc. v. Harris, 736 S.W. 2d 632 (1987). In In Re 523 East Fifth Street Housing Preservation Development Fund Corp., 79 Bankr. 568 (Bankr. S.D. N.Y. 1987) the court held that a covenant contained in deed conveying property from the city to a purchaser that became a Chapter 11 debtor and that required the property to be used solely for lowincome housing was not an executory contract since it touched and concerned the land and ran with the land. The reasoning of this discussion should be valid even though the touch and concern doctrine itself has in most jurisdictions probably been displaced by modern servitude law. See French, Toward a Modern Law of Servitudes: Reweaving the Ancient Straws, 55 So. Calif. L. Rev. 1261, (1982). 55. When covenants restricting land use are imposed pursuant to a common scheme of development, they exist especially for the mutual benefit and protection of the grantees of that scheme. All grantees under that scheme are deemed beneficiaries and are entitled to enforcement of the covenants against all other grantees; such covenants create property rights. Gaspare v. American Tien'a Corp., No slip op. (V.S.D.C. Utah October 19, 1982): (A reciprocal easement agreement was executory because it had not been agreed upon, title had not been conveyed, payment had not been made and the closing had not occurred.) Contra In Re Coordinated Finuncial Planning Corp., 65 Bankr. 711 (9th Cir. BAP 1986): Although a right of first refusal for purchase of real property was, under the applicable provisillns of the California Code, a covenant running with the land and thus enforceable against the covenantor's successor in interest, it was also an executory contract which could be assumed or rejected by a trustee in bankruptcy of the debtor that owned the burdened estate. In support of this conclusion, the court cites the Countrymen article and In Re Waldron, 36 B.R. 633 (Bankr. S.D. Fla. 1984). 56. To say that a servitude may be creat.ed by contract (see 2.1 Restatement of the Law Servitudes Ten. Draft No.1, AprilS, 1989.) is not necessarily to say that once so created the rights under the REA are "contract rights" that are subject to Section See Westbrook, A functional Analysis of Executory Contracts, 74 Minn. L. Recv 227,(1989) where Professor Westbrook in his article on executory contracts in bankruptcy. Professor Westbrook advances the concept of what he calls an "Interest in the Thing Itself' (258). (The "In") This is "An interest in a specific asset that entitles the owner of the interest to the asset itself, or to a priority pa)ment of the proceeds of the sale " 58. For non bankruptcy purposes a "contract right" is a "property right", especially for purposes of constitutional anci!ysis. See also Andrew, Executory Contracts in Bankruptcy: Understanding "Rejection". 59 V. Colo L. Rev 854,924 (1988). Copyright 1993 By Marvin Garfinkel All Rights Reserved 18 March 17, 1993 FS _2