Puerto Rico HOA Creditors Take Another Hit in Bankruptcy

Puerto Rico HOA Creditors Take Another Hit in Bankruptcy

Last February, Judge Lamoutte held that a lien created under the Puerto Rico Condominium Act, Act No. 129-2020, for an apartment owner's liability for common expenses, is not a statutory lien. As a result, Judge Lamoutte held that such lien had to be registered in the Property Registry in order to constitute a security interest over an apartment.

Judge Lamoutte was not persuaded by the ESJ HOA’s argument that Act 129-2020 eliminated the requirement that such lien be registered in the Property Registry, since the prior act expressly required such registration, and the new one did not. For Judge Lamoutte, the creation of a “legal mortgage” had to be “stated in clear terms”, a requirement which Act 129 lacked.

In April, Chief Judge Cabán reached a similar conclusion by rejecting arguments similar to those raised by the ESJ HOA (chapter 11), this time by Condominio Pine Grove HOA in a chapter 13 case. The court concluded that the HOA did not have a statutory lien over the debtor’s property.

However, the HOA had a fallback argument. The HOA also claimed a judicial lien over the same property by virtue of a pre-petition state court attachment.

The problem with this fallback argument was that, after the senior liens, there was no equity in the property. Citing In re Mann, 249 BR 831, 834 (B.A.P. 1st Cir. 2000) as support, the Chief Judge recently concluded that the HOA’s claim was “a wholly unsecured claim.” As such, it was not entitled to the protection of the anti-modification provision (§1322(b)(2)) and could be stripped.

It is worth noting that even if the property had sufficient value to secure the HOA’s claim, the debtor argued that the judicial lien should be avoided under §522(f) because it impaired the debtor’s homestead exemption. The court did not reach this argument.