In re the Spa At Sunset Isles Condo. Ass'n Inc.

454 B.R. 898

55 Bankr.Ct.Dec. 66

In re the SPA AT SUNSET ISLES CONDOMINIUM ASSOCIATION, INC., Debtor.

No. 10–33758–PGH.

United States Bankruptcy Court, S.D. Florida,West Palm Beach Division.

July 13, 2011.

OPINION TEXT STARTS HEREWest CodenotesLimited on Preemption GroundsWest's F.S.A. §§ 718.115, 718.116(1)(b), 718.303

Bradley S. Shraiberg, for Debtor.

ORDER GRANTING IN PART DEBTOR'S MOTION FOR SURCHARGE PURSUANT TO 11 U.S.C. § 506(c) AGAINST ONEWEST BANK

PAUL G. HYMAN JR., Chief Judge.

THIS MATTER came before the Court upon The Spa at Sunset Isles Condominium Association, Inc.'s (the “Debtor”) Motion for Surcharge Pursuant to 11 U.S.C. § 506(c) (the “Motion”) and OneWest Bank FSB's (“OneWest”) ¹ Response. The Debtor filed the Motion pursuant to its Plan of Reorganization (D.E. 31) (the “Plan”),² which the Court approved on February 15, 2011 (the “Confirmation Hearing”). Of the numerous banks that are the target of the Motion, only OneWest filed a Response. In this Order, the Court will address OneWest's substantive arguments and grant the Motion in part as it relates to OneWest. The Court will enter a separate order as to the banks that did not object to the Motion.

The Court held an initial hearing on the Motion on March 8, 2011, and an additional hearing on June 21, 2011 to clarify several material facts. At both hearings, the Debtor offered evidence and proffered facts without objection. Additionally, the Debtor and OneWest each submitted written proposed orders (D.E. 152 and 153, respectively), as well as a Joint Stipulation of Facts (the “Joint Stipulation”) (D.E. 149). The Court, having considered the Debtor's exhibits and proffers, the written proposed orders, and the Joint Stipulation, hereby makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

1. The Debtor's Background

The Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code on August 12, 2010 (the “Petition Date”). The Debtor is a condominium association, a Florida not-for-profit corporation created in connection with the formation of the Spa at Sunset Isles Condominium (the “Condominium”), as reflected by the Condominium's Declaration of Condominium (the “Declaration”). ³ Pursuant to the Declaration and applicable Florida law, the Condominium is comprised of three classes of real property: (1) 232 individual residential apartment units (a “Unit” or “Units”), as described in the Declaration; (2) Common Elements, comprised of all portions of the Condominium other than Units and Limited Common Elements; and (3) Limited Common Elements, comprised of any portion of the Common Elements which serves one or more Units but, by its nature, cannot serve all Units.⁴

Florida law and the Declaration govern the relationship between the Debtor, the Common Elements, and individual Units. Appurtenant to each Unit is an undivided interest in the Common Elements, apart from which a Unit cannot be conveyed or encumbered separately. The Debtor is required to maintain the Common Elements, and is the only person or entity permitted to do so under the Declaration and applicable Florida law. Virtually all of the Debtor's revenues are generated through the collection of Assessments, as defined in the Declaration, paid by the owners of individual Units in the Condominium. Pursuant to Florida law, the Debtor has a lien on each Unit to secure the payment of Assessments (an “Assessment Lien”). In this case, each of the Debtor's Assessment Liens is inferior to the mortgages on each Unit in the Condominium.

In 2006 and 2007, sales of Units took place during a so-called condo-conversion, with Units selling for an average sale price of approximately $250,000.00. Today, there is a recorded first mortgage encumbering the overwhelming majority of Units in the Condominium, with a recorded second mortgage also encumbering many Units. The average first mortgage debt against Units as of June 21, 2011 was approximately $218,000.00 per Unit. As of that same date, the average value of a Unit was approximately $48,000.00. There is not sufficient equity in any Unit to exceed the amount of that Unit's first mortgage. In other words, every second mortgage and Assessment Lien is completely undersecured.

2. The Foreclosure Proceedings

Prior to the Petition Date, mortgage lenders (the “Foreclosure Plaintiffs”) initiated more than 180 mortgage foreclosure proceedings (the “Mortgage Foreclosure Proceedings”) against Unit owners within the Condominium. Because a Unit cannot be conveyed separately from its interest in the Common Elements, the Common Elements constituted part of the collateral in every Mortgage Foreclosure Proceeding.⁵ The Debtor has an interest in these Units by virtue of its statutory obligation to maintain the Common Elements, and by virtue of its Assessment Liens. Consequently, Foreclosure Plaintiffs named the Debtor as a defendant in each Mortgage Foreclosure Proceeding. In most of these Proceedings, the Foreclosure Plaintiffs faced either token or no opposition. Nevertheless, over 100 Mortgage Foreclosure Proceedings were pending as of the Confirmation Hearing. These cases were pending for an average of 736 days, with the oldest one-third pending for an average of over 1011 days. The parties stipulate that there is no good reason for an undefended mortgage foreclosure case in Palm Beach County to last more than 180 days.

Pursuant to the Declaration ⁶ and Florida law, in a non-bankruptcy context the Foreclosure Plaintiffs would not be required to pay Assessments for the maintenance of the Common Elements until they took title to their respective Units. Because the Debtor relies on Assessments to generate revenue, the delays by the Foreclosure Plaintiffs in completing their Mortgage Foreclosure Proceedings devastated the Debtor's normal cash flow and depleted the Debtor's financial reserves. This forced the Debtor to raise Assessments on the owners within the Condominium who do timely pay their Assessments and drastically cut back on maintenance and repairs of the Common Elements. The Debtor asserts that the Foreclosure Plaintiffs are deliberately failing to timely prosecute their Mortgage Foreclosure Proceedings in order to delay taking title to their respective Units. The Court notes that on September 17, 2010, the Court granted full relief from stay in this case for all of the Foreclosure Plaintiffs to complete their respective Mortgage Foreclosure Proceedings (D.E. 22).

OneWest disputes that it has deliberately delayed taking title to at least two of the Units on which it holds first mortgages, Unit 307 and Unit 1704. ⁷ OneWest's Mortgage Foreclosure Proceeding on Unit 307 commenced in Palm Beach County Circuit Court in July 2008. In April 2010 the owner of Unit 307 entered bankruptcy under Chapter 13, and OneWest was required to retain new counsel in December 2010.⁸ Both of these events delayed the Mortgage Foreclosure Proceeding against Unit 307, which is currently still pending. The Mortgage Foreclosure Proceeding against Unit 1704 commenced in Palm Beach County Circuit Court in June 2008, was unopposed, and resulted in the entry of defaults against all defendants. As with the Unit 307 matter, however, the Mortgage Foreclosure Proceeding was delayed in January 2011 when OneWest was required to retain new counsel.

Pursuant to its Plan,⁹ the Debtor filed its own foreclosure actions in Palm Beach County Court against certain Units, including Units 307 and 1704. The Debtor's foreclosure action against the owner of Unit 307 commenced in August 2010 and is still pending. The Debtor's foreclosure action against the owner of Unit 1704 commenced in September 2010 and was completed in February 2011. The Debtor received a Certificate of Sale and then a Certificate of Title for Unit 1704 in March 2011, and executed a deed conveying Unit 1704 to OneWest in April 2011. Accordingly, OneWest now owns Units 1704. ¹⁰ As previously indicated, however, every Unit is worth less than the amount of the Unit's first mortgage, and each Assessment Lien is inferior to each first mortgage. Thus, the Debtor's successful prosecution of any foreclosure action, including against Unit 1704, could not result in any recovery to the Debtor for its underlying claim for past-due Assessments.

3. The Motion and the Response

Notwithstanding the Foreclosure Plaintiff's failure to pay Assessments, and the Debtor's corresponding decline in revenue, the Debtor continued to incur the cost of maintaining the Common Elements since the Petition Date. In the seven-month period between the Petition Date and the first hearing on the Surcharge Motion, the Debtor incurred the following costs:

+---------------------------------------+
¦Contract Labor:            ¦$ 91,108.66¦
+---------------------------+-----------¦
¦Insurance:                 ¦$ 81,821.48¦
+---------------------------+-----------¦
¦Repairs & Maintenance:     ¦$ 33,229.09¦
+---------------------------+-----------¦
¦Telephone:                 ¦$ 5,032.31 ¦
+---------------------------+-----------¦
¦Utilities:                 ¦$ 21,064.33¦
+---------------------------+-----------¦
¦Total:                     ¦$232,255.87¦
+---------------------------------------+

These expenses included electricity for the Common Elements, including the sprinkler system and security gates; telephone service, including service for the security system; water for landscaping; alarm service; swimming pool service; insurance for the Common Elements; electrician service; air conditioning service and replacement; security gate repair and maintenance; plumbing service and annual back-flow preventer inspections; employment of property management; supplies for the repair and maintenance of the Common Elements; and office supplies and equipment for property management staff. The Debtor continued to incur these costs through the Effective Date of the Plan.

OneWest acknowledges that all of these expenditures were necessary for the operation of...