Opinion
CASE NO. 01-09067-AJM-13
February 27, 2002
David Krebs, for the Debtor
Matthew Griffith, for Steeplechase
ENTRY ON OBJECTION TO CONFIRMATION OF PROPOSED PLAN AND PETITION FOR PAYMENT OF PRE — AND POST — PETITION ASSESSMENTS
The Debtor, Donald Leroy Smith (the "Debtor") owns four (4) condominium units (the "Units") in a residential development known as Steeplechase West. The Units are subject to the Declarations of Covenants, Conditions and Restrictions of Steeplechase West (the "Covenants") and are enforced by the Steeplechase West Homeowners Association, Inc. ("Steeplechase"). Among the Debtor's obligations under the Covenants is the payment of a monthly fee (the "Assessments") in exchange for services provided to unit owners through Steeplechase.
The Units are all located at Aintree Place, Indianapolis, Indiana, and the unit numbers are: 6514, 6517, 6532 and 6541.
The Debtor filed his voluntary petition for relief under Chapter 13 on June 13, 2001 (the "Petition Date") and, as of the Petition Date, the Debtor owed past due Assessments under the Covenants. The Debtor does not dispute his obligation to pay the Assessments that accrue post-petition.
The Debtor's chapter 13 plan filed on August 7, 2001. In the section of the plan that dealt with the treatment and payment of allowed secured claims, the plan provided for each of the Units that "Steeplechase West Homeowners Association shall not retain a lien on the debtor's residential real estate . . . for any prepetition dues owing". Steeplechase objected on September 17, 2001 to confirmation of the plan and petitioned for payment for the Assessments that have accrued both pre and post petition ("the Objection"). Hearing on confirmation of the plan and the Objection was held on December 18, 2001 wherein the Debtor appeared by counsel, David Krebs; Steeplechase appeared by counsel, Matt Griffith. The Court gave the parties the option of filing post-hearing memoranda or citation of authorities within thirty (30) days and the last of these was filed on January 22, 2002.
Because this is a contested matter under Federal Rule of Bankruptcy Procedure (F. R. Bankr. P.) 9014, F. R. Bankr. P. 7052 applies, and this entry constitutes findings of fact and conclusions of law under that rule.
Steeplechase contends that the Debtor owes $3,687.88 in pre petition assessments (the "Pre Petition Assessments") and, as of the date of the Objection, $600 in post petition assessments (the "Post Petition Assessments") as well as $1,967.40 in attorneys fees. Since the Debtor does not dispute his continuing obligation to pay the Post Petition Assessments, the Court will address only the treatment of the Pre Petition Assessments.
Steeplechase objects to the treatment of the Pre Petition Assessments under the Plan on the basis that those assessments are administrative expenses of the estate and therefore should be paid in full under the Plan. Steeplechase bases this objection on its contention that the Covenants that gave rise to the Assessments are an executory contract under § 365 and, the Debtor must either assume that contract and bring current all Pre Petition Assessments and give adequate assurance of future performance (payment) of the Post Petition Assessments, or Steeplechase should be given relief from the stay to foreclose its interests in the Units. Steeplechase also contends that any unpaid assessments — pre or post petition — are entitled to administrative priority status under § 503(b) (and § 507(a)(1).
Covenants as Executory Contracts
The crux of Steeplechase's Objection to confirmation of the Debtor's Plan is that the Covenants are a contract, and are an executory contract at that, since obligations remain due on both sides. Although there is a split of authority among the several courts that have considered the issue, the Seventh Circuit Court of Appeals has concluded that restrictive covenants that govern the rights of homeowners in a residential subdivision are not contractual in nature, much less executory contracts, but rather are in the nature of a property interests that run with the land. Gouveia v. Tazbir, 37 F.3d 295, 298 (7th Cir. 1994). And, if those types of restrictive covenants are not executory contracts, then the covenants governing the rights and duties of condominium unit owners are not either, and courts have clearly so held. See, In re Beeter, 173 B.R. 108, 113-116 (Bankr. W. D. Tex. 1994) (holding that the declaration of covenants with respect to a condominium unit was not an "executory contract" where the debtor brought an action for violation of the post petition injunction under § 524 for attempted collection of post petition assessments); In re Raymond, 129 B.R. 354, 357-359 (Bankr. S.D.N.Y. 1991) (declaration was a covenant that "attaches to and runs with the land" and therefore, not an executory contract).
If the Covenants are an executory contract, it would be capable of rejection by the Debtor. However, the nature of the Covenants here do not easily lend its classification as an executory contract.
Although § 365 of the Bankruptcy Code does not define it, the oft-cited definition of an executory contract is a contract "under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure to either to complete performance would constitute a material breach excusing the performance of the other". Countryman, Executory Contracts in Bankruptcy (Pt.1), 57 Minn. L.Rev. 439, 460 (1973). The Covenants presumably defines the rights and obligations of not only the Debtor but all other unit owners and creates the unique combination of the Debtor's individual ownership interests in his Units, together with the inseparable and undivided ownership interests that he shares with other unit owners in the common elements such as sidewalks, parking lots and common areas. See, Raymond, 129 B.R. at 358; Beeter, 173 B.R. at 108.
Applying the Countryman definition, if Steeplechase's obligations under the Covenants (to maintain parking lots, common hallways and other common areas) and the Debtor's obligations under the Covenants (presumably, payment of the assessments) were so unperformed that the failure of the Debtor to complete performance (pay) would constitute a material breach excusing the performance of Steeplechase (to maintain common areas), then the Covenants would be executory. But, "[O]ne cannot purchase a condominium without also purchasing the undivided interest of the common areas. One cannot be excluded from the common areas once one has become an owner of a unit, whether or not one actually pays the assessments". Beeter, 173 B.R. at 115-116. So, the Debtor cannot carve out and reject his obligations under his undivided ownership interest in the common elements and area because, "[O]ne will still park one's car in the parking lot or garage, will still walk on the sidewalk to get to the unit, and still have one's way lit by the lights in the common area, whether or not the association dues have been paid". Beeter, 173 B.R. at 116. Because such obligations with respect to the common areas are indivisible and inseparable, the "benefits and burdens" under the Covenants are not executory and therefore treatment of the Pre Petition Assessments or their payment or priority in the Plan is not governed by § 365. To the extent Steeplechase relies on references in § 365 to award it an administrative claim under § 503(b), it will not be awarded an administrative claim because § 365 does not control. Furthermore, apart from any § 365 section, Steeplechase has not demonstrated under § 503(b) how the Pre Petition Assessments qualify as "actual, necessary costs and expenses of preserving the estate". With no proven § 503(b) administrative claim, § 507(a)(1) does not apply.
In summary, the limited question the court is faced with is whether the Covenants is an "executory contract" under § 365, and whether, because of its alleged § 365 character, and the evidence in the record, the Pre Petition Assessments are entitled to administrative status priority. The Court holds "no" to both questions. Accordingly, Steeplechase's objection is OVERRULED.