Opinion
In Bankruptcy Case No. 97-22293-BKC-PGH, Adversary No. 00-2041-BKC-PGH-A
October 2000
OPINION
The issue before the Court is whether the Chapter 7 trustee of a not-for-profit homeowners' association has the authority to make and collect assessments from the individual homeowners of the Debtor in order to pay the valid claims of the Debtor.
The Debtor, Westwood Community Two Association, Inc., is a not-for-profit homeowners' association under Florida law. Peter Martin, John Lewis, and Mark and Linda Menzano are creditors of the Debtor. The creditors were involved with the Debtor in litigation regarding the Federal and Florida Fair Housing Acts. After losing at every stage of the Florida court system, the Debtor filed a voluntary petition pursuant to Chapter 7 of the Bankruptcy Code on April 16, 1997. John Barbee was appointed as the Chapter 7 trustee for the estate of the Debtor.
The Debtor ceased operating as a homeowners' association upon the filing of the Chapter 7 petition. The Trustee's application to operate the business of the Debtor was denied on June 26, 1997.
Mr. Martin, Mr. Lewis, and Mr. and Ms. Menzano filed claims against the Debtor. The Trustee filed objections to the claims, and an evidentiary hearing was held on April 20 and 21, 1999. All parties in interest, including the individual homeowners, were notified of the Trustee's objections and the evidentiary hearing.
A number of the homeowners appeared at the hearing.
On June 29, 1999, the Court entered an Order Determining Allowed Claims. Mr. Martin was allowed a general unsecured claim of compensatory damages in the amount of $83,386.95, and a claim for punitive damages in the amount of $150,000. Mr. Lewis was allowed a general unsecured claim of compensatory damages in the amount of $126,079.70, and a claim for punitive damages in the amount of $250,000. The Menzanos were allowed a general unsecured claim of compensatory damages in the amount of $112,372.57, and a claim for punitive damages in the amount of $500,000. The Debtor's total liability on these claims is $321,839.22 for compensatory damages and $900,000 for punitive damages. The large amount of these damages was warranted by the illegal and thoroughly reprehensible conduct of the Debtor and its individual members.
The Court has rarely seen conduct as mean-spirited as that displayed by the Debtor and so deserving of punitive damages. 11 U.S.C. § 704(1) provides that it is the duty of the trustee to "collect and reduce to money the property of the estate for which such trustee serves. . ." The chapter 7 trustee acts as a fiduciary to all of the creditors of the bankruptcy estate. In re Krikava, 236 B.R. 701, 707 (Bankr.D.Neb. 1999). The chief duty of the trustee is to realize the maximum from the estate for distribution to the creditors. In re Cowan, 235 B.R. 922, 924 (Bankr.W.D.Mo. 1999).
11 U.S.C. § 541(a)(1) provides that "property of the estate" includes "all legal and equitable interests of the debtor in property as of the commencement of the case." The statutory definition of property of the estate is broadly construed. In re American Way Service Corp., 229 B.R. 496, 537 (Bankr.S.D.Fla. 1999). A fundamental purpose of the Bankruptcy Code is to place property of the estate, wherever found, under the control of the court for equal distribution to the creditors of the bankruptcy estate. In re QC Piping Installations, Inc., 225 B.R. 553, 564 (Bankr.E.D.N.Y. 1998). While the question of whether a debtor's interest in property is property of the estate is a question of federal law, the nature and extent of the debtor's interest in property is determined by applicable non-bankruptcy law. Butner v. United States, 440 U.S. 48, 99 S.Ct. 914 (1979). 11 U.S.C. § 323(a) provides that "[t]he trustee in a case under this title is the representative of the estate."
Accordingly, the trustee stands in the shoes of the debtor for the purpose of asserting or maintaining the debtor's causes of action which become property of the bankruptcy estate upon filing. In re Rare Coin Gallery of America, Inc., 862 F.2d 896, 901 (1st Cir. 1988). However, the bankruptcy trustee has no greater rights in estate property than the debtor had on the date the case was commenced. In re Borison, 226 B.R. 779, 787 (Bankr.S.D.N.Y. 1998).
In an effort to fulfill his fiduciary duty to conserve estate assets and to maximize distributions to creditors, the Trustee in this proceeding has levied a special assessment against the members of the homeowners' association who owned real property in the community in the amount of $7,250 each. This assessment was made in order to satisfy the allowed claims in this case and the costs of administration. As of May, 2000, the Trustee has collected approximately $475,000 in special assessments from a limited number of the homeowners in the community.
Edward Klein has filed adversary proceeding number 00-2041-BKC-PGH-A seeking to enjoin the Trustee from levying the special assessment. In addition, a separate disgruntled group of homeowners calling itself the "Unofficial Ad Hoc Committee for Westwood Community Two Association, Inc." has filed a "Motion for Entry of an Order Pursuant to 11 U.S.C. § 704 Directing the Trustee to Immediately (i) Cease Engaging in Unlawful Actions and (ii) Return Funds Previously Received From Members of the Committee in Response to Unlawful Assessment Demand." Both Mr. Klein and the Committee challenge the Trustee's authority to make the special assessment.
The Bankruptcy Trustee succeeds only to the rights which the pre-petition Debtor could assert prior to the filing of its petition in bankruptcy. In this proceeding, the Debtor is a corporation, and the Trustee succeeds to the rights of the Debtor as set forth in the Articles of Incorporation, the Declaration and By-Laws. The Trustee may not assert rights or impose duties beyond those provided for in those documents prior to the filing of the bankruptcy petition. Thus, the Court must examine the relevant documents to determine whether the Trustee has the authority to make the special assessment at issue in this proceeding.
Article 8 of the Declaration of Restrictions provides as follows:
The owner of each IMPROVED LOT in the SUBDIVISION is hereby made liable to the DEVELOPER, its successors or assigns (including the ASSOCIATION) for a pro rata share of the actual cost (including taxes and insurance) of the operation, maintenance and repair of the recreational and parking facilities. . .
Article 7 of the Declaration of Restrictions provides as follows:
. . . the ASSOCIATION shall have a lien on each LOT in the SUBDIVISION for any unpaid assessment made by the. . . ASSOCIATION
Article 13 of the Declaration of Restrictions provides as follows:
ENFORCEMENT. These restrictions and requirements may be enforced by an action at law or in equity by any of the LOT OWNERS in the SUBDIVISION, the DEVELOPER, or the ASSOCIATION.
Article II, Section (4) of the Articles of Incorporation provides as follows:
The Association shall make and collect such assessments as are necessary to perform each and every duty and responsibility expressly conferred upon it by these Articles and as set forth in the heretofore mentioned Declaration of Restrictions to be assumed by this Association.
Section 4.8 of the By-Laws provides as follows:
As more fully provided in the Declaration of Restrictions, each member is obligated to pay to the Association annual and/or monthly special assessments which are secured by a continuing lien upon property against which the assessment is made.
Mr. Klein and the Committee argue that the Trustee's pro rata assessment of $7,250 for payment of compensatory and punitive damages does not fall within "the operation, maintenance and repair of the recreation and parking facilities" of the Association. The Trustee argues that the Martin, Lewis, and Menzano claims arose from the manner in which the Debtor operated its business. A brief review of the Martin, Lewis, and Menzano claims is helpful at this point.
The claims of Martin, Lewis, and Menzano arose from the Debtor's systematic program of discrimination against the claimants. Both state and federal courts have found the Debtor's actions to be in violation of the Federal and Florida Fair Housing Acts. This Court found, after an evidentiary hearing, that it was not the individual acts of a few "mean people" in the community, but rather a pervasive scheme which was approved by the membership of the homeowners' association, either explicitly or tacitly. The Debtor filed lawsuits against the claimants seeking to harass and intimidate them. Publications in the Debtor's newsletter regularly demeaned the claimants and urged the membership to undertake retaliatory actions. Signs were posed at the clubhouse in direct violation of court orders alleging that an age restriction was in force. Members of the Debtor were encouraged to terminate their lawn service with Mr. Lewis. Baseless criminal and assault charges were fined against Mr. Lewis. In sum, the Debtor and its members did everything possible to insult, intimidate, embarrass and humiliate the Claimants. As a result, the Claimants suffered significant emotional pain and suffering, strains on their physical and mental health, and financial hardship.
The Committee and Mr. Klein argue that the above actions did not occur in the "operation, maintenance, and repair of the recreational and parking facilities" of the Debtor. They correctly note that the recorded Declaration of Restrictions, Articles of Incorporation, and By-Laws do not give the Debtor the power to impose age or familial status restrictions upon the subdivision or to screen prospective occupants. See Westwood Community Two Association, Inc. v. Lewis, 687 So.2d 296 (Fla. App. 1997).
The sole purpose of the Debtor under the governing Declaration is to maintain the pool, clubhouse and common areas. Because the violations of the Federal and State Fair Housing Acts which form the basis of the Claimants' claims do not have anything to do with the operation and maintenance of the recreational and parking facilities, they argue that the Trustee is without the authority to make the special pro rata assessment.
The argument of the Committee and Mr. Klein misses the mark.
The basis of the claims is not relevant to this proceeding. Mr. Lewis, Mr. Martin, and the Menzanos filed claims in this case, the Court held a hearing on the Trustee's objections to the claims, and the Court found the claims to be valid. The Trustee, as the legal representative of the homeowners' community at large, has a legal obligation to satisfy the claims as determined by the Court. The Trustee has a fiduciary obligation to exercise control over all property of the estate, including the assessment power, to satisfy the valid claims against the Debtor. If the Trustee is denied the right to exercise the special assessment power, then the claimants would ultimately be permitted to garnish the Debtor's bank accounts and execute against the Debtor's leasehold interests in the real property on which the clubhouse and pool are located. The Debtor is obligated by the Declaration of Restrictions to maintain these common areas. Therefore, the Trustee has the authority under the Declaration of Restrictions to make the pro rata assessment of $7,250 because such assessment is necessary for the operation and maintenance of the Debtor's recreational and parking facilities.
For the foregoing reasons, the relief requested by Mr. Klein and the Unofficial Ad Hoc Committee for Westwood Community Two Association, Inc. is denied, and judgment is entered in favor of the Trustee.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons set forth in an Opinion entered this day,
IT IS HEREBY ORDERED that the Committee's Motion filed March 31, 2000, be and is hereby denied.
IT IS FURTHER ORDERED that Plaintiff Edward Klein's adversary complaint to enjoin John P. Barbee, Trustee, be and is hereby denied.