United States Court of Appeals for the 3rd Circuit Limits Enforcement of the Lien for Assessments to Actions in Foreclosure
On June 9, 2014, the United States Court of Appeals for the 3rd Circuit, in a bankruptcy matter titled In re Kelly L. Mankowka, held that the lien for assessments created by Section 5315 of the Pennsylvania Planned Community Act (68 PA.C.S.A. Section 5101 et seq – the Act), can only be preserved for statute of limitation purposes, by an in rem foreclosure action. Consequently, the filing of a money judgment suit against the unit owner was held insufficient to toll the three year statute of limitations for enforcement of the lien. In the context of bankruptcy therefore, the statutory lien for assessments accruing more than three years prior to the filing of a bankruptcy, unless enforced by an action in foreclosure, is unenforceable.
In this case, the debtor owns a home in Pocono Mountain Lake Estates, a Pennsylvania Planned Community (Association) as defined under the Act. Ms. Mankowka became delinquent in the payment of assessments in 2005, as a result of which the Association filed for and obtained (in 2008 and in 2010) two money judgments against her. A Chapter 13 bankruptcy was filed just prior to a sheriff’s execution sale. Although the debtor acknowledged existence of the Association’s self-executing statutory lien for assessments pursuant to Section 5315 of the Act, she sought to avoid a portion of the lien on statute of limitations grounds. She argued that proper enforcement of the lien could not proceed through the obtainment of in personam money judgments. As the Association had chosen to seek money judgments rather than to implement foreclosure proceedings against the unit, she maintained that the statute of limitations on enforcement of the lien barred any claims accruing more than three years prior to the date of bankruptcy.
Initially, the US Bankruptcy Court for the Middle District of Pennsylvania denied her motion to avoid the lien, holding that the Association had indeed preserved the lien by pursuing money judgments against the debtor. On appeal however, the United States District Court for the Middle District of Pennsylvania and the United States Court of Appeals for the 3rd Circuit reversed the Bankruptcy Court in an attempt to reconcile competing Pennsylvania appellate decisions from the Superior Court [Forest Highlands Community Association v. Hammer, 903 A.2d 1236 (Pa. Super. 2006)] and Commonwealth Court [Commonwealth Court London Towne Homeowners Association v. Karr, 866 A.2d 447 (Pa. Cmwlth. 2004)]. Absent consideration of this issue by the Supreme Court of Pennsylvania, the U.S. Court of Appeals was called upon to predict how the highest court of Pennsylvania would rule.
It is of course undisputed that Section 5315 of the Act creates a statutory lien for assessments, perfected by the filing of the declaration. In relevant part, Section 5315 provides as follows:
§ 5315. Lien for assessments
(a) GENERAL RULE.– The association has a lien on a unit for any assessment levied against that unit or fines imposed against its unit owner from the time the assessment or fine becomes due. The association’s lien may be foreclosed in a like manner as a mortgage on real estate. ….
(d) NOTICE AND PERFECTION OF LIEN.– Subject to the provisions of subsection (b), recording of the declaration constitutes record notice and perfection of the lien.
(e) LIMITATION OF ACTIONS.– A lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within three years after the assessments become payable.
(f) OTHER REMEDIES PRESERVED.– Nothing in this section shall be construed to prohibit actions or suits to recover sums for which subsection (a) creates a lien or to prohibit an association from taking a deed in lieu of foreclosure.(emphasis added)
Enforcement of the lien is thus addressed in paragraph (a) “in a like manner as a mortgage on real estate”. However, Associations are not limited to filing in rem foreclosure actions. Paragraph (f) clearly permits collection of unpaid assessments to proceed by in personam actions in contract. The question decided in Makowka is not whether associations must proceed in one way or another to collect assessments; rather, the question decided is whether in rem foreclosure against the unit is the sole method of “enforcing the lien”.
In Karr, the Commonwealth Court held that “The first step to enforcing an assessment lien is the filing of a foreclosure complaint”. However, the Court in Karr did not directly address the question of whether a money judgment suit would have similarly constituted an enforcement of the lien. Instead, the issue in Karr focused on the Association’s attempt to file a second lien rather than a complaint. The Karr Court held that the lien for assessments is perfected by virtue of the recording of the Declaration, and that the filing of additional liens was thus inappropriate. While the Court in Karr indeed acknowledged that associations are “free, for example to bring an action in debt or in contract to collect an assessment”, the decision is interpreted to hold that the first step to enforcing the lien is the filing of a foreclosure complaint. Karr was decided in December of 2004.
The Superior Court’s decision in Hammer was published in July of 2006. The issue framed in Hammer is “WHETHER A PLANNED COMMUNITY LIEN IS A JUDGMENT UPON WHICH A WRIT OF EXECUTION MAY ISSUE?”. In Hammer, the Association sought foreclosure of the lien without first filing a complaint, seeking to merely issue a writ of execution. In holding that the filing of a complaint is necessary, the Hammer Court quoted Karr as follows:
Thus, we find specious Appellant’s contention that using a sheriff’s sale to recoup monies claimed due from Appellee was the proper step to enforce its assessment lien. Rather, “[t]he first step to enforcing an assessment lien is the filing of a foreclosure complaint[, action in debt or contract]. (bracketed additions in original, emphasis added).
The Bankruptcy Court in Mankowka felt constrained by the words inserted by the Court in Hammer to the holding of Karr (Hammer being the more recent decision), and held that an in personam action to collect assessments was indeed sufficient to enforce the lien. Both the District Court and US Court of Appeals disagreed. In maintaining the clear distinction between actions in foreclosure (paragraph (a) of 5315), and other remedies (paragraph (f) of 5315), the U.S. Court of Appeals wrote as follows:
The Commonwealth Court’s analysis in Karr comports with the text and structure of the statute at issue. Section 5315 draws a clear distinction between subsection (e)’s “proceeding to enforce” the statutory lien and the pursuit of “[o]ther remedies”…. As the Commonwealth Court noted in Karr, the statute explicitly provides for enforcement by “foreclose[ure] in a like manner as a mortgage on real estate; thus, one may enforce the line by filing an action in foreclosure.
In contrast to subsections (a) and (e), subsection (f) is concerned not with the lien itself but with the “sums for which subsection (a) creates the lien.” This shift in word choice demonstrates that actions in debt or contract provide an alternative recourse from the lien created by the provision, and do not constitute “proceedings to enforce the lien.”
Accordingly, the U.S. Court of Appeals clearly held that in personam actions in debt do not constitute enforcement of the statutory lien. Although Mankowka is a U.S. Court of Appeals bankruptcy decision predicting Pennsylvania law, its implication is not necessarily limited to the bankruptcy context. Associations may now have to consider in rem foreclosure actions for assessment delinquencies which approach the three year statute of limitations period. However, procedures to enforce the lien (by foreclosure) may not be required when ownership of the unit is not at issue. In Pennsylvania, a money judgment filed in any county in which the defendant holds real estate constitutes a judgment lien (against that real estate). Therefore, depending on the amount of the delinquency, and circumstances such as foreclosure and bankruptcy, a money judgment suit will likely continue to be an appropriate remedy.