The issue at appeal is whether the bankruptcy court abused its discretion in determining that Carlton House Condominium Association, Inc. (Ohio) violated a debtor’s Chapter 7 discharge in re-scheduling a sheriff’s sale in a pre-petition foreclosure action upon issuance of the discharge and closing of the case and in assessing fees associated with the re-scheduling of the foreclosure sale.
The Court confirmed that the discharge of personal obligations through a Chapter 7 discharge does not terminate a secured creditor’s in rem rights unless the creditor’s lien was avoided during the bankruptcy.
Carlton House’s statutory lien continued after the discharge. SO, even though Carlton House was not entitled to proceed against Jackson for discharged pre-petition debts, the Association could proceed against the Unit for all sums secured by the lien, both pre-petition and post-petition.
The BAP further held that bankruptcy court appeared to give little weight to the unique situation of a condominium (or similar) association. Any exercise of in rem rights includes either the intended or unintended consequence of requiring the debtor to voluntarily cure arrearages, including prepetition arrearages, or face the loss of the collateral.
Carlton House has statutory obligations to other unit owners under Ohio law. and reason to be concerned that, without a foreclosure sale, Jackson may not pay the ongoing post-petition fees and assessments or the arrears that existed at the time of discharge.
The 6th Circuit Bankruptcy Appeals Panel held that the court abused its discretion in sanctioning the Association for violating the debtor’s discharge.