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Meritage Homeowners' Association v. Watt

United States District Court, D. Oregon, Portland Division

November 20, 2017

MERITAGE HOMEOWNERS' ASSOCIATION, Plaintiff,
v.
NICHOLAS LEE WATT and PATRICIA MOUDY WATT, Defendants.

          AMENDED OPINION AND ORDER

          Ann Aiken United States District Judge

         Plaintiff Meritage Homeowners' Association ("Meritage") filed this action against defendants Nicholas Lee Watt and Patricia Moudy Watt ("the Watts"), asserting that the Watts owe Meritage dues, assessments, interest, and related to a vacation property on the Oregon coast. The Watts now move for summary judgment. For the reasons set forth below, the motion is granted in part and denied in part. This opinion was initially filed August 13, 2017, but was amended after the Watts filed a motion for reconsideration.

         BACKGROUND[1]

         In 2006, the Watts took out a loan to purchase a second residence in Newport, Oregon ("the property"). The property, one of eighteen townhouse units within a planned community known as Meritage at Little Creek, is subject to a series of covenants and restrictions ("CCRs") enforced by Meritage. Pursuant to the CCRs, unit owners are responsible for maintenance and repair of windows. Compl. ¶ 14.

         In 2008 and 2009, Meritage and other interested parties filed a construction defect action in state court, alleging defective installation of windows in all Meritage at Little Creek units ("the window litigation"). The defective windows caused substantial water damage to individual units as well as to common areas of Meritage at Little Creek. In 2011, the Watts and ten other Meritage at Little Creek owners sued Meritage in state court ("the HOA litigation"). The plaintiffs in the HOA litigation then intervened in the window litigation. Also in 2011, Meritage sued the Watts and other unit owners in state court for failure to pay assessments and charges and for violating the CCRs ("the collection litigation"). Id. ¶ 20.

         In 2012, the HOA litigation and the window litigation settled. After the settlement in the HOA litigation, Meritage's insurance company refused to pay a claim for a portion of Meritage's attorney's fees. Meritage levied a special assessment to recoup those unreimbursed fees ("first special assessment"). In accordance with the terms of the HOA litigation settlement agreement, Meritage levied the first special assessment only against the plaintiffs in the HOA litigation rather than against all unit owners.[2] Also in 2012, the Watts defaulted on their loan payments. Lender Bank New York Mellon ("BNYM") instituted foreclosure proceedings.

         In September 2013, Meritage approved a resolution imposing a fine of $500 per day, up to $5, 000 per month, against any unit owner that failed to repair the defective windows or deposit the money necessary to begin the window replacement process. Id. ¶ 19.

         In February 2014, Meritage obtained a stipulated judgment of $175, 504 against the Watts in the collection litigation. One month later, the Watts filed a petition for relief under Chapter 13 of the Bankruptcy Code. In June 2014, the Watts proposed a second amended Chapter 13 plan.[3]The second amended plan included the stipulated judgment from the collection litigation in its list of debts. It also included a nonstandard provision purporting to vest the property in BNYM upon confirmation. BNYM objected to the second amended plan because it did not want to take title to the property. BNYM found taking title objectionable, in part, because it would make BNYM responsible for ongoing obligations associated with the property-including dues and assessments. Those obligations were substantial. Dues for the property exceed $15, 000 per year and, as noted, assessments for failure to replace the windows ran as high as $5, 000 per month.

         In September 2014, the Lincoln County Circuit Court ruled in a companion action to the collection litigation that the first special assessment violated Oregon law because it had been assessed against only a subset of unit owners without a determination that those unit owners were at fault. In response to that decision, Meritage rescinded the first special assessment. Meritage applied a credit in the amount of the first special assessment to the Watts' $175, 504 stipulated-judgment debt, which was by then a part of the Watts' bankruptcy proceeding.

         During the fourth quarter of 2014, Meritage found that the Watts (and others) were at fault with respect to the unreimbursed attorney's fees in the HOA litigation. It then levied a new special assessment ("second special assessment") against the Watts in the amount of $26, 316.25.

         On October 15, 2014, the bankruptcy court confirmed the plan over BNYM's objection, and the property was transferred to BNYM. BNYM appealed. On April 22, 2015, this Court vacated and remanded, holding that the bankruptcy court lacked statutory authority to force an objecting creditor to assume a debtor's interest in and ongoing liabilities associated with a piece of property. Bankof N.Y. Mellon v. Watt, 2015 WL 1879680, *7 (D. Or. Apr. 22, 2015).[4]

         On August 27, 2015, the property was reconveyed to BNYM through a sale under 11 U.S.C. § 363. The practical effect of this complex procedural history is that, after they filed for bankruptcy, the Watts were the owners of the property for roughly eleven months.[5]

         Meritage ceased attempts to collect the stipulated judgment from the Watts after they filed for bankruptcy. However, throughout the bankruptcy process, Meritage has continued to engage in collection activities against the Watts. Through those efforts, including in this action, Meritage seeks to collect three debts it asserts are post-petition obligations incurred during the eleven months the Watts owned the property after filing for bankruptcy: unpaid post-petition homeowners' association dues ("HOA dues"), unpaid post-petition assessments for failure to replace the windows ("window fines"), and the second special assessment, Meritage sent the Watts collection statements regarding those debts in August 2014, [6] November 2014, January 2016, and May 2016. Nicholas Watt Decl, ¶ 12.

         In June 2016, Meritage initiated this action as an adversary proceeding in bankruptcy court. Meritage seeks a declaratory judgment endorsing its collection efforts as "legitimate efforts to enforce the Watts' obligations under the CCRs" and "an appropriate exercise of Meritage's fiduciary obligation to assure unit owners comply with the CCRs." Compl. ¶ 45. Meritage also seeks money damages, including attorney's fees, which it calculated to total $124, 969.03 as of the date the complaint was filed. Id. ¶¶ 49-50.

         Pursuant to 28 U.S.C. § 157(d) and Local Rule 2100-4, Judge Dunn sua sponte issued a report and recommendation asking this Court to withdraw the reference with respect to the adversary proceeding. Judge Dunn's recommendation rested on his determination that state law issues predominate over bankruptcy issues in this case and on the relationship between Meritage's claims in this action and its claims against BNYM in another case already pending in this Court. Judge Dunn also questioned whether the bankruptcy court had authority to adjudicate Meritage's claims under recent Supreme Court precedent. The case was assigned to Judge Hernandez, who adopted Judge Dunn's report and recommendation and withdrew the reference. The case was then reassigned to me based on its close factual connection to Meritage Homeowners' Association v. The Bank of New York Mellon, Case No. 6:16-cv-00300.

         Meritage had filed a motion for partial summary judgment in bankruptcy court. That motion, which was fully briefed when Judge Hernandez withdrew the reference, sought summary judgment with respect to the Watts' obligation to pay the second special assessment and unpaid dues. Meritage did not seek summary judgment with respect to the window assessments or attorney's fees.

         On April 11, 2017, I denied Meritage's motion. I concluded that Meritage was not entitled to summary judgment with respect to the second special assessment because that assessment

is simply the first special assessment in a new form. Because the Watts' obligation to pay both the first and second special assessments arose from the same pre-petition conduct, and because the Watts played no affirmative role in the post-petition events that required the first special assessment to be rescinded, the second special assessment is part of a debt "provided for by the plan" and subject to discharge under [11 U.S.C.] § 1328(a).

Meritage Homeowners' Ass'n, 2017 WL 1364209 at *5. I also concluded that the Watts were liable for $7, 422.96 in unpaid dues and associated interest. Id. at *6. However, I could not grant summary judgment with respect to the unpaid dues because the Watts had made a partial settlement payment of $ 14, 969.79. Id.

         The Watts now move for summary judgment on all Meritage's claims. They also seek summary judgment on their first and third counterclaims, which allege violation of the Bankruptcy Code's automatic stay and breach of the settlement agreements in the HOA litigation and window litigation.

         STANDARD OF REVIEW

         Summary judgment is appropriate if "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The moving party has the burden of establishing the absence of a genuine issue of material fact. Id.; Cehtex Corp. v. Catrelt, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine issue of material fact, the nonmoving party must go beyond the pleadings and identify facts which show a genuine issue for trial. Id. at 324. "Summary judgment is inappropriate if reasonable jurors, drawing all inferences in favor of the nonmoving party, could return a verdict in the nonmoving party's favor." Diaz v. Eagle Produce Ltd. Partnership, 521 F.3d 1201, 1207 (9th Cir. 2008).

         DISCUSSION

         I. Meritage 's Claims

         The Watts first seek summary judgment with respect to Meritage's claims. In essence, they contend that their maximum liability in this case could not possibly exceed the $14, 969.79 payment they already made. To evaluate that argument, I must carefully examine Meritage's ...


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