Nine into Eleven: Accounting for Common Interest Communities in Bankruptcy
31 Pages Posted: 22 Jun 2017
Date Written: June 21, 2017
Ever more Americans live in a common interest community such as a homeowners’ association or condominium. Common interest communities restrict the uses owners may make of their property but provide benefits to the owners. The community association pays for these benefits by levying assessments on the owners’ property. Common interest communities offer a wide variety of benefits that can be divided into two sorts: public and private. Local municipalities typically provide public benefits at taxpayer expense; private entities usually afford private benefits at the consumer’s expense.
Like both public and private entities, common interest communities can experience the problem of financial distress. The ultimate solution to financial distress is relief under the Bankruptcy Code. Private entities are eligible for relief under chapter 11; public entities — municipalities — are eligible for relief under chapter 9. Chapter 9 affords municipalities significant protections compared to private entities under chapter 11 because of the irreducible political sovereignty of municipalities. Nonetheless, even though common interest communities also provide public goods, they are eligible for relief only under chapter 11 and thus lack the protections afforded by chapter 9.
Chapter 11 of the Code should be amended in two ways to afford common interest communities some of the benefits of chapter 9. Specifically: (1) the standard of the best interests of creditors in a proposed chapter 11 plan of reorganization should not be evaluated against a hypothetical chapter 7 liquidation; and (2) a common interest community should be able to cram down its plan without regard to retention by the community of its assets. Without these amendments, common interest communities in financial distress and their members will be less likely to reorganize, and the cost of providing public goods will revert to the local community and its taxpayers.
Keywords: Bankruptcy, Common Interest Community, Homeowners Association, Condominium Association
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