If there was such a contest, the 232-unit Spa at Sunset Isles would be in the running for "worst case scenario" condo-conversion.  Here is a summary of the development's situation as it existed in late 2010:  

  • Although initially priced at $250,000, the average unit price had sunk to $48K, a drop of over 80%
  • The average first mortgage debt was approximately $218,000
  • More than 180 mortgage foreclosure proceedings had been commenced
  • The foreclosures had been pending for an average of 736 days, with the oldest one-third pending for more than 1011 days on average
  • No assessments were being paid with resopect to almost 70% of the units

Obviously, the first step in fixing the problem would be to start collecting asessments again.  However, as pointed out by Sun-Sentinel reporter Daniel Vasquez, banks had no incentive to foreclose on the underwater properties and assume the assessment obligation.  And Florida courts had clearly rejected the argument that "equity and fairness" could support a court order requiring mortgagees to pay assessments while foreclosure proceeding are pending.

But if necessity is the mother of invention, bankruptcy is invention's power tool.  Ignoring the Tadmore precedent in Florida, the Sunset Isles HOA filed bankruptcy and asserted in its Plan of Reorganization that it had the right to surcharge the mortgagees under 11 USC 506(c).  That bankruptcy code section states:

The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim. 

Of the over 250 mortgagees, only OneWest Bank filed a response in opposition.  The Court agreed with OneWest that the Florida condominium law shields the holder of a first mortgage from paying assessments until the mortgagee takes title.  But the Courtt ultimately rejected OneWest's argument, holding that:

When the Bankruptcy Code and state law conflict, the Code takes precedence over state laws under the Supremacy Clause.

The Vasquez article above posits that this decision breaks new legal ground.  Skeptical, we did our own WestLaw search.  And it looks like Vasquez was right - we did not find any prior cases involving an owners' association making use of 11 USC 506(c) in this way.