MEMORANDUM DECISION RE OBJECTION TO PROOF OF CLAIM 1-2 OF MORENO VALLEY RANCH COMMUNITY ASSOCIATION

MEREDITH A. JURY, Bankruptcy Judge.

BACKGROUND

Debtor Jorge Serrano (debtor) filed an objection to proof of claim 1-2 (claim) filed by Moreno Valley Ranch Community Association (Association) on May 30, 2017. This claim amended claim 1-1, filed by the Association in the sum of $17,933.19, which is being paid as a secured claim in debtor's confirmed Chapter 13 Plan. The amendment added post-petition attorney's fees and costs totaling $2626.71 to the claim. Debtor's objection argued that the attorney for the Association was "doing nothing more than every creditor routinely does in a Chapter 13 case; namely `processing payments from the trustee, periodically reviewing the Court docket and updating the client each month.'" Debtor asserted that because he was current on his post-petition payments to the Association and his plan payments to the Trustee, there was no need for additional work on behalf of the Association.

The Association responded to the objection, arguing that as an oversecured creditor, it was entitled to recover attorney's fees and costs under 11 U.S.C. § 506(b) as part of its secured claim. Under the provisions of the Covenants, Conditions and Restrictions (CC&R's), to which debtor is bound, and California Civil Code §5650(b)(1), the Association is entitled to add to the debt owed by debtor reasonable fees and costs of collection and reasonable attorney's fees. Therefore, it asserted the additional fees and costs were appropriately included in the claim.

At the initial hearing on the objection on October 30, 2017, the court noted that the Association's response did not include the itemized billing records from the law firm representing the Association for the attorney's fees added to the claim. The hearing was therefore continued to allow the Association to file those billing records, which were filed on November 14, 2017. After argument at the continued hearing, the court took the matter under submission. This memorandum shall constitute the court's findings of fact and conclusions of law under the provisions of FRBP 7052 and its ruling on the claim objection.

ANALYSIS

The initial claim filed by the Association prior to plan confirmation in the amount of $17,933.19 included unpaid assessments of $4043.78, late charges, interest, and collection costs of $3477.63 and attorney's fees and costs of $7400.31. As noted in an objection to confirmation filed by the Association (Docket #9), debtor had not paid his regular monthly assessments for more than 4 years, which delinquency caused the Association to incur collection costs and attorney's fees which more than quadrupled the amount of the debt owed by debtor. Despite these startling numbers, debtor did not object to Claim 1-1, perhaps because he understood the serious nature of his delinquency and the rights and protections for homeowner's associations which are embedded in both the California statutes and recorded CC&R's.

It is not unique for this court to review a claim from a homeowner's association in which the amount of unpaid assessments are dwarfed by the fees and costs which are added to the bill. Homeowner's Associations (HOA's) are unique creditors in that they are not lenders or sellers of product, but are rather nonprofit organizations which provided common services and amenities to a housing development at a cost which must be borne by all property owners in the development. Tightly regulated by statute and run by an elected board of directors, an HOA must establish annually a budget for the allowable expenses it must pay and then assess all homeowners equally to pay the costs entailed in the budget. If a homeowner defaults and the default remains unpaid despite collection efforts of an HOA1, those unpaid sums must eventually be redistributed among all the remaining homeowners, who in essence are economically damaged when a neighbor reneges on his obligation to pay assessments. The California statutes recognize that any costs borne by an association in collecting delinquent assessment must be paid by the defaulting homeowner to minimize the impact of such default on the rest of the neighborhood. As a result, the right to add such costs to the debt is broadly written:

Subdivision (b) allows an association to recover upon delinquency "(1) Reasonable costs incurred in collecting the delinquent assessment, including reasonable attorney's fees." It is noteworthy that the statute allows addition of both collection costs and attorney's fees to the debt. Section 5720, which provides that an association may not foreclose a lien for assessment amounts less than $1800, excludes from that lien-threshold limit "fees and costs of collection and attorney's fees", reinforcing the right of an association to recover those sums from a delinquent homeowner.

The CC&R's of the Association at Section 4.8 also include in any lien or judgment to which the Association is entitled both costs and reasonable attorney's fees.

Because debtor did not object to the substantial collection costs and attorney's fees included in the initial claim, the court assumes he acknowledges the Association's right to those collection costs and fees as part of its secured claim. His argument here, not couched as an allowable objection under § 502 (b) but presumably based on the argument that the claim is unenforceable against the debtor under state law2, is that since debtor is post-petition current the collection costs and fees are not reasonable. Therefore, this court's analysis turns on two factors: (1) both collection costs and attorney's fees may be added to the claim and (2) such costs and fees must be reasonable. Only the second factor is truly in dispute.

At the continued hearing, the court presented the parties with a tentative ruling which consisted of a marked up copy of the billing records. The court had tentatively determined that many of the time entries on the billings were not attorney's fees, but rather were clerical or bookkeeping work whereby the law firm was receiving and accounting for the payments made by the debtor and Trustee. The court reasoned that the Association or its management firm could easily have done such accounting once the law firm had instructed them how to separately account for the direct payments versus the Trustee payments on the arrearage. In response to this analysis, counsel for the Association argued3 that once a delinquent assessment was sent to her law firm for litigation, it remained there for collection purposes during a Chapter 13. Thus, she argued that the entries were proper attorney billing charges; however, if not, then they were costs of collection that were recoverable under the statute. In light of the breadth of recovery allowed by the statute, the court determined to reconsider what entries in the billings should be allowed as reasonable, either as collection costs or attorney's fees.

Debtor continued to argue that none of the fees should be allowed because he had remained current post petition and other creditors did not supplement their claims with this type of collection charge. He also suggested that equity should balance in favor of the Chapter 13 debtor, who was diligently trying to repay his debt as allowed by law. The court rejects both arguments. First, the fact that other creditors did not include such fees bears no weight because other creditors are not HOA's, which must recoup all the additional costs caused by the defaulting homeowner from the debtor. Additionally, many other creditors would not have the statutory right to collect costs of collection in addition to attorney's fees. Second, the equities do not balance in favor of the debtor, if equity comes into play at all.4 The debtor here did not bother to pay relatively minimal assessments for more than 4 years, causing a burden on the Association and his neighbors while receiving many of the benefits that those assessments paid for.5 That he filed a Chapter 13 to stop a foreclosure by the Association was not noble, but rather a usage of the automatic stay to keep his home.

With this backdrop, the court has reanalyzed the billings and allowed some of the entries as reasonable costs of collection and/or attorney's fees. The annotated billings are attached to this memorandum as Exhibit A. This annotated billing shows a total supplement to the claim of $2105 based on the billing entries and $80.62 as costs on the billings, for a total of $2185.62.6 The court made adjustments as follows: (a) the attachment to the supplemental claim at paragraph 10 broke out how the law firm bills the Association. Included in the charges was $45.00 for clerical assistants. The court determines that the reasonable charge for the bookkeeping services, once the methodology was set up, should be clerical time, not paralegal time. Those adjustments are shown on the billing as the $4.50 and $9.00 charges; (b) Some of the time is normally included in overhead, as part of the hourly rate which covers administrative costs of running a law office. For example, filling out the form to put money in a trust account is not billable time, nor is filing a document electronically. The court has marked those entries with an "O" and disregarded them; (c) a periodic status report to the client might be reasonable, but not monthly when no default has occurred. Many of the status report entries have been deleted; and (d) on some letters both the paralegal and the attorney have drafted and edited. For such simple, non-legal matters one billing personnel is all that is needed. On the other hand, the court has allowed most of the attorney time for setting up the accounting, communicating with the client, responding to debtor inquiries, and defending the claim.

The court will prepare an order in accordance with this ruling.

Exhibit A