On December 3rd, the Illinois Supreme Court issued an opinion confirming the holding of the First District Appellate Court in the case of 1010 Lake Shore Association vs. Deutsche Bank National Trust Company. If you are reading this article, you probably know the facts of this case already. If not, in a nutshell, the case involved a foreclosed unit at 1010 Lake Shore that Deutsche Bank purchased at a foreclosure auction. The foreclosed-out owner owed a substantial balance to the Association at the time the foreclosure sale took place. Upon taking ownership of the unit, Deutsche Bank failed to pay any assessments. The Association ultimately sued Deutsche Bank in circuit court and the court entered judgment against Deutsche Bank for the pre-foreclosure balance. Deutsche Bank appealed the circuit court’s ruling and on appeal the First District Appellate Court held and the Illinois Supreme Court subsequently confirmed that under Section 9(g)(3) of the Illinois Condominium Property Act, a foreclosure purchaser must pay common expenses beginning the month after the sale. The Appellate Court and Supreme Court also held that if a foreclosure purchaser fails to pay assessments beginning the month after the foreclosure sale, the association’s lien for common expenses not paid by the foreclosed-out owner is not extinguished and the foreclosure purchaser then becomes obligated to pay the entire pre-foreclosure balance.
What does this mean for condominium associations and how should associations and management handle unpaid balances on foreclosed units?
- Actively monitoring foreclosures continues to be important. Those associations that work with our office know how frequently we track foreclosure cases for our clients. We have consistently advised our clients the importance of knowing the status of pending foreclosure actions. The holding in this case makes knowing whether a unit has recently been sold at foreclosure auction more critical than ever as not being on top of the status of a sold unit could result in an association losing out on its right to collect pre-foreclosure amounts.
- Don’t write off balances. Writing off a pre-foreclosure balance without consulting with counsel could result in an association walking away from money it is legally entitled to recover.
- If the purchaser of a unit at foreclosure (a lending institution, a quasi-governmental agency, or a third-party investor) fails to timely pay the assessment due the month after the foreclosure sale is conducted, turn the account over to association counsel for collection. Do not wait 60, 90 or 120 days after confirmation of the foreclosure sale to turn the account over if there is a pre-foreclosure balance and the new owner has not paid any post-foreclosure assessments.
- Once an account has been turned over to counsel for collection, do not accept any payments without first discussing the matter with counsel. Accepting a payment will most likely preclude an association from collecting any portion of the pre-foreclosure balance.
- It does not matter if an association has been included as a defendant in a foreclosure action. The obligation to promptly pay post-foreclosure assessments applies to all foreclosure actions, whether the association has been named as a defendant or not. Further, the Supreme Court also appeared to state that if an association is not named as a defendant in the foreclosure action, the association’s lien is not extinguished even if post-foreclosure assessments are paid.
Because Deutsche Bank did not pay any post-foreclosure assessments, the Supreme Court did not address the timing of when a foreclosure purchasers’ ability to extinguish the pre-foreclosure lien by paying the post-foreclosure assessments expires. The only statement the Supreme Court made on the issue is Section 9(g)(3) “provides an incentive for prompt payment,” but it did not include any definition of what “prompt” means. Therefore, the Court did not impose any set deadline for payment. Accepting a payment, regardless of when the payment is made, most likely eliminates an association’s ability to collect the pre-foreclosure balance. Without any additional guidance from the Court, the best recommendation we can make is to be aggressive in turning accounts over post-foreclosure if the accounts have a pre-foreclosure balance and once accounts are turned over for collection, do not accept any payments.
While the General Assembly has not been responsive to efforts made by those who advocate on behalf of condominium associations to afford some additional relief related to the loss of assessment revenue that usually accompanies a foreclosure, the Illinois Supreme Court has unanimously recognized the obligation of foreclosure purchasers to promptly make payments upon taking ownership of units. If a foreclosure purchaser fails to promptly make post-foreclosure assessment payments and if an association acts diligently, it will put itself in position to recover pre-foreclosure amounts it may have believed were lost once ownership of the unit transferred.