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Condominium Law FLASHPOINTS April 2019

April 15, 2019Print This Post Print This Post

Kenneth Michaels, Jr., Lakelaw, Chicago
312-588-5000 | E-Mail Kenneth Michaels, Jr.

Appellate Court Punts §22.1 Costs Question Back to Trial Court

Attorneys are prohibited by Supreme Court Rule 23 from citing Rule 23 orders as precedent in litigation. However, occasionally a Rule 23 decision is released which feeds that for which Illinois jurisprudence hungers. In the past couple weeks, Friedman v. Lieberman Management Services, Inc., 2019 IL App (1st) 180059-U, whetted the appetite but left issues unresolved and promised substantial future litigation against condominium management companies and boards of directors.

Background on 22.1 Disclosures

A year ago, this column explored disclosure requirements under §22.1 of the Condominium Property Act, 765 ILCS 605/1, et seq., and provided a sample disclosure form. See Condominium Law FLASHPOINTS March 2018. We will briefly summarize §22.1 requirements here.

765 ILCS 605/22.1 applies to resales of condominium units under the Act. It requires that upon buyer’s demand, the condominium unit seller (current unit owner) shall “obtain from the Board of Managers and shall make available for inspection to the prospective purchaser” certain specified documents and information. Section 22.1(b) specifically requires that “[t]he principal officer of the unit owner’s association or such other officer as is specifically designated shall furnish the above information when requested to do so in writing and within 30 days of the request.” No ambivalence exists that the board of directors is responsible for producing the 22.1 disclosures and that the president (or such other officer as designated by the board of directors) is specifically responsible for furnishing the documents and information.

In practice, in the northeastern part of Illinois, producing necessary documents under §22.1 and for sale transactions has become a management company’s profit center. In associations with management companies, few, if any, boards of directors actually produce the documents or information. Sellers and their attorneys are specifically directed by an association’s management companies to visit a website, often run by an internet company, that is given the documents and information by the management company and then sends electronic copies to the sale parties after receipt of payment. These companies usually also will sell a paid assessment letter (which is required by the title company if the buyer and seller intend to close with title insurance) — all for an aggregation of fees which usually approaches $500. Additionally, most larger associations are now charging through their managers both move-in and move-out fees which approach another $500. And some management companies charge documenting fees adding another hundred or two into the pot. In those few mid-size or large associations in which the seller can actually communicate with a director, he or she will invariably be told when requesting §22.1 disclosures to “go see the manager.” Association directors and officers often have no idea that they have specific statutory duties to produce the §22.1 disclosures or even know what purpose the disclosures serve.

The §22.1 disclosures themselves consist of

  1. the condominium instruments and rules and regulations;

  2. a statement of any association liens and account balances owed for the subject unit;

  3. a statement of anticipated capital expenditures by the association in the next two fiscal years;

  4. a statement of reserve funds held and earmarked for projects;

  5. the last fiscal year’s statement of financial condition;

  6. a schedule of pending lawsuits or judgments in which the association is a party;

  7. a statement of the association’s insurance (often the recipient is simply given the insurance agent’s contact information and told to go get it themselves);

  8. a statement that improvements to the subject unit and its limited common elements by the prior owner were made in compliance with the condominium instruments (often an association has no reason to know what the unit owner did inside a unit unless the owner volunteered information or neighbors complained); and

  9. identification of the association’s principal officer and his or her mailing address, as well as that of the association’s registered agent for service of process.

Section 22.1 concludes limiting the costs to be charged to the seller for the §22.1 disclosures to “direct out-of-pocket” costs:

A reasonable fee covering the direct out-of-pocket cost of providing such information and copying may be charged by the association or its board of managers to the unit seller for providing such information.

Friedman v. Lieberman Management Services, Inc.

The plaintiff unit owner filed a class action against solely his condominium association’s management company after he sought to sell his unit and went to the management company’s website, ordered the §22.1 disclosures, and was charged a $220 fee. He was also charged $250 for a paid assessment letter, a rush fee, and a buyer’s transfer fee. 2019 IL App (1st) 180059-U at ¶4.

The management company moved to dismiss the complaint on two grounds: (1) §22.1 on its own terms applies to the association or its board of directors, not to the management company; and (2) no implied cause of action exists under §22.1 against the management company because the purpose of the section is to protect condominium purchasers, not sellers. The plaintiff responded with an agency argument that an agent may be liable for a principal’s breach of duty in which the agent took an active part in the violation of the principal’s duty. 2019 IL App (1st) 180059-U at ¶6.

On the management company’s motion, the trial court certified two questions under Supreme Court Rule 308 to the appellate court, which granted leave to appeal. The certified questions were

(1) Whether [§22.1 of the Act] allows a cause of action to be brought by a condominium unit seller against a property management company, acting as an agent for the Condominium Board of Managers and/or the ‘Unit Owners’ Association, with respect to the fees charged by the property management company to the condominium unit seller for the documents described in Section 22.1 of the Act?

(2) Whether a private cause of action can be implied on behalf of a condominium unit seller and against a property management company, under Section 22.1 of the Act . . . where the property management company is acting as agent for the Condominium Board of Managers and/or the ‘Unit Owners’ Association, with respect to the fees charged by the property management company to the condominium unit seller for the documents described in Section 22.1 of the Act? 2019 IL App (1st) 180059-U at ¶8.

The Majority Opinion

The appellate court’s decision in Friedman found that leave to appeal was improvidently granted and vacated the order granting leave. Reading through the majority’s analysis, one can see why they declined to answer the certified questions.

First, the certified questions assume the existence of an agency relationship between the association and management company in making the §22.1 disclosures. The complaint did not allege underlying facts establishing the existence of an agency relationship. “Merely alleging that defendant was authorized by the Association or its board of managers to provide section 22.1 disclosure documents is insufficient to establish the existence of an agency relationship, as it says nothing about the nature of the relationship between the defendant and the non-party condominium association.” 2019 IL App (1st) 180059-U at ¶12. The appellate court examined the management agreement, which referred to the manager as the association’s agent, but this was too vague to help the appellate court analyze the relationship. “[N]otably there is no duty under the agreement that requires the defendant to provide section 22.1 disclosure documents on the Association’s behalf; the capacity in which defendant provided the section 22.1 disclosure documents has not been established, either in the pleadings or by way of concession or an admission.” 2019 IL App (1st) 180059-U at ¶13.

Second, because agency was not pled and was not at issue, an answer to the certified questions “would be provisional and would not lead to the ultimate termination of this lawsuit.” 2019 IL App (1st) 180059-U at ¶14. The appellate court presented an example that if agency had been pled and the court gave its answer to the certified questions, but then the agency issue was later resolved to show no agency existed, the answers to the certified questions would have been advisory and provisional.

The Dissent

Justice Walker dissented from the majority opinion, noting that one answer to the certified questions would lead to immediate dismissal of the lawsuit and the other answer would lead to protracted litigation, and that therefore the majority “effectively concedes that the correct answer to the certified question is ‘Yes.’ ” 2019 IL App (1st) 180059-U at ¶19.

Justice Walker noted that “[t]he Condominium Property Act does not explicitly create a cause of action, and a cause of action is allowed ‘if and only if’ a private cause of action can be implied under Section 22.1 of [the] Act.” 2019 IL App (1st) 180059-U at ¶20. He also observed that the certified questions did not require resolving any questions of fact. 2019 IL App (1st) 180059-U at ¶21.

Against this background, the dissent looked at the three criteria that Supreme Court Rule 308 sets forth regarding certified questions. First, the question must involve a question of law, not a question of application of law to the facts of a specific case. 2019 IL App (1st) 180059-U at ¶24. Second, there must be substantial ground for difference of opinion as to the certified question. 2019 IL App (1st) 180059-U at ¶25. Third, the question should be such that an immediate appeal may materially advance the ultimate termination of the litigation. Id.

Regarding the second criteria, substantial ground for differences of opinion, the dissent agreed with the trial court that Illinois courts have not addressed this question. 2019 IL App (1st) 180059-U at ¶¶33 – 34. However, three federal decisions all answered “no” to the certified questions. In Horst v. Sudler & Co., No. 17 C 8113, 2018 WL 1920113 (N.D.Ill. Apr. 24, 2018), the district court found that §22.1 protects only prospective purchasers, not sellers, and therefore no implied action exists for the benefit of current unit owners. Pointing to the legislative history of §22.1 and its relationship to the Uniform Condominium Property Act, the dissent characterized the district court’s holding in Horst as implausible. The second district court decision, Ahrendt v. Condocerts.com, Inc., Case No. 17-cv-8418, 2018 WL 2193140 (N.D.Ill. May 14, 2018), simply followed Horst and should be disregarded for the same reasons. The third district court case found that §22.1 protected current owners but that they could simply pass through the increased costs to purchasers, so no implied cause of action under §22.1 existed. Murphy v. Foster Premier, Inc., No. 17 CV 8114, 2018 WL 3428084 (N.D.Ill. July 16, 2018).

The dissent held §22.1 implied a cause of action for a unit owner against a property management company acting as agent for the board of directors. 2019 IL App (1st) 180059-U at ¶37. It also held that an agent is not liable for the acts of a disclosed principal unless the agent takes some active part in violating some duty the principal owes to a third person. Landau v. Landau, 409 Ill. 556, 564 (1951). 2019 IL App (1st) 180059-U at ¶38. Additionally, the dissent did not appear persuaded by the Community Associations Institute’s amicusbrief, which threatened that managing agents would increase fees to associations and withhold required documents, thus preventing sales. 2019 IL App (1st) 180059-U at ¶36. The dissent would have answered yes to both of the certified questions.

The decision to not answer the certified question will have one obvious effect: managing agents will continue collecting excessive fees from condominium unit sellers, secure in the knowledge that many of their victims, leaving the condominiums, will not seek recompense even after the courts declare that the excessive fees violate the Condominium Property Act. 2019 IL App (1st) 180059-U at ¶45.

For more information about condominium law, see CONDOMINIUM LAW (ILLINOIS) — 2016 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.facebooktwittergoogle_pluslinkedinrssyoutube

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