When Unit Owner Has Obtained Bankruptcy Discharge, Association’s Appropriate Remedy To Enforce Its Lien Is Foreclosure
A bankruptcy law adage is that a discharge order discharges the debt but not the lien. What happens when a debtor obtains discharge of prepetition condominium assessments and remains current on all postpetition assessments? How should the association’s lien be enforced? Does the condominium association have an obligation to enforce the lien on the debtor’s unit? If so, what are the association’s likely concerns?
In the June 2019 Condominium Law FLASHPOINTS (available in the IICLE® Online Library to subscribers), we reviewed the effects of a bankruptcy court’s discharge order on condominium assessments and a recommendation by the American Bankruptcy Institute to return to treatment of postpetition assessments before the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, 119 Stat. 23. As a general proposition, under current bankruptcy law, a good-faith, honest debtor’s prepetition debt for condominium assessments is discharged by entry of a discharge order in a Chapter 7 or Chapter 13 bankruptcy case. The debtor remains liable for postpetition assessments. The pivotal date in “bankruptcy speak” is the date of the order of relief. To us mortals, the date of the order of relief is usually the date on which the debtor filed his or her bankruptcy petition with the court.
We have discussed the association’s statutory lien against a unit in many prior Condominium Law FLASHPOINTS over the past few years. Generally, §9(g)(1) of the Illinois Condominium Property Act, 765 ILCS 605/1, et seq., creates a statutory lien against each condominium unit, which exists the moment the unit owner fails to pay an assessment when due. If assessment payments are due the first of the month, the lien exists as of the second, even if there is a grace period to cure the arrearage before late fees are imposed.
In re Terrell
In a recent bankruptcy court opinion from the Northern District of Illinois, Bankruptcy Judge Deborah L. Thorne tells condominium practitioners that they should foreclose the association’s lien against a unit after a discharge order was entered — and not use the eviction process. In re Terrell, Case No. 19-07629, 2020 WL 1744065 (N.D.Ill. Apr. 8, 2020). This opinion arose from debtor’s motion for an award of a sanction against the condominium association.
The underlying facts are not complex. In March 2019, the debtor unit owner filed a pro se Chapter 7 bankruptcy case. At such time, she owed the condominium association $16,866.30 in past-due assessments. The association had a pending eviction case in the Circuit Court of Cook County. The day after the debtor’s filing, the association voluntarily dismissed its state court eviction case without prejudice. The association never objected to discharge or dischargeability of the debtor’s debt. In July 2019, the bankruptcy court entered a discharge order, a copy of which was mailed by the clerk of the court to the association and its attorney. The debtor paid all postpetition assessments. 2020 WL 1744065 at *1.
After the discharge order was entered, the association reinstated its dismissed eviction against the debtor asserting a claim of $1 against the debtor and $17,688 in rem against the condominium unit. In October 2019, the state court entered a possession order for these amounts and stayed the order 60 days. Id. The debtor moved in the bankruptcy court for an order to determine the state court possession order void, which was granted prior to the instant opinion being issued. Id.
No dispute existed that the entire amount of debtor’s prepetition debt was discharged in the bankruptcy proceeding. The court began its analysis by recognizing the association has a lien, for the benefit of other unit owners, against the unit for unpaid assessments. Pursuant to §§9(g) and 9(h) of the Condominium Property Act, this lien has a priority position except against unpaid taxes, municipal levies, and prior recorded encumbrances. Additionally, §9.2 of the Condominium Property Act permits an association to pursue an eviction action against a defaulting unit owner pursuant to Article IX of the Illinois Code of Civil Procedure 735 ILCS 5/1-101, et seq., which governs eviction actions in state court. The bankruptcy court found that the debtor was not in default because her prepetition debt was discharged, and she was current in payments of postpetition assessments. 2020 WL 1744065 at *2. This finding was central to the remainder of the court’s decision.
Section 727(b) of the Bankruptcy Code, 11 U.S.C. §101, et seq., empowers the bankruptcy court to discharge prepetition debt in a Chapter 7 case. The discharge order “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.” 11 U.S.C. §524(a)(2). Because postpetition condominium assessments are excepted from discharge pursuant to 11 U.S.C. §523(a)(16) (see June 2019 Condominium Law FLASHPOINTS (available in the IICLE® Online Library to subscribers)), the Code implies that prepetition assessments are discharged. 2020 WL 1744065 at *2.
When a creditor has a lien on the debtor’s property and after the bankruptcy case is concluded, the creditor may proceed in rem against the debtor’s property, but proceeding against the debtor in personam violates the discharge injunction under §524(a)(2) of the Bankruptcy Code.
The condominium association argued here that Illinois eviction law allows the association to proceed in rem. The court rejected this argument.
This is wrong. The condominium association may resort to eviction “when the action is based upon the failure of an owner of a unit therein to pay when due his or her proportionate share of the common expenses of the property.” 735 ILCS 5/9-111. A creditor may not invoke a state law enforcement action to collect a personal liability which has been discharged. Doing so is a violation of the discharge injunction because the debt was discharged in bankruptcy. . . . Although Illinois law allows eviction to collect on obligations owed by a unit owner, it can only pursue eviction if the personal liability for the assessments are due and in this case, the prepetition assessments were discharged. [Citations omitted.] 2020 WL 1744065 at *3.
Again, unlike we mere mortals, the bankruptcy judge cited and relied on the only Illinois case on point, 339 W. Barry Condominium Ass’n v. Bunin, 401 Ill.App.3d 1144, 989 N.E.2d 1218, 371 Ill.Dec. 290 (1st Dist. 2010) (Rule 23). In a footnote, the judge explained that federal courts are not bound by Rule 23 and that while the order may not have precedential effect, it can be persuasive. The judge agreed with the “clear and cogent” reasoning of the appellate court in the order. 2020 WL 1744065 at *3. The association’s in rem recourse was through foreclosure, not an action to obtain possession until such time as the discharged debt was repaid.
The condominium association also argued that eviction actions may be brought to enforce in rem debts relying on §9-107 of the Illinois Eviction Act, 735 ILCS 5/9-107. Although the bankruptcy court opinion does not quote the relevant language, presumably the association was relying on the portion of the statute on constructive notice that provides in relevant part:
However, in cases where the defendant or unknown occupant is notified by posting and mailing of notices or by publication and mailing, and the defendant or unknown occupant does not appear generally, the court may rule only on the portion of the complaint which seeks an eviction order, and the court shall not enter judgment as to any rent claim joined in the complaint or enter personal judgment for any amount owed by a unit owner for his or her proportionate share of the common expenses, however, an in rem judgment may be entered against the unit for the amount of common expenses due, any other expenses lawfully agreed upon or the amount of any unpaid fine, together with reasonable attorney fees, if any, and costs. 735 ILCS 5/9-107.
The bankruptcy court rejected this argument as “governing standards of constructive notice . . . where the association is unable to serve the defaulting unit owner by personal service . . . but is not relevant to the issues before this court where the unit owner’s personal liability has been discharged.” 2020 WL 1744065 at *4.
Finally, the bankruptcy court found that sanctions against the condominium association were appropriate under the new standard recently adopted by the U.S. Supreme Court for holding a creditor in civil contempt for violating a discharge order, namely, when there is not a “fair ground of doubt” as to whether the creditor’s conduct might be lawful under the discharge order. Id., citing Taggart v. Lorenzen, ___ U.S. ___, 204 L.Ed.2d 129, 139 S.Ct. 1795, 1804 (2019). “[The association] has not put forth any objective explanation as to why it pursued the post-discharge eviction other than stating that ‘this is how it is always done’ and later by citing several cases that have nothing to do with the right to pursue an eviction when the in personam liability has been discharged.” 2020 WL 1744065 at *4. Additionally, the court was troubled by the association’s including a $1 claim against the debtor in both its eviction complaint and later in the possession order even though it knew that the unit owner was current on postpetition assessments. The court found that this suggests that the association knew it had no basis for pursuing an eviction action. Id. The bankruptcy court entered fees and costs of $2,372 against the condominium association.
Finally, for readers who may find the debtor’s name ringing familiar, in the December 2019 Condominium Law FLASHPOINTS (available in the IICLE® Online Library to subscribers), we reviewed two Human Rights Commission cases brought by this debtor against her condominium association. Those cases were dismissed, and the dismissals were affirmed.
Let’s return to the questions presented at the beginning of this article.
What happens when a debtor obtains discharge of prepetition condominium assessments and remains current on all postpetition assessments? The bankruptcy court’s analysis shows that if the association is to proceed with any recourse to enforce the lien on the condominium unit, the association needs to do so through a foreclosure action in state court. If the unit owner defaults on postpetition assessments, an eviction action may be commenced but it must be restricted to the postpetition assessments.
How should the lien be enforced? The proper remedy to execute on the association’s lien is foreclosure of the lien.
Does the condominium association have an obligation to enforce the lien on the debtor’s unit? If so, what are the association’s likely concerns? These questions relate back to last month’s Condominium Law FLASHPOINTS, which discussed the statutory duty on the association not to forebear the collection of assessments. The reasons evictions are appealing remedies to condominium associations include the fact that they are a faster legal process, much cheaper to prosecute, and typically place the association in an immediate position to start collecting on the debt. Foreclosure actions typically afford the association little or no relief especially when the unit has no equity or, even if it has equity, the association is not in a position to borrow sufficient funds to satisfy the priority mortgage(s) on the unit. Arguably, an association should not waste unit owner funds pursuing a foreclosure action to enforce a lien unless there is a viable likelihood of some recovery. When there has been prior discharge of assessments, the better course may be to remain mindful of the lien on the unit and hope to recover the lien amount, or a portion of it, eventually when the unit is sold.
For more information about condominium law, see CONDOMINIUM LAW (ILLINOIS) (IICLE®, 2016). 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.