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Condominium Law FLASHPOINTS November 2019

November 15, 2019Print This Post Print This Post

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

Seventh Circuit Finds for Property Managers and Their Vendors in §22.1 Disclosure Dispute

The Seventh Circuit has affirmed dismissal of a class action against one of Chicago’s most well-known and largest condominium property management companies relating to charges for disclosures under §22.1 of the Illinois Condominium Property Act, 765 ILCS 605/1, et seq. Horist v. Sudler & Co., No. 18-2150, 2019 WL 5304497 (7th Cir. Oct. 21, 2019). However, in doing so, the Seventh Circuit has likely not had the final word on future litigation with regard to §22.1 disclosure cost claims.

Regular readers of this column may recall that in April 2019, we examined the Rule 23 opinion in Friedman v. Lieberman Management Services, Inc., 2019 IL App (1st) 180059-U, in which the appellate court found that leave to appeal was improvidently granted and vacated the Supreme Court Rule 308 order certifying certain questions and granting leave to appeal. Of particular interest was Justice Walker’s dissent which argued that the district court’s conclusion that §22.1 of the Illinois Condominium Property Act, 765 ILCS 605/1, et seq., protected only prospective purchasers and not selling unit owners in Horist v. Sudler & Co., 17 C 8113, 2018 WL 1920113 (N.D.Ill. April 24, 2018), was “implausible.” 2019 IL App (1st) 180059-U at ¶33. The Seventh Circuit has now affirmed Horist but has left questions unresolved which all but guarantee further litigation, especially against Illinois associations and their directors.

Brief overview of 765 ILCS 605/22.1

In the March 2018 and April 2019 Condominium Law FLASHPOINTS (available in the IICLE® Online Library to subscribers), we reviewed in detail the disclosure documents which seller unit owners are required to obtain from their condominium associations pursuant to §22.1. Suffice it to summarize for our purposes that upon request of a buyer, a seller unit owner must request from his or her condominium association’s board of directors copies of (1) the declaration and by-laws and amendments, (2) recent budget, and (3) certain disclosures relating to finances, capital maintenance and improvement projects, and litigation. These disclosure provisions are set forth in §22.1(a) of the Act.

Subsection (b) specifically requires that: “The 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.” 765 ILCS 605/22.1(b).

Subsection (c) provides: “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.” 765 ILCS 605/22.1(c).

As discussed in our prior columns, several lawsuits have been filed challenging the common practice for management companies to provide the documents and disclosures through one of several web-based companies that charge hundreds of dollars for the documents and disclosures, these costs thereby becoming compulsory costs for the privilege of selling a condominium unit.

The Facts

The facts in Horist are simple. Selling unit owners in two separate condominium associations ordered disclosure documents through a link on the management company’s website to www.homewisedocs.com (HomeWise). One of the plaintiff households was charged $240 for copies of the disclosure documents, and the other household was charged $365 for the documents. The plaintiffs filed a class action complaint in the Circuit Court of Cook County. One of the defendants, Nextlevel Association Solutions, Inc., a California corporation doing business as www.homewisedocs.com, removed the class action to federal court under the federal Class Action Fairness Act of 2005 (CAFA), Pub.L. No. 109-2, 119 Stat. 4. CAFA permits a relaxed exercise of diversity jurisdiction in class actions cases when at least one plaintiff and one defendant are diverse from each other. The trade-off for this relaxed diversity requirement is that the minimum amount in controversy was raised from $75,000 to $5,000,000. This amount in controversy demonstrates the amount at stake in these lawsuits relating to §22.1 disclosure document costs.

The Claims

The plaintiffs asserted five claims: (1) violation of the “reasonable fee covering the direct out-of-pocket cost” provision in §22.1 of the Act; (2) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act), 815 ILCS 505/1, et seq.; (3) aiding and abetting breach of fiduciary duty (those duties owed by the associations’ board of directors); (4) civil conspiracy; and (5) unjust enrichment.

The trial court dismissed all five claims holding that unit sellers did not enjoy an expressed or implied right of action under §22.1; that no viable claim for unfair trade practices existed under the Consumer Fraud Act; and that the three common-law claims would require an underlying statutory breach of the Condominium Property Act or Consumer Fraud Act. Horist, supra, 2019 WL 5304497 at *2.

No Private Right of Action Implied for Sellers Under §22.1 of the Act

The Seventh Circuit analysis began with the question of whether a private right of action was implied for sellers in §22.1 of the Condominium Property Act. Illinois courts recognize a private right of action if four factors are satisfied:

(1) the plaintiff is within the class of members the statute was enacted to benefit; (2) the plaintiff’s injury is one the statute was designed to prevent; (3) a private right of action is consistent with the underlying purpose of the statute; and (4) inferring a private right of action is necessary to provide an adequate remedy for statutory violations. 2019 WL 5304497 at *2, citing Fisher v. Lexington Health Care, Inc., 188 Ill.2d 455, 722 N.E.2d 1115, 1117 – 1118, 243 Ill.Dec. 46 (1999).

The court found none of the factors satisfied in the instant case. Id.

The Seventh Circuit relied on the concept that “[t]wo decisions of the Illinois Appellate Court largely control the outcome.” 2019 WL 5304497 at *3. In Nikolopulos v. Balourdos, 245 Ill.App.3d 71, 614 N.E.2d 412, 185 Ill.Dec. 278 (1st Dist. 1993), the court recognized an implied right of action under §22.1 for prospective purchasers to allow them a reasonable amount of time to cancel a purchase contract based on previously undisclosed expenses disclosed pursuant to the statute. In D’Attomo v. Baumbeck, 2015 IL App (2d) 140865, 36 N.E.3d 892, 394 Ill.Dec. 601, the court extended this action to recognize redress against sellers who concealed information required to be disclosed pursuant to §22.1. The Seventh Circuit concluded that “[t]he unmistakable takeaway from these two decisions is that section 22.1 is designed to protect the interests of condominium purchasers, not condominium sellers.” [Emphasis in original.] Horist, supra, 2019 WL 5304497 at *3.

The court rejected the plaintiffs’ argument that §22.1(c) was designed to protect sellers by requiring a “reasonable fee covering the direct out-of-pocket cost” (2019 WL 5304497 at *1) because “as a general rule of interpretation, Illinois courts read statutes as a whole rather than focusing on isolated subsections” (2019 WL 5304497 at *1, citing Metzger v. DaRosa, 209 Ill.2d 30, 805 N.E.2d 1165, 282 Ill.Dec. 148 (2004) (holding that Illinois Personnel Code, 20 ILCS 415/1, et seq., is designed to protect state and Illinois citizens and provision prohibiting retaliation against Illinois employees who report another employee’s misconduct does not imply private right of action)).

Reading section 22.1 in this holistic way, subsection (a) of the statute establishes the seller’s duty to disclose an array of important documents to the buyer; subsection (b) requires condominium associations to furnish the required documents to unit owners within 30 days of a written request; and subsection (c) allows associations to charge a reasonable fee for doing so. The statute works as an integrated whole for the benefit of prospective condominium purchasers, not sellers. [Emphasis on original.] 2019 WL 5304497 at *3.

The court was persuaded that subsections (b) and (c) implement subsection (a), which is designed to protect condominium purchasers from fraud of the concealment variety. 2019 WL 530447 at *4.

No Consumer Fraud Act Claim

To prevail on a Consumer Fraud Act claim, “a plaintiff must plead and prove that the defendant committed a deceptive or unfair act with the intent that others rely on the deception, that the act occurred in the course of trade or commerce, and that it caused actual damages.” 2019 WL 5304497 at *4, quoting Vanzant v. Hill’s Pet Nutrition, Inc., 934 F.3d 730, 736 (7th Cir. 2019). A trade practice may be considered unfair if it “(1) ‘offends public policy’; (2) is ‘immoral, unethical, oppressive or unscrupulous’; or (3) ‘causes substantial injury to consumers.’ ” 2019 WL 5304497 at *4, quoting Vanzant, supra, 934 F.3d at 739.

The Seventh Circuit found that the plaintiffs’ Consumer Fraud Act claim failed because it was largely based on alleged violations of §22.1 of the Condominium Property Act. Although the opinion does not express such, the clear implication of the opinion is that the plaintiffs missed their mark because they sued the property manager and its service vendor rather than suing the condominium associations and their board of directors.

1. “[I]t’s the condominium association’s duty to furnish the required disclosure documents to unit owners on request; as a corollary, it may charge a reasonable fee for doing so.”

2. “[A]lthough the association may retain a professional management firm to handle the day-to-day operation of the property, it cannot outsource its statutory duties to the property-management company.”

3. Section 18.7 of the Condominium Property Act establishes standards of conduct for property management firms but explicitly precludes an action under the section by unit owners against property managers while preserving actions “under existing law” against the board of directors.

4. As the association and its board are principals, under Illinois agency law their duties to unit owners cannot be imputed to the agent property managers, and the property manager as an agent of the association is not liable for the association’s breach of its duties to unit owners. For an agent to be liable to a third party, the agent must breach an independent duty owed to the third party. 2019 WL 5304497 at *4.

The Seventh Circuit’s analysis here reveals the reason its curious statement earlier in the opinion: “We note for starters that the associations are not defendants; this suit is against the property-management firm and its third-party online document vendor.” 2019 WL 5304497 at *2.

Thus stripped of its Condominium Act premise, the Consumer Fraud Act claim rests on nothing more than a generic allegation that HomeWise charged too much for a PDF of the disclosure documents. But the Illinois courts have held that “charging an unconscionably high price generally is insufficient to establish a claim for unfairness.” 2019 WL 5304497 at *5, quoting Robinson v. Toyota Motor Credit Corp., 201 Ill.2d 403, 775 N.E.2d 951, 961, 266 Ill.Dec. 879 (2002).

Common Law Claims

Dismissal of the claims for unjust enrichment and civil conspiracy were readily affirmed because they are not separate causes of action under Illinois law. The claim of breach of fiduciary duty failed because there were no allegations against the associations breaching fiduciary duties which the manager or its vendor could have aided and abetted. The court suggested, for example, that there is no allegation that “an officer or board member refused to produce the disclosure documents for the plaintiffs upon request or charged them an excessive fee to make copies.” 2019 WL 5304497 at *5. The court observed that all that is alleged is that the management company was hired to manage day-to-day operations and that the management company in turn hired a vendor to assemble and provide PDF copies of the disclosure documents for a fee. “This contractual arrangement is not a breach of the board members’ fiduciary duties. It does not become one even if we accept, as the complaint alleges, that HomeWise’s fee exceeded the out-of-pocket cost of making the PDF.” Id.

Takeaway

The Seventh Circuit’s well-written opinion addressing this subject is welcome. However, it is not likely to be the final word on the subject because the associations were not defendant parties in this lawsuit. The Seventh Circuit clearly left the door open for a question of what happens if a unit owner demands the disclosure documents from an association director or officer and the association refuses to produce the documents without going through the management company. Additionally, the court’s observation at the end of the opinion that the association’s hiring the management company and the contractual arrangement does not breach the board members’ fiduciary duties is gratuitous obiter dictum given that such a question was never presented to this court. Indeed, the court’s analysis in this opinion very likely exacerbates the board’s dilemma about responding to this situation.

Any association attorney who has negotiated condominium management agreements knows that the provision of §22.1 documents by the management company is nonnegotiable. Additionally, any association attorney who has been tasked with assembling the disclosure documents and required information on behalf of a smaller association, which does not have a management company, knows that this task is usually a time-consuming exercise that could easily cost hundreds of dollars in legal fees to the association.

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.

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