Kenneth Michaels, Jr., Bauch & Michaels, LLC, Chicago
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Bankruptcy Court Exercises Permissive Abstention to City of Chicago’s Complaint To Appoint Receiver and De-Convert Condominium Property
This month we consider what is likely the first reported decision under §14.5 of the Illinois Condominium Property Act, 765 ILCS 605/1, et seq., which gives municipalities the right to declare a condominium property a “distressed condominium property” if it meets certain criteria, to have a receiver appointed, and, possibly, to have the property withdrawn from the Act. Unfortunately, but not surprisingly, the bankruptcy court hearing the adversary proceeding brought by the City of Chicago against such a property in a Subchapter V, Chapter 11 case ultimately decided to exercise permissive abstention under 28 U.S.C. §1334(c). City of Chicago v. Ford City Condominium Ass’n (In re Ford City Condominium Ass’n), Case No. 21-05193, 2023 WL 5625289 (Bankr. N.D.Ill. Aug. 31, 2023).
Facts Regarding the Association
The condominium property consists of 319 units in 7 residential buildings. With the bar date for filing claims still open, there are claims filed for more than $1.3 million in overdue water charges; $129,612 in elevator services; and $219,085 for masonry work. The city has numerous outstanding building court cases for building code violations, and a city inspection in May 2023 found 115 code violations. Unit owners owe more than $1.5 million in unpaid assessments, and the Subchapter V trustee argued to the court that it would take $25 million to bring the common elements up to building code and another $25 million to bring the units to code. 2023 WL 5625289 at *1.
The condominium association filed for bankruptcy relief under Subchapter V of Chapter 11 of the Bankruptcy Code in April 2021. In September 2021, after hearing substantial allegations of mismanagement, the court removed the association as debtor-in-possession and appointed the Subchapter V Trustee as the trustee of the estate. Id.
Section 14.5 of the Act
This author has discussed §14.5 of the Act in Ch. 7, Distressed Condominium Developments, CONDOMINIUM LAW: DAILY OPERATION CHALLENGES (IICLE®, 2021) (available in the IICLE® Online Library to subscribers). In particular, §7.20 of the chapter discusses the General Assembly’s enactment of §14.5 to the Act granting municipalities the right to bring an action to appoint a receiver, and possibly to withdraw the property from the Act, when the property meets at least two of six conditions. One of those conditions is the existence of serious building code violations. It is unclear from the court’s opinion as to whether any of the other five conditions were met. As of 2021, no reported decisions existed pertaining to §14.5 of the Act. This author was critical of §14.5 because the legislation itself fails to give any direction on rights and obligations once the municipality succeeds in obtaining its receiver and withdrawal of the property from the Act. The reality of the circumstances is that almost all the unit owners can expect to find themselves defending actions brought by their lenders whose loans will hardly be satisfied. Eventually, most of the unit owners can expect to find themselves in personal bankruptcy. Effectively, each unit owner will become jointly and severally liable for the debts of the association and other unit owners. Anyone who has equity in his or her unit will find it evaporated by mortgages on overly encumbered units. The only person likely to survive in whole in an action under §14.5 is the receiver, whose fees take priority in the eventual sale of the property.
Court’s Exercise of Permissive Abstention
28 U.S.C. §1334(c)(1) gives the district and bankruptcy courts the power to exercise permissive abstention to allow state courts, under the principles of comity, to hear any cases arising within a bankruptcy proceeding. As the bankruptcy court in the instant case noted, in deciding whether to exercise such abstention, the federal courts look to the potential effect of the abstention on the bankruptcy estate, the extent to which state law predominates the issues presented, the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, and the likelihood of forum shopping. 2023 WL 5625289 at *2. The bankruptcy court may, as it did here, raise abstention sua sponte.
In this case, the bankruptcy court found three factors compelling in its decision to exercise abstention. First, abstention would not impact the bankruptcy estate because the association does not actually own any of the property. Second, the applicable law is entirely state law, not bankruptcy law. Third, the state courts have more experience administering receiverships and marshalling of assets upon liquidation. The Bankruptcy Code does not give the bankruptcy court the broad array of receiver’s powers as may be available under state law. 2023 WL 5625289 at *3.
The Subchapter V trustee and the city sought to keep the case in the bankruptcy court because bankruptcy litigation generally proceeds faster than in the state courts and because federal law affords service of process by U.S. mail rather than actual service required under state law. Id. The bankruptcy court noted that the city and the trustee referred to the Circuit Court of Cook County moving as “slow as molasses.” Id. (This author, who engages in a substantial amount of litigation in the Circuit Court of Cook County begs to differ with the city and trustee on this particular generalization.) The bankruptcy court could not help but observe that the city’s arguments were disingenuous given that it took the city more than two years to file the complaint under §14.5 of the Act. Id.
The trial court concluded by modifying the automatic stay under §362 of the Bankruptcy Code, 11 U.S.C. §101, et seq., to permit the city to proceed in the Circuit Court of Cook County.
For more information about condominium law, see CONDOMINIUM LAW: GOVERNANCE, AUTHORITY, AND CONTROLLING DOCUMENTS (IICLE®, 2021). 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.