Illinois Appellate Court Holds that Condominium Association Entitled to Collect All Unpaid Assessments from Foreclosure Purchaser

Illinois Appellate Court Holds that Condominium Association Entitled to Collect All Unpaid Assessments from Foreclosure Purchaser

Assessments are the lifeblood of a condominium association. Thus, when a unit owner becomes delinquent on their assessments, it is imperative that the community association act swiftly (and legally) to try to recoup any of the unpaid assessments. One option a condominium association has is to file a foreclosure action against the unit. However, often times when a unit owner fails to pay their association assessments, they also have likely failed to make their mortgage payments leading to the first mortgagee to initiate a foreclosure action against the unit. Generally, if a condominium association has a lien for any unpaid assessments, the lien will be extinguished in a foreclosure sale. However, in  Franklin Am. Mortg. Co. v. 7306 N. Winchester Condo. Ass’n, 2016 IL App (1st) 140666-U, the court found that a condominium association’s lien is not extinguished if the foreclosure purchaser fails to pay the post-foreclosure sale assessments. This article will discuss Franklin and the potential impact it has on condominium associations.

765 ILCS 605/9(g) of the Illinois Condominium Act sets forth a condominium association’s rights to receive unpaid assessments in a foreclosure sale

First, 765 ILCS 605/9(g)(1) of the Illinois Condominium Property Act provides that a condominium association has an automatic lien should a unit owner fail to make payment of the common expenses or the amount of any unpaid fine when due. In 1010 Lake Shore Ass’n v. Deutsche Bank Nat. Tr. Co., 2015 IL 118372, 43 N.E.3d 1005, the Supreme Court of Illinois interpreted 765 ILCS 605/9(g)(3)-(5) of the Illinois Condominium Property Act as follows:

“[S]ections 9(g)(4) and 9(g)(5) apply to foreclosure sale purchasers other than mortgagees and to purchasers acquiring title form a mortgagee. Those third-party purchasers are required to pay a prior owner’s unpaid assessments that accrued during the six months preceding an action to collect assessments. Section 9(g)(5) requires the notice of the foreclosure sale to state that a purchaser other than a mortgagee must pay those prior unpaid assessments. Sections 9(g)(4) and 9(g)(5), therefore allow condominium associations to recover a portion of the prior owner’s unpaid assessments from the new owner.

Section 9(g)(3), in contrast, applies to all foreclosure sale purchasers, including mortgagees, and it simply requires the purchaser to pay assessments beginning the month following the foreclosure sale to confirm the extinguishment of the lien created by the prior owner’s failure to pay assessments. Section 9(g)(3) does not require a foreclosure sale purchaser to pay any of the prior owner’s unpaid assessments if the purchaser pays the assessments coming due following the sale. Thus, section 9(g)(3) ensures payment of assessments accruing after the foreclosure sale. Under section 9, mortgagees may be exempted from liability for the prior owner’s unpaid assessments, but only if the mortgagee pays the assessments coming due following its purchase of the unit at the foreclosure sale.” Deutsche Bank, 2015 IL 1183782, ¶¶ 32–33.

Accordingly, all foreclosure purchasers, including mortgagees, are required to pay the post-foreclosure assessments to confirm the extinguishment of the lien. Should a foreclosure purchaser fail to pay the post-foreclosure assessments, the foreclosure purchaser may be liable for the prior owner’s unpaid assessments as the court found in Franklin.

The facts of Franklin

In Franklin, Chase Home Finance (“Chase”) filed a foreclosure complaint against Eric Tripp, the unit owner, and the condominium association for the property at 7306 North Winchester Avenue, citing a mortgage note executed on May 21, 2008, held by Franklin Mortgage. The association asserted a lien for unpaid assessments totaling $970.14, which were accruing monthly. They later filed a separate forcible entry and detainer action against Tripp for unpaid association payments. On May 11, 2012, the circuit court ruled in favor of Franklin Mortgage, granting a default judgment against Tripp and allowing the foreclosure sale. A judicial sale occurred on August 13, 2012, where Franklin Mortgage purchased the property for $40,984.23. After the sale, Franklin Mortgage assigned the property to Clearvue, which sought to clarify the obligations regarding unpaid assessments. The condominium association demanded payment for prior assessments totaling $11,453.52, threatening legal action for non-payment. Clearvue intervened in the proceedings, and the court ruled on September 5, 2013, that the condominium association’s lien for assessments prior to November 1, 2012, was extinguished by the foreclosure. As such, Clearvue was not liable for these prior assessments. The condominium association filed a motion to reconsider which the court refused. The condominium association appealed.

A condominium association may collect all unpaid assessments if the foreclosure purchaser fails to pay post-foreclosure sale assessments

In Franklin, the court looked to the Deutsche Bank case in which the court provided the following two-step procedure which is necessary to extinguish a lien on any unpaid condominium assessments incurred by a prior unit owner: (1) pursuant to 765 ILCS 605/9(g)(1)of the Illinois Condominium Property Act, the condominium association must be included as a party to the mortgage foreclosure action so that any lien can be extinguished upon the foreclosure sale and (2) pursuant to 765 ILCS 605/9(g)(3) of the Illinois Condominium Property Act, “an additional step” must be taken “to confirm or formally approve the extinguishment by paying the post-foreclosure sale assessments.” Franklin at ¶ 19. Without this confirmation, the foreclosure purchaser remains liable on the unpaid assessments. Id.

Applying the principles of Deutsche Bank to the instant case, the court found that the trial court’s order finding that the condominium association was not entitled to collect any unpaid assessments constitutes reversible error. Id. at ¶ 22. The court found that although the lien created by the prior unit’s owner failure to pay the common assessments was extinguished by the foreclosure sale, with the condominium association named a party in the foreclosure action, in order to avoid liability on those assessments, Franklin Mortgage needed to confirm the extinguishment of the lien by paying the post-foreclosure assessments. Id. The court found that the extinguishment of the lien was not confirmed and the lien was still alive because the record did not reveal that Franklin Mortgage nor Clearvue ever made payments on the post-foreclosure assessments. Id. Therefore, the court found that the condominium association was entitled to all unpaid assessments pursuant to 9(g)(1) and 9(g)(4) of the Condominium Property Act, as well as any costs and reasonable attorney fees incurred in attempting to recoup them. Id.

Conclusion

Given that Franklin is an unpublished case, no court in Illinois is required to follow the ruling set forth in Franklin. Nevertheless, Franklin is a persuasive case that an Illinois court likely will follow given that the court’s reasoning stems from case issued by the Supreme Court of Illinois. Per Franklin, a condominium association is entitled to all unpaid assessments if the foreclosure purchaser, including the mortgagee, fails to pay the post-foreclosure sale assessments.  In the event of a foreclosure of a unit, a condominium association should hire a condominium attorney to monitor the foreclosure proceedings. Once the foreclosure sale has occurred and the unit has sold – whether to the first mortgagee or to a third-party purchaser – the condominium association should issue a letter to the purchaser notifying them of the condominium association’s lien and providing them with an amount of the post-foreclosure assessment. Should the purchaser fail to pay this post-foreclosure sale assessment after the first month of possession, the purchaser may be liable for all of the unpaid assessments prior to the foreclosure sale. The attorneys at Hirzel Law, PLC are experienced condominium attorneys who can help navigate a condominium association through the intricacies of the foreclosure process.

 

Jeremy Fernando is an Associate Attorney at Hirzel Law, PLC. Mr. Fernando is licensed to practice law in the State of Illinois. He concentrates his practice on community association law, condominium law, homeowners association law, and real estate law. Mr. Fernando’s legal career includes serving in corporate practice where he represented insurance companies and institutional investors in U.S. and cross-border private placements of securities, including transactions in the Netherlands, England, Ireland, Australia, and Germany. Mr. Fernando earned his Juris Doctor from Marquette University Law School, where he graduated with honors and ranked in the top 15% of his class. He also served as an Associate Editor of the Marquette Law Review. Mr. Fernando is committed to providing effective legal representation to his clients and is passionate about helping communities navigate complex legal challenges. He may be reached at 312-552-7669 or jfernando@hirzellaw.com.