Illinois condominium associations cannot take collection action against a unit owner who is discharged in bankruptcy with respect to unpaid condominium assessments that predate the bankruptcy filing. Doing so may result in sanctions being entered against the condominium association. This was the central issue in In re Terrell, 614 B.R. 300 (Bankr. N.D. Ill. 2020). In that case, a delinquent unit owner was discharged in bankruptcy. The discharge order included unpaid assessments that were accrued before the unit owner filed her bankruptcy petition. Despite being aware of the discharge order, the condominium association filed an eviction case against the unit owner for unpaid condominium assessments that predated the bankruptcy filing and ultimately obtained an Order of Possession. However, the bankruptcy court found that the condominium association’s actions violated the discharge order and determined that the Order of Possession was void. The bankruptcy court also entered sanctions against the condominium association. The bankruptcy court’s finding in In re Terrell is an important reminder for all condominium associations that engaging in collection activity in violation of a bankruptcy court order can result in serious consequences.
Background of In re Terrell
Ann Terrell (“Terrell”) was the owner of a unit in the Beaufort of Gordon Terrace Condominium Association (“Condominium Association”). Terrell owed the Condominium Association $16,866.30 in past-due assessments. Prior to March 2019, due to the unpaid assessments, the Condominium Association filed a forcible entry and detainer action (“Eviction Case”) against Terrell pursuant to the Illinois Condominium Property Act (765 ILCS 605/9.2). In March 2019, Terrell filed a Chapter 7 bankruptcy petition (“Bankruptcy Petition”) in the United States Bankruptcy Court for the Northern District of Illinois (“Bankruptcy Court”). In her Bankruptcy Petition, Terrell listed the Condominium Association as a creditor and disclosed the Eviction Case. As a result of the filed Bankruptcy Petition, the Condominium Association dismissed the Eviction Case without prejudice. The Condominium Association did not object to Terrell’s discharge or to the dischargeability of its claim in the Bankruptcy Court proceedings. In July 2019, Terrell received a discharge of all her pre-Bankruptcy Petition debts, including the pre-Bankruptcy Petition condominium assessments. The Condominium Association received notice of the Bankruptcy Court’s discharge order. Terrell paid all post-Bankruptcy Petition assessments to the Condominium Association.
After the Bankruptcy Court entered its discharge order, the Condominium Association reinstated its Eviction Case against Terrell, seeking possession of Terrell’s unit based on the pre-Bankruptcy Petition assessments that were not paid. In October 2019, the Circuit Court of Cook County, Illinois entered an Order of Possession in the Eviction Case against Terrell and in favor of the Condominium Association. However, the Bankruptcy Court subsequently found that the Order of Possession was void. As a result, Terrell then filed a motion for sanctions in the Bankruptcy Court against the Condominium Association for reinstating the Eviction Case after the discharge order was entered.
Bankruptcy Court Finds Sanctions Against Condominium Association Are Warranted
The issue for the Bankruptcy Court to consider was whether the Condominium Association (when it re-instated its Eviction Case) violated the discharge order and, if so, whether sanctions should be awarded against it. As stated by the Bankruptcy Court, the “ discharge 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.” “Debts” subject to the discharge are defined as “liability on a claim.” Furthermore, a “claim” is defined as a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” In its analysis, the Bankruptcy Court further cited to the bankruptcy code which “specifically excepts from discharge postpetition condominium assessments and thereby implies that prepetition condominium assessments are discharged.”
Here, the Bankruptcy Court acknowledged that, pursuant to the Illinois Condominium Property Act, the “failure to pay common expenses when due constitutes a lien on the interest of the unit owner prior to all other liens except taxes…and prior recorded encumbrances on the interest of the unit owner.” (765 ILCS 605/9(g)). Furthermore, the Bankruptcy Court stated that “the lien of the condominium association is in favor of the association and is for the benefit of all other unit owners.” (765 ILCS 605/9(h)). In addition, the Bankruptcy Court stated that under the Illinois Condominium Property Act, an association may evict a defaulting unit owner…and the “only way to avoid eviction is for the defaulting unit owner to pay the outstanding assessments.” (765 ILCS 605/9.2).
However, in this case, the Bankruptcy Court found that Terrell “was not in default” and “did not personally owe any assessments because her personal liability was discharged in her bankruptcy.” Specifically, the Bankruptcy Court opined that Terrell’s “personal liability for the prepetition condominium assessments was discharged.” Although the lien for unpaid condominium assessments is not removed by the discharge, the discharge does extinguish actions against the debtor (Terrell) personally. Therefore, as stated by the Bankruptcy Court, the lien for unpaid condominium assessments remains only against Terrell’s unit. As such, once the Bankruptcy Court’s discharge order was entered, the Condominium Association’s remedy as to the pre-Bankruptcy Petition unpaid assessments is limited to commencing a foreclosure proceeding, not an eviction proceeding. The Bankruptcy Court went on to say that “a creditor may not invoke a state law enforcement action to collect a personal liability which has been discharged.” Although Illinois law allows evictions to collect unpaid assessments, “the prepetition assessments were discharged.” Simply put, the Bankruptcy Court found that an “action to evict is nothing less than an action to collect the discharged claim and violates the injunction.”
Here, the Bankruptcy Court determined that the Condominium Association’s action in pursuing an eviction after the discharge order was entered violated the automatic stay, and the Order of Possession obtained from the Circuit Court of Cook County, Illinois, was void. The Condominium Association had no legal right to proceed with a collection action to collect the discharged pre-Bankruptcy Petition assessments. Despite being aware of the discharge order, the Condominium Association reinstated the Eviction Case. According to the Bankruptcy Court, the Condominium Association did not demonstrate “any reasonable basis” for concluding that its conduct was lawful. Therefore, the Bankruptcy Court found that sanctions were appropriate and ordered the Condominium Association to pay Terrell’s attorneys’ fees in the sum of $2,348.00 and $24.00 in costs.
Why This Case Matters for Condominium Associations
In re Terrell serves as an important reminder for Illinois condominium associations that they must be mindful not to violate any bankruptcy laws when attempting to collect unpaid assessments from a delinquent unit owner who has filed a bankruptcy petition. Once a unit owner files for bankruptcy, it is incumbent on the condominium association to review the bankruptcy case docket and monitor any orders that are entered by the bankruptcy court. Ultimately, condominium associations will need to know whether a discharge order was entered. Furthermore, condominium associations should keep detailed records of all assessments that accrued prior to the bankruptcy filing and those that accrued after. This will ensure that only those debts for which collection action can be taken will be pursued.
At Hirzel Law, PLC, we regularly advise and assist condominium associations in collection efforts against delinquent unit owners, including those that have filed for bankruptcy. We routinely monitor the status of any bankruptcy cases, file proof of claims when appropriate, and determine when collection efforts may resume (if at all) and for what amounts (if any). Most importantly, we ensure that our clients do not run afoul of any bankruptcy laws when collecting unpaid condominium assessments. If your condominium association would like assistance with this, please contact our office.
