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Counsel’s Corner: Ruling Puts Lenders on the Hook for Unpaid Assessments

12-16 Louis Manetti

Louis Manetti

Louis J. Manetti handles complex litigation matters as part of the Contested Litigation Unit with Chicago-based firm Codilis & Associates. He has extensive experience in appellate advocacy and has won favorable dispositions for Codilis’ clients in dozens of appeals. He has also orally argued before many of the Illinois Appellate Court districts and the Illinois Supreme Court. Additionally, Mr. Manetti manages contested cases at the trial court level, involving mechanics lien issues, removal to federal court, and evidentiary hearings.

The Illinois Supreme Court created potentially hazardous territory for lenders who take title to condominium property via foreclosure lawsuits. In 1010 Lake Shore Drive Ass’n v. Deutsche Bank Nat’l Trust Co., the Supreme Court held that liens for unpaid condominium assessments are not extinguished unless the lender pays post-sale assessments and in doing so it upheld a money judgment against a lender for unpaid assessments which were the debt obligation of the prior unit owner. The decision does not provide much clarity for lenders going forward, and it leaves lenders potentially vulnerable to money judgments for all unpaid assessments—even assessments which became due prior to judicial sale.

A brief explanation of the condominium statute and the foreclosure statute will clarify the issues at stake before the Supreme Court. In Illinois, lenders who are the successful bidders of condominium property at foreclosure sale are liable for assessments beginning on the first day of the month after judicial sale. Moreover, missed assessment payments operate as a lien on the condominium unit. The condominium statute states that making the post-sale payment for assessments “confirms the extinguishment” of any lien for unpaid assessments. So lenders have the personal obligation to pay assessments beginning the month after judicial sale, with the knowledge that there may be a lien against the property because the prior owner failed to pay assessments. But in mortgage foreclosure actions, the judicial sale is not final until the court confirms the sale: until then, it is merely an irrevocable offer to purchase the property. A lender could potentially wait months between the judicial sale and when the judge confirms the sale.

In 1010 Lake Shore Ass’n, judicial sale occurred on June 17, 2010. The lender failed to pay monthly assessments, and on May 17, 2012, the association filed a lawsuit for possession and unpaid assessments. It claimed that the lender owed it approximately $62,000.00 in unpaid assessments. The association eventually moved for summary judgment. The lender responded that it only owed $43,000.00 of post-sale assessments—the rest of the amount demanded was the debt of the prior unit owner. The trial court entered judgment in the association’s favor in the amount of approximately $70,000.00.

The appellate court affirmed. It held that the judgment was appropriate because the lien for unpaid assessments was not extinguished. It held that liens for unpaid assessments are not extinguished unless the lender pays assessments following the judicial sale. It reasoned that the condominium statute states that post-sale payment “confirms the extinguishment” of the lien, so the lien for unpaid assessments was not fully extinguished. Justice Liu dissented, and argued that under the foreclosure law all claims were barred on completion of the foreclosure, so section 9(g)(3) of the condominium statute offered an alternative method to extinguish the lien for unpaid assessments.

The Supreme Court began by finding that the issue of the appropriateness of the association’s remedy—that is, whether a money judgment was appropriate given the trial court’s insistence that it was enforcing a lien—had been forfeited because the lender did not raise the issue until after the appellate court had issued its decision.

Next, the Supreme Court agreed with the appellate court’s interpretation of section 9(g)(3) of the condominium statute and held that post-sale assessment payments are necessary to extinguish a lien for unpaid assessments. It held that even if a condominium association is named as a defendant in the foreclosure action which leads to the judicial sale, the association’s lien for unpaid assessments is not extinguished unless the lender pays assessments post-sale. “[S]ection 9(g)(3) [of the condominium statute] plainly mandates an additional step beyond the extinguishment of the lien in a foreclosure action.” It found that interpreting post-sale assessment payment as an alternative means of extinguishing a lien for unpaid assessments would be contrary to the plain language of the condominium statute.

The Supreme Court further held that section 15-1509(c) of the foreclosure law does not contradict this result. Section 15-1509(c) of the foreclosure law bars claims of all parties to the foreclosure when title is vested via a judicial sale deed. 735 ILCS 5/15-1509(c). But the Supreme Court found that this language cannot bar the claims of an association for unpaid assessments because the condominium statute contemplates that the association shall be a party to the foreclosure, and section 9(g)(3) requires the additional step of post-sale assessment payments to extinguish the lien. As a result, it affirmed an approximately $70,000.00 money judgment against the lender—even though about $20,000.00 of it was the personal debt of the prior owner.

There are two major issues lenders will face in the wake of this decision. The first is whether it is appropriate for condominium associations to be demanding money from lenders for unpaid assessment liens. The second issue is when a lender will be deemed to owe pre-sale assessments for failure to make post-sale payments.

Regarding the propriety of entering money judgments against lenders for pre-sale assessments, a lien is merely “a charge on property for the payment of a debt or duty, and for which it may be sold in discharge of the lien.” And the Supreme Court has held that “property conveyed subject to a lien does not impose any personal liability upon the grantee to the person holding the lien.” And the appellate court in this case conceded unpaid assessments constitute a lien, “not a personal judgment against the foreclosure purchaser, when assessment payments are not made for the first full month following the judicial foreclosure sale.” Yet the Supreme Court just affirmed the entry of a $70,000.00 money judgment against the lender, and explicitly refused to reach the issue of whether the entry of a money judgment—as enforcement of a lien—was proper.

The other issue left unresolved by the decision is when lenders will be deemed to owe unpaid pre-sale assessments for failure to make post-sale payments. The Supreme Court characterized the extinguishment section of the condominium statute as providing “incentive for prompt payment of those postforeclosure sale assessments,” but the decision fails to address exactly when a lender becomes liable for all unpaid pre-sale assessments. It also failed to address an existing appellate case which states that late post-sale assessment payments can extinguish liens for unpaid assessments if the lender tenders payment for the entire post-sale period (holding that an association lien was extinguished, even though the lender missed the monthly payment for May, because in June it tendered the payments for both May and June).

It is uncertain how trial courts will resolve these issues in the future. What is certain in the wake of 1010 Lake Shore Ass’n is that lenders participating at judicial foreclosure sale for condominium properties run the risk of full liability for past-due assessments if section 9(g)(3)’s mandate that the lender is responsible for assessment payments beginning on the first day of the month after sale is violated.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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