In the closing days of its September term, the Illinois Supreme Court heard oral argument in 1010 Lake Shore Association v. Deutsche Bank National Trust Company. 1010 Lake Shore poses the question of whether a foreclosure sale on a condominium unit extinguishes the homeowners’ association’s lien for assessments which came due before the sale closed. Our detailed summary of the underlying facts and lower court opinions in 1010 Lake Shore is here.

The defendant bank in 1010 Lake Shore bought the condominium unit at issue in 2010. Nearly two years later, the plaintiff sued, alleging that the defendant owed more than $62,000 in unpaid assessments. The plaintiff moved for summary judgment, arguing that because the defendant hadn’t made any payments on assessments incurred after the sale, the lien resulting from unpaid pre-sale assessments had never been extinguished. The defendant argued that it wasn’t liable for any amounts incurred before the foreclosure sale. The trial court granted the plaintiff’s motion for summary judgment and awarded the plaintiff possession of the unit. A divided Appellate Court affirmed, holding that the issue turned on construction of Section 9(g)(3) of the Condominium Property Act:

The purchaser of a condominium unit at a judicial foreclosure sale . . . shall have the duty to pay the unit’s proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale . . . [s]uch payment confirms the extinguishment of any lien created pursuant to paragraph (1) . . . . of this subsection (g) by virtue of the failure or refusal of a prior unit owner to make payment of common expenses, where the judicial foreclosure sale has been confirmed by order of the court.  765 ILCS 605/9(g)(3).

Counsel for the bank began the argument. Counsel argued that the issue was whether the Condominium Property Act overcame the Illinois Mortgage Foreclosure Law. The Appellate Court said that the two statutes conflicted, and the CPA governed. Counsel argued that instead, the Court should assume that the legislature intended for the two statutes to be read harmoniously. Justice Thomas asked why the defendant never paid assessments it conceded it owed. Counsel explained that after the sale was confirmed, the plaintiff had made a demand for $62,000, including the unpaid assessment. The defendant was concerned that if it paid the invoice, the payment would be credited against the past balance of the prior owner, rather than against current assessments. The defendant was concerned about the possibility of being accused of voluntarily paying the judgment, and thus creating another issue for the appeal. Counsel argued that the legislature didn’t intend to make a foreclosing mortgagor liable for prior unpaid assessments, and the legislature knows how to do that if they’d intended to. Sections 9(g)(3) and 9(g)(4) of the CPL both apply to third party purchasers at judicial foreclosure sales, counsel argued – 9(g)(4) provides for liability for six months’ prior assessments, but according to the Appellate Court, 9(g)(3) provides for unlimited liability. According to counsel, that means that Section 9(g)(4) means nothing at all. Justice Burke asked what the term “confirmed” in Section 9(g)(3) means. Counsel responded that he didn’t disagree with the definitions set by the Appellate Court. “Confirmed,” counsel argued, is intended to resolve uncertainty. Confirmed can’t possibly mean that a lien previously extinguished is revived, which counsel argued is what the Appellate Court’s opinion means. Counsel argued that the legislature knew exactly what it was doing when it adopted Section 9(g)(4), making the purchaser liable for up to six months’ prior unpaid assessments. In contrast, the 1991 amendment adding the relevant language to Section 9(g)(3) was called a “technical amendment.” Counsel argued that the IMFL only bars future claims by lienholders joined in the foreclosure action. Justice Karmeier asked if the lien was extinguished if the condominium association wasn’t named in the foreclosure suit. Counsel answered that the lien was extinguished by Section 9(g)(3) if payments were made on the assessment following the foreclosure sale. Counsel argued that Section 9(g)(3) was added to clear up uncertainty where nobody was paying assessments between the time of the foreclosure sale and the confirmation of the sale. Justice Thomas asked whether the argument was at odds with the statutory language of Section 15-1509(c) providing that all claims of parties to the foreclosure are barred. Counsel responded no. The court said that Section 1509(c) doesn’t come into play because the condominiums association wasn’t a party to the foreclosure.

Counsel for the homeowners association followed. He argued that every sentence in the statute matters. At the time Section 9(g)(3) of the CPA was enacted, banks were buying units and not paying assessments, counsel argued. The applicable concept was almost one of unclean hands, counsel argued, or the notion that a claiming party can’t be in breach of contract. Section 9(g)(3) provides that if a party wants to extinguish all liens, it has to pay the pending assessments. Counsel argued that the Court had two options – the “extra step” approach, or a due process violation. Section 9(g)(3) is more specific than the IMFL, and is the more recent statute, and should therefore govern, according to counsel. Chief Justice Garman asked how Section 9(g)(4) fits. Counsel answered that Section 9(g)(3) doesn’t conflict with either section 9(g)(4) or 9(g)(5); each sits in its separate spheres. Section 9(g)(3) affects any judicial sale purchaser. Sections 9(g)(4) and 9(g)(5) affect only third party purchasers other than the mortgagee. Section 9(g)(3) affects only current rights and obligations, while Sections 9(g)(4) and 9(g)(5) affect only future rights and obligations. Justice Kilbride asked if the bank wanted to find out, would they have had the right to get information from the association about any pending assessments. Counsel said yes, any lien holder can request an account history for the unit. The bank chose not to pay the assessments. They could have sent the check with language saying it was for payment of assessments only from that day forward. Counsel concluded by arguing that Section 9(g)(3) worked as it was supposed to here. In the wake of the Appellate Court decision, counsel now gets calls the day after a foreclosure sale from banks wanting to pay assessments.

Counsel for the bank concluded in rebuttal, explaining that Section 9(g)(5) only governs third party purchasers (other than mortgagees). This, on the other hand, is almost a secret lien, counsel argued. Sections 9(g)(3) and 9(g)(4) affect different actors. Section 9(g)(4) doesn’t affect mortgagees, but 9(g)(3) affects everyone. Counsel argued that if the Appellate Court is affirmed, Section 9(g)(3) means that banks face potentially unlimited liability – here, ten years of unpaid assessments. That affects mortgagees and non-mortgagees.

We expect 1010 Lake Shore to be decided in four to six months.

Image courtesy of Flickr by Nick Bastian (no changes).