A recent Illinois Appellate Court decision has brought to the forefront the ongoing dispute between foreclosure sale purchasers—usually mortgagees—and homeowners associations (HOAs) regarding the extent to which purchasers are responsible for HOA assessments. In a potentially significant ruling, the Appellate Court held that an Illinois foreclosure purchaser’s failure to pay assessments that come due after the foreclosure sale could result in liability for all previously unpaid assessments, including those that accrued prior to the sale. 1010 Lake Shore Ass’n v. Deutsche Bank Nat’l Trust Co., 2014 IL App (1st) 130962.

The context for this decision is an ongoing tug-of-war between foreclosure sale purchasers and HOAs that has been percolating since the housing crisis began in 2008. On one hand, foreclosure purchasers do not want to pay assessments that were unpaid by a prior owner, reasonably arguing that the prior owner is solely responsible for those fees. HOAs, on the other hand, feeling the crunch associated with foreclosed properties in their condominium developments, have sought to increase the obligations of foreclosure purchasers to stabilize their balance sheets.

The Illinois Condominium Act, 765 ILCS 605/1 et seq., attempts to strike a balance between the competing concerns. The statute protects HOAs by granting them liens for unpaid assessments (section 9(g)(1)) and requiring purchasers of condominium units at judicial sales to pay the assessments due on the first day of the month after the sale (not the confirmation of sale) (section 9(g)(3)). The statute also protects purchasers by stating that payment of the first post-sale assessment "confirms the extinguishment of any lien" that the HOA may have had based on the prior owner’s failure to pay assessments, thus limiting the overall liability of the purchaser.

In 1010 Lake Shore Association, that balance appears to have shifted toward the HOAs. Deutsche Bank (likely acting through a servicer and solely in its capacity as trustee of a securitized trust that owned a mortgage on a condominium unit) foreclosed on its unit and named the HOA as a defendant. Deutsche Bank obtained a judgment of foreclosure and purchased the property at a foreclosure sale in June 2010. The sale was later confirmed, extinguishing the HOA’s lien securing payment of past-due assessments due from the prior owner—or so Deutsche Bank thought.

In May 2012, the HOA sued Deutsche Bank, asserting that no post-sale assessments had been paid and, therefore, under the Condominium Act the HOA’s lien securing payment of all past-due assessments remained in force. The complaint sought over $62,000 in unpaid assessments—including over $40,000 in unpaid assessments from the prior owner—as well as attorneys’ fees and costs. Deutsche Bank disputed liability for any pre-sale assessments due from the prior owner. The circuit court granted summary judgment in favor of the HOA for the full amount of the claimed assessments and the attorneys’ fees and costs, and awarded the HOA possession of the unit.

The Illinois Appellate Court for the First District affirmed the HOA’s summary judgment on August 12, 2014. The court noted that section 9(g)(1) of the Condominium Act gives an HOA a lien for any unpaid assessments. The court further noted that section 9(g)(3) says that a foreclosure purchaser must pay assessments from the first day of the month after the judicial sale, and that "[s]uch payment confirms the extinguishment" of the HOA’s lien. Relying on this language, the court held that since Deutsche Bank had not paid the post-sale assessments, the HOA’s lien for pre-sale assessments was not extinguished and remained valid as to Deutsche Bank’s interest in the unit. In reaching its decision, the court held that section 9(g)(3) of the Condominium Act is a specific limitation on the general rule under section 15-1509(c) of the Illinois Mortgage Foreclosure Law that all claims of all parties to a foreclosure action are extinguished upon transfer of a judicial deed. This controversial holding was the subject of a substantive dissent, which reasoned that the correct and harmonious interpretation of the Condominium Act and the Foreclosure Law is that an HOA lien is extinguished in accordance with the Foreclosure Law when an HOA is named as a defendant in a foreclosure case; when an HOA is not named as a defendant in a judicial foreclosure, the lien may only be extinguished upon the payment of the post-sale assessments in accordance with the Condominium Act. Citing procedural grounds, the majority further declined to consider two defenses asserted by Deutsche Bank: (1) there was evidence of payment that was not considered by the court in entering summary judgment for the HOA, and (2) the new action by the HOA was barred by the doctrine of res judicata.

The 1010 Lake Shore Association decision raises as many questions as it answers. As the dissent pointed out, section 15-1509(c) of the Illinois Mortgage Foreclosure Law (735 ILCS § 5/15-1509(c)) states that "all claims of parties to the foreclosure" are barred after title vests post-foreclosure. Here, the HOA was named and served and its interest was foreclosed. Allowing the HOA to bring a claim to recover assessments that had accrued pre-foreclosure would appear to be directly prohibited by section 15-1509(c). Similarly, allowing an HOA to re-litigate the validity of a lien that was the subject of a prior court action to which the HOA was a party raises questions about whether such claims should be barred by res judicata or the collateral attack doctrine.

In addition, the majority opinion does not indicate whether a single monthly payment of post-foreclosure assessments fully extinguishes the HOA’s lien or if the purchaser must continue to pay those assessments throughout its ownership in order to avoid the risk of a "springing" lien that might retroactively apply to pre-foreclosure assessments. The majority opinion also does not address when that first assessment payment must be made—if payment is late, does that mean the HOA’s foreclosed lien is not extinguished? Put another way, if a judicial sale occurs near the end of the month, and the purchaser is unable to determine the amount of the monthly assessment and make payment on the first day of the following month, is the foreclosure then ineffective as to the lien of a properly named and served HOA defendant? Or, can a purchaser belatedly make the payments due and extinguish the lien under the Condominium Act?

Those questions, the answers to which will directly impact mortgage and Real Estate Owned (REO) servicing in Illinois, are likely to be addressed in subsequent decisions or legislation. But for now, the decision must be considered in connection with Illinois (and particularly Cook County) foreclosures involving HOA assessments.

To avoid the risk of liability for pre-sale assessments after the completion of a foreclosure, mortgagees and their servicers should ensure that there is a procedure in place to pay monthly assessments after the foreclosure sale.