FYI: Ill App Ct (1st Dist) Allows Private Right of Action Against HOAs for Charging Excessive Fees

In a ruling that is favorable to "real estate owned" (REO) owners dealing with exorbitant fees charged by condominium and home owners associations, the Appellate Court of Illinois, First District, recently held that the Illinois Condominium Property Act provides an implied cause of action against a condominium property manager, as well as the condominium association or its board of directors, based on allegations that the property manager charged excessive fees for the production of information required to be disclosed under the statute.

 

A copy of the opinion is available at:  Link to Opinion

 

Section 22.1 of the Condominium Property Act requires unit owners to provide nine categories of documents and information concerning the condominium and its unit owners' association to prospective purchasers. Id. The principal officer or "such other officer as specifically designated" must provide the requested information within 30 days of the request and may charge a "reasonable fee covering the direct out-of-pocket cost of providing such information and copying" to the unit seller for providing the information. Id. § 22.1(b)-(c).

 

In this case, a property management company (Agent) was designated to provide the documents and information required by Section 22.1(a). When the plaintiff condominium unit sellers (Sellers) entered into a contract with prospective purchasers, they notified Agent of their intent to sell their unit and were provided with a standard form to request documents. The form listed various categories of documents each with a price next to it. The total fee for the documents requested by Sellers was $245.

 

Sellers alleged that this was not a "reasonable fee covering the direct out-of-pocket cost of providing such information." § 22.1(c). Sellers further argued as they were unable to obtain the information and documents from anyone other than Agent, they were "beholden" to Agent and had no choice but to pay the fee. Sellers alleged Agents actions to have violated the Illinois Condominium Property Act and the Illinois Consumer Fraud and Deceptive Practices Act.

 

Agent moved to dismiss arguing that no implied private right of action existed in favor of Sellers under Section 22.1 because the purpose of the section is to protect prospective purchasers, not sellers; that section 22.1(c) did not govern the fees property management companies providing services to condominiums could charge, as its unambiguous language mentioned only what may be charged for providing information; and that Sellers failed to state a cause of action for a violation of the Illinois Consumer Fraud and Deceptive Practices Act.

 

The trial court denied the motion to dismiss and held that an implied cause of action in favor of Seller existed under section 22.1.

 

The trial court found that the Illinois Condominium Property Act contains protections for buyers and sellers, as "[t]oday's buyer becomes tomorrow's seller." The trial court further stated Section 22.1 imposed "substantial obligations on sellers to secure the provision of certain documents from management, but in turn offer[ed] them a shred of protection against price-gouging." Finally, the trial court noted that a unit seller was by definition a unit owner and that other implied statutory causes of action had been recognized in favor of unit owners.

 

The trial court next rejected the reasoning in Horist v. Sudler & Co., 941 F.3d 274, 279-80 (7thh Cir. 2019), in which the federal court of appeals concluded that the purpose of Section 22.1 was for the protection of purchasers only.

 

The trial court reasoned that the federal appellate court had read the decisions it relied on too narrowly as "permitting no other purpose to be read in to the statute" than protecting the purchasers and that the court of appeals decision was likely based on hesitancy of federal courts to recognize "novel state law claims," which the court found this claim to be.

 

Finally, the trial court found that the claim could be brought against Agent as Landau v. Landau, 409 Ill. 556, 564 (1951) recognized that an agent may be held responsible for breaching a duty owed by a principal where the agent "'takes some active part in violating some duty the principal owes to a third person.'" 

 

Thus, the trial court denied the motion to dismiss. Agent then filed a motion seeking to have the trial court certify the above-mentioned question of law to the state appellate court.  The motion was granted, and this appeal ensued.

 

The state Appellate Court first looked to the plain language of the statute, stating implication of a private right of action is appropriate if four factors are met: "(1)  the plaintiffs are members of the class for whose benefit the statute was enacted, (2) the plaintiffs' injury is one the statute was designed to prevent, (3) a private right of action is consistent with the underlying purpose of the statute, and (4) implying a private right of action is necessary to provide an adequate remedy for violations of the statute." Metzger v. DaRosa, 209 Ill.2d. 30, 36 (2004).

 

The Appellate Court found that the plain language of the statute required them to reject Agent's argument that the purpose of the statute was only for the benefit or protection of potential purchasers.

 

Although the primary purpose of the statute may be to protect potential purchasers, the Appellate Court reasoned, the statute also has the purpose of benefiting condominium unit owners who wish to sell their units. A unit owner who wants to sell their unit would be significantly hindered if they had no legal method to acquire the information from the party in possession of it to provide to a potential buyer.

 

As such, the Appellate Court found Section 22.1 to protect unit owners who want to sell by ensuring that they have a statutory mechanism to obtain the information from the association to provide in connection with a sale.

 

The Appellate Court continued, finding that Section 22.1(c) was designed to prevent disputes between unit owners and associations or boards regarding fees and to protect all parties in the process by specifying that an association may charge for copying and providing documents and providing general parameters of what the amount of that charge may be. The Appellate Court noted that the specification that only a direct out-of-pocket expense may be charged was especially indicative of the legislatures intent to protect sellers needing to obtain the information.

 

After determining that Sellers were among the class of people the statute was designed to protect, the Appellate Court moved on to the second prong, finding that Sellers alleged injury that the Agent charged an "excessive and unreasonable fee" of $245.00 was an injury that the statute was designed to protect against.

 

The Appellate Court, relying on the above reasoning, also determined a private right of action was consistent with the underlying purpose of Section 22.1 and that without an implied private right of action in favor of a seller, the prohibition on charging excessive fees would be ineffective.

 

Having found the necessary elements met to imply a private right of action in favor of a seller who is charged an excessive or unreasonable fee to receive required documents or information, the Appellate Court turned to the question of agency.

 

The Appellate Court stated that the plain language of Section 22.1 contained no mentioned of agents acting on behalf of unit owners' associations or boards of directors, but that the Illinois Condominium Association Act separately grants the board of managers the ability to "engage the services of a manger or managing agent." Id. at §18(a)(5).

 

The Appellate Court agreed with the trial court's reasoning regarding agency and saw no reason why this would not be one of the services for which the board of managers may engage a managing agent under 18(a)(5).

 

The Appellate Court further held "[w]here a property manager, as part of the services for which it is engaged as an agent by a condominium association, is delegated and agrees to perform the duties of an association or board of managers under section 22.1, it cannot be delegated or agree to perform those duties as agent in a way that the association or board would be prohibited from doing as principal." The Agent, having agreed to act as agent for the owner's association, could be held liable if it took an active part in violating statutory duty that its principal owes to a third party. Landau. 409 Ill. At 564.

 

Thus, the Appellate Court found that the Illinois Condominium Property Act provided an implied cause of action in favor of a condominium unit seller against a property manager, as well as the condominium association or its board of directors, based on allegations of excessive fees charged for the production of information required to be disclosed to a prospective buyer under that statute.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 7th Cir Rejects Borrower's Attempt to Appeal Remand Order and Related Fee Award

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the dismissal of several actions by a borrower against a mortgagee, and in so ruling also held that it did not have jurisdiction to review the lower court's remand order, and that the borrower had waived his right to challenge an award of attorney fees and costs in connection with the remand.

 

A copy of the opinion is available at:  Link to Opinion

 

The dispute encompassed three lawsuits: (1) a bankruptcy proceeding where the borrower (Mortgagor) challenged Mortgagee's debt and security interest; (2) Mortgagee's foreclosure action against the Mortgagor; and (3) Mortgagor's separate lawsuit against Mortgagee alleging unfair debt collection practices.

 

In 2005, Mortgagor executed a mortgage loan secured by his residence, and later defaulted. After defaulting, Mortgagor entered bankruptcy. Mortgagee filed a proof of claim as to its loan secured by Mortgagor's residence.

 

The Chapter 13 bankruptcy plan was approved in 2012 and incorporated an agreement between the parties that conditioned the automatic stay on Mortgagor making monthly mortgage payments to Mortgagee. Pursuant to the agreement, if Mortgagor defaulted on the payments to Mortgagee, the stay would lift and Mortgagee could foreclose on the residence. Mortgagor stopped making the mortgage loan payments in 2014, at which time Mortgagee withdrew its proof of claim and notified the bankruptcy court that the stay had terminated.

 

Mortgagor then filed an adversary proceeding challenging Mortgagee's debt and security interest. While the adversary proceeding was pending, Mortgagor completed the Chapter 13 plan and received a bankruptcy discharge. The adversary proceeding concluded in 2019, when the bankruptcy court granted Mortgagee's motion to dismiss, ruling the bankruptcy discharge did not cover the debt owed to Mortgagee. The court held the debt was either a long-term debt provided for under Section 1322(b)(5) of the Bankruptcy Code or was not a debt provided for by the confirmed Chapter 13 plan. Mortgagor did not appeal the bankruptcy court's ruling within the statutorily required time period.

 

After dismissal, Mortgagee filed a foreclosure action which Mortgagor attempted to remove to the bankruptcy court, arguing that Mortgagor was seeking a personal deficiency judgment against him, which contravened the bankruptcy discharge. Mortgagee moved to remand arguing there was no federal jurisdiction on the face of its foreclosure proceeding. The bankruptcy court instructed Mortgagor to respond to the remand motion and show why it had jurisdiction but Mortgagor failed to do so. As Mortgagor had no basis to assert federal question jurisdiction, the bankruptcy court found the removal unreasonable and awarded Mortgagor attorney fees and costs under 28 U.S.C § 1447(c).

 

Mortgagor appealed the remand order to the trial court, but the order was affirmed. Mortgagor then appealed to the Seventh Circuit and also sought review of the attorney fees and costs awarded to Mortgagee.

 

Finally, Mortgagor sued Mortgagee in federal trial court, alleging violations of the federal Fair Debt Collection Practices Act and the 2018 bankruptcy discharge injunction. Mortgagee moved to dismiss and the trial court granted dismissal as the bankruptcy court had held that the debt owed to Mortgagee was not subject to the 2018 discharge. Mortgagor appealed the dismissal of this lawsuit also.

 

On reviewing Mortgagor's claims, the Seventh Circuit first determined whether it had jurisdiction to review the remand order. Pursuant to 28 U.S.C. § 1447(c), "[a]n order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise." Further, 28. U.S.C. § 1452(b) states that a remand order issued "on any equitable ground" "is not reviewable by appeal or otherwise by the court of appeals…or by the Supreme Court of the United States." Thus, the ability to review the trial court's affirmance of the remand order was foreclosed by the two statutes.

 

Mortgagor relied on City of Waco v. United States Fidelity & Guaranty Co., 293 U.S. 130 (1934) in which the Supreme Court of the United States determined that although the remand was not appealable, the order of dismissal was reviewable because it preceded the remand order "in logic and in fact." Id. at 143. Mortgagor alleged that, because his appeal of the remand order contested the bankruptcy court's conclusion that his discharge did not cover the debt rather than disputing the court's holding that it lacked subject matter jurisdiction, it fit within Waco.

 

The Court of Appeals found this argument unpersuasive, as the Court has expressly stated that "Waco does not permit an appeal when there is no order separate from the unreviewable remand order." Powerex Corp. v. Reliant Energy Servs., Inc., 551 U.S. 224, 236 (2007). The Seventh Circuit added that Mortgagor had every opportunity to timely appeal the court's conclusion that his bankruptcy discharge did not cover the debt owed to Mortgagee but chose not to do so.

 

Next, Mortgagor argued that the attorney fees and costs awarded to Mortgagee should be reversed because he had a reasonable basis to contest that his bankruptcy discharge covered the debt owed to Mortgagee. The Seventh Circuit found that Mortgagor had waived these arguments, as Mortgagor offered no argument before the trial court as to why the bankruptcy court's fees and costs award was improper. Further, the Appellate Court found that, because Mortgagor's argument against the fees and costs before their court differed from the challenge to the award in the trial court, he had waived his current argument.

 

Finally, Mortgagor challenged the dismissal of his suit against Mortgagee claiming violations under the federal Fair Debt Collections Practice Act, the Illinois Consumer Fraud and Deceptive Practices Act, and the 2018 bankruptcy discharge injunction. The Seventh Circuit found that all of Mortgagor's claims hinged on the question of whether the debt owed Mortgagee was covered under the bankruptcy discharge, which had already been resolved in the bankruptcy court action, which Mortgagor did not appeal. Thus, the Court held, the appeal was an impermissible collateral attack.

 

Mortgagor raised three arguments to avoid the Court's conclusion. First, Mortgagor argued that the bankruptcy court's dismissal of his adversary action was not a final order and therefore should not be given a preclusive effect. The Seventh Circuit quicky dispensed with this argument finding that the bankruptcy court dismissed the adversary proceeding, and "[a] final resolution of any adversary proceeding is appealable, as it is equivalent to a stand-alone lawsuit." Fifth Third Bank, Ind. v. Edgar Cnty. Bank & Tr., 482 F.3d 904, 905 (7th Cir. 2007).

 

Next, Mortgagor argued that the bankruptcy court's analysis regarding the scope of the discharge was dicta. The Seventh Circuit found this a mischaracterization of the court's decision. The Appellate Court found that the bankruptcy court dismissed the proceeding because it had devolved into "a two-party dispute under state law" that "[did] not implicate bankruptcy rights." Thus, the conclusion was reached because Mortgagor's bankruptcy discharge did not implicate the debt owed Mortgagee and therefore, the court's analysis on the scope of the bankruptcy discharge was central to the court's decision.

 

Finally, Mortgagor argued he was denied adequate notice and an opportunity to respond to the bankruptcy discharge issue because Mortgagee did not file a motion or objection challenging his right to a discharge. The Seventh Circuit found Mortgagor had not basis to contend he did not have a constitutionally sufficient notice that the bankruptcy court could make findings or determinations on the scope of his bankruptcy discharge in the adversary proceedings as Mortgagor was the one who originally placed the scope of his discharge before the court. Further, if Mortgagor believed the decision in the bankruptcy court denied him due process, he had every right and opportunity to appeal the bankruptcy court's final order but he failed to do so.

 

Therefore, the Seventh Circuit dismissed the appeal of the remand order and affirmed the fees and costs award and the trial court's dismissal with prejudice of Mortgagor's suit against Mortgagee.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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