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Can a Condo Association Retain Possession after a bankruptcy filing?

This question was raised in the case In re Sarah DiGregaorio, 458 B.R. 436 (Bankr. N.D. Illinois 2011).

After the debtor fell behind on her condo assessments, the condo association sued her in state court.  The court entered an order for possession and awarded the association a monetary judgment for the unpaid assessments.  The order for possession was not effective under Illinois law for 60 days.  After the 60-day period expired and the debtor failed to pay the judgment, the order for possession was enforced and the debtor was evicted from her unit.

The debtor then filed a Chapter 13 bankruptcy one month after the eviction.  Under Section 362(a)(3) of the Bankruptcy Code, filing of bankruptcy automatically stays "any act to obtain possession of property of the estate or...exercise control over property of the estate."  The debtor sought damages against the association under Section 362(k) of the Bankruptcy Code, alleging that the association willfully violated the automatic stay for failure to return possession of her condo unit after being informed of the bankruptcy filing.

The question presented to the bankruptcy court was whether entry of a final Illinois Court judgment dispossessing debtor of a possessory interest in her property effectively keeps that interest from being recovered as part of the bankruptcy estate.  The court answered in the affirmative; it does.

The court first found that the state court's entry of a judgment for possession had extinguished the debtor's right to possession.  Under the Illinois Condominium Property Act, the condo association has a lien on a unit upon a unit owner's failure to pay assessments and may foreclose on that lien by evicting the owner.  While she retains ownership interest in the unit, the owner does lose the right to possession unless and until the delinquency is cured, even if she later files bankruptcy.

The court explained that under the Rooker-Feldman doctrine, federal courts other than the Supreme Court cannot review state court judgments and rejected the debtor's argument that bankruptcy law provides an independent basis for recovering possession of her unit.

The court reasoned that, since the debtor's possessory interest in the unit was effectively transferred through a final state court judgment giving possession to the association a month before the bankruptcy filing, that unit was not property of the bankruptcy estate.  The debtor's ownership right to the unit merely givers her the right to reclaim possession of the property by satisfying the judgment.  It distinguished the case United States v Whiting Pools, 462 U.S. 198 (1983), where the Supreme Court held that the IRS must return the debtor's property seized before bankruptcy since Section 542 of the Code "brings] into the estate property in which the debtor did not have a possessory interest at the time the bankruptcy proceeding commenced."  The bankruptcy court noted that not final judgment of any court had terminated the debtor's right to possession in Whiting Pools, as was the case in DiGregorio.

Finally, the court distinguished the case from Thompson v General Motors Acceptance Corp., LLC., 566 F.3rd 699 (7th Cir. 2009).  In Thompson, the U.S. Court of Appeals for the Seventh Circuit held that a creditor must return property seized prepetition to the debtor before seeking adequate protection.  The bankruptcy court pointed out that the pre-bankruptcy repossession in Thompson, while lawful, was not pursuant to a state court judgment terminating the possession rights, as was in the instant case.

This case is an example of why you need an experienced Chicago bankruptcy attorney advising and representing you.  At Ledford & Wu, bankruptcy and consumer defense is all we do and we only work in the greater Chicago area, so we stay abreast of all of the significant cases and changes in law that may effect your case.  Call us today for a free bankruptcy consultation.

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