Illinois Bankruptcy Court sanctions condominium association for violating discharge injunction in pursuing post-discharge eviction proceedings

In In re: Terrell, No. 19-07629 (April 8, 2020), the Bankruptcy Court for the Northern District of Illinois found that a condominium association violated the discharge injunction by pursuing post-discharge eviction proceedings based on pre-petition assessments. It ordered the association to pay the debtor’s attorney’s fees and costs as a sanction for its actions, finding no reasonable basis for the violation.

The debtor filed a chapter 7 bankruptcy petition in March 2019. She scheduled her condominium association as a creditor with a claim for past-due prepetition condominium assessments and disclosed the association’s pending eviction action against her. Within one day of the bankruptcy filing, the association dismissed the eviction action without prejudice. The debtor did not reaffirm her debt to the association and the association to did not object to the dischargeability of its claim.  In July 2019, the debtor received a discharge of all her prepetition debts, including the prepetition assessments. Notice of the discharge order was mailed by the court to the association and its attorney. The debtor timely paid all postpetition assessments. Despite making those payments, shortly after her discharge the association reinstated the eviction action and obtained an order of eviction. The debtor then moved for an award of sanctions against the association in the bankruptcy case for violating the discharge injunction.

The Bankruptcy court considered two issues: (1) whether the discharge of the personal liability in the chapter 7 case enjoined the association from pursuing an eviction action, and (2) if the association did violate the discharge injunction, is it liable for sanctions for its violation.

The court noted first that a creditor may exercise its in rem rights against property without implicating the protections of the discharge injunction. Thus, the association could proceed to foreclose on the debtor’s unit but it could only collect against the property after all prior liens were paid and to the extent there was sufficient value. An action against the property, in other words, does not violate the discharge injunction. The association argued, however, that Illinois law allows it to also pursue eviction to collect on the in rem lien. The court found this argument to be wrong, noting that an association may resort to eviction “when the action is based upon the failure of an owner of a unit therein to pay when due his or her proportionate share of the common expenses of the property.” Although Illinois law allows eviction to collect on a unit owner’s obligation, it can only pursue eviction if there was personal liability for the assessments are due. In this case, the prepetition assessments were not due, they were discharged. A creditor may not invoke a state law enforcement action to collect a personal liability which has been discharged. The eviction action to collect the discharged debts therefore violated the discharge injunction.

Second, a court may hold a creditor in civil contempt for violating a discharge order where there is not a fair ground of doubt as to whether the creditor’s conduct might be lawful under the discharge order. This standard strikes the ‘careful balance between the interests of creditors and debtors’ that the Bankruptcy Code often seeks to achieve.”  In this case, the association was clearly aware of the automatic stay and dismissed its prepetition eviction action because it understood that collecting prepetition assessments was prohibited. The association received notice of the discharge injunction. In spite of that, it immediately reinstated the eviction action to collect the discharged debt. The association did not demonstrate any reasonable basis that the conduct was lawful. Therefore, the court sanctioned and ordered the association to pay the attorney fees and costs of the debtor.

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