In Hawaii, a purchaser at a foreclosure sale – such as one initiated for failure of a unit owner to pay assessments and fees – has the obligation to pay the unit’s share of the common assessments / dues for six (6) months. See HRS § 514B-146(g)-(h) (pertaining to condominiums); see also HRS § 421J-10.5(g)-(h) (relating to planned communities and homeowners’ associations).
For association attorneys, it is an efficient practice, once title transfers to the new owner, to immediately request, and timely receive the six (6) months of dues. Yet, a recent Illinois case may throw a wrench into the works for both associations and their attorneys.
The relevant ruling in Board of Managers of Cornell Columbian Condominium Association v. Smith, No. 1-14-3307 (Ill. Ct. App. Sept 30, 2015) was that a foreclosure purchaser’s obligation for six (6) months of unpaid assessments is cleared as soon as the purchaser pays any portion of the outstanding purchases. The Illinois Appellate Court failed to define the “any portion” requirement; yet the effect remains. Purchasers at a foreclosure auction – at least in Illinois – who pay “any portion” of the six (6) months of dues owed to the association can have the remainder of the statutory obligation wiped clean.
Some important notes about Smith:
It appears to be an outlier case, as no other Illinois cases have yet ruled similarly. Moreover, it is likely that, given the adverse ruling, the association will appeal the appellate court’s decision up to the Illinois Supreme Court, who may turn around and reverse the holding in Smith.Because the Illinois Appellate Court failed to define how much of a partial payment would relieve a purchaser of their obligation, this term could be further clarified in other cases. For example, would a $1 payment relieve a $600 bill? Or should the rule of reasonableness apply, and “substantial payment” be the determining amount? Until this term is clearly defined, this aspect of the Smith ruling will remain in doubt, resulting in further litigation, until the Illinois courts (or legislature) make a final determination.This is also an Illinois case and is, thus, not binding on Hawaii. Hawaii courts have not ruled the same way as the Smith court. In addition, a review of Florida, California, and South Carolina cases (jurisdictions with substantial association law precedent) do not reveal a similar holding.
Yet, if the Smith decision is upheld, Illinois is one of the states to which Hawaii courts look for guidance when its law is unclear. Consequently, the ruling that partial payment constitutes sufficient performance of the six (6) months of dues owed may soon directly affect – and cause problems for – associations here in Hawaii.
In light of this change in the law, it is recommended that associations – whether condominium or homeowners – enter into reasonable repayment plans with delinquent owners, and exhaust all other possible remedies available under statute. Experienced attorneys can negotiate and draft terms and repayment contracts that will protect the interest of the association without having to go through the foreclosure process and potentially trigger a Smith-like ruling in Hawaii.