Major Alert: CRLTO 5-12-080 (security deposit) judgments not dischargeable by landlords in bankruptcy

A new case published on October 14, 2011 by the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division indicates that a judgment obtained by a tenant against a landlord for various violations of Section 5-12-080 of the Chicago Residential Landlord Tenant Ordinance is not dischargeable in bankruptcy as it constitutes “defalcation while acting in a fiduciary” under 11 U.S.C. Section 523(a)(4).  The case is Kennedy v. Frempong and was issued within the broader federal Bankruptcy case: In re Maxwell Kofi Frempong as adversary case 10 A 011773.

Without going deeply into the bankruptcy law issues at hand (after all, this is not a bankruptcy blog!), the Kennedy case basically provides that a landlord declaring bankruptcy cannot get a discharge of judgments related to Section 5-12-080 (security deposit) violations.

Here’s a quick reminder about Section 5-12-080.  That section deals with: commingling a security deposit, the deduction and return of a deposit, the transfer on sale of a deposit, the security deposit receipt, the notice of banking institution holding the deposit, paying interest on the deposit, etc.  Pretty major stuff.

This is just another indication to landlords that the courts take the CRLTO serious.  Technical violations, even violations that do no actual harm to a tenant, can lead to major liability.  Landlords should take CRLTO compliance seriously.  Landlords are often reluctant to spend their time and money getting educated and getting the documents and knowledge necessary to keep them in compliance with the ordinance.  The trouble is, once the landlord has a violation, it may be too late.  An ounce of prevention is worth a pound of cure.