 Welcome to another episode of Kondo Insider and my name is Jane Sugimura and I'm your host for this show. And you know today we're going to be talking about non-judicial foreclosure and I know there are some associations out there and I don't know if anybody's out there listening but you know there are at least 50 associations who have been sued for doing non-judicial foreclosures and you know there are cases that have gone you know up to the up to the Hawaii Supreme Court and back again and I know I've talked to you know certain board members and you know they're kind of bewildered they don't know why they're getting sued you know they're you know it's something that you sit on the board you have attorneys who give you advice you follow that advice and then you end up getting sued so it is you know kind of uh stressful and we have an expert here and to tell us to explain to us you know exactly you know what the issues are and you know what happened when it went up on appeal and and why we're still litigating after all these years my guest is Mary Martin. Hi Mary. Hi there Jane how are you glad to be here and Mary's Mary's an attorney uh with the law firm of Clay uh Chapman Iwamura police and Nervell and I got to make a disclosure I'm a part of that firm too and her expertise is uh appellate work and so she's been involved in you know a lot of these cases that went on appeal about the non-judicial foreclosure right there yes more than I'd like to yeah well you know I know this is a kind of complicated issue so if you can just talk in layman's terms as to you know what exactly is a non-judicial foreclosure how's it different from a regular foreclosure okay well that in essence the non-judicial foreclosure is a foreclosure that is done outside of the purview of the court by way of background most of the condo documents when condos were incorporated years and years ago decades ago their documents said that you could do foreclosure by action and that has been interpreted to be by a lawsuit a judicial foreclosure along the way the legislature put into some legislation that condos could do non-judicial foreclosures which is power of sale which is as you say it's outside of the purview of the court it's with certain amounts of notice publication but you never go before a judge and that's that's the basic difference okay so that's the basic difference was there a specific period of time when these non-judicial foreclosures you know were were being done that resulted in these lawsuits yeah yes actually from around 1999 up to almost sometime in 2012 there was a part of the foreclosure statute under chapter 667 that allowed non-judicial foreclosures and the way associations attorneys read the the law it was the associations were allowed to use this part one statute and I don't think it was used a whole lot because people weren't going into default a whole lot in the early 2000s but when we hit the the whole real estate problems around 2008 people started going in default and associations were caught in the fact that banks weren't doing their foreclosures and they were running behind so they started using this part one thing which does not have a whole lot of security behind it but it was a way easier than the alternative which was basically unusable because it required the dead person deader to agree to it essentially anyway so 2008 to mostly in 2009 2010 2011 associations on the recommendation of their attorneys were using this simple non-judicial foreclosure process in 2012 that process was taken off the books and wasn't an option anymore so those cases are the basic of what has transpired into a bunch of lawsuits that were filed years after the fact and you know I remember the situation in 2008 and it was because I don't know what it was that we had we were in a recession there are all these foreclosures and there was one foreclosure's judge and you couldn't get a hearing and I can remember you know because I sit on my board and you know we you know when when a unit owner went into default you know the we you know we send them a couple of demand letters that they didn't pay put a lien on their property and then we file this foreclosure action except it used to take us six to eight months to get a summary judgment motion heard before we can you know we could even you know get a commissioner to sell the property and then we had to wait another six or eight months after the property was sold to get it confirmed and you know it was taking like you know at least two years to get a simple foreclosure that before used to take us months you know maybe six months now it went it was into two years and I mean this was creating a terrible problem you know for for condominiums and I can remember two condominiums in Maui that I heard about I mean because in Maui and Kihei you have a lot of investor owners people were walking away from their condoms right and so if you have 80% of your unit owners who are investor owners who walk away from their units you have a cash flow problem you can't pay your bills right and so that's that's the situation where you know where the non it was like well if we can't do judicial foreclosure then you know the only way we you know we can go and collect our money is through this non-judicial foreclosure business and that's why I think a lot of us did that and I can remember the frustration you know you have people not paying their maintenance fees and we can't sue them in court because there's you know no judges or you know they were just this backlog and it was just so frustrating yeah part of that whole equation was the fact that these people were not only defaulting on their maintenance fees but they were also defaulting on their mortgages and the banks were being caught up and having done some real bad things and shortcuts and the Dodd-Frank Act came in and that kind of held the banks up from doing from enforcing the defaults on their mortgages which exacerbated the situation for the condominiums that's why the condos had to rely on here's here's what we can do here's how we can get things going and you know try and get something out of this unit because the law only allowed condos to collect so much of the old debt and if you just allowed it to linger then you were stuck with this as you said huge amount behind and that meant the rest of the association the rest of the members had to shoulder that debt not a good deal no so what was it that happened what was it that that happened in these non-judicial foreclosures that happened in that window between let's say 1999 and 2012 when the law changed that resulted in these associations getting sued the triggering thing was the fact that the associations were using this very simple version of non-judicial foreclosures there were two different parts to the foreclosure statute under 667 the first part was this very simple one that basically you gave notice and you had to publish and there were you know there were certain things that had to be followed but there wasn't a lot of control or oversight and it kind of led to people saying was this really fair whereas the other part of it had certain things that were you could do there but it was much more egregious for the associations and it was almost as if you went through a judicial process and it you know it just wasn't going to work so the associations through their attorneys went with through this part one a few years after the fact somebody and it we're still not sure exactly who triggered it but people started looking back at this and said I don't think that was right I don't think associations should have been able to do non-judicial foreclosures under that part one unless their bylaws specifically allowed them to do non-judicial or power of sale like I said back when they were drafted most of the bylaws said you could do foreclosure by action and that by definition means in a court the judicial process so people some attorneys got together and started looking back and seeing what cases were out there and a there were a couple piecemeal cases that that have been up to the Hawaii Supreme Court but a class action lawsuit was filed in federal court that triggered a whole lot of this stuff the actually I shouldn't say it was filed in wait was that one filed in federal court yes filed in federal court in late 2016 and eventually the court said no you can't do it as a class action they severed the main parties apart because in those cases the law firms were getting fired or sued as well and the court said you got different law firms you got different condo associations we're not going to let you go together and eventually denied class certification across the board after which the all of these various people who were presumably wronged by having a wrongful non-judicial foreclosure completed against them filed lawsuits some of them as early as 2019 and 2020 all after the fact these are these are for non-judicial foreclosures that happened before 2012 right yes absolutely some of them in 2010 some of them in 2011 yes all from way back when and they relied on a statute of limitations presumption that they they could file them that late because they didn't know until one of the key cases the first one that came up said hey there's a problem with these condo associations that use this part one statute to foreclose so they've now just discovered the fact that there was something wrong with that non-judicial foreclosure against them and so these lawsuits are relying on that statute of limitations plus a couple other pieces that have to go in some of which is up on appeal are are being discussed at the U.S. Supreme Court in other cases that have come up you know what statutes of limitations actually apply and then we get so now we have more than 50 cases as you mentioned that have been filed by people who were non-judicially foreclosed under that part one the simple version way back in 2010 2011 they have sued their associations for the wrongful foreclosure because they don't have it's interesting they're not suing the attorneys who brought it because under another recent case that because the association is the one that have the contract with the debtors it's the association they have the claim against that the attorneys are just acting on behalf of the association so then what turns around is the associations have their own defenses and say hey wait a minute we only did it because the attorney said we could do it so now we're seeing attorneys get sued as a third party brought into these lawsuits so it's the debtor suing the association who then brings in the law firms as a third party defendant against these claims because these people all are saying it was wrongful I should get all my money back and I should get the value of my unit and even if I owed money on it there's myriad things that fix into it because then you've got the issue of what happens if they also defaulted on a bank loan at the same time I mean I've seen one where there was a non-judicial foreclosure in 2011 the bank actually foreclosed in 2016 and in the end of 2019 the debtor who didn't even answer the bank's foreclosure complaint is now suing the associations like wait wait a minute let's all get on the same page and discuss this whole thing it's yeah that just that just doesn't seem right because you know why you know why should these people be awarded damages when they defaulted when they didn't pay their maintenance fees because the association went to sue them to begin with that they had paid their maintenance fees well there's a couple cases that went up to the Hawaii Supreme Court that specifically addressed whether these foreclosures under the part one statute were valid or not and two key cases that came out one under the name Sakal and wonder under the name Malabi came out where the Hawaii Supreme Court after the ICA had done some rulings the Hawaii Supreme Court came out with very lengthy rulings last June in which they said you know what those part one foreclosures they were voidable not necessarily void but voidable and so that's what's triggered some of this stuff in the Supreme Court it was kind of interesting because going back in history what does it mean voidable that means that means that you know it's not void I mean not invalid it basically gives a variety of remedies void me void would generally mean the unit goes back to the debtor and then maybe there's some monetary damages on the side voidable means the debtor more has more of a choice of whether they want to get the unit back with maybe some damages or they're just saying you know I'm way past that I just want a bunch of money so but it's it it came up in these two cases where the Supreme Court following the ICA's ruling ignored a piece of legislation from back in 1999 1999 where the legislature had invoked or deemed that all the association's bylaws included the ability to non-judicially foreclose but that was read as a the courts the appellate courts looked at it as a well but that was foreclosure like the banks did and that meant under the paperwork that banks had and banks generally have a power of sale in their mortgages and so the Supreme Court bought that argument we were all surprised but that's what they did and said hey unless it's in the association's documents that they have the authority to do a non-judicial also known as power of sale foreclosure then they didn't have that authority and therefore it was wrongful so that's what his it's the court's decision to go that way it was a surprise to a lot of condominiums like the 50 or so that are being sued currently I don't know if there's any others out there yet to be discovered but there's like I say 50 or so condominium associations who are under the gun to try and figure out how to deal with this and whether they have to settle or whether they're going to sue the attorneys and whether the attorneys are going to be found liable it gets rather convoluted but you know there was a bill in fact I testified before the legislature because I was there in 1999 when Ron Menor passed that that legislation that said that that associations you know had you know could do the power of sale foreclosure that it would that even if they didn't have it in their documents it would be deemed to be in their you know dox so that they could do the non-judicial foreclosure and that was to address the situation we were facing in 2008 when you know I mean during the recession when we couldn't get the the court hearings and in what was it in 2019 there was that statute and and we really went to the legislature which they approved and it basically said you know back then the 1999 we really really really meant it I think that's what the whole gist of that 19 2019 law was the legislature said because they knew about all these uh appellate decisions that were being and and and the gist of that law was to tell the supreme court hey we made a law back then and we did this for the protection of the associations because they couldn't do for you know regular judicial foreclosure and so we did really mean that they could do it but they the supreme right seem to disregard that legislation well actually they didn't totally disregard it because in the malabi case that that legislation passed while they were in the midst of dealing with their ultimate decision there and they asked for that case to be briefed or that act to be briefed and they addressed it and said well we're not going to totally decide on constitutionality but the way we interpret it it doesn't go back and save the part one foreclosures from back then back then they said they're reading of it picking down to the the little nitpicky that you're talking I think about act 282 which became part of 514 the 146 and 146.5 those it says exactly what you said but the way the supreme court looked at it they said well but it's done in the context of part six which was part of what was enacted in 2012 and so it doesn't it doesn't save those wrongful foreclosures from way back then that were done under part one that was what the supreme court said in the malabi case so it's still out there as a non-saving clause for those particular cases frustrating it is very frustrating and you know one of the issues on appeal was also the statute of limitations. Yes and that's that's another interesting aspect because that the Hawaii Supreme Court hasn't specifically addressed what the statute of limitations is for bringing a wrongful non-judicial foreclosure or wrongful foreclosure case. The Intermediate Court of Appeals in a more recent case, DELAPENIA addressed that and they decided that the six-year statute of limitations applied so because DELAPENIA was filed in like 2060 or a lot of these cases were filed initiated by the class action in 2016 that encompassed cases that went back into 2010 and 2011 but DELAPENIA that's the Intermediate Court opinion that was taken up to the Hawaii Supreme Court on cert oral arguments were held this past October and the Supreme Court has not yet ruled on it. Now I don't I can't tell you what exactly issues the Supreme Court is addressing in that case but that's what that's the only place in the appellate rulings that says it's a six-year statute of limitations for the wrongful foreclosure to bring a wrongful foreclosure action but then then you're even dealing with when did you discover it when did that statute of limitations run did it start because some of these some of these you know foreclosures happened way past the six years so how do you determine when does the six years start? Yeah well then you get into that what we know as the the discovery rule when did I know or should have known that I was wrong and the counsel that's representing most of these plaintiffs is saying well it wasn't till 2016 when the it actually came from the federal court that said these were these were wrong that's that was one of the seminal cases on on the fact that part one foreclosures were not valid because it wasn't in the bylaws and the that you could do by power of sale or non-judicial foreclosure so their claim is we didn't know until 2016 and if that's for sure for for true then you add six years to 2016 and we haven't necessarily seen all the cases that might get filed yet because if that's the starting date for the statute of limitations then it's still an open book for more cases if they find anymore but you got to find the people I mean a lot of them have probably left I don't know you know I don't know what the status is I mean there was some huge research to find all these people that might want to pursue a claim and you know one of the other issues that that that went up on appeal that I kind of found strange was what they call the udep the unfair and deceptive trade practice and it's like but this is you know this is a real estate transaction so you know where does the udep claim come in the plaintiffs are claiming that they are consumers so that they are covered under the udep statute and that one has a little interesting history in these cases also because that was brought up in one of the one of the federal cases and it was thrown out on a four-year statute of limitations but then it went over in one of the cases that went up in the hawaii supreme court the malabi case it it was one of the issues that was raised below and the court at the first instance the lower court trial court had thrown it out saying hey there's a four-year statute of limitations here it's not good but in the malabi opinion the court said well you know we don't file under we don't adhere to the federal courts mandate on pleadings we're more liberal and there's a color of a claim out there so we're going to let them go ahead and look at whether that statute of limitations was stayed meaning they didn't discover it they somehow they were fraudulently convinced that they that following the part one was okay and if you went strictly on that then they should have they should have been stopped dead in the water at four years from whenever their foreclosure took place but the supreme court in the malabi case said no i it's we're not quite that strict so that one's got to go back to the court for them to determine whether there was some reason that the statute wasn't invoked until later and then more interesting it had bounced back over the opinion bounced back over to the federal court to one of the cases there where the federal court had thrown it thrown it out on statute of limitations and the federal the ruling from the malabi case was brought to the federal court and the federal court said oh well we're going to reconsider that so we're going to allow allow that particular claim to go forward as well and shortly thereafter i presume it was my settlement but that case was dismissed a couple months ago in its entirety so i'm assuming some kind of settlement right and i guess i guess from the association standpoint and from their attorney's standpoint i mean this is big exposure because if it's a you that unfair and deceptive trade practice it's treble damages right three times the damages yes it is yeah it's a big deal yeah and you know i was just shocked at that they would allow that or even consider it but anyway so so that one still has not been resolved yet either right there's been substantive determination as to whether or not it applies so it could still apply yes it could still apply but the associations have you know then the associations through the attorneys you're the one that told us we could do this and and we relied on your advice we gave you the authority to go ahead and do the foreclosure you did it we were not in control of this so they go back to the attorney for indentification so now you have the associations suing their you know suing their attorneys and now it's becoming an even longer lawsuit more complicated lawsuit yes absolutely and there's a new let's there's a bill in the legislation this session right that seems to address this yeah it'll be interesting to see goes 191 yeah 191 and they're modifying that bill that you talked about that was just passed a couple years ago that gave the associations to the right to foreclose two years ago the law that was passed that is still in question said associations may the lien may be foreclosed by action or by nonjudicial or power of uh sale foreclosure regardless of the presence or absence of that language in their documents and the new the new proposal seems to want to authorize the board if they follow all the correct procedures notice and opportunity to be heard allows a board to modify the bylaws that'll be interesting to see if it's passed and then i'm sure that's going to be challenged in court so when it comes to the end of the day so we haven't seen the end of these losses yet right probably not so but i have a thought and and i know one association has at least done this associations have the right to correct or change or amend their own bylaws of course it takes two-thirds majority of the owners to do it but i know of at least one association that has gone through the time effort and trouble to actually adopt that power of sale nonjudicial foreclosure language into their bylaws with a two-thirds majority and then then they would avoid would avoid all of this all of this controversy going forward yes yes but you know i'm on a board also and i i don't know if you have the same issue i do but trying to get a two-thirds majority or a two-thirds representation at an annual meeting is tricky and and this association that i'm aware of they didn't do it at a meeting they did it by an ongoing solicitation of votes throughout a several months period until they actually they had a deadline by time for by which they had to do it and they managed to get the votes in and they did it yeah not you know we've run out of we've run out of time for today but you know someday when this is a whole over then you need to come back and tell us exactly how the story ends because right now there's so many loose ends that need to be resolved because there's no there's been no definitive decision and what's unfortunate is you've got about 50 condo associations out there just hanging uh not knowing what the end is going to be or when it's when that end is going to happen right you're right it is it's it we're a long way from the finish line a real long way okay well so so you know someday you're going to have to come back and tell us you know and maybe give us a wrap up of of how this happened and you know you know some information or tips on how to avoid this in the future but right now you know we reached the the end of our our our episode today and I thank everybody for you know who tuned in to listen to us and uh you know you should tune in next week I know Raylene Tennell who's going to be the host next week is got I think she's got somebody from the DCCA a condo specialist and this is the person you would call whatever you have a problem with your condo management or the board so tune in next week for a real interesting session and thank you and Mahalo for joining us this week and thank you Mary for being like thank you for having me