 Aloha welcome to our weekly show condo insider about association living and let me say to all of you out there happy Valentine's Day and especially to my little trophy wife happy Valentine's Day after the show I'm going to take her out for a nice dinner and glass of wine because all the attorneys in town this week have driven me to drink so that's my excuse anyway I'm sticking with it but you know in our industry there's been a lot of consternation coconut wireless talking about foreclosures and non-judicial foreclosures of people getting sued and potential class action lawsuits and and I thought it might be helpful to review the foreclosure process and it's currently written today and talk about what's going on in the marketplace with regard to these lawsuits and and I'm sure we don't have the full bottom line because of the courts haven't ruled on everything but I've invited my favorite guest now on to be here attorney the only attorney I like in the entire state of Hawaii you know remind us a little bit welcome to the show thank you Richard aloha everyone happy Valentine's Day my name is not line I'm a attorney with a law firm Damon Key Leon Cup check castored I practice condominium law immigration law and because and a business transaction dispute resolution and you were so cute though before the show because I was telling you how this week because of various legal matters I'm having depositions taken and I'm a fact witness in a trial and I said I'm tired of attorneys beating on me and you said I don't like my clients to get involved in legal problems and lawsuits I try to keep them out of litigation which I thought was so cute but anyway let's maybe get in with some of the basics we know this foreclosure to judicial and non-judicial in simple terms for our audience describe the difference okay so for judicial foreclosure that means the creditor has to go into the court you know both parties before a judge complete the process to try to get your credit rights enforced for the non judicial foreclosure it's also known as a power of sale foreclosure basically means without the courts involvement the creditor can just follow certain steps specified in the statute and then complete the process you know getting their lien foreclosed and getting their remedies so in a judicial foreclosure you're going to court before judge and a non-judicial foreclosure you're not going before judge you're following steps that are specified in the law to be able to do a power of sale quote non-judicial foreclosure is that kind of true yes so taking a judicial foreclosure non-judicial comparing them so in a non-judicial foreclosure what happens to the first mortgage if it's the association foreclosing usually that's the second in place your foreclosing subject to the power lien so thus the mortgage lien is still in place you're basically just you know whoever bid on the property at the auction it's gonna buy subject to that mortgage lien and tax lien there's property tax lien if there's real property tax and other assessments legally imposed by the government entities and what if there were other judgments against that person usually that's where the the recording you know first in first the in place you it's a risk game basically whoever the creditor they record their judgment lien you look at the recording date whoever's first association lien because there's a statue there we we are always going to be right after the real property tax lien and the mortgage lien and then that's going to be the association's lien and then you know we take priority over the others and I would just make sure we understand we would be subordinate to second third mortgages as well yes if those mortgage liens are recorded prior to the association's lien and so if you do a non-judicial foreclosure and you're probably doing it because they're delinquent in their maintenance fees probably yes what happens to delinquent maintenance fees does the association get that or does the lender have to pay any of that or what happens in that case usually it's the non defaulting the other members of association has for the bill if one you know some owners are defaulting then the other owners have to pay because the association has this operating expenses and budget in place and you know the lender has no obligation to pay you know if the foreclose first there is a statutory right on a six month maintenance fee usually whoever if it's the lender or it's a third party who when the bid becomes the new owner then they have to compensate the association for that six month it's called a super priority lien so in some ways in that circumstance it emphasizes the need for an association to be prompt on its collection action because they sit there for years under the circumstance you described they don't ever get six months and they would lose the balance whatever it may be say another six months a year or two years whatever it may be yeah and there are also problem situations where the property will not taking care of there's gonna be squatters who leave there or the property is really just left abandoned there in vacant yeah so when you do a non judicial foreclosure about how long does it take for associations to do that for non judicial foreclosure that's usually I would see five to eight months for judicial foreclosure that could be you know eight to 14 months or even more sometimes depending on the situation I know a project of Maui I worked with and they had a delinquent owner that they were foreclosing on but then the delinquent owner had a non-related partner so it's jointly owned by two non-related people not like a husband-of-wife they were just two separate people and so on the eve of foreclosure one of the people died without a will they went to probate court and they finally got that resolved after about two and a half years and they went to continue their foreclosure then the other person died without a will yes I think it took over five years to address that issue with respect to the getting possession so those owners would suffer because they lost five years worth of maintenance fee payments with respect to that because even under non judicial foreclosure because you couldn't serve or address the issues because of the probate court it just rugged out forever yeah I mean it's really a balance you also have to take into account the due process rights of the party that it's being foreclosed that's why sometimes foreclosure attorney is a really wrestling with a service issue in an example I gave would be the estate probably and then I had cases where at the last moment the owner filed bankruptcy yeah there's the automatic stay you have to stop pause and you know deal with the bankruptcy proceeding yeah so it's a it's a complicated thing with respect to non judicial so why do associations do non judicial foreclosures I mean why they did this wait for the lender why don't they just file the judicial foreclosure which is much safer in some respect to your foreclosing around the mortgage and taxing everybody's got to show up before the judge so why are they using the non judicial foreclosure method what's the benefit to the association usually you know non judicial foreclosures you know it's faster it's cheaper because the association also has to pay their attorneys to do the the process and for a judicial foreclosure is taking a long time it's like costing a lot of legal fees and costs so that's also you know a financial stress on the association when they're already you know a short age of those assessment they're supposed to be paid another matter is really because they are you know their liens usually subordinate to the mortgage lien if they don't take timely action you know you know by the time you know the lender forecloses you know they could be there could be little you know left for the association to seek redress and then the third one is mainly I think for associations it's just for associations to it's just you know they they try to put pressure also on the owners if you don't you just sit there do nothing the owners doesn't you don't want to pay but sometimes I see proceedings where they start the proceeding and then the owners would have come up with the money to pay it off so the automated goal is really also to try to motive with the owners to cooperate with maybe come up with a payment plan you know a 12 month payment plan that would be reasonable to just gradually pay off instead of you know they would use that money spending some other way and from my experience what associations do when they do a non-judicial because the way I describe as they're getting possession of the property around the first mortgage any tax liens and there may be some other legitimate liens out there because they want to get possession so they can rent it out so they have maintenance fees of $800 a month yeah they're assuming they can get more than $800 a month so the delinquency or their loss of cash flow won't get any worse so have some income to offset the delinquency lack of a better word yeah so if you think about if there's no equity in the property there's no third party who would be interested in bidding on this so usually the association would take a credit bid like a $1 bid and then take over possession try to rent it out maintain the property and then using the rental income to try to pay off the debt owed by the owner it's also my belief and you can correct me if I'm wrong I'll use some simple numbers they are delinquent $12,000 a thousand a month 12 months worth of maintenance fees so the owners delinquent $12,000 so the association forecloses they get possession and they rent it out for $2,000 a month because the rental income is strong it's my understanding that that's income to the association it's not applied to the delinquency of the owner is that correct well it because there's there is a statutory provision regarding that so basically you know the rental income you brings over there's if there's surplus let's see you know if the owner owns a certain amount you're now collecting more than what's owed then there's a statutory provision which would guide the association on how you're supposed to do with that excess rental income well I know that when a commissioner is appointed in bankruptcy you know the commissioner can step in and and take the position of the association and take the rents and collect the rents instead of the association but then the commissioner still has to pay the maintenance fees so they still have that lost former lost cash flow they still have that recovery by this process you like not just before you know I don't have a personal preference for my clients you know if that's necessary for them then you know that's the way to go but really you know our hope is you know if there's a way to work things out we would work with the owners first and I think the problem or the attacks on abuses mostly occurs when the delinquency does not arise from you know just delinquent on maintenance fees it could be like a violation issue starting with fines the legal fees and costs and the late fees and then gradually that's the situation where the statute prohibits you from doing non-judicial foreclosure but before because there's a priority payment policy there are a lot of situations where association would apply those payments first to you know penalties or fines late fees and the last to maintenance fee and then causing problems when owners are doubting about the legitimacy of foreclosure and tend to challenge the process before we take a break one more question to keep the continuity mm-hmm so the priority of payment issues changed dramatically with Act 195 last year that's true but also prior to that it's my belief that in the foreclosure provisions that if the only hanging outstanding was legal fees and late fees you couldn't do a non-judicial foreclosure yes the statute prohibits you from using the non-judicial foreclosure approach on that one yeah so just to repeat for our audience if in fact the foreclosure is being done and the only balance is related to these fines or or late fees or legal fees then in fact you could not do a non-judicial foreclosure you know and the whole industry has changed over the last couple years we're trying to prevent unintended consequences certainly every association needs its owners to pay a statutory amount do with that being said we don't want the use of priority of payment to create these artificial maintenance fee balances for foreclosure and the current statute prohibits that even before this week's legislation yes and so what we're going to do is we're going to take a one-minute break and we're going to go up back and talk about what's going on in the industry what the coconut wireless saying what the courts are saying because there's been a lot of interesting court rulings recently and the legislature is dealing with that a little bit this year so we'll be right back in one minute. Aloha I'm Wendy Lo and I'm coming to you every other Tuesday at two o'clock live from Think Tech Hawaii and on our show we talk about taking your health back and what does that mean it means mind body and soul anything you can do that makes your body healthier and happier is what we're going to be talking about whether it's spiritual health mental health fascia health beautiful smile health whatever it means let's take healthy back Aloha. Aloha and Mabuhay my name is Emi Ortega Anderson inviting you to join us every Tuesday here on Pinau Power Hawaii with Think Tech Hawaii we come to your home at 12 noon every Tuesday we invite you to listen watch for our mission of empowerment we aim to enrich and lighten educate entertain and we hope to empower again maraming salamat po Mabuhay and Aloha. Welcome back to Kondo Insider I'm sitting with Nalan local attorney specializing in association matters and we're talking about foreclosures and judicial versus non-judicial and and a lot of people have been upset about non-judicial foreclosures so kind of give us a brief overview with the coconut wire what's happened in recent lawsuits kind of where this new legislation potentially to cure the problem is being driven fun kind of describe what's happened in the market with lawsuits being filed on this matter right so if you've been tracking the news you will see news reports about class action lawsuits federal lawsuits or state lawsuits challenging foreclosure under the old statue which is the part one of the six seven six six seven foreclosure statue in Hawaii and then there's also a very important case law came out last year Sakau regarding you know for non-judicial foreclosure conducted by association under the new part of the foreclosure statue which is part six of the six six seven foreclosure statue where the court has to decide if the association's bylaws the declaration does not permit a power does not provide for a power sale foreclosure can the association simply proceed i have to do it based on the statue in place and our intermediate court of appeals basically held that the association cannot do so when your project documents does not specifically or explicitly permit for that in the federal courts in the series of cases like a brown or you know Malabi executive center case all these cases the federal court basically predicted what the supreme court is going to rule on this matter you know it's along the same lines as the Sakau case basically also saying if the association's project documents does not explicitly permit a power sale foreclosure then the association cannot just go ahead do a non-judicial foreclosure that's going to be invalid foreclosure so associations could be exposed to wrongful foreclosure claims by owners and what's interesting is the rate for the parties in the Sakau case try to appeal further try to seek for a review by the supreme court but i think the supreme court in december of last year actually rejected to hear the case i've heard different situations that happen to me see i'm a layperson yeah let me see if i can accurately explain this right when you buy into an association you have governing documents and it's almost like a contract between the parties and so what the supreme court or the appellate courts are saying is unless those documents specifically provide for a power of sale so if they're absent a power of sale they're saying you cannot do a non-judicial foreclosure although there's a great deal of belief that the original laws passed by our legislature that its intent was to give associations the right of power of sale whether it be in the governing documents or not that kind of kind of where that it sets so the industry has been you know been practicing based on the assumption that those statutes basically gave the association the right to do so but when the court is presented with the specific facts in that Sakau case you know i can see the parties where briefings are you know compared with the other states where the other states they have statute where they specifically see you know if the owner buys into a condominium then you know you automatically agree that the association have the right to foreclose by a power of sale but our statue you know doesn't you know see that clarity so there's ambiguity left there where the court according to the separation power the court would be the ultimate decision maker to decide or interpret that law so right now now we're talking about this legislation session there's bills proposed we're trying to address this issue now which is what we are going to talk about right yes well because i'm i do lobby at the legislature i'm don't ask me to list all the bills because every year we i think we have 40 this year but about that anyway there's a bill in the house and a bill in the senate that's working their way through the committee so they're still alive they've passed out of the committees which means they still have a long way to go with the real language is going to be but the intent of the industry was you know when this law was a pass back a while ago allowing nitrogen foreclosures it was the intent of the legislature to allow power of sale foreclosures and the belief is that if in fact the legislature clears up that issue this year with a bill and clearly comes forward that our intent from the beginning so it's retroactive which adds new little things with regard to constitutionality and the rest of it but they can do retroactive bills or they can make retroactive law but if the legislature says was our intent all along from day one retroactively to allow power of sale that probably helps clear up for the courts what the intent of the legislature was that's kind of the belief what do you think the bill is still pending right now so if you look at the language of the bill you know the legislature still hasn't clearly said the intent of this bill to have retroactive impact and if a bill has retroactive impact it also tends to be subject to challenges by parties whose rights going to be negatively impacted because of this you know new bill so that's uncertain and also the bill is still pending it hasn't crossed over to the other chamber yet we don't know what's going to happen but I can definitely see why our ICA when they made the decision they're basically comparing the association's rights with the lenders the mortgage holders so power of sale basically is a right where a creditor would dispose of other people's vested property rights without involving a court just do self-remedy sort of following the procedure they think if this is such an important right they don't want to just you know interpret it when the legislature didn't make it clear because for mortgagee is for banks if they don't you know specify a power of sale in their contractual documents with the borrower they cannot do power of sale so they just want you know the association you know in a like manner as mortgagee is we don't have superior power unless the legislature sees so clearly so that's why we're pushing for the legislature to see it clearly now we're getting near the end of the show but please tell me what i'm going to say is wrong so the intermediate media court of appeals and courts have said so our interpretation that there's no power of sale language specifically in the governing documents then you can't do a power of sale non-judicial foreclosure these lawsuits are for the thousands of foreclosures that have been done by non-judicial foreclosure and so if there is it's incorrect there could be tens of millions of dollars of damages the condos across the hawaii that don't have power of sale language in their original governing documents which is frankly uncommon that's only for those projects where their project documents does not have the power of sale language which is i think is in the lesser amount because most of the association they update or restate their project documents they wouldn't have this issue it's those very old projects who've never updated their project documents who's going to be in trouble you know their insurers you know the law firms who did the foreclosures for them definitely they're exposed to risks so it could be millions of dollars yes and and so here the person who was foreclosed on for not paying his bills could be part of a class action for millions of dollars for the alleged wrongful foreclosure when in fact there's arguments probably good arguments that the intentional legislature was all along to to give the association the power of sale like other states and meanwhile we have bills going through the legislature both the house and the senate trying to clear this up to be continued yeah this is definitely a hot issue for non-judicial foreclosures because our us supreme court is actually also picked a case in the 10th circuit colorado it's a case where the supreme court is going to decide whether a fair debt collection act applies to non-judicial foreclosures and our ninth circuit is basically taking the same position as 10th circuit saying that it does not apply but if you know this matter supreme court decides otherwise across the board there's going to be big changes to the industry so for a condo who might have this problem if they build a wall around their condominium that prevent unauthorized entry i'm way joking you know since the wall seems to be the big topic of conversation these days but let me thank you for being here today on condo insider it's a very interesting case i guess it is going to be to be continued because we have two bills one in the house one in the senate that are addressing this issue to try to give some safe haven for condos that may have done non-judicial foreclosures and we want to thank all of our viewers for watching and we look forward and hope you join us next thursday at three o'clock on condo insider aloha and happy valentine's day