 Hello, huh? I'm Richard Emory. I'm your host today for Kondo Insider, our weekly show about association and living. And I have a great guest with me who's been with me before and who's actually a co-host, Jane Sugumura, president of Hawaii Council, lawyer, couple maker and everything else. So welcome to the show. Thank you for having me. It's always good to have you here. Any new going on at HCCA, Hawaii Council? Oh, well, we have a lot of things. I mean, we're dealing with legislative issues and we're still working on the fire safety, you know, law trying to shape and get it into shape. I think we're also working on a big seminar in September, aren't we? Yes. It's a new board member or board member training seminar for, you know. Right. That'll be in September. So we hope all of you taking new board members will consider going to about a half-day-long seminar about modern association issues because they change all the time. But I've asked Jane to come in today because there's a big problem in our industry right now. It's misunderstood by, I'm going to say, lawyers, owners, and certainly legislators to some extent regarding foreclosures of units for non-payment of their maintenance fees. And so I guess my first question to you, isn't it true today that foreclosing a property has to be for non-payment of maintenance fees that can't be for a fine or something? Yes. And that's because of Act 195 that went into effect last year. But a lot of the complaints and concerns regarding non-judicial foreclosure, which is what we're going to be discussing today, is because of something called the priority of payments policy that allowed associations to apply current maintenance fee payments to any outstanding laycharges, penalties, fines, and legal fees so that if the payment of your maintenance fee was applied that way, then you end up with a shortfall so you're delinquent. And a lot of times because you're on short pay or an automatic payment program, you're not notified because the association assumes that you know because this is something that was adopted maybe even before you bought your property, but it's in the minutes that the association adopted this policy so everybody should know about it. And because there has been some issues that went to the legislature, Senator Rosbacher did make a statement, I think it was two or three years ago, and you and I helped her get this bill through Act 195, but she made it real clear that she was tired of hearing about foreclosures that were based on late fees, penalties, and legal fees relating to these charges. And people should not be losing their homes because of those costs. You and I agree on that. We think people who are legitimately delinquent on their common assessments, which we maintenance fees or a special assessment or a cost that all owners have to pay for, typically by percentage of common interest, would be legitimate reasons for foreclosure and these fines and other things because if you put the whole thing together what you and I worked on, we certainly worked hard with Senator Baker regarding making it clear there has to be the delinquency of a common assessment. We also worked hard to get the act to get a value of mediation so that when you have the fines and the rest of those issues there are fees or should say programs without lawyers they can use to try to resolve these disputes. Right. And the whole thing with foreclosure stems from the fact that associations, it's a zero base budget. In other words, the budget that the association prepares is only for one year. And then it's allocated among the apartment units, so if you have 100 units and the association comes up with a budget and they say, okay, you know, it's a $1,000 budget. Right. So each unit owner would get assessed $10. And so if one of those unit owners doesn't pay their $10, guess what? The other unit owners have to pay so that they end up paying more. And that's not fair. So one of the things that the board of directors of an association has to do is to make sure that the maintenance fee delinquencies are addressed so that the people who aren't paying do pay, and so the board initiates collection actions that could result in foreclosure. The way I explain that, before we move on to getting a little more understanding about the basics, if you had 100 units and they're all exactly the same so they had 1 percent common interest, and we do a budget which says, okay, we need just enough money to pay all these bills, let's put this money in the reserves for a reserve study. So if 10 percent don't pay, you're short 10 percent. And that means you're either not paying the electric bill or the insurance bill, or you're not funding the reserves, but you need the money. You have to pay the bills, you have to fund the reserves, so the other 90 percent are forced in a way to subsidize those owners who are the nonpaying owners because ultimately they'll have to be assessed for the catch up. Right. And some of the unit owners are people on fixed incomes, or young couples just starting out, they can barely pay the expenses that they have. And so if they have to pay extra, it puts them in a financial hardship position, which also isn't fair. And so it's in everybody's best interest, the unit owners, to try to make sure that the people who aren't paying pay, and foreclosure is one of the ways. People are saying, oh, but we've seen your budget, you've got a million dollars in reserves. The reserves cannot be used for operating expenses. And if they are, then you're not doing things right. That is for the deferred maintenance, the big jobs like replacing the roof and maybe replacing your pipes, but that's for the big projects that are part of your reserve study. So the fact that you might have a million dollars in your reserves doesn't mean that the association can take that money and use it to subsidize the non-payment of maintenance fee. Let me just comment it before I ask you a question about foreclosures. My recollection, we know we have the statute, I-14b-148 for reserves, but there's also the Hawaii administrative rules, which kind of goes in more detail how that applies. And my recollection was if you borrow from your reserves or use money for reserves for another purpose like the operating expenses, you have three years to pay the money back. Yes. You have to pay it back. Right. And it's not like your piggy bank that if you're short, you can run and grab money from it. And so that means next year's budget will have a higher amount for the reserve contributions, which is another example of the paying owners subsidizing the non-paying owners who were created as shortfall in the budget or the reserve fund. Right. Yeah. So we keep saying non-judicial foreclosure, and there's different kinds of foreclosures. Briefly, this, tell us there's been a judicial foreclosure or non-judicial. Okay. Non-judicial means that there's no court process. And judicial foreclosure means that you have to go through the court, which means you file a complaint and you go into circuit court, you know, whatever island you live in. And if it's a court process, you have filing fees that you pay the court. And you have sheriff's fees because you have to serve papers. Okay. With the non-judicial foreclosure, it's a process where you still have to give written notice to the debtor, to the unit owner, that they owe money for a non-payment of the delinquent maintenance fees. And if they do not comply, then you can give them a notice of intent to foreclose. And there's all kinds of rules about non-judicial foreclosure. And you have to record the notices that you give to the debtor. You have to record it with, I mean, at the end, the whole packet goes and gets recorded at the bureau. So people say, well, I didn't get notice. It's recorded. All the efforts of the association to notify the unit owner that they are delinquent and if they don't pay, they're going to foreclose on their unit. And I've been to some of these auctions and some of the concerns I've heard with a non-judicial foreclosure is that associations will buy it for a dollar or some nominal amount. And what people don't understand is that the associations have a junior position because there's a mortgage. There's a mortgage on these units, and so they're selling the unit subject to the mortgage, which makes the interest that the association is so-called acquiring for a dollar. It has very little interest because if the very next day, let's say it's first time I am bank, decides to foreclose on that mortgage, the association's interest goes away. The way I describe it, and you're the lawyer and I'm just the guy who's been bruised and beat up for years in this business, is that it's a judicial foreclosure. You're basically bringing all the parties there, the lender, maybe there's a second mortgage on it, then you have the county property taxes, then they may have some judgment liens, some IRS liens, all those parties are going to go before the court. And the judge is going to buy a priority, is going to foreclose on the property with the funds distributed, and whoever buys it will own it free and clear with their title. Where in a non-judicial foreclosure, typically used only by associations, you foreclose around all those liens and mortgages and property taxes, and all you really do is get possession. And what it does is it allows you, the association, to rent it out, usually when a person's being non-judicial foreclosed, they stop paying your mortgage. And so it allows that association to rent it out, to cut the bleeding of not getting the maintenance. Right, so the association rents it out, and let's say you're the tenant, and so you're paying $1,000, and the maintenance fees are $500. And that $500 gets applied to the maintenance fee so that the association gets its maintenance fees, and maybe there's a rental agent, and maybe there's insurance. So there are costs associated with the association taking over that unit. And in the statute, it tells you in what order the association has to apply these proceeds. And some of it goes to pay off the delinquency of that unit order. And at some point, if you hold it long enough, then the association is holding it for the benefit of a secured creditor, which is the lender. And this will lead into my question, and what I'm leading is just briefly tell us from your experience, the difference in time it takes to do a judicial foreclosure and a non-judicial foreclosure. Okay, a judicial foreclosure, you can do it relatively quickly. It is a few months. A judicial or non-judicial? Non-judicial. For a judicial foreclosure, because it's a court process with court deadlines, and you have to file motions, and the motion gets a hearing maybe five or six weeks down the road, and then after you have your motion for summary judgment, then a commissioner is appointed, they have to sell the property, and then you have to come back to court for another hearing. It may take six months to a year to foreclose on a property. And that's assuming there's no, you know, issues. I know I had a case on Maui that they were being foreclosed on, and it was jointly owned by tenants in common, two different parties. We were going through the foreclosure process, party A passed away, and so then it had to go to probate courts with no will, and so then we got through that, and we're getting ready to complete the foreclosure, and party B passed away with no will, and it actually took about six years from the beginning for the association to get possession of the unit. My point being is all that time nobody was paying the fees, and all the paying owners were having to subsidize the difference at the cost. Right. So my experience has been because of the way the courts are and are backed up, it's one to two years for judicial foreclosure, and six months or so for non-judicial foreclosure. Yes, it's shorter. And for a non-judicial foreclosure, the association doesn't get a judgment. They want to get a judgment against a unit owner, they have to go to court, and they have to file a separate lawsuit, you know, it's not a foreclosure, then it's just collection. So it's not like they can, they have enforcement rights because the only way you get enforcement rights is if you file a judicial foreclosure. So what we're gonna do is we're gonna take a short break and we're gonna get back into the fun stuff, what's happened in the courts and what's going on in the legislature right after our break, we'll be back in one minute. Okay. Hi, I'm Rusty Kamori, host of Beyond the Lines on Think Tech Hawaii. My show is based on my book, also titled Beyond the Lines, and it's about creating a superior culture of excellence, leadership, and finding greatness. I interview guests who are successful in business, sports, and life, which is sure to inspire you in finding your greatness. Join me every Monday as we go Beyond the Lines at 11 a.m. Aloha. Aloha, I'm Dave Stevens, host of the Cyber Underground. This is where we discuss everything that relates to computers that's just gonna scare you out of your mind. So come join us every week here on thinktechawaii.com, 1 p.m. on Friday afternoons, and then you can go see all our episodes on YouTube, just look up the Cyber Underground on YouTube. All our shows will show up, and please follow us. We're always giving you current, relevant information to protect you. Keepin' you safe. Aloha. You have to, you have to. Welcome back to Kondo Insider. We're gonna get into the fun stuff. Jane Sugimore and I have been reviewing something we've talked about many, many times on the show, the difference between judicial and non-judicial foreclosure, and the importance of paying your maintenance fees because it's a zero-based budget, and one person doesn't pay, the paying owners have to make the difference. But, you know, it's always my belief that the 514A and B provided for non-judicial foreclosure. So associations, I'm gonna say for more than a decade, maybe not quite that long, I think we changed that in 2012, but, let's just say a long, long time. And I know that I was there. Okay, you were there. I was there. So we've used non-judicial foreclosures. I'm getting all this coconut wireless stuff that's all these lawsuits and wrongful foreclosures. In 1999, and I was, me and John Morris and some other attorneys were in the legislature, telling the legislature, because there was a recession. There was a recession, and it was so hard to do a non-judicial foreclosure. And we had a non-judicial foreclosure law except time insurance companies wouldn't insure against, insure, so associations couldn't do it. And the judicial foreclosure is because of the recession, and we had one foreclosure judge. Well, in every circuit, there's only one foreclosure judge. And it took you, and one of the things that gets you into a foreclosure, you have to follow a motion for summary judgment. That's the one that says, okay, you're entitled to foreclose, and we're gonna appoint a commissioner to sell the property and distribute the proceeds. It took anywhere from six to eight months to even get a hearing. And then the hearing was set maybe two months out. It took, and for every hearing, it took months to get. And so it was taking two to three years to do a foreclosure. And meanwhile, you're getting all backed up in the court. And we went to the legislature for a period of three years, and we finally got them to change the 514B and 514A and insure that provision that associations would have the same remedies as lenders had under the power sale provision. And that language is in the statute. And the reason it's there is because there was no way the associations could do judicial foreclosure in an economic way, because meanwhile, we're bleeding because the people are in their units and they're not paying their maintenance fees. And we can't foreclose and get them out. That was the- See what's happened is, so associations, because the statute says so, they foreclose, but now we're seeing, I wanna say a rash of a fair number of lawsuits where they were being argued that they were illegal. Well, there's a supreme, I mean, there's an intermediate court of appeals opinion, and it happened, I think, last year in the summertime. I think it was last year, August. Anyway, the ICA, Intermediate Court of Appeals, ruled that that language and 514B does not reflect a clear intent by the legislature that they intended the associations to do nonjudicial foreclosure. And this is from people who know nothing about condo law and were not in the room like me and John Morris were. I mean, and clearly, the legislators who put that language in in 1999 knew why we wanted it in there, and they put it in because that was the only way we could, you know, foreclose on these units and collect on our maintenance fees. Well, let me tell you what I think I'm hearing you say. You're saying that the law says you can do nonjudicial foreclosure, but the Intermediate Court of Appeals said, well, it's not clear that the existing law that the legislature wanted to give you that authority, unless it exists already in the governing documents of the association. And so therefore, all these foreclosures you've done are improper or illegal. And so therefore, you have to go back for a trial on damages. And so therefore, all the paying owners are gonna end up having to reward the nonpaying owners because the appellate court said, because there's no power of sale language in your documents. And it only applies to a narrow period. I think it's 2008, nonjudicial foreclosures that were done between 2008 and 2011 because it was a change in the law in 2012. And so we're talking about a very narrow area. And what that happens, and I know I've gotten calls from associations who have been sued for this wrong foreclosure business. And they say, well, we relied on our attorney who told us that this is what we do. And so what's been happening is the attorneys are being let off. They're getting dismissed and the associations end up kind of like holding the bag. And it's costing them substantial amount of money which the unit owners, the current unit owners are being assessed for and paying. And their insurance premiums are going up because they're getting sued. And so it is a problem. Well, I know some insurers are now putting in endorsements on the policy of the Director of Office Reliability that won't cover foreclosure lawsuits. So they're seeing the pressure of that particular issue. So that's gonna have an impact. But when I think about this logically, so it just rubs me the wrong way that now all the people who paid all the time are being assessed for the damage claim if the former owner prevailed. Yes. That it's gonna end up there, they're having to pay for it. Right. And it doesn't answer the question. Well, the people who defaulted, why are they now allowed to sue for something that they weren't doing right? They weren't paying their maintenance fees. That's why they went through the non-judicial foreclosure process. So there's really no sanction for those people who didn't pay their maintenance fees and now the rest of the membership and unit owners are ending up paying for all of this. So what we said today is we have all the condowners who with the legislature, all the attorneys who with the legislature, all the management companies who with the legislature, because they passed the law and everybody thought that they had the right to do this. And you were there and you know what happened. Yes. There's a bill, Senate bill 551. We have a bill that we hope will correct us, Senate bill 551, what does that do? It says that we really meant it. Back in 19, the bill says in 1999, when the legislature changed the language in 514b, that we really knew and intended that the associations could do non-judicial foreclosure. We knew that they didn't have that language in their governing documents. And that's why we changed the statute. And that's what 551 is all about, Senate bill 551. Is it moving? It's moving. It's out of the Senate, it's in the house and it's set for hearing tomorrow. It's set for hearing tomorrow before the House judiciary, before Chair Chris Lee and for people who are out there, you know, who are concerned, they can go on the legislative website and submit testimony. And it's one of those things where you just sign in and, you know, click and you can say that you support Senate bill 551. Well, it protects the owners who live there and are paying their bills, you know. And I'm gonna say this, I wanna say I'm surprised, but I'm not surprised. And that is, I've seen recently in the paper, ads by attorneys saying, if you were foreclosed on, it's kind of like these ads, you see all of the paper if you asbestos or whatever. I'm seeing ads that if you're a person who had your unit foreclosed on, contact me, the lawyer, right away. So it's like opening this door of all these lawsuits. Yes, it's like ambulance chasing. And, you know, I think it's regrettable because, you know, the associations now, and these are for non-judicial foreclosures that occurred in 2008 to 2011. We're talking almost 10 years ago. And so the people who live in the building might not have even been around. And the directors who sit on the board, they might not have been around, but now, you know, they have to deal with this issue. And it is very distressing and time-consuming for them because they're involved in a lawsuit and it's expensive. Well, you know, you use the term ambulance chasing and I'm not gonna use that term because, you know, ambulances are out to save lives, make people healthy again and do good things. I look at it more like hearse chasing, you know. Who we can get to the cemetery because they're gonna, the attorneys who get this are gonna be out for, probably take them on a contingency basis, are gonna be out to take advantage of appellate court ruling, which to me, I have a hard time understanding because this has been done forever. And certainly I was in the industry at the time. I remember all the issues. I wasn't a lawyer testifying, but this was a way to allow associations, the ability to get possession of a unit, to stop the bleeding of the loss of revenue and income, to protect those people who live there now, such as the seniors, the disabled, the people who don't have the income to pay extra money. Right. And what I'm hearing is that non-judicial foreclosure that non-judicial foreclosure is bad for seniors because seniors and I heard that military, active military have lost their homes. But what people seem to forget is that these people, their unit owners would not be in that position of being involved in a non-judicial foreclosure if they paid their maintenance fees. And there are other remedies in the statute where you can ask for a payment plan that will stop it. I mean, that's already in the law books. So if they come into financial difficulty, I think what the unit owner has to do is talk to family, look at resources, try to borrow money, but they cannot not pay the maintenance fees because if they don't pay the maintenance fees, they are gonna face foreclosure because the association really has no other remedy to recover that money and they need it for operating expenses now. Well, we're down to our last minutes. So what's your last word of wisdom to our viewers? That, you know, if you're, if you live in an association, you need to contact the Chris Lee's committee, the House Judiciary, they're having the hearing tomorrow on Senate Bill 551 and you need to say that you support 551 and you want the legislature to pass it because all it does is say, we really, really, really intended the law back in 1999 to allow condominiums to do non-judicial foreclosure. That's all it's, that's all it's all about. Well, I always love working with you and I appreciate your passion for our industry and you're probably one of the hardest working people I know in our industry and I thank you for that because in a way it's a thankless job because we also have a paying job to do somewhere along the way. So I thank you for being here today. Well, thank you for having me. To our viewers, I hope you appreciated our shows with Encando Insider. Go online, contact the legislature, support SB 551. It's in your best interest. And Aloha and thank you for watching Encando Insider.