 Nekando Insider, Hawaii's weekly show about association living for both board members and homeowners alike. We've been doing this show. I think this is over 170 episodes we've done so far. I want to begin by wishing everybody a Mele Kalikimaka, happy holidays, and hope you're safe during these difficult COVID times. The day show is by request of some of our viewers who emailed me and asked me to again review what associations can do regarding delinquencies. And we want to talk about that not only for the scope what the normal procedure is, but maybe with a little footnote about the COVID times we're now in. So I ask a really great lawyer who's a good friend of mine, Kampono Kiyakona, to join me today and to talk about delinquencies. So welcome, Kampono, and tell us a little bit about yourself. Thank you, Richard. I've been practicing for about 20 years now. I'm a partner in Puerto Maguire, Kiyakona. We focus mainly on managing and assisting condos and other community associations. We handle their delinquencies. We treat ourselves as a full service law firm for that aspect. From governing documents to the smallest delinquency that needs to be handled. That's what we cover. So when we talk about delinquencies, that's something I cover quite a bit. And it's something that I think we're seeing not as many as I expected initially, but we're seeing quite a few more lately. It was interesting. I went to a seminar, National Seminar with CAI, and I'm going to repeat what they said, which I can only repeat what they said, is that they are saying before COVID, delinquencies and condos ran nine to 10% throughout the industry. This is throughout the United States. This is not just the way. And post COVID now, delinquencies are still running nine to 10%. They haven't seen a major shift, but the problem is for condos, they budget on what we call zero sum budgeting. They have to collect from everybody to pay their bills and fund the reserves. So a 10% delinquency means something's not getting paid or reserves aren't being funded. So can you briefly just take us to forget COVID and the challenges? Kind of what the normal steps are that condos should be doing with regard to collecting delinquencies? Certainly. So you have your standard procedure, and I think it's important that everyone in a condo understand what that procedure is. So normally you pay monthly, let's say you miss a month or two, you will get your warning letters coming from the managing agent. Depending on how the contract is for the managing agent, those warning letters, what we typically see is about three months, three warning letters from the managing agent. The timing can be anywhere from a month and a half to three months or so worth of delinquencies. Once they go through that, it gets sent to us as the attorney. We are sometimes referred to as a debt collector. There's a lot deeper in there. Let's not worry about that for our purposes. But you send out a 30-day demand letter to the owner. So you have 30 days to respond, challenge, pay it off, anything. After those 30 days are up, we file a lien. Once that lien is recorded, we send a post lien demand letter. Following that, you go through the foreclosure process. Now, that's the basic of it. That's the most generalized term you're going to go with. There's all kind of steps in between that can happen, payment plans, discussions, partial payments, things along those lines. Do you think payment plans are a good solution to boards if the person contacts you and I'll make it up so they lost my job or my mother got sick or whatever? And if you are going to have payment plans, are there any kind of basic rules like don't get further delinquent or whatever? Yeah, generally, payment plans are a good idea, especially for boards. You want to, payment plans do the best job of balancing both the concerns of the association and the concerns of the owner. You know, sometimes people get in a rough spot, they can't pay it, but the association needs to be paid. Through your payment plans, you want to make sure that the association is continued to be paid throughout the process. So you want to say, okay, we'll give you a payment plan, we'll give you a 12 month payment plan, and you can pay your delinquency off in 12 months. But during that time, you have to stay current with your monthly maintenance fees in addition to the 12 month payment plan. So let's say someone owes $1,200 and their monthly maintenance fees are $200. They're on a 12 month payment plan, very simple. They continue paying the $200 to the maintenance fee, then they pay the extra $100 a month to pay down that delinquency. Does the statute require the board to give a payment plan or is that something strictly optional within the board? So there's a requirement to do payment plans under certain circumstances during the foreclosure process. Since that's a requirement, it's just good governance for the association to be willing to do it at any time. There's no harm and it's almost foolhardy to say, okay, well we will go to this process so that you can trigger the payment plan. If someone wants to get on a payment plan early, we always recommend that the boards do it. So when you look at this, whether it be a payment plan or just an owner who's paying maintenance fees, I know that in my time as a president of a kind of committee of managing agency, we would find things that just go wrong that can delay the process forever. And a good example would be a Mali I had a case where two people owned a unit, but they weren't married. They were just joint tenants, I guess it's called, and they were delinquent. And then the first person died without a will and it stuck it in probate course. And then we got through that and then the second person died without a will. And so I want to say it took a couple, two, three years to resolve that, but tell us beside my example I gave you, what kind of things can go wrong? They really disrupt the normal collection process like bankruptcy and things like that. Can you give us some ideas of what they might be? Certainly, certainly. And to be fair, what you've described is essentially the worst case scenario. Probate is where all timely actions go to die. That's just no pun intended on that. Things will take forever. Bankruptcy is certainly one of those places. There's an interesting tick in the bankruptcy code, which has caused some issues for condo associations and the distinction has to be made between the type of bankruptcy that someone's filed. So the difference between a Chapter 7 and a Chapter 13 bankruptcy. Just briefly, Chapter 7 is essentially a forgiveness of debts. Chapter 13 is an extensive payment plan. Chapter 13 goes anywhere from three to five years long. With that being said, there's a trick within, and I don't want to say tricks probably the wrong term, but there's an issue with the language that's used in Chapter 13 versus what's used in Chapter 7. If someone files under Chapter 7, they are still required to pay the maintenance fees following the filing of the bankruptcy. That's called post-petition. Under Chapter 13, there's recent case law that interpreted a certain section that doesn't exist under Chapter 7, which treats the debt essentially like a mortgage, meaning that the future costs are not allowed to be claimed against the individual owner who filed for Chapter 13. So what you end up doing is your right is just a foreclose. You don't have the right to go after that owner for any post-petition delinquency. So that causes an issue because often people will use Chapter 13 as a way to get back on their feet, but it doesn't help when the association's sole remedy is to foreclose on that. It also affects associations when someone's using bankruptcy courts to delay. We've had several instances where people are unscrupulous about the way they file for bankruptcy and require extensive amounts of litigation to do it. It's not something that's helpful, but it's something you have to face. Sometimes things go sideways and you have to deal with that. And then I don't know if you're aware about the new sub-Chapter 5 of Chapter 11 bankruptcy. It just passed February 20th, 2020. And I happen to be one of two people appointed in the state of Hawaii to be a sub-Chapter 5 bankruptcy trustee. And it adds another little quirk. I don't know exactly how it applies to condos yet, but you as a sole provider and individual can file for sub-Chapter 5 under Chapter 11 reorganization, which is different than 7 and 13 as far as how it operates. And the thing I do know because I have a case I'm doing right now is that the post-petition rule does apply to that. They have to stay current with the post-petition expenses. But the problem is that whenever you get a filing, would it be backed up to your probate? It slows down the process of what we're saying. It's going to be extra steps, extra costs to try to secure your position. Yes. And it doesn't help anybody when there's extra costs involved. How about in the old days, we used to talk about cutting off utilities and services and collecting rental attendant investment property. Is that still active and alive? Those are still useful. There hasn't been much change to that. What you're seeing though is there's less appreciation for the cutting off of utilities. There's greater claims and then that's not even getting into the allegation that you're harming people during the pandemic. In terms of the rent intercept, I'm a fan of rent intercept provided the person has a legitimate rental agent. The hardest part of rent intercepts is it doesn't have the teeth it needs. I remember that. I remember on the utility side, we used to always say, we don't want to be turning off the electricity. You don't know the guys on a heart lung machine, for example. What we found was really affected by the way was turning off the TV cable. That got the most attention out of anything. They couldn't watch their NFL football game or whatever it was. In our practice, we tried to focus on the TV cable and not touch the other like water and electricity because we thought there was too much liability to it. Absolutely. That's the safest move. No one can say I can't live without their TV, but then it's just hyperbole. Yeah, that's true. Well, you know, we've kind of gone through the basics and we're we're due for a break right now. So what I wanted to say before we go on break is we talked about foreclosures and there's been some some pre-court rulings and some changes and that whole foreclosure idea, recognizing also there's a proclamation by the governor and all these different things. So what we're going to do is we're going to take a short one minute break. We're going to come back with my good friend Capone Tiacona and we're going to talk about the hammer, the foreclosure and how that fits into today's world. So we'll be right back in one minute. Welcome back to Kondo Insider. Richard Emery here with my good friend and attorney Capone Tiacona. We're talking about foreclosures in the first half. We talked about the normal process where the managing agency sent some letters and then they send a demand letter and then they follow Lean and they send a host Lean letter and that kind of goes through normal realizing that somewhere along the way people call bankruptcy and die and have probate court and things that can really slow it down. The key takeaway to me was if you have a delinquent owner, talk to them and try to get a payment plan where you preserve the fact they'll pay the current and that they will pay the delinquency over a specified period of time. And that's probably cheaper, better and faster for everybody if you can get people to agree to a payment plan. But what I ended up with was the comments that we've gone through all these things that one of the rights of an association under certain circumstances is to foreclose on the unit and take it back. And in the old days there used to be maybe even the new days a non-judicial and judicial foreclosure and then our Hawaii Supreme Court came out with a recent ruling. So let's begin with that Kupano. Tell us about the recent ruling and tell us how that affects condos. All right. I have to watch my tongue on this because I have personal feelings on it that aren't that may contradict what the Supreme Court justices have said. So the way it's working now is the legislature has brought out and clarified a bunch of issues that the Supreme Court originally and Intermediate Court of Appeals had originally had issues with. Right. The legislature said like associations have always had this ability and we've recognized that by statute. That being said the Hawaii Supreme Court disagreed on some issues and are still requiring potentially requiring that it be in the association's project documents in order for them to do foreclosures. The problem you'll see and for those of you on boards who've been dealing with your attorneys on this, your attorneys will tell you that the main problem is we don't know which way it's going to come down when the Supreme Court, if they ever get their hands on this again. If this comes up again on another issue because they've already done something that is essentially saying they disagree with what the legislature said. So what we've done and what I know a few of my colleagues around town have done is said the risk-reward factor exists for non-judicial foreclosures only when you have that right specifically enumerated in your project documents. That's the best way to look at it and the best way to treat it and it's the safest way to avoid litigation. One of the things that are interesting and I didn't tell you about this before we talked about the show is that one of our state senators has approached our industry with the idea of saying, look, let's provide like in the law that boards of directors and or a low threshold of owners, maybe it's 51% of the meeting or maybe 51% overall, has the authority to amend the project document to allow for non-judicial foreclosure which takes away the argument of contract in the sense because the contract provides for amendments to the contract in this process and so the state senator is in the process of drafting a bill to find an easy mechanism for association to amend their project documents to allow non-judicial foreclosure by either a board being allowed to do it and or some low threshold of owners to do it. How do you what do you think about that? I think that's a good plan. Realistically as you know and many of your listeners know condos are creatures of statute. They're essentially created and governed by the statute. The statute specifically says that associations can do non-judicial foreclosers. You also can go back and this was back when there was 514a and 514b, there was a provision that allowed you to opt into and use any part of 514b based on a 50% threshold vote. There's precedence for that exact action saying this is in the statute. It only makes sense that you should be able to amend your governing documents when you want to do something that's allowed in the statute. You know I think that's I can tell you being on the community association legislative action committee and also on the board of governors of white council community association. We're all working with the senator who's a lawyer and industry lawyers to try to perfect some language to be introduced in 2021. But the second part of this issue which goes back to some recent legislation. In the old days we used to do something called priority of payment. And so when we got I would tell boards and owners it's kind of like you get your visa bill with all these charges on it. You send them one check. They don't apply it first to Macy, second to the Sacs Fifth Avenue, third to Safeway. I mean the computers you know they have to have some kind of pecking order and how they apply the cash leaving something delinquently. And on associations that ends up with you have made this being special assessment in utilities you rent a storage locker they assess you for an HO6 policy. Then you paid late so you have a late fee and legal fee to find. And so they changed the law with respect to how associations can apply payment. Can you talk about that a little bit? Certainly certainly. So I'm going to avoid the sort of in between because when they first changed it there was it was you know I hate to criticize but it was poorly written. So a lot of people had difficulty understanding it. So right now the way it operates is priority of payments are created under the statute. It's just the priority is that your maintenance fees get paid first. Any amount you put in that goes to your maintenance fees if they're leftovers that goes to differing levels of common expenses and then ultimately it can cover individual expenses and then ultimately late fees late interest and attorneys fees. Which is essentially backwards from the priority of payments as they used to be. Yeah it's kind of there put this in another perspective in the old days not now everybody means no not now. The payments would be first applied to legal late fees and interest. Thus the last thing applied to be maintenance fees. Thus you had a delinquent in your maintenance fee and thus you got foreclosed up. Now the law is written you first have to apply the common expenses I'm going to say. The maintenance fees the special assessment. Then there's some intermediary things like the storage locker. You might have submetering utilities and things along that line that is next. And then you get to the late fees legal fees and fines. And so if a person has legal fees and late fees and fines are disputed and they're paying their regular common expenses you can't foreclose now on those legal fees and late fees as I understand it. So how do you collect that money? Okay so primarily that there's a two-fold issue on that right. One let's assume that the association can do non-judicial foreclosures. So if they have the right to do non-judicial foreclosures and the only thing remaining are legal fees, late fees, and fines. The ability to do non-judicial foreclosures is cut off. You can never do a non-judicial foreclosure just on those types of delinquencies. So you have to go to court and you have to tell a judge this is what we're doing. So that's the way you handle it on that aspect. They can challenge it and you have to go through mediation and you have to take certain steps. But you can still act on that it just delays the process. It's not a foregone conclusion that these amounts can never be collected against. That would be a ludicrous interpretation of the statute and I'm certain there are some debtors that are saying that yes that's how it should be. But that's not what we've seen and we've been able to move forward on once where that's the situation. Admittedly the judges don't like seeing just late fees and legal. But when you're able to explain judge this is why the way the priority of payment works and this is what happened. They decided to only pay the maintenance fees after we've already gotten to this point of filing a foreclosure. Therefore it's realistic. Have you actually gone to court on things like this that have you prevailed with the judges award of the fine and the legal fees because of nonpayment? Not enough. We have not foreclosed on that amount. We've been pushed to go a different route. But the judges are willing to award a judgment, a money judgment, on those types of dollar figures. So does that also apply to the military? Okay so military realistically Richard I don't want to get too deep into it because the military exemptions cover a wide range of what can be done and when and how. Right so if we're talking just foreclosure there's a distinction between when if you're able to do a non-judicial foreclosure or not premised on whether they're active, when they bought the property, whether they're in state or they are deployed out of state. So I'm not trying to be cagey on this one but there's a lot of different levels on that one. So the answer is yes it depends. We're down to our last two minutes of the show. I'll ask you one more question so I need a kind of short concise answer and that is with the proclamation and COVID can you do foreclosure right now? You can process it and you can start it. The problem is with the proclamations having the actual gathering and doing the actual auction it's not allowed. There's a way to argue around it but you could run into trouble and you could be subject to challenge. I want to thank you for being here today but you know with regard to delinquency this short answer to hold is if you pay your maintenance fees on time you won't have a problem and we won't have this conversation so I encourage everybody to pay their maintenance fees on time. I want to thank Cappado for being with us today and sharing us your expertise. I know you're the past president of CAI here locally. Thank you for your work in the industry and I know you have a great firm you're with and I want to thank you today and remind all of our guests that we are going to continue through the holidays. It'll be a little bit of a hiatus. You might see a repeat show here or there but we hope you have a very merry Christmas and a happy holiday. Same to you Cappado and thank you all Aloha and Melee Klikimaka.