 Good afternoon, and thank you for joining us for another episode of Kondo Insider. My name is Jane Sugimura, and I'm your host for our show today. And we're going to be talking about proposed legislation that's going to be before the legislature in the 2019 session that's going to start in less than a month. January 16th is the beginning of the legislature. And so we will be quite busy from now until then. And for my guest today, I have Larie McGuire, and she's a partner with the law firm of Porter McGuire, Kia Kona and Chow. Thank you, Larie, for being with us again. Thank you. I'm happy to be here. And why don't you tell us a little bit about yourself? Sure. Well, I have been practicing with Porter McGuire since 1999 and have been doing condominium work, condominium HOA work since 1999 as well. I would say probably 75% of our practice deals with condominiums and homeowner associations. So you are well versed to talk about the issues that we're going to be talking about today. I hope so, yes. And one of the first things that we have on the agenda to speak of is Act 195, and that was effective on July 1 of 2018, and it deals with priority of payments. Why don't you explain to the listening audience what that bill, priority of payments, was all about? Okay. Yes. Effective July 1, 2018, the legislature passed Act 195, which in effect stated that priority of payment policies are now void as a matter of law. And previously, associations were allowed to have priority of payment policies. And what they did is they prioritized categories of expenses such that when an owner would send in a payment, that payment would be applied in the order of the priority of the various expenses. So for example, they may say that when the payment came in, it was first applied to maybe a special assessment, second applied to legal fees, then late fees, and lastly, it was applied to maintenance fees and reserve fees. And so why was that, I mean, why did that bill, I mean, why did that priority of payments policy exist to begin with? Okay. That's a good question. Finally, before the legislature created 514b105, owners would often make a payment and they would pay the common expenses only. They wouldn't pay the late fees, they wouldn't pay the legal fees, they may not pay the fines, they would just pay the common expense assessments. Well, under 514b146, associations could not foreclose doing a non-judicial foreclosure on an owner if the only thing that was owed was legal fees, late fees, fines, and penalties. And so the legislature recognized the problem that associations were having in this regard and they enacted 514b105, which allowed associations to implement these priority of payment policies. But effective last session, they did away with those policies. Okay. Now, as a result of Act 195, did this cause any problems with the association or their management companies? Yes, it did, because it didn't define exactly what the legislature considered a common expense assessment. It just laid out the term common expense assessment without that definition. So for example, if somebody paid a payment and they didn't designate that payment, and let me back up. Let's say, for example, an owner gets a demand letter and the demand letter covers common expense assessments, late fees, legal fees, reserve fees. And an owner sends us a payment that is less than the amount noted in the demand letter. So under the new law, when the management company gets that payment, they can apply it only to common expense assessments, because under the new law, it's presumed to be for common expense assessments unless it's stated otherwise. So unless that owner had paid that full amount, then the entire amount would go towards common expense assessments. The problem, though, is that you could only apply it towards these individual categories if the owner designated that. And so it just became a real problem for management companies in terms of how to deal with it. And if they paid less than that amount, then you've got to send them another letter and ask them to please let you know what the remaining amount is for or to pay the full amount due. And I understand that there's a bill now that is being proposed that is going to be submitted to the legislature to try to clarify some of the problems created by Act 195 in this connection regarding what is the priority of payments and how do you apply these payments that you get from the unit owners? Right, right. Exactly. Well, what we're trying to do at this point, and it's a work in process, is to define a common expense assessment. In other words, what is encompassed in the common expense assessment? What is encompassed in non-common expense assessments? So you know the distinction, and that way management companies will know how to apply payments. When they're sent in by the owners. Yes, exactly. And another part of 514, another part of, what is it, the Act 195. There is this pay first dispute later. Correct. Explain that to the people who are listening. All right. Act 195 amended 514b 146. And previously under that law, if the association sent an owner a demand letter, and that owner had a dispute concerning the amount in that demand letter under that law as it existed prior to July 1st, 2018, owners had to pay the entire amount, and then they could dispute the amount. So after they paid, then they had a right to go to mediation. But they had to pay the full amount first. Under the new law, they still have to pay the common expense portion of that payment, and then they can dispute the remainder with respect to everything other than the common expense assessment payment. They can dispute that, and then pay later, meaning after they've gone to mediation, to address their dispute. And so are, is there anything in this new legislation that's going to be addressing that portion of the Act? That portion, to my knowledge, is pretty good. I mean, you know, people don't really have a problem with it. I mean, you know, there are some deficiencies in terms of, for example, if an owner has a dispute over it, they can seek mediation. However, the statute doesn't make a determination as to whom the owner must submit their demand for mediation. So that's a little ambiguous, but I think, you know, that may or may not be changed. And you know, with respect to this bill, I guess the reason, the reason that I've heard that it was put into Act 195 is you had some people who had, you know, who maybe had economic problems, or maybe they lost a job, and they got behind in their payments. And the way the law was set up, they couldn't really dispute the, you know, the charges that were being made, I mean, that were sent to them, because they had to pay everything, including the late charges and the legal fees. And so this was a little bit of an impender. So now, even though they owe the late fees and the legal charges, they don't have to pay them in order to dispute the underlying amount that's being demanded. Of them regarding payment. That's correct. And so let's say they go through mediation and they resolve the payment of the amounts that are due. That doesn't mean that the legal fees or the late charges are waived. No, not at all. It just means they get to go through mediation to address whatever issue they may have with the amount shown or with any particular charges. So they go through mediation. And then at the end of mediation, there's a determination of exactly what they have to pay. And it may be that they have to pay the full amount. But at least at that point, they will have had their say, so to speak. They will have been heard. Yes, exactly. Their day at court. And so they would get a chance to have their dispute about how much is owed resolved. But that doesn't mean that the late charges or the legal fees are being waived even though they don't have to pay them upfront. Correct. Yes, they are not being waived. So in a worst case scenario, they may get a reduction in the amounts that are due. But they will probably not get any type of relief regarding late charges or their attorney's fees. Well, each situation will be evaluated on its own facts, obviously. And some may, some may not. It may be that if there's room to move, the association may be willing to enter into a settlement agreement with them. I mean, that's one of the good things about mediation is nobody's telling you that you have to do something. The parties can reach an agreement. But at least that way, the parties are sitting down and the association representatives can explain to that homeowner the basis for these charges. Because sometimes that's all that's necessary. That's all that a homeowner wants is to have a discussion and find out, you know, what's the basis of this charge? Why am I being charged this, you know, when I've been paying my maintenance fees all along? Well, you know, in certain instances, it may be that a homeowner has received a fine. Or maybe they paid a partial payment and so they got hit with a late fee. And they're not aware of this because they are not monitoring their payments. So they don't know, for example, well, you know, in certain cases, an owner may have an agent who pays their payment for them. You know, but so say the agent doesn't pay it on time. And so they have a late fee. Well, they may not know about that late fee. And so if you don't pay that late fee, then late fees continue to accrue. And so my point here is that now they're going to have an opportunity to come together face to face the owner and the association representative and have a discussion about what these charges are, the amounts of the charges, when they accrue. And you can go over the person's ledger, accounting ledger with them, you know, statement, you know, on each statement and line by line if necessary. And in a lot of situations, that's all it takes is basically this discussion because otherwise the unit owner is dealing with some stranger that they've never met. And I think everybody will agree that if you sit down and you talk about something and you have somebody there who can answer your questions and maybe hear why you didn't know that, you know, you owed this amount of money, that may end up in a resolution. And the good thing, too, now we've got evaluative mediation, which is subsidized by the condominium education fund so that for both parties it's relatively economical to go into mediation and try to resolve these disputes besides without litigating, which is not the preferred method by either the association or the unit owner. And the parties have 60 days to complete mediation. So from the time the owner demands mediation, the 60-day clock begins to run. And if, for example, if an owner doesn't demand mediation, then at the end of 30 days the association can move forward with collection. If they do demand mediation, then there's a 60-day period wherein that owner can initiate mediation and the parties can participate and complete that mediation. And then the case moves forward. OK. All right. We're going to take a break right now. And when we come back, we're going to talk about other portions of Act 195. And then we have an interesting issue about nonjudicial foreclosures, which you're going to be addressing as well. OK. So we're going to take one minute break and then we'll be back. Thank you. I'm getting older. Do I need to worry about falling? Yes, you do. Each year, one in four people 65 and older will experience a fall and many will be serious. The majority of falls happen at home, so remove things that could make you trip and install handrails to keep you steady. To learn more about the steps you can take to help prevent a fall, please talk to your doctor. You can also visit aarpfoundation.org or Medicaremadeclear.com slash falls. This message was brought to you by UnitedHealthcare and AARP Foundation. I'm Jay Fidel of Think Tech. I'm around every Tuesday at 2 p.m. with John, David, Ann and me. We're talking about history, history lens, right, John? Exactly. Seeing current events through the lens of the past. Absolutely. See you next time. OK, Jay. Thanks. OK. Welcome back to another episode of Condo Insider. We're talking about some proposed legislation for the 2019 state legislature. And we have, as our guest, Larie McGuire from Porter McGuire, Kiyokona and Chow. Thank you very much. Thank you. And she's talking to us about Act 195. And we talked about two sections. And now there's another section of Act 195 that clarifies what happens in a nonjudicial foreclosure. Why don't you tell us about that? And is this change a good thing or a bad thing? OK. The third thing that Act 195 did was it amended HRS 667-94. And that is the section concerning cure of default. So previously, whenever an association would pursue a nonjudicial foreclosure with regard to a particular owner, they would record a notice of lien if the owner didn't pay off that notice of lien. And at some point, the association would pursue or had the option to pursue, and in certain instances did pursue, a nonjudicial foreclosure. And how they did that is they— And let me just interrupt. A nonjudicial foreclosure for those people who are listening, who aren't really into legalese, what's the difference between a nonjudicial foreclosure and a foreclosure? Good question. A judicial foreclosure is in court. Here before a judge, you file a complaint and various other pleadings, and you proceed. The whole procedure is under the supervision of a judge. A nonjudicial foreclosure is governed solely by statute. There are procedures that you follow from the beginning to the end. And so it's not with a judge. The association does it with the assistance of their attorney, and they have to follow the statute. And they have to file records with the state of Hawaii, but not with the court. Correct. Correct. You record various documents with the bureau or land court, depending on the type of property. So in this particular instance, 66794 deals with a cure of default. So once the association begins to pursue the nonjudicial foreclosure, they file what's known as a notice of default and intent to foreclose, also known as an NDIF. Well previously, before the law was amended, effective July 1st, 2018, whenever an owner sought to enter into a payment plan to cure the default, if the association had recorded an NDIF on title to that property, once the owner entered into a payment plan, the association had to rescind or file a release, record a release of that NDIF. Well, unfortunately, oftentimes owners will default on payment plans. So as soon as the owner defaults on the payment plan, then the association turns around and has to record that NDIF once again, and that's an additional cost, which ultimately is borne by the homeowner. So if you have to file this document because of the default, and you file the release, there's a filing fee for the filing of the NDIF and for the release, and the unit owner gets charged for it. And so if they do a payment plan on the default, then you file another NDIF, and then if they ask for another payment plan, you have to file a release, so these charges will accumulate. Yes, but they're only entitled to one payment plan. If they default, they're not entitled to another one under this procedure. But the good thing about this amendment is now, if they have, if the association has recorded an NDIF, and there's a payment plan that's entered into, what happens at this point is the non-judicial foreclosure is placed on hold. And 14 days within entering into that payment plan, the association has to notify everyone who was previously served with a copy of the NDIF, advising everyone involved that the parties are now in the middle of a payment plan. And what kind of people would get notices other than the unit owner who is in default? Any time you pursue a non-judicial foreclosure, you have to notify everyone who has any kind of an encumbrance on title. So all lean holders, so for example, if the homeowner has a mortgage or a second mortgage or possibly a judgment lien, then you have to notify everyone who has an interest in that property that's recorded on title. So that would be the lender, the first mortgagee, the second mortgagee. Anyone who has a judgment lien on title. And if it's the IRS, and if they have a tax lien, the IRS, or it could be the state of Hawaii, I mean, or the city and county of Honolulu, if it's a real property tax. Or the state of Hawaii, there's an income tax, state income tax, right? So you have to notify all these people. So if that person completes that payment plan and it's cured, then at that point the NDIF is released. And everyone who was previously notified also gets notice of that release. However, if there is a default in the payment plan, then the hold comes off and the association may pursue, complete the non-judicial foreclosure. So do you have to then notify everybody else about the hold being released? Well, ultimately what happens is, the next thing that happens is you serve everyone with a copy of the notice of judicial foreclosure, letting them know when the auction is set. And so that's how they learn that the matter is now proceeding. Okay, so the change now with the $195, it makes it better? I think it does, yes. I think it's better for everyone because, number one, I mean, the Bureau, they have enough, it's so hard at this point to get things recorded at the Bureau. The line is always long and it's cost prohibitive. If you have somebody in foreclosure, the last thing they need are additional recording fees that they have to pay for, ultimately. So it's better for everyone. It's much better to just put it on hold and see if you can settle it. And that does encourage settlements too? Yes, yes. Okay, and which is always a good thing, they're better to settle this and for the association to get their fees rather than to get the unit. Yeah, the association is not in the business of buying and selling units. They just want their maintenance fees. They want to be able to pay their bills. They just want to be paid, right? Correct. Okay, the last thing that I think we want to talk, there's some proposed legislation to clarify whether a condominium association, as to whether condominium have been or entitled to exercise the non-judicial foreclosure remedy. And why is this legislation, the proposed legislation going to be heard this session? There's some appellate decision. Yes, the Intermediate Court of Appeals recently came down with a decision in the Sakal v. Hawaiian Monarch case. And in that particular case, the ICA held that there is no statute that provides for a power of sale foreclosure and that condominiums in order to condominium, yes, condominiums solely applies to condominiums. For condominiums to do non-judicial foreclosures, there must be a power of sale provision in the bylaws. I will have to say that the condo bar is not in favor of this. We strongly disagree with it. We believe that there are provisions that do allow condominiums to do non-judicial foreclosures. And the bylaws are written such a long time ago before this was even an issue. Yes. I mean, if you think about it, so many of our condos were built in the 70s and 80s. Non-judicial foreclosures weren't even going on at that time. It wasn't even a topic of discussion. So it's not in. That provision is not in. Most bylaws. Exactly. However, a lot of bylaws do state that basically they say that they will comply with the act, with 514b. In other words, if it's in 514b, then it applies to that particular condominium. And the reason for that is as most condominium homeowners know, it's very difficult to amend your governing documents, especially here in Hawaii where we have so many homeowners that don't live here. They actually live on the mainland. They live in Japan. They live elsewhere. And so they don't necessarily come back or even submit their proxy to vote at an annual meeting. So it's very difficult to be able to amend the governing documents. But if you think back to 2008, 2009, 2010, where you had so many condominiums that had home owners a huge percentage that were in default, I mean, but for the non-judicial foreclosure process, many of the associations would have had to file bankruptcy because they just wouldn't have been able to pay their bills. Because the maintenance fees weren't being paid. And that's what is used to pay for the bills to operate the condominium. Yes. We're a zero-budget. Condominiums are a zero-budget project, basically. In other words, they budget from year to year. And at the end of that year, there's nothing left in the budget. So they don't have a profit that they can then spill over. So that's why it's so important. And in 2012, the legislature made an effort to try to resolve this, and it's our position that they did insert language in the statute, albeit maybe it was inartfully crafted. But the position is that that language is there and does provide remedies that allow associations to do non-judicial foreclosures. And in power of sale, I think the ICAE, the appellate court, is taking in a mortgage. If you had a mortgage, the mortgage has got a power of sale language in it. Well, what the court ruled on in a prior case, the Lee case, in that particular case the court stated that in order for mortgages, lenders, to pursue a non-judicial, the mortgage had to have a power of sale provision in that. However, the difference is associations, condominium associations, are creatures of statute. Everything governing these condominiums are in the statute itself, as to where lenders and mortgages are governed by contract. They have a contract between the owner and the lender. In our case, we don't have a contract with that owner. lenders have no say as to who can be a member of that association. The lender really is the one that decides, because the lender looks at the risk and makes a decision, you know, can this person afford the mortgage? Well, the association doesn't do that. They can't look at that person and say, well, can this person afford to pay their maintenance fees? We have no say so in that. So that's how the proposed legislation is going before the legislature to clarify it in the condo statute so that the courts will not have concerns regarding condominiums during non-judicial foreclosure. Correct. Correct. To clarify the language to show that the remedy of a power of sale provision, or as a non-judicial foreclosure, as it's also known, to show that that remedy is in the statute itself. It's currently in 514B146. And so we want to clarify that. We want to clarify that language to make it crystal clear that that remedy is in the statute. OK. Well, good luck to you. Thank you. And hopefully that will happen. And we've come to the end of our time. And so thank you for joining us. And next week we're going to be talking about yet another attempt to update the fire safety law relating to fire sprinklers. So I hope you will tune in and join us for that episode. And since we're so close to Christmas, I want to wish all of you who are watching us today a very merry Christmas and a happy new year. Thank you. And aloha. Good.