 and welcome to Kondo Insider, Hawaii's show about association living, mostly condos. As we've said many times, maybe as much as 40% of our population lives in some form of association in Hawaii and we're here to talk about hot topics and for information for board members and owners and today we have a really exciting show in my opinion. I have one of my very favorite guests, John Morris. But one of the things that's been rambling rampant throughout the industry is a lot of what I'm going to call fake news of what's really going on under quote class action lawsuit on foreclosures with all sorts of wild interpretation of how the world is coming to an end and how all the associations are going to be in trouble and after looking at this carefully myself, I find there's a lot of fiction in what's being said. So we're going to talk about today and I'm going to ask my guest John Morris welcome and tell us about yourself and your firm. I became involved with condominiums when I was the first state condo specialist. I've been in private practice since 1991 and I'm in a law firm, Ekimoto and Morris, where we specialize in representing associations. So you've been around the Kondo world for a long time? Yes, quite a while. You drink a lot? I have some time strength, but not as much as I probably should. I understand your pain. Well, before we get into the class action lawsuit itself, tell kind of how we got there because there's judicial foreclosures, non-judicial foreclosures. There's kind of a history in and how this all transpired over the last decade. So tell us kind of how we got to where we are. The legislature in 1998 passed a new non-judicial foreclosure law to supplement the existing. The old law was called part one. The new law was called part two. And so after it was passed in 1998, there were some problems with it, but thereafter since this involves associations in 1999, we asked the legislature to specifically give associations the right to conduct non-judicial foreclosures, which they did in an act passed in 1999. And the problem stems from that and the interpretation of what the legislature intended and whether they intended us to be able to use condominium associations to be able to use the old law or the new law, the part two, so part one and part two. And the argument is in the class action that we should not have been allowed to use the part one non-judicial foreclosure law only the part two. But this particular class action concerns a timeframe from 2010 August up to about May of 2011 because of what's called the statute of limitations. Plains have to be brought in a timely manner. Well, we're going to come back to that. But for our audience, can you explain just the basic difference between a judicial foreclosure and a non-judicial foreclosure and why it benefits an association to have a non-judicial foreclosure? The problem for associations is the longer a foreclosure takes, the more money they lose. So that was the main emphasis for them to ask the legislature to allow them to use the non-judicial process. If they foreclosed judicially back in the late 90s, it would take maybe 12, 14 months, cost about $8,000 to $10,000. If they could foreclose non-judicially, it would take four to five months, and it would be about half to a third of that. So they not only save money doing the foreclosure, but they also save time because as soon as they could foreclose, they could at least try to do something productive with the unit. So the advantage of non-judicial was the time taken was quite a bit shorter, half, maybe two thirds of time, and half to two thirds of price. So the premise is you have an owner who's not paying essentially. And therefore the association is being harmed because they don't have that maintenance fee payment from the owner who's not paying, which to me, it makes me think that that means all the other owners are paying for it. Yes. And that's exactly what happens. And I can remember associations in the 1990s. I remember one with a lot of foreclosures, their maintenance fee went up from $250, roughly $250 to $350 in the space of a year or two simply because they were losing so much money grinding through the judicial foreclosure process or waiting for lenders to complete their foreclosures. So it was, it did have an adverse impact on those owners who were paying. And that was the problem from the association's point of view. So an association forecloses using the non-judicial process. Yes. Are they assuming any responsibility for the first mortgage or the unpaid property taxes? Unfortunately, that was always the problem for associations. They had no ability to affect the rights of any prior lien, which was usually the first mortgage. So they had to conduct their foreclosure subject to the prior mortgage. Hawaii's foreclosure law required that. And then they had no ability, no matter what they did, they could not affect a prior lien. So the problem they had, they might have a unit worth $300,000 with a mortgage of $350. They'd be trying to sell a unit in foreclosure, which was essentially worth minus $50,000 if you took into account the fact that that mortgage of $350,000 would remain as a lien on the property, even if the association foreclosed. Because again, the foreclosure law prevented the association in second position from affecting the mortgage company in first place. So conceptually, they wanted to do this to get possession so they can rent it out, which at least mitigates not receiving maintenance fees because probably the rent will cover the maintenance fees and maybe a little bit more. And then they sit and wait for the lender to foreclose or the taxing officials to foreclose. Yes, that was pretty much what they would try to do. They would hope that the unit was in rentable condition. Some of them were just abandoned and that was the worst of all, where they would just be sitting there, no productive use, nobody was paying anything. But basically, that was usually the option. Associations would buy the unit for a nominal amount subject to the first mortgage, which was typically worth more than the unit. And then they would try to rent it out for as long as they could until the lender would come in and foreclose. And because of the way the foreclosure law is written, the first lien holder could always wipe out everyone below. The second could not wipe out anyone above. So the mortgage company would come in and wipe out the association's interest by its foreclosure. And does that mortgage company have any obligation to pay unpaid maintenance fees? Unfortunately, they had no obligation to pay at least until 2000. They had no obligation to pay anything that was owed prior to the time they took title. And the second problem we had was sometimes they would foreclose and then not take title and they'd wait till they found a buyer. And during that time until they recorded the deed, the unit would still theoretically be in the name of the former owner. So that was another problem we lobbied to correct in 1990. So it seems to me I'm not a lawyer. So in lay terms, what I hear you saying is that judicial foreclosure, where you get kind of pure and clear title at the end, takes a long time and a lot of money. Meanwhile, the association is certainly their lien for the maintenance fees is below that of the first mortgage. And they're losing money and all the other owners are paying for those losses by because they have to cover it to pay their bills. And so that in fact, then they use a non judicial to get possession kind of foreclosing around the mortgage and any property taxes and not paying them just getting possession, running out to kind of mitigate their damages. Yes, that was really pretty much all they could do because the unit if there was no equity in the unit because the mortgage was more than it was worth, it was almost impossible to sell it because the only way someone might be able to get clear title would be to negotiate with the mortgage company. But that was very rare that they would be willing to ride off in exchange for the person paying them. And although this is an extreme example, I know and I think it was 2008 or 2009 when we had this financial industry collapse. I had an association of Maui that about 30% of their vacation rental units all stopped paying their maintenance fees, yes, which left 70% having to come over the money they actually did a special assessment called cash flow assessment, which was covering their shortages based on the number of delinquencies. Yes, I'm afraid that was the problem. Quite a few associations maybe not quite as bad, but a lot of them would have a dozen foreclosures going on, waiting for the lender to foreclose. So all the time they were losing money on those units. Yeah. So what's the beat? How does class action lawsuit come about? Well, the class action lawsuit is based on the legislatures decision to create a new non judicial foreclosure law and leave the old law in place. And the claim in the class action is basically that condominium associations were not allowed to use the old foreclosure law. They had to use the new so they were not allowed to use part one they had to use part two. And the reason they were supposedly not allowed to use part one is because they had no agreement that part one said it only referred to mortgage companies and it said that it could only be used if the mortgage company had the right to non judicially foreclosed written in the mortgage. So that was the genesis of the class action. They argued that when association started using the old non judicial foreclosure law after 1999, they should not have been doing that because they had no agreement with the members of their association that they had a right to do so. So that's the basic argument didn't this that legislature in some form theoretically amend all the bylaws to say they do have a right. Yes, that was the other thing when we lobbied in 1999 to have the right to do non judicial. We not only got that right put into the section dealing with foreclosures. We got it put into the section of the law which said, these provisions will be automatically become part of every set of bylaws in the state. So that's it was a two pronged approach to get the legal right in the foreclosure section of the condominium law and to ensure that the right to do non judicial foreclosures was added into the bylaws by operation of law. And this was a section in chapter 514 a which said anything in this section will deemed to be part of your bylaws whether it's there or not, it's deemed to be part of your bylaws just by operation. So in essence, you were foreclosing in part one at this period of time. Yes. And part two. I know that kind of the answer about what like our audience to know. What was what was the problem with part two? Well, the problem was that the very end of 1998 when the legislature was finalizing the bill that became part two, they added in a section which said at the end of the foreclosure, after the foreclosing party has completed the foreclosure, they had to go to the owner and get them to sign the final conveyance of the foreclosure would not be valid. So in essence, that meant that the foreclosing party would spend maybe four or $5,000 and take five or six months to do a non judicial, then they would have to go and if the owner was in the unit, they would have to say, Would you mind signing this conveyance so I can take your property away from you and throw you out on the street? And that was very unlikely to happen. And I think the record would show that because of that decision of the legislature to add that in 1998, I'm not aware of anyone who ever tried to use part two for a non judicial foreclosure until after 2011 when the legislature took that requirement out. But between 1998 and 2011, the only way to complete a successful part two non judicial was to get the person you were foreclosing on, sign the final deed conveying their property away from that's kind of I hate to say stupid, but I mean, who in their right mind is going to sign this document? And because all these costs of foreclosure are also going on their ledger, you know, why would they do that? That was something that many people couldn't really understand. I think there might have been some confusion that somehow non judicial foreclosure was a collaborative process instead of an adversarial process, that somehow the owner was working with the association. But of course, if they were willing to deed the property to the association in the first place, the association could have just asked for a deed in lieu of foreclosure, saved all the time and expense of the non judicial. So that was the problem we were up against. And that is why neither associations nor even lenders ever use part two until 2011. We're gonna take a short break. This is really interesting. And I have a lot more questions. We'll be right back in a minute. Which you can see live from one to 130 every Tuesday at think tech Hawaii.com and then later on YouTube. I'm an energy attorney, clean energy advocate and community outreach specialist. And on power up Hawaii, we come together to talk about how can Hawaii walk towards a clean, renewable and just energy future. To do that, we talk to stakeholders all over the spectrum from clean energy technology folks to community groups to politicians to regulators to the utility. So please join us Tuesdays at one o'clock for power up. Welcome back to kind of insider. We're sitting here with John Marcus talking about the infamous class action lawsuit on foreclosures as permeating the coconut wireless in our state with a lot of misinformation. And we want to talk some more about this. Well, can you just generally tell us what a class action lawsuit is? It's basically a means of allowing a lot of plaintiffs to bring a claim against someone else. It's supposed to be more efficient. If the claim, the criteria to create a class action is there are too many people to be named as plaintiffs in the lawsuit. There has to be a common question of law and fact. That's the basis for the claim. So they all have to have a very similar claim. The claims and defenses of the people who are actually named as plaintiff and defendant have to be essentially the same as everyone else in the class. And then the plaintiffs who are named in the lawsuit, they have to be representative of all the other plaintiffs who are not named in the lawsuit. So it's a way for the courts to handle claims involving a lot of people in a more efficient manner. So you get John Doe who sues a class action naming a lot of parties and probably a lot of defendants. So if there's an award, does he get a better benefit out of this than maybe the person who is at the bottom of the list? The process is supposed to be part of the process is supposed to be to ensure that those plaintiffs in the class action, if there is a recovery, get a proportionate share of the recovery. So I'm not sure whether certain people might be able to justify more. But the theory is that everyone in the class has essentially the same claim. So they should share in the recovery. And if you're the first person in like the named plaintiff, you should be getting a share with all the other plaintiffs, you should not have some special advantage. And there's even a federal law that tries to make sure that the process is done fairly and efficiently. So it sounds more of a win-win to the attorneys to me. That's what some people have said. Sometimes the attorneys get their fees paid, and the class participants get a fairly small recovery because there are so many of them, because the legal fees have been paid. So that is one of the problems with the class. And others I think the recovery is greater. It depends on the nature of the claim and the amounts that the class action recovers for the claim. One of the things you briefly mentioned on this particular class action suit on the foreclosures, and I want to emphasize that and dig into a little bit more is through the time I've been in Hawaii for 40 some years, there's been a lot of foreclosures. Yes, what period of time are we talking about? Because you talk about the laws changed several times, you talked about Part 1s and Part 2s. Does this apply to every foreclosure ever held or is it a limited period of time that's affected? The complaint in this case is filed in August 2016 and it's claiming under a six year statute of limitations, a limitation on when claims must be brought. It's claiming from a period of about August of 2010, up until May of 2011, when the legislature put a moratorium on the use of Part 1. So from 1999, Association started using Part 1, Part 2, for the reasons we discussed. That continued up until May of 2011, when the legislature said there will be no more foreclosures under Part 1. And in fact, in 2012, they've repealed it. But the timeframe for the class action is essentially from August 2010, six years back from when the complaint was filed in the class action to May of 2011, when the legislature said there would be no more Part 1 non-judicial foreclosures. My quick calculation, you know, about eight or nine months of a period of time of foreclosures and it had to be a non-judicial and they had to be done under the old Part 1. Yes, that's basically it. It's that timeframe from August of 2010 to May of 2011. So if you're an association and you've done foreclosures recently or in, you know, your attorney's working today under the current law, they probably don't have anything to worry about with regard to the class action. It should not be that the class action is based on use of Part 1. So since nobody used Part 1 after about May of 2011, then they started using Part 2 because the legislature eliminated the requirement that the party being foreclosed on had to sign the final conveyance. So really, the class action should not apply to foreclosures that were conducted after about May of 2011. That's a very narrow field, you know. Yes, it's a fairly short period of time. And I mean, it just strikes me that the, how do you prove the damages on this? I mean, if the guy's not paying his bills anyway, and he's probably being foreclosed on by his lender, typically. Yes, I'm not sure. And then there were bankruptcies. So that is something that I think hasn't been clarified in because right now the issue before the federal judge who's deciding on whether the class action can go forward is she's deciding whether the claim that Part 1 could not be used by condominium associations is valid. So until that claim is decided, we don't exactly know what will happen next. And that is presently under consideration by the federal judge who's presiding over the class action. But this was also in state court prior to the federal court, right? These same claims, right? Their claims, individual claims were brought in state court. I think there were three or four cases. They were all dismissed by the circuit court judges. And one of those cases I think is now on appeal. So the plaintiffs are arguing that in that case. But those cases were individual. It was one owner suing the association they were not class actions. So I think the issue in the federal class action is not quite the same. But the state courts did dismiss, I think three or four of these claims brought by individuals against association. So the issue of use of Part 1 in this time period we talked about August 2010, the May of 2011, there's been three or four individual lawsuits that have been dismissed by the judge meaning that they're not siding with a plaintiff. One is under appeal. Yes. Then we have the class action representing the bundle of people before the federal judge. That's right. That's pretty much and what does that stand right now the federal case? There was a decision by the federal judge in a case in which one owner had sued the owner's association. And following that the judge asked for additional briefing on the class action. So I understand that right now she is considering those additional arguments in the class action, but there's been no ruling that I'm aware of. So the judge is not able to as the judge sort of find the class even agreed that there's a class. I believe the first question before the judge is this question of whether there's a common question of law and fact whether all of these plaintiffs in the class action have a claim that the defendant associations in the class action should not have been using Part 1 from August 2010 up to July, I'm sorry, May 2011. So then theoretically after that is decided, yes, if the case is going to continue, then there would be a certification of the class. Yes, they would have to to essentially show those points that there are a lot of people claimants. The common question would be decided if the judge decides that way. The parties have the same claims and defenses so that they can all be adjudicated at the same time and that the named plaintiffs of which there are two in the class action are representative of the other members of the class. Now, if I'm correct and please correct me if I'm wrong, in the class action, my understanding is the plaintiff has actually filed bankruptcy and abandoned the property. That's what I've heard. Yes, in one of the plaintiffs. How does that affect everything? I'm honestly not sure how that would come up. But yes, if they filed bankruptcy and abandoned the property, then that would be, I think, at least be a factor. So how much longer is this going to go? I mean, how long do you, I mean, you wouldn't you predict when the judge is going to rule on the first time? I'm sorry, I can't if I was that smart, I wouldn't be doing this in the first place, I think, but I think it's really up to the federal judge now to review the supplemental briefs that were submitted after her decision in the individual case and then make a decision on that issue of whether condominium associations were permitted to use part one of the nonjudicial foreclosure. Well, I know in the actual and we're down to our last minute or so of time, but one question I want to make sure our audience do the answer to, if you're in this window of August 2010, the May 2011 where they're alleging by your your name being attached to the complaint, are you are you not a defendant in all of that? Yes, the complaint has the named he named associations in the caption and then it has a list of I think it's about 60 or 70 other associations who are supposed to have been conducting nonjudicial foreclosures in that August 2010 to May 2011 timeframe. And I guess what association should be doing is notifying their insurance company their insurance agent by a copy of this claim and letting them decide the next course of action. Yes, and I think some associations there insurance company has appointed counsel. I'm not sure that that's true of all of them, but that would be the best thing is the insurance company will then evaluate it for the board. Well, thank you for being here today. It's a very complex topic that I'm sure many of us, including me and many of you out there are heads are spinning about all the different changes and changes in the law and the time periods. But again, check with your insurance agent and check with your counsel. But this is kind of an update on the exact status of this foreclosure lawsuit. And I guess we're pending the judges ruling on the first part of whether there is a common legal cause. Yeah, that's right. Well, thank you for being here. And next week, we'll have another exciting show condo insider every 30 Thursday, three to 330. Feel free to call in any time. Thank you for watching.