 Thank you for joining us for another episode of Kondo Insider. I'm your host today. My name is Jane Sugimura. And Kondo Insider is the weekly show about Kondo living and how it affects people who live and work in Kondos. And today I have as my guest a good friend, John Morris. He's an attorney and a partner with Ekimoto and Morris. And he's had his firm, you know, specializes in Kondo Association Law. And we're going to be discussing non-judicial foreclosure, what's the beef. We had a bill, Senate bill 551 this session, and it was very, very controversial. And having attended the hearings, I kind of think that some of the people who were there and even some of the people who, you know, were following the bill didn't quite understand it. And so hopefully, and since it's now a law, I've asked John to come and help us understand it. First of all, thank you for joining us, John. Yes. Thanks for inviting me. And why don't you tell us about your firm and tell the listeners about what you do? We represent mainly condominiums, some homeowner associations. We do general advice, plus we also do collections and enforcement of the rules. So that's basically our practice. Okay. And we're here to talk about basically, there was a bill this session, Senate bill 551 that caused a whole lot of uproar. We had, you know, very challenging testimony on both sides on this bill. So why don't you tell us what it was all about, Senate bill 551? Well, it was in response to a several appellate decisions in Hawaii. Plus there was a district court, federal district court, which from our point of view, essentially rewrote history because they said the legislature had not intended to allow condominium associations to conduct non-judicial foreclosures unless they had some kind of an agreement with the owners or unless the authority to conduct non-judicial foreclosures was written specifically into their governing documents. Couldn't be just a general statement of the right to foreclose. It had to say non-judicial power of sale foreclosures. So we as an industry, as attorneys representing, were very surprised to see these decisions because back in 1999 when we first got the right to conduct non-judicial foreclosures, there was no question in our mind that the legislature did intend to allow us to use the non-judicial process. Why don't you tell the audience, what's the difference, what is the non-judicial foreclosure? Well, it's in some ways is like a do-it-yourself foreclosure. You do not actually have to file paperwork in court, but you do have to follow a specific procedure when the law, the recent law, which has been in effect for six or seven years, it requires you to notify the owner that you're intending to conduct a non-judicial. Then you have to give them 60 days to use something if they are going to try and pay off. They have a right to propose a payment plan of up to 12 months, but it's a foreclosure in which the association usually through its attorney and notify the owner of their delinquency, notify the owner of the association and tends to foreclose, give the owner notice and hold a sale. Put an advertisement in the paper, advertise the property for sale and sell the property. In contrast, in a judicial foreclosure, you have to file a complaint in court, move for summary judgment, which is judgment simply saying that you are owed money, you're entitled to sell the property, have the court authorize you to proceed and have the court appoint a commissioner to sell the property. The commissioner, as in a non-judicial, advertises the property, holds an auction and sells the property. So the process is essentially the same except in a non-judicial, the association does not have to go through the court process, but they do have to follow very specific procedures written into the law. Why would an association have to do foreclosure to begin with? Well, the problem is if someone is not paying at some point, the association has to take action to get paid. They don't have a lot of alternatives and probably the most effective alternative is telling the owner, if you cannot afford to stay in this association, we will have to foreclose on you, sell the unit to someone who can afford to pay their maintenance fees because the problem is if you don't pay, it means all of your fellow owners have to make up the difference. So it can be very difficult for a board to allow an owner to stay in a condominium or a homeowner association if they're not paying because the others have to pay. To explain to some of our owners who may not understand, with a condominium, why as a person who owns a unit in an association, a condominium association, you are required under the governing documents, which basically say what you're supposed to do and what you can and cannot do, that you have to pay maintenance fees. And the maintenance fees are used to operate the building. They pay for the electricity, the employees, the insurance, they pay for everything that's necessary for the association to operate this building. And so basically, if people don't pay their maintenance fees, I mean, it's feasible that you might have to lay off your staff because you don't have money to pay them. You might have to downsize on your services and tell people, well, you're going to have to stop using as so much electricity or water because we can't pay the bill. Yes, that is the main problem because it's everyone is in the same organization, namely the association together. And if they don't all pay their fair share to keep the building operating, the other owners have to make up the difference. And if too many owners go delinquent, then there aren't enough other owners to make up the difference. The maintenance fee sometimes has to go up just to cover the losses. So that is the basic problem. Without every owner paying their fair share, the other owners have to make up the difference. And to give you an example, I think just before the show, I was telling you about during the 2008 period, there were all these foreclosures during the recession. There was somebody in Kihei who called me and said that their building was like 80% investor-owned and 20% owner-occupant. Over 50% had abandoned their units and so they were on the brink of bankruptcy. That's what happens, right? When you have people who don't or cannot pay their maintenance fees, your cash flow doesn't come in and the building can't operate. That's pretty much what happens and it's like a downward spiral because people who are paying have to make up the difference. The maintenance fee goes up and that tends to make it much more difficult for the association to operate because they have to start cutting back. And maybe not to get off the subject, but that would be a reason why a person who is concerned about paying maintenance fees, when they go in to buy, look at a condo, they would want to know what the owner-occupant ratio is because if you have a whole lot of investor owners and the economy decides to go south, then there might be a lot of people defaulting and if you're an owner-occupant, you're going to be left holding the bag and maybe subsidizing all those people who don't pay their maintenance fees. That's why a lot of lenders look at the same statistic because they're worried they're different. The building has too many investors, they are very not heavily invested in the project and they're more likely to walk away if they feel like they're losing money and someone who actually lives in the project. And you advise condo associations on collections. So when would an association decide whether to use a judicial foreclosure or non-judicial foreclosure? Because they have a choice, right? Yes, they do have a choice and the problem for associations is that the judicial process usually takes two to three times as long and costs two to three times as much to get the same fairly crummy result, which is a function of the fact that Hawaii's foreclosure law gives priority to the first lien on the property, which is almost always a mortgage. So the association board is faced with the proposition of spending 10, 12 or more thousand dollars and taking a year and a half to complete the foreclosure or spending maybe four or five, six thousand dollars and taking six months to complete the process. And part of that problem is that when there are foreclosures, there are usually a lot of foreclosures, they clog the court, it takes the courts longer to schedule and the problem is the way the association operates, it is often trying to foreclose on a property that is worth, that is essentially worthless. And the reason is because if there is a mortgage on the property, that will always take priority and that will be any sale the association makes has to be made, object to that mortgage. And you know, when you do these non-judicial foreclosures, and I, you know, being president of a condominium association who has done non-judicial foreclosures, the reason why we've done it is basically to get the unit back, because usually we're the ones who bug at the auction, you know, are the ones who are bidding on it and we take it back the unit and we rent it and we use it to basically pay back the delinquency and to provide cash flow to the association so that they get paid maintenance fees for that unit that wasn't paying before. Yes, that's pretty much what most associations, because the problem is if you are going to start a foreclosure, you get the title report, you look in the title report, the unit's worth $400,000, but it has a mortgage of $500,000, you know that when you hold your foreclosure auction, you will have to sell that $400,000 unit subject to the $500,000 mortgage, which means anyone who buys that unit will buy it with the mortgage still on the property and unfortunately the holder of that mortgage can then come and foreclose on their mortgage and wipe out the buyer's interest. So that applies to associations, that applies to anyone else who buys from association. They can lose all of their interest and they cannot do anything that affects a mortgage that was recorded prior to the association's lien. So that's the problem facing most boards. They are trying to foreclose on a property to sell it at auction when it actually has a minus value. It has a mortgage on it which will stay on the property and the association will have to sell it subject to that mortgage. So someone who buys it will know that at some point that mortgage can also be foreclosed and it will wipe out the association's interest or the interest of anyone who buys in an association. When you sell a subject to the mortgage, people who come to the auction and there is a public auction where you actually have a sale and there are people who are interested who will show up because they've seen the newspaper as that gives the date and time of the auction and so they come thinking they're going to pick up something cheap. So they're told you buy subject to a mortgage and they're given written notice on a fact sheet that they're buying a subject to a mortgage and the name of the lender is on the notice. We try to do that because if we don't do that there are people you can say it, you can try and explain to them that they will bid and sometimes buy the property and then they'll find out that they bought it subject to a mortgage that is more than it's worth and that mortgage is still on the property. So you're right. We always try and fully disclose that the association's auction in almost every case is subject to a prior mortgage which will remain on the property after the association's auction. Let's just give an example. Let's say the association lien is $3,000 and so they have a lien by statute and then you do the non-judicial foreclosure so the auction is held to foreclose that $3,000 lien and so typically the association will bid its judgment. They don't have to actually put $3,000 on the table. They credit this so they can bid $3,000. So let's say I show up at the auction if I want that I have to bid higher than the $3,000 and so if I bid $4,000 if the association wants to give it to me I have to write you a check for $4,000 and go to the association and I get this property but let's say the very next day first Hawaiian bank is lender and they decide to hold a foreclosure I lose that. I never get my $4,000 back right? No because you bought that when you bought it all you got were our rights as an association and our rights as an association are subject to the lender's rights because their mortgage is the first lien on the property. So that's one of the problems we often had. People would say how can the association buy it for a dollar and we would say because nobody wanted it because it was worth $100,000 less than the mortgage that would remain on the property after we sold it. And nobody knows when that lender is going to come forward and foreclose. That was pretty common. We would push forward with the foreclosure because the board felt compelled to do so out of fairness to the owners who were paying. We would hold an auction and sometimes within just a few months the lender would come along behind they would foreclose they would wipe out our interest or they would wipe out the interest of anyone who bought from us and that would be the end of that. The lender would then take the property back and that person or the association would lose their interest in the property because the mortgage would wipe out all the liens and claims on that property that were recorded after the mortgage. Okay well why don't we take a break now because now that we've kind of explained it let's when we come back we'll talk about the the court decisions and how that affects us. Okay we're going to take a one minute break. Hey aloha everyone and welcome to the Think Tech Hawaii studio. My name is Andrew Lanning. I'm the host of Pretty Matters Hawaii. We air here every Tuesday at 10 a.m. Hawaii time trying to bring you issues about security that you may not know issues that can protect your family, protect yourself, protect our community, protect our companies, the folks we work with. Please join us and I hope you can maybe get a little different perspective on how to live a little safer. Aloha. Okay welcome back to another episode of Condo Insider and my guest today is John Morris and we're talking about non-judicial foreclosures and the first part of the show we were talking we explained what a non-judicial foreclosure was and why the associations would choose to do a non-judicial versus a judicial foreclosure or some of the factors and now we're going to be talking about the court decisions that were the reasons why Senate Bill 551 had to be introduced this year. So John there's basically there's several court decisions that are happening because of the non-judicial foreclosure issue but the two that seem to be at the forefront now mainly because they're kind of coming to an end. It's a call which was the intermediate court of appeals decision and Malabe which is in with the Hawaii Supreme Court now right. It was also a decision of the yes. Why don't you tell us about those two cases? Well they were appeals from lower court circuit court cases by owners who'd been foreclosed on and their basic argument was that the association did not have the authority under the condominium or any other law to conduct a non-judicial foreclosure which to be honest was news to us because many of us were there in 1999 when we were both down there and we were both aware the legislature went out of its way to provide remedies to associations in 1999 because they were suffering such severe delinquencies and one of those remedies one is non-judicial but in 2018 these two appeals came up and the intermediate court of appeals first in Sakaal they said the only way an association even though the condominium law says an association can do a non-judicial foreclosure even though the condominium law said every condominium association is deemed to have that authority in their bylaws the courts ruled that the associations could not do non-judicial foreclosures unless they had the authority in their bylaws some type of other agreement with the owners that they were entitled to do that and that was done by analogy to mortgages when people sign a mortgage it will have a clause in there saying if you fail to pay we can conduct a non-judicial foreclosure the court said associations were subject to the same rule which again was a surprise to associations because of the efforts and the way in which the law had been structured to give them that authority so both Sakaal and Malabi Sakaal was there were two different laws but they reached the same conclusion associations in this case condominium associations could not do non-judicals unless they had specific authority it couldn't just be authority to foreclose it would have to say this association can do a non-judicial power of sale foreclosure that either had to be in the documents or some type of written agreement you know I think with the Sakaal decision what it does reflect is you know things don't happen in a vacuum and you and I were both back in 1999 before the legislature and so the people who made the decision in 2018 in the the intermediate court of appeals they're making assumptions I mean there's been when I read the opinion and when when they said there's no legislative extract I think excuse me I can remember being there I think I was there I think I remember seeing this committee report and and and it was the facts at that time was because that we were going through a recession it was taking us so long for associations to get through a judicial foreclosure it took us six to eight months even to get a motion for summary judgment took us another six to eight months to get a motion to confirm we were in court for a year and a half to two years if we were lucky because there are all these cases that were jamming up the foreclosure court there was only one foreclosure judge who was handling everything and and we went to the legislature and and there were a whole lot of other issues but this was their fallback position and it was very clear to me being there and being a witness to the event so to speak no no that that they intended us to have the right to do nonjudicial foreclosure yes that was and we explained to them we said we're losing money because of the problem of the lender always being in first position because of the problem the unit dropped in value below the amount of the mortgage making essentially worthless that was one of the options they gave us and the other problem of course was even if the lender was foreclosing it was taking them a year and a half to complete their foreclosure and during that time associations would usually be getting nothing right because there would be no one paying and that meant that the other owners were complying with the law and making their monthly payments they ended up subsidizing the people who didn't pay yes and so that was the shock to almost everyone when the intermediate court of appeals ruled that based on their view of the legislative history there was no intention to allow associations to do nonjudicials unless they had specific authority which in fact they did have because of the way the condominium law worked that was deemed to be part of their bylaws as a matter of law but that was a big shock and that's what led to SB 551 which is now to Act 282 we went back to the legislature and said we must be missing something when we asked you to do this 19 years ago you were very clear that you were helping us out and in fact in 2012 we even went to the legislature and said we would like our own foreclosure law we don't want to have the terms mortgage and all the rest of the stuff we want a section in the foreclosure law purely for associations which they did they passed a section which applies only to condominiums and HA so we couldn't understand how the intermediate court of appeals could reach a conclusion that the legislature did not intend to give us the right to do a nonjudicial without some extra because we'd actually got this completely separate section of the foreclosure law just for us but they said no that doesn't count you have to have they said it's just like a mortgage you have to have some written agreement saying you can do a nonjudicial and that's what led us to go back to the legislature and say we need your help because this is clearly not what you intended and in fact as 551 shows they agreed with us and 551 basically says we really really meant this back in you know 1999 when we passed those those because uh the the bill sets I mean the bill sets out this legislative history and it says this was and it talks about the committee reports and and so it kind of regurgitates everything that we were all aware of this whole 19-year period it's totally the ICA for some reason who didn't seem to understand this legislative history that all of us were part of we participated in it and so we couldn't understand this is called decision when it came out and so and so in fact I think one of the legislators when we went to ask them to do the you know when we were talking about what became Senate Bill 551 is like why do you need this it's like because there's this court that says there's no legislative history and there's plenty of legislative history so we need for you to come and do a bill that says yes there's legislative and we really meant it yeah and you know so this is sending them and it's and this is not unusual because legislatures I mean they don't do it all the time but when there has been a miscarriage of justice the legislature can't tell the judiciary hey guys you got it wrong yes and that's what this and that's what the Senate Bill 551 is all about the first section actually goes into some detail about what they did intend over the last 20 years and so that's very helpful to us there are other provisions but that as you say confirms that we did really mean to allow associations to do non-judicials without any additional agreements or anything else it was our attempt to help them out and in fact the legislation in the prior acts it did say that because we've indicated we've decided that you know condominiums can do non-judicial foreclosures it's deemed to be in their bylaws that language is in the statute that's what the statute said yeah it said this is deemed by operation of law this right to do non-judicials to be put into every set of bylaws in the state and and you know so that that's why you know since the the words are in the legislature legislation it's like how come the ICA couldn't see that yes it was a surprise many people were very surprised when that decision came out but because of those decisions there have been impacts on the associations right these insurance tell tell tell audience about the insurance issue regarding the so-called decision in my lobby decision so the so the now it's pretty clear almost every insurance company is excluding coverage the claims against an association or wrongful non-judicial foreclosure many additional even after this act was passed and and allowed to become law there are there have been many additional lawsuits filed alleging that the associations engage particular associations engaged in wrongful foreclosure so that is happening after this so it's making difficult it's difficult for associations they have to disclose that there are claims being made against them their insurance coverage has been limited because of the numerous claims being filed against them so it has had an impact and that's why we are grateful that the association took the time to pass this bill okay and and as you indicated the bill has bill the the senate bill has become law it's act 282 and it became law without the governor's signature but it is law nevertheless the governor I think weighed everything and he did decide he thought there were problems but he did decide to let it become law and and and now with the passage of senate bill 551 do you think that things will change I mean will associations feel more comfortable using non-judicial foreclosure now that this bill has passed they should do but the problem is the intermediate court of appeals the two decisions Sakal and Malabe are both being appealed to the Hawaii Supreme Court and so there is still a lot of uncertainty about what the court might rule when it decides those two cases but Sakal is coming up for oral argument soon right no I believe it's actually Malabe oh Malabe okay yes Sakal the court did not agree to review the decision at the association's request they are reviewing it from the homeowner's request in Malabe the court has said we will review the association's appeal and determine whether this bill and this non-judicial foreclosure practice of the last 20 years was consistent with the law so now because both of those decisions are on appeal the there is still a certain there is still uncertainty about how the court may rule the Hawaii Supreme Court on both of these appeals and that has to that extent held people back from relying on SB 551 Act 282 which according to its terms should be completely um should allow association to continue to conduct non-judicial foreclosures but there is a concern the courts may rule in such a way that that could become an issue in the future okay but we should be learning pretty soon what's going to happen well the I think the oral argument in Malabe is in about a month maybe six weeks and then it's just a question of when the court issues its decision and we'll probably have another show once we yes that'll be the determining thing because how the court responds to Act 282 SB 551 will be the determining factor in both of those cases okay then we have to look forward to that those decisions and you'll have to come back when that happens okay thank you very much for joining us and like I said you know when we when we'll do another update on this issue when the Supreme Court makes a decision because it does impact everybody who lives and works in condominiums thank you for joining us today and please join us next week for another uh interesting episode of condo insider thank you and mahalo