 Welcome to Kondo Insider, a Hawaii show about association living. This is kind of an important week for us because as of last week, if the bills before the legislature hadn't got out of its final committee, they were dead. So since we've seen you last or you've seen us last, two bills have died. One was the bill that would eliminate the board majority of being an option on the proxy each year. That bill is now deferred and then was the bill where they were looking at allowing board members or board of directors to establish house rules, making the entire building not smoking. That too didn't get a hearing or get out of the last committee, so it too is dead. I have with me my good friend, Jane Sugimur from Hawaii Council of Community Associations. We're sitting here kind of chagrin today because one of the most important bills before our legislature is Senate Bill 551 and it has passed through the committees, although some of the amendments are very objectionable, and it's going to what we call conference committee between the House and the Senate to see if they can line out the differences in the two bills, come to an agreement so it goes to the floor and then to the governor. So welcome again to the show. Thank you for having me. This review everybody would ask me 551, the original intent was. Okay, the original intent of Senate Bill 551 was to address an appellate court decision, the SACAL decision, that basically held that when the legislature made an amendment to chapter 514A back in 1999, which allowed associations to do non-judicial foreclosures, and technically what we're talking about is power of sale language that appears in mortgages, and because it's between the lender and the borrower, I mean it's an enforceable agreement, and in this situation, the legislature, and just to give you the backstory, during, in 1999, the associations were faced with this situation where there was a recession, there was this backlog in circuit court, and so if you did a foreclosure, it took you over a year to complete it because it took you six to eight months to even get an initial hearing on the foreclosure, and then after you had that motion which allowed you to do the foreclosure, you had to wait another six to eight months to get a motion to come from the sale. So it was taking 12 to 14 months, 16 months to even complete a foreclosure, and that meant associations really could not recover on their maintenance fees. That's what foreclosure is all about. People don't pay their maintenance fees, they get sued by the association, and so, and there was a, there was a law in effect before 1999 that allowed for non-judicial foreclosures associations to do it, but what happened just before, the year before the change that resulted in the controversy that we're dealing with, the legislature changed the language so that you couldn't use it. I mean, they put language in the non-judicial foreclosure bill that said that basically, if you're the association, you had to get the debtor's signature on the final document, and in most cases, when you do a foreclosure, by the time you get to the end, the unit owner, the debtor is long gone, and even if he was around or she was around, they're not going to sign this document, making it official, and so it was useless, and so we went back to the legislature, and I was there, and we told the legislature, the associations are facing financial hardship. We can't recover on our maintenance fees because it takes us so long to do these foreclosures. We need some relief, and they added language into the statute that said that condominiums could use the power of sale foreclosure without having a contract with it, that it could be just in the statute. It didn't have to be in their governing document, and so they were allowed to do the non-judicial foreclosures, which is a foreclosure that is not supervised by the court, and then they were able to sell the unit and basically take it back, and most typically they bought it back for a dollar because these units, when you're the association, you take subject to the first mortgage, so the unit is relatively worthless because the first mortgage has got priority, and so they would basically use a non-judicial foreclosure to get the unit so that they could rent it. At least this way, when you get a tenant in, you have a tenant who's paying the maintenance fees, and what happens if you don't have people paying their share of the maintenance fees? If you have, let's say 10 people in a building who don't pay their maintenance fees, the other people who live in the building end up subsidizing them because the condominium budget is a zero-sum budget, in other words, you make a budget and you put enough money in the budget to cover all of your expenses for that one year, so if you have people who aren't paying, that means the other people who do pay end up subsidizing the non-payees. Before I say this, let me just say that I had a project on Maui that was approximately 64 units, primarily owned by second owners in the mainland, but then you had the economic crisis hit, and 31 of the units walked away from their unit, and they lived on the mainland. That means that 31 of 64, almost half the budget was gone. That's your cash flow. If you're not getting money from half of the unit owners, how do you pay for the electricity and the water and the staff, and... Let me tell you how they did it. They did what they call a cash flow assessment, and they assessed everybody, another 40% of their maintenance fees on a monthly basis, until they could do a non-judicial foreclosure, which in turn then they got possession of the unit subject to the mortgage, which time then they could get a tenant, and as those tenants started taking hold of these units that they got non-judicial, the amount of cash flow necessary was reduced, so eventually the cash flow assessment was whittled to zero, but the truth was during this interim period, because like you said, it's a zero-sum budget, everybody else had to chip in. All the paying owners had to chip in, so they could pay their electric bill and their manager and all the related costs, so back in 1999, when the legislature made this change, to me it sounds like because the appellate court said, well, it's got to be in your governing documents, the legislature's not stepping up and being counted for this is what we agreed to in 1999. Right, and that's the problem with the Senate Bill of 551. I mean the whole intent of the legislature, of the legislation was to confirm that the legislature did truly intend that to happen, and the documents relating to what happened in 1999, of course that, they knew that the associations needed to do these non-judicial foreclosures in order to assist them with their cash flows problem. They also knew that by putting it in the ordinance, I mean in the statute, that there was no contract between the unit owners and the association with this power of sale language in it, like there would be in a mortgage. So they knew, they knew what they were doing and they truly intended that the associations could do the non-judicial foreclosures. And that's why by not passing 551 and saying that we really intended that to happen, they're doing a disservice to the associations because now what's happening is that the associations who allowed non-judicial foreclosures to happen between 2008, I think in 2011, which is a crucial time period, right, before the law changed again in 2012 to fix some of the situation. That's the exposure period. And so those associations will now get sued and a lot of the claims are frivolous because the claims, I mean the people who are doing the suing don't dispute the fact that they owed the association money. They were delinquent. And so the bottom line is that the legislature, I think, needs to own up and say that they really intended for this legislation that the non-judicial foreclosures to happen. The opponent of this bill that I see the testimony appear to be a couple law firms, the Sue Association, for the wrongful foreclosure concept as we described. And then they have three or four clients they're bringing down to the legislature. They're saying, for me, I owed the association just a little money and they foreclosed and took my home away from me. But that's what kind of was the legislature is hearing right now. So what's your experience with that? My experience is that they don't dispute that they were delinquent and that they weren't paying their maintenance fees. And I think people need to understand that in a condominium everybody has to pay their fair share. Otherwise, the people who are paying end up subsidizing the people who don't pay and that's not fair. And when you buy into a condominium, I mean you kind of expect that your neighbors, everybody in the building is going to pay their fair share and you're not going to be stuck holding the bag, so to speak. And so when you have a situation here where the associations took aggressive steps to try to make sure that there was sufficient money in the pool to make sure that the building, the condominium could operate, they should not be penalized years later because here it is in 2019 and we're talking about lawsuits for non-judicial foreclosures that happened between 2008 and 2011. And to me, what would be fair is what the Senate Bill 551 tried to do is to say we really intended back then to allow the associations to do non-judicial foreclosures even if they didn't have that language in their governing documents. And we did it on purpose, we did it to help them. And if this is causing a problem, then we should do it on a going forward basis and change the law to require them to have that language in their governing documents, not going retroactively and saying, well, you should have known better. And that's not fair. What frustrates me about this is that I go to the legislature and I'll see this innocent homeowner get up and say, poor me. I wanted to make a payment plan. My bad road board wouldn't have worked with me and they took my home. So I'm not going to give names on the show, but I went and looked at one of the people who testified that way and I got their records out, which showed number one, the person with the language. The association offered them twice to make a payment plan. They did not refuse or did not answer, did not reply, did not make a payment plan. Quit paying their mortgage as well. After a while, he went back to the association and said, well, give me another chance. The association gave him another chance. He still didn't comply or make a payment plan. And finally, on the eve of foreclosure, when he owed almost $40,000 in delinquent maintenance fees, he said, well, let me make a payment plan offer to you, which would have taken, at no interest, 46 years for him to pay off the initial judgment, which the association couldn't accept. But they were out there in town and legislature, oh, it's the bad board. I'm a good person. Yeah, I ran into some hard times, but it doesn't seem fair to me that all the rest of the owners should suffer. I certainly respect that person, may have come across some hard times, but doesn't excuse his contractual obligation to pay his share of the cost. Right, and to punish the boards for relying on a law that they thought was valid. And all of us thought it was valid. And to now say, oh no, well, we changed our mind. To make it invalid retroactively is not fair. And so if they're going to make it invalid, they've got to do it on a going forward basis. And to me, that's more fair. And I think that's what some of the controversy is regarding this bill is because the way some of the legislators are talking now, they're gonna say, oh well, no, it wasn't valid back then. But then there were hundreds of associations who in reliance on the fact that the words are in the statute. And the words in the statute said that associations could do non-judicial foreclosures. And so now the legislature say, well, we really didn't mean it. To me, that's not fair. Okay, we're gonna take a one minute break. I have a lot more questions about this. We write back the condo insider to talk more about non-judicial foreclosures, power of sale foreclosures, and the negative impact on association. We'll be right back. Hi, I'm Rusty Komori, host of Beyond the Lines on Think Tech, Hawaii. My show is based on my book also titled Beyond the Lines. And it's about creating a superior culture of excellence, leadership, and finding greatness. I interview guests who are successful in business, sports, and life, which is sure to inspire you in finding your greatness. Join me every Monday as we go Beyond the Lines at 11 a.m., aloha. Hello, I'm Dave Stevens, host of the Cyber Underground. This is where we discuss everything that relates to computers that just kind of scare you out of your mind. So come join us every week here on thinktechhawaii.com, 1 p.m. on Friday afternoons. And then you can go see all our episodes on YouTube. Just look up the Cyber Underground on YouTube. All our shows will show up. And please follow us. We're always giving you current, relevant information to protect you. Keepin' you safe. Aloha. Aloha, welcome back to Kondo Insider. I'm Richard Emory, your co-host. And I'm sitting with my co-host, Jane Sugimura. We're talking about this critical bill, Senate Bill 551, which has got potentially great harm to associations. And we were talking about the appellate court ruling. Just to describe again briefly, we've been doing non-judicial foreclosures since 1999. It's been a common practice to prevent associations from having greater financial harm, having to subsidize a non-paying owner. What was the basic ICA appellate court ruling? The basic ICA appellate ruling said that the non-judicial foreclosures couldn't be done because there was no, the language, the power of sale language was not in an agreement that was binding between the unit owners and the associations, like it wasn't in their bylaws and it wasn't in their declaration. Like the power of sale foreclosures that are used with mortgages, it's in the mortgage, which is a contract between the lender and the borrower. And in condo land, the contract between the unit owner and the association are the bylaws and the declaration. And so the ICA is saying in retrospect, it should have been in those documents not in the statute, except that in other states, and I think it's in the appellate briefs, there's a number of states on the mainland that have statutory provisions that allow for non-judicial foreclosure and it's not in the governing documents, it's in the statute. But isn't the issue, and why this bill is important, because the ICA appellate court basically said the intent of the legislature is not clear. And that's what the SB 551 is trying to say. It was our intent back in 1999 to allow non-judicial foreclosures whether or not it was in the governing documents. Right. That's exactly what the Senate Bill 551 is all about. And the committee reports for that legislation back in 1999 does specifically indicate that the purpose of that change, the language that they put in there was to allow associations to do non-judicial foreclosures. And I was there, I was present, I was in the room back in 1999 when we were debating this in the legislature. And I can attest to the fact that they really intended to allow, they put that language in to allow us to do non-judicial foreclosures. And for now, for this legislature now to say, oh, well, we're not really sure. I mean, to me, that's not fair. I mean, here are people who weren't there, but the records that document what happened back then clearly show that there was an intent. And the people, and I wasn't the only one who was around back then who recall that it was, you know, that the legislature specifically intended for us to use that language to do non-judicial foreclosures. And to say, now, almost 20 years later, oh, well, you know, there's an issue as to whether or not there was an intent to allow you to do that. I don't think it's fair. Well, I know that I've already seen a dozen lawsuits because of the ICA ruling. So let's talk about the financial risk and the harm to the association. So if this doesn't pass, what happens? The associations who did non-judicial foreclosures between 2008 and 2011 are gonna get sued. And I have a friend who lives in one of the units who got, I mean, one of the associations who got sued. And, you know, she says that, you know, it's costing thousands of dollars, you know, and there's not a whole lot they can do because, you know, the ICA is basically saying that they couldn't have done the non-judicial foreclosure. And so they basically had to settle that lawsuit after spending thousands of dollars not getting any type of resolution and they were ready to, the court had it set for trial. And why spend thousands of dollars more to litigate the issue? And so they settled it, but it cost them a lot of money. So, someone's gonna have to pay that owner who was foreclosed upon some money and probably pay the attorney fees? Right. Is that on top of the settlement? Right. Is the insurance company gonna pay any of this? I don't think so. I think there's, I'm being told the association's paying for it. And so that means that, you know, they end up having to pay the settlement. And in this case, I mean, they had to give the unit back because they had foreclosed and the lender had not, the lender had been filed a foreclosure but had not completed it. So they ended up giving the unit back to the unit owner. It's been 10 years. We're talking about a foreclosure that happened in 2010. Okay, a non-judicial foreclosure. And so here it is 2019 and it's just settling now. They had to give the unit back to the, and they had to pay a monetary settlement. And they had to pay the lawyer. And they had to pay the lawyers and they had to pay their own lawyer. Oh, no, their lawyer was paid for by the insurance company. Okay, but then they had, you know, their insurance premium went up. So it doesn't, this doesn't seem fair to me that the legislature passes this law and everybody follows it and does what they think they're supposed to do. Now the non-paying owner and his lawyer, because I've seen ads in the paper where lawyers are running ads that if you were foreclosed upon, call me, you know? And I think it's not talking to so small percentage. We're talking tens of millions of dollars of risk or condo association. Right, and we're talking frivolous lawsuits because there's no dispute. These people, these plaintiffs who are suing the associations are not saying that they weren't in default. They're saying, yeah, we were in default. But we tried to make a deal and, you know, for me, I mean, the association was mean and they wouldn't, you know, deal with me and, you know, and those, those are all factual issues that have to be litigated. And now this, the associations are gonna get sued and they're gonna be litigating facts that happened over 10 years ago because we're only talking about a narrow window between 2008 and 2011. Okay, that's over 10 years ago. So our audience understands why is it only 2008 to 2011? What happened in 2012? In 2012, they changed the law to put consumer protection provisions into non-judicial foreclosures. More notices, you know, in writing, more deadlines and provisions about if you do this payment plan thing, you can't proceed with the lawsuit. And so, you know, they put in a lot of consumer protection plans. And, you know, since, you know, one of the, one of the legislatures, Ross Baker, you know, for years, you know, she was very concerned with something called priority of payments policy. And she, she was, you know, she was of the opinion that because of that, a lot of associations were using that priority of payments policy against people who were in default so that when they filed foreclosure, it was basically based on late charges, legal fees and fines. And so, in last year, the 2018, and it took us a couple of years to get that bill through, I mean, we finally passed that bill that got rid of the priority of payments policy. And I think that, you know, that Senator Baker was right that it did lead to some abuses and it did resolve in some foreclosures that shouldn't have happened, okay? And recognizing that, and then, you know, and I have to give her credit that she did something to try to fix the problem. And, you know, and we just haven't had enough time to see whether or not the problem is gonna be addressed because it only went in, the law only went into effect July of last year. And I think, you know, because of what Senator Baker did, it is gonna address a lot of the abuses and maybe minimize the amount of people who end up in foreclosure because they don't, you know, because of late charges and the attorney's fees and whatnot. And I think, you know, that's the more responsible way to handle the concerns that are, you know, that some of the people who are testifying about now are rather than, you know, then allowing them to sue associations for something that happened 10 years ago. Well, because we only have a couple of minutes left. Where does Senate Bill 551 stand now? What do we need to do to help get it passed? It's going into conference committee, which means the Senate and the House will have to send people to discuss it. And for people who are in associations or unit owners or board members, if they wanna help, they need to contact their legislators. And they can email them or call their offices and say that they support Senate Bill 551, the original House version or the original Senate version. But not the version it is right now. And they need to do it quickly because the conference committees will start in about a week. Well, I think that's important. I know our industry is gonna be emailing a lot of owners about Lee's Senate testimony and support of the original Senate Bill 551, either the House or Senate version. Although we're hopeful we can get what they call CD1, but in place it helps correct this. But I don't think people realize that because of this period, 2008 to 11, if your associations in that review is non-judicial and they sue you, you're gonna be taking money from reserves in your operating account to pay off these judgments, meaning you're gonna have to pay more money in legal fees and not legal fees and maintenance fees or in addition, more insurance premiums all because of a non-paying owner taking advantage that the appellate court has said, well, we're confused by this. Well, until that ruling came down, nobody else was confused about this. Right. Any final comments? No, but I think that this is a terribly unfair situation where you have people who relied on the statute which the legislature passed. And for now, for this current legislature to waffle, that's the only term I can think of, waffle and say, well, jeez, we're not really sure if they really intend. I think that's terrible. You know, the documentation is there that the legislature in 1999 truly intended to allow associations to do non-judicial foreclosure. They should not open the door and allow people to follow these lawsuits because the current legislature won't confirm the legislative intent that happened back in 1999. Well, I want to thank you for being here as usual. It's always fun to talk to you about these things. Not so much fun today, though. I want to thank our viewers for watching Kondo Insider. The beautiful view behind us is the Alawai Boat Harbor, I think. But either way, we're going to probably talk about that and the redevelopment plans in the upcoming weeks. In the meantime, send an email to your legislature. You support SB 551. You don't want to pay for other people's non-payment of their bills. Thank you for watching Kondo Insider. We'll see you all next week.