Foreclosure questions hit Hawaii condominium associations

Stop by and read my column at Civil Beat today (“Ian Lind: Wrongful Foreclosure Claims Rock The Condo World“).

It’s the tale of a legal issue that has slowly been making its way through the courts and now, it seems, is poised for a decision.

The issue seems simple but has far-reaching consequences: Did condominium and community associations act legally when they pursued nonjudicial foreclosures under Part I of the state foreclosure law to collect delinquent payments due from condo owners?

There are several cases crawling through appeals that raise the issue in different forms, but a definitive legal answer is still a way off, it seems.

But the issue has suddenly been highlighted by a lawsuit filed here in federal court which accuses two major condo law firms, and the owners associations of more than 70 condominiums, of wrongful foreclosure, deceptive practices, and more.

Hawaii law allows nonjudicial foreclosures in certain circumstances, but their use to collect debts owed to condominium associations is controversial.

The suit alleges that these foreclosures are barred unless the condominium declaration contains a specific “power of sale” clause, which acts as a contract giving the condo association the right to foreclose on an owner’s property to collect delinquent maintenance fees or other unpaid assessments. And, according to the suit, none of the defendant associations had the required “power of sale” in their governing documents.

The lawsuit seeks payment of restitution and damages, including punitive damages, along with interest, to those whose properties were allegedly improperly foreclosed.

The spicy part is the participation of two San Diego-based law firms specializing in consumer-related class action lawsuits. That’s got people’s attention in the way that a slew of local challenges to nonjudicial foreclosures have not.

And I wasn’t able to include one very big, messy part of this legal battle.

Since the condominiums and their legal teams are named separately in this class action suit, it’s highly likely that the association insurers will be asked to step in to defend them.

And if the case doesn’t get thrown out of court in the early stages of litigation, I’ve been told that it’s again highly likely that the condominium associations will have to file cross claims against the lawyers that represented them in the foreclosures, sort of a “if anything illegal happened, it was their fault because were were only following their legal advice” kind of defense.

And that would create a big conflict of interest, possibly forcing the associations to sever their ties to their former law firms and retain new attorneys to handle their routine legal business.

What a mess that’s going to cause!

And, in the background, there’s a looming issue of whether or not the insurance policies purchased by condominium associations will cover the damages if the plaintiffs in this or other similar cases prevail in court.

If not, we could at least theoretically be seeing at least some condo associations sinking financially into the legal mess and declaring bankruptcy. And what will that mean in practical terms? I don’t know, but I think I’ll cover my eyes!

Bottom line: the legal uncertainty makes this all a big and unsettling legal mess for anyone who owns a condominium unit, serves on a condo board, or provides management or legal services to condominium associations.

5 responses to “Foreclosure questions hit Hawaii condominium associations

  1. Off topic but happy 13th anniversary of Ms. Annie’s rescue!

  2. Great story Ian!

  3. I think you should clarify one thing. May 2011 the legislature changed things. I don’t believe any of these cases arise from that point onwards.

  4. Yikes!! I wish I could close my eyes. This will no doubt come up in a CE course next term.

  5. Steven K. S. Chung

    The story is inaccurate. The complaint asserts that HRS 667-5 can only be used by the holder of a mortgage that contains power of sale. The homeowner associations did not hold mortgages. The Supreme Court said in Lee v. HSBA Bank and Santiago v. Tanaka that 667-5 does not create a power of sale. It sets forth a process that can only be used by the holder of a mortgage containing a power of sale.

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