It didn’t take long for a lawsuit to be filed in a case alleging that a nonjudicial foreclosure conducted by a Honolulu condominium is illegal because it followed a section of Hawaii law that does not give foreclosure authority to condominiums, as described here recently.

The Association of Apartment Owners of the Ilikai Apartment Building was named in a lawsuit filed on November 3. The suit was filed by Wells Fargo Bank, which serves as trustee for a mortgage loan trust that included a mortgage on Apartment 1731 in the Ilikai.

The bank is seeking to recover clear title to the apartment following a disputed sale to a third party in a nonjudicial foreclosure initiated by the Ilikai.

The apartment has a tangled history.

The 500 square foot apartment was purchased in January 2007 by Medina Cheatle of Irvine, California, financed with a $525,550 mortgage from Option One Mortgage Corporation. The mortgage was then packaged with a number of other mortgages in the Option One Mortgage Loan Trust 2007-4, and sold to investors as Asset Backed Certificates, Series 2007-4.

It didn’t take long for Cheatle to fall behind on mortgage payments and monthly maintenance fees owed to the Ilikai.

In early 2009, Wells Fargo, as trustee for the Option One package of mortgages, foreclosed on its mortgage loan to Cheatle and took back title to the property for $318,734, apparently the outstanding loan balance.

At about the same time, the Ilikai Apartments condominium association filed a lien for its unpaid maintenance fees. More than a year later, the Ilikai initiated a nonjudicial foreclosure and sold the apartment to a new buyer, Daniel Omiya, principle broker for One Realty Inc., for a price of just $15,000.

The complaint by Wells Fargo says it was the true owner of the apartment after its 2009 foreclosure, and that it did not receive legally proper notice of the Ilikai’s foreclosure action.

More important, for other condominium associations, is Wells Fargo challenge to the nonjudicial foreclosure procedure. The complaint says the Ilikai could have filed a foreclosure suit and proceeded under court supervision, but chose not to.

The Ilikai’s subsequent foreclosure was “legally defective”, the lawsuit alleges, because “there are no power of sale rights granted to…Ilikai for it to have exercised.”

Some condominium associations have turned to nonjudicial foreclosures because the out-of-court process can be faster to complete and subject to fewer legal restrictions. However, it is subject to challenge, as in this case, because it seems applicable only to lenders holding mortgages.

Part 1 of the foreclosure law, relied on by the Ilikai, allows mortgage lenders to use the nonjudicial foreclosure process only if their mortgage contracts contain a “power of sale” provision. In this instance, Wells Fargo says, there was no mortgage between Wells Fargo and the Ilikai, so there could not have been a “power of sale” provision for the Ilikai to use.

It seems likely that this case will eventually be settled without the court having to rule on the question of this disputed authority. However, now that the issue has been raised directly in court, it is more likely to be raised by others challenging condominium foreclosures.