An unexpected court ruling issued in July and reaffirmed this month has condominium associations across the state, and their attorneys, on edge.

The ruling by Hawaii’s Intermediate Court of Appeals calls into question virtually all nonjudicial foreclosures conducted by condominium associations, and raised the specter of potential wrongful foreclosure lawsuits by an unknown number of former owners who lost their properties through such proceedings.

The ruling came in the case of Christian Sakal, who lost his leasehold apartment in the Hawaiian Monarch condominium in Waikiki in 2012, when the association foreclosed and auctioned the apartment using a nonjudicial procedure spelled out in state law. Sakal sued, charging that the foreclosure was illegal, but Circuit Court Judge Bert Ayabe ruled in favor of the condominium association.

That decision was appealed to the Intermediate Court by Honolulu attorneys Gary Victor Dubin and Frederick J. Arensmeyer.

In a July 26, 2018 decision, the Intermediate Court held condominiums cannot utilize the nonjudicial process unless their association bylaws or other “enforceable agreement with its unit owners” specifically contain “power of sale” provisions granting that authority.

The three-judge panel that heard the case was made up of Chief Judge Lisa Ginoza, along with associate judges Alexa Fujise and Katherine Leonard.

The ruling is the latest in a series of cases making their way through federal and state courts challenging the authority of condominium associations to pursue nonjudicial foreclosures. Several law firms specializing in nonjudicial foreclosures have been named as defendants in other cases, along with numerous condominium associations, and attorneys representing plaintiffs in the case have previously speculated that resulting monetary claims could be very high.

Prior court rulings have limited nonjudicial foreclosures, but those cases have focused on foreclosures conducted prior to the legislature’s major rewrite of the law in 2012. Those 2012 amendments, based on recommendations by a legislatively-appointed task force, provided additional protections to condo owners, but were also wide viewed as providing foreclosure powers to condominiums similar to those held by mortgage lenders, who are also authorized to conduct foreclosures without going through a court process.

But the latest decision appears to overturn that understanding.

From the Sakal decision:

This case presents difficult and consequential questions concerning whether an association of apartment owners must have a power of sale over its units in order to foreclose on a lien against a unit through the nonjudicial power of sale foreclosure procedures set for in the Hawaii Foreclosures statute. After an exhaustive review, we have concluded that over a number of years the Legislature has worked to craft workable, nonjudicial foreclosure procedures, available to associations as well as lenders, but at no point did the Legislature take up the issue of whether to enact a blanket grant of powers of sale over all condominium properties in Hawaii. Accordingly, we conclude that a power of sale in favor of a foreclosing association must otherwise exist, in the association’s bylaws or another enforceable agreement with its unit owners, in order for the association to avail itself of the nonjudicial power of sale foreclosure procedures set forth in Hawaii Revised Statutes Chapter 667. As discussed herein, under the circumstances of this case, we conclude that Sakal may not regain title and possession of the subject property, but that the Circuit Court erred in dismissing Sakal’s claim against the AOAO for wrongful foreclosure.

Attorneys representing the Hawaiian Monarch asked the judges to reconsider their decision.

It cannot be disputed that the Opinion of this Honorable Court caught the attention of the hundreds of homeowner associations in Hawaii, as well as their legal counsel, by surprise. It purports to invoke a material change in Hawaii foreclosure law and practice. In effect, this Court’s Opinion effectively precludes most, if not all, homeowner associations from conducting non-judicial/power of sale foreclosures in the manner which they have been doing for years.

However, in an order issued on September 19, 2018, the three judges denied the motion for reconsideration without comment.

Time limits for bringing claims for wrongful foreclosure weren’t at issue in this case, so exactly how many nonjudicial foreclosures this could affect isn’t known. I expect there must be hundreds, at least, and potentially thousands of prior forced sales that could now be subject to challenge.

This has to mean that there are a lot of condo associations and their attorneys who will be holding their collective breath until the issue gets a definitive ruling from the Hawaii Supreme Court.

See:

“Ian Lind: Wrongful Foreclosure Claims Rock The Condo World,” Civil Beat, August 31, 2016.

“Ian Lind: Why Condo Associations Are Sweating After A Judge’s Ruling,” Civil Beat, April 12, 2017.