Some of the sound and fury at the end of last week, in addition to all the thunder and lightning that accompanied widespread flooding, may have been the sound of another huge shoe falling in the ongoing legal battle over the legality of nonjudicial foreclosures conducted on behalf of condominium associations.

The Hawaii Supreme Court on Friday declined to accept an appeal by the Association of Apartment Owners of Hawaiian Monarch condominium of an adverse ruling back in July by the Intermediate Court of Appeals.

The ICA had concluded that a condominium association cannot legally use nonjudicial foreclosures unless it’s foundational legal documents contain a specific and unambiguous “power of sale” provision. As a result, the association can be liable for damage claims by those who have been wrongfully foreclose on, subject I’m sure to existing statute of limitations.

The Supreme Court, by rejecting an appeal by the condominium association, essentially makes the ICA decision the law of the land.

See: Sakal v. Association of Apartment Owners of Hawaiian Monarch (Order Rejecting Application for Writ of Certiorari).

The ICA concluded the Hawaiian Monarch had wrongfully foreclosed on the plaintiff in the case, who lost his unit as a result of the foreclosure. Although the court declined to overturn the foreclosure sale and return the apartment to the plaintiff, the decision allows the plaintiff to pursue a damage claim against the condominium association “arising out of the wrongful foreclosure,” which would include the value of the condominium, interest, and other damages.

Prior cases have reached similar conclusions through different reasoning, but have applied only to nonjudicial foreclosures done prior to a rewrite to the foreclosure laws applicable to condominiums passed by the Legislature in 2012.

The amended law specifically created an “alternative peer of sale” provision that allowed condominium associations to use nonjudicial foreclosures to recover money owed by owners, but also added a number of additional safeguards providing increased transparency and notice. These alternative foreclosure procedures, which did not involve judicial oversight, could be used if a condominium’s declaration or other legal documents included a specific “power of sale” clause.

Lawyers representing condominium associations have long justified taking the nonjudicial foreclosure route by pointing to standard language in condominium declarations and by-laws allowing them to pursue debts through any means provided by law.

However, as a result of a series of incremental court decisions which came together in this case, the court held that such indirect authority is not sufficient. Instead, nonjudicial foreclosures will not be considered lawful unless the underlying condominium documents specifically include language authorizing the condominium association to utilize a power of sale remedy to collect sums owed.

The legal arguments are convoluted and involve interpreting overlapping provisions of the foreclosure law and the state’s condominium law.

But the ICA concluded:

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 thorugh the nonjudicial power of sale foreclosure procedures set forth 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 not 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 other 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 Statues (HRS) chapter 667. As discussed herein, under the circumstances of this case, we conclude [the plaintiff] may not regain title and possession of the subject property, but that the Circuit Court erred in dismissing [his] claims against the AOAO for wrongful foreclosure.

Lawyers representing the condominium association unsuccessfully asked the ICA to reconsider its decision, and then appealed to the Supreme Court, predicting dire consequences if the decision was not overturned.

It cannot be disputed that the Opinion of the ICA caught the attention of the hundreds, if not thousands, of condominium associations in Hawai?i because it is at odds with express statutory language and the intent of the Legislature. For almost 20 years, condominium associations throughout the state have conducted nonjudicial foreclosures in reliance upon the express language of §§ 514B-146, 514A-90, 514A-82(b)(13) and 667-40. The Opinion calls into question hundreds of conveyances resulting from those nonjudicial foreclosures by condominium associations and opens the doors to potential mass litigation against condominium associations that reasonably relied upon the express language of the law when conducting nonjudicial foreclosures.

But a divided Hawaii Supreme Court declined to hear the case, leaving the ICA decision intact. The majority upholding the ICA decision included justices McKenna, Pollack, and Wilson. A dissenting opinion was issued by Chief Justice Recktenwald, who said he would have accepted the appeal. Justice Nakayama joined in the dissent.

Interestingly, the court split the same way in the previous week’s sunshine law decision in which Recktenwald and Nakayama also dissented. That decision overturned a longstanding legal interpretation by the Office of Information Practices that had closed off public access to a wide range of internal government documents.