Many condominium associations unlawfully used an 1874 statute to collect maintenance fees and are now liable for wrongful foreclosure. Senate Bill 551 attempts to bail out those associations, but it is improper and should be vetoed.

Condominium apartments cost hundreds of thousands of dollars and families typically borrow most of the purchase price. When an association lien for unpaid maintenance fees is foreclosed, therefore, the consequences are staggering. The home is lost but the family remains liable for the loan.

Prior to 1998, associations were required by HRS 514A-90 to go to court to foreclose their liens. Creditors with mortgages, however, could bypass the court if their mortgages contained a power of sale. Under an 1874 law referred to as Part I of Chapter 667, these creditors could sell a debtor’s property to collect the amounts due with no judicial oversight. In 1998, associations asked the Legislature for the same right.

The Legislature was reluctant because Part I contained no protection for consumers. All creditors had to do was give notice of default, publish notice of the sale for three weeks, and hold an auction 15 days later. Using Part I, creditors could take the debtor’s property from them in as little as 36 days, and that is how many Native Hawaiians lost the land they received in the Great Mahele.

Instead of giving associations the right to use Part I, therefore, the Legislature passed Act 122, which created an alternate, nonjudicial foreclosure process for associations to use.

Codified at HRS 667-21 through 42, it is designed to protect and give homeowners a chance to save their homes by requiring that the notice of default be served in the same manner as service of process and the homeowner be given at least 60 days to cure the default. It also requires reasonable payment plans to be accepted and amounts not paid through the foreclosure sale to be waived.

Cory Lum/Civil Beat

Act 122 makes clear that associations are only authorized to use the nonjudicial foreclosure process it contains. In that regard, HRS 667-40 states:

A power of sale foreclosure under this part may be used in certain non-mortgage situations where a law or a written document contains, authorizes, permits, or provides for a power of sale, a power of sale foreclosure, a power of sale remedy, or a nonjudicial foreclosure. These laws or written documents are limited to those involving time share plans, condominium property regimes, and agreements of sale.

When Act 122 was passed, there were no laws or written documents that met the criteria set forth in HRS 667-40 and HRS 514A-90 continued to say that liens had to be foreclosed by court action.

This oversight was fixed in 1999 when Act 236 was adopted. It amended HRS 514A-90 to provide that liens could be enforced by nonjudicial foreclosure, and incorporated the following language into the bylaws of associations:

(13) A lien created pursuant to section 514A-90 may be enforced by the association in any manner permitted by law, including non-judicial or power of sale foreclosure procedures authorized by chapter 667, as that chapter may be amended from time to time.

Despite its passage, associations did not use Act 122 because they did not want to comply with its consumer safeguards. Instead, they used Part I, which their attorneys touted as being simpler and faster. They were warned that using Part I was dangerous because associations do not hold mortgages and could be held liable for money damages if courts ruled that using Part I was improper.

However, they ignored the warning and used Part I to strip more than 600 families of their homes before that statute was repealed in 2012.

In 2015, the Supreme Court ruled that creditors who used Part I without mortgages containing powers of sale are liable for wrongful foreclosure. Lawsuits against associations and attorneys that unlawfully used Part I followed, and the defendants argued that Act 236 gave them the right to enforce liens “in any manner permitted by law,” including Part I. The court rejected that defense, however, saying it is illogical to argue that the Legislature adopted Act 122, with its consumer protection provisions, and then passed another law allowing those safeguards to be circumvented.

This year, the Legislature passed SB 551, which seeks to bail out associations and attorneys who unlawfully used Part I by retroactively legalizing its use. SB 551 is disingenuous as it states that its intent is to clarify that associations were previously given the right to use Part I by Act 122 and Act 236. That statement is in conflict with the language of HRS 667-40 and is false.

SB 551 is an abuse of power and should be vetoed, as the governor has indicated he intends to do.