A class action lawsuit recently filed in federal court accuses two prominent law firms, and more than 70 condominium associations they represent, of “the wrongful and unlawful sale” of condominium units through an improper foreclosure process.
Nonjudicial foreclosures allow real property to be sold to satisfy debts without going to court. Instead, the party initiating the foreclosure, typically a mortgage lender, is simply required to notify the property owner and, if the debt isn’t paid, proceed to auction off the property themselves, selling to the highest bidder.
In the majority of cases, the properties end up being sold to the lender or the condominium association, often with little or no money actually changing hands.
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.
Veteran condo lawyer Milton Motooka has long warned that nonjudicial foreclosures are a risky choice for associations.
The defendants reject the allegations, pointing to a specific provision the Legislature added into the state’s condominium law that provides condo associations with the same foreclosure powers given to mortgage lenders, including the right to choose a nonjudicial process.
This case is far from the first case challenging the legality of nonjudicial foreclosures by condominium associations seeking to recoup unpaid and past due maintenance fees from owners, and it’s not the first seeking certification as a class action.
But it is prompting an unusual amount of concern among those with special interests in condominiums, including condo boards, attorneys, management companies, and insurers, because a respected local law firm has teamed up in the case with attorneys from two San Diego-based firms specializing in consumer-oriented class-action lawsuits.
If the plaintiffs win, the potential damages are staggering, and could give a whole new meaning to the often-heard term, “foreclosure crisis.”
Just last week, Mike Hartley, president of Hawaiiana Management Company, the state’s largest association management firm, sent an email to clients about the case, with a link to the legal complaint.
Hartley’s advice was simple. “If you have any questions or concerns, you may wish to consult legal counsel, and to the extent that you may find it helpful, your insurance agent, whether or not your association’s name appears in the list of potential defendants,” he wrote.
In another indication of the cascading impact, a Kona law firm, Devries & Associates, has announced its availability to conduct legal audits and develop response strategies for any condominium association that has conducted nonjudicial foreclosures since 2010.
The firm is advising associations and their management agents to take “immediate action,” including potentially switching away from law firms named as defendants in the case, according to a message sent to the firm’s clients and posted on its Facebook page.
The lawsuit was filed in Honolulu’s Federal District Court on Aug.10 by Steven K.S. Chung and two other attorneys associated with the law firm of Imanaka Asato, along with two San Diego-based firms, Blood Hurst & O’Reardon, and Cohelan Khoury & Singer.
Named as defendants are Porter McGuire Kiakona & Chow LLP, and Ekimoto & Morris LLLP, both leading island law firms that specialize in condominium law. The firms have been acknowledged leaders in using nonjudicial foreclosure procedures, rather than the traditional route of court-supervised foreclosures.
The lawsuit identifies what it alleges are at least 160 individuals who had their property illegally foreclosed by 72 condominium associations represented by the Porter and Ekimoto law firms, and asks the court to certify these plaintiffs and defendants as part of potentially larger classes of similarly placed parties.
If the lawsuit is not dismissed during the initial rounds of litigation, it could grow to include many more people who lost their homes to nonjudicial foreclosures, and additional condominium associations who benefited from the foreclosures.
The laws governing foreclosures have developed incrementally as successive legislatures have alternately sought to provide the tools needed by homeowner associations to collect the maintenance fees that individual owners must pay to fund the operation, repairs and maintenance of their buildings and grounds, and to provide basic protection of the rights of individual condo owners facing financial distress and foreclosure.
The state’s foreclosure law has two parts. Part I has been on the books for over a century, and gives mortgage lenders the choice of pursuing foreclosure through court action or, if the mortgage provides for “power of sale,” to use a streamlined nonjudicial process.
Part II, added in 1998, provides a nonjudicial process for community associations, including condominium associations, but with many more built-in safeguards. As originally adopted, however, it had what most considered a fatal flaw. It required the person losing their property through foreclosure to sign off on the transfer of title, which meant it could not work if the foreclosure was contested.
“It’s a gamble. If I’m right, it could bankrupt these law firms and many condominium associations along with them.” — Jim Bickerton, attorney
The following year, the Legislature acted again, this time responding to complaints from condominium associations struggling to collect amounts owed by a minority of owners who were delinquent in paying their fees.
But instead of amending the foreclosure law to clarify the powers of associations, the Legislature instead added a new provision to the state’s condominium law, giving associations the right to collect debts “in any manner permitted by law,” including the nonjudicial foreclosure process contained in the bankruptcy law.
Unfortunately, the Legislature at that time failed to specify whether the reference back to the bankruptcy law was only to Part II, the section written specifically for associations, or whether it was meant to also include Part I, which on its face applies only to mortgage lenders.
Beginning sometime around 2010, both the Porter and Ekimoto law firms were aggressively pitching their use of nonjudicial, Part I, foreclosures to cash-strapped condominium boards. The potential of quicker, easier and less costly nonjudicial foreclosures was a lure that drew in many new clients for these firms.
Other condominium specialists were highly critical of nonjudicial foreclosures and advised clients against them.
For example, veteran condo lawyer Milton Motooka has long warned that nonjudicial foreclosures are a risky choice for associations.
In a November 2010 letter to clients, Motooka described the nonjudicial route as “quite dangerous,” pointing to the risk “that Hawaii courts could ultimately rule that Association NJFs brought under Part 1 are illegal and invalid, and therefore voidable.”
“Such a ruling would give rise to the specter of not just wholesale reversals of Association NJF’s, but also open-ended exposure to claims for consequential money damages,” Motooka warned.
Honolulu attorney Jim Bickerton, who recently filed a separate class-action lawsuit in state court challenging similar nonjudicial foreclosures and naming the Porter law firm as one of the defendants, agreed condo boards need to assess the risks.
He advised condo boards to avoid pursuing nonjudicial foreclosures unless they have insurance protecting against wrongful foreclosures.
Bickerton acknowledged he could be wrong, and the courts could determine the association’s Part 1 nonjudicial foreclosures are legally permitted.
“But it’s a gamble,” he said. “If I’m right, it could bankrupt these law firms and many condominium associations along with them.”
Disclosure: Ian Lind is an elected director of a condominium association represented by the Porter law firm, although it is not named in the current lawsuit.
See the complaint below: