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Hawaii Supreme Court Decision Impacts Pre-June 2011 Nonjudicial Foreclosures

Posted By USFN, Wednesday, March 22, 2017
Updated: Monday, March 20, 2017

March 22, 2017

by Justin Moyer
Aldridge Pite, LLP – USFN Member (California, Georgia)

A recent Hawaii Supreme Court case [Hungate v. The Law Office of David B. Rosen (Haw. Feb. 27, 2017)] significantly impacts Hawaii properties that were foreclosed upon via a nonjudicial foreclosure prior to the May 2011 repeal of the statutory scheme governing nonjudicial foreclosures in Hawaii. After May 2011, mortgagees were then compelled to only foreclose judicially on their mortgages. More specifically, the Supreme Court held in Hungate that:

i. when calculating the four-week publication requirement for nonjudicial foreclosures, the four-week period is counted from the day after the first publication and if the original publication did not meet this requirement, publication needed to be repeated (see Hungate at pp. 12-15);
ii. if the power of sale clause in a mortgage required that a notice of sale be published, then any postponed nonjudicial foreclosure sale also needed to be published; however, the Supreme Court does not indicate how many times or how far in advance (see Hungate at pp. 15-18); and
iii. a mortgagee has a duty to use “fair and reasonable means” to conduct a nonjudicial foreclosure sale that is “conducive to obtaining the best price under the circumstances,” and a mortgagee who purchases the property at its own nonjudicial foreclosure sale has the burden to establish that the sale was “regularly and fairly conducted” and that “an adequate price” was paid under the circumstances (see Hungate at pp. 29-32).

As a result of Hungate, it is likely that the filing of wrongful foreclosure actions against mortgagees who previously nonjudicially foreclosed on their mortgages will increase in Hawaii. A more detailed discussion follows.

Analysis of Hungate
The borrower commenced an action against the mortgagee’s attorney and the mortgagee who previously foreclosed upon its mortgage via a nonjudicial foreclosure. The borrower asserted that the nonjudicial foreclosure was defective and wrongful because: (1) the proposed sale date was only 28 days after the date the notice of sale was first published when it was required that the sale date be at least 29 days after the first published notice; (2) the postponed nonjudicial foreclosure sale date, time, and location were never published as allegedly required by the power of sale clause contained in the mortgage; and (3) the mortgagee breached its duty to obtain the best possible price for the property.

With respect to holding (i) referenced above, the statutory scheme previously governing nonjudicial foreclosures in Hawaii provided that a nonjudicial foreclosure sale could not be held until “after the expiration of four weeks from the date when [the notice of sale was] first advertised.” [Hungate, p. 12.] When analyzing how the four-week period should be calculated, the Supreme Court determined that the day that the notice of sale appeared in the newspaper should not be counted when calculating the four-week period; i.e., the first day of the 28-day period should be counted from the day after the publication. This determination overruled a prior Hawaii Supreme Court decision on the exact issue [Silva v. Lopez, 5 Haw. 262, 270 (Haw. Kingdom 1884)]. As a result, it was not uncommon for mortgagees to treat the first day of publication as the starting point to count days toward the four-week period. Hungate establishes that this calculation method was incorrect.

As for holding (ii) referenced above, the Supreme Court determined that the power of sale clause requiring that a “Lender shall publish a notice of sale and shall sell the Property at the time and place under the terms specified in the notice of sale” should be interpreted as requiring that the date, time, and location of any postponed nonjudicial foreclosure sale also be published. Hungate does not indicate how many times and how far in advance of any new auction date a postponement notice needed to be published. While it was the common practice for a mortgagee to publicly announce a postponement of a nonjudicial foreclosure sale at the date, time, and location of the initially scheduled sale, it was not the common practice for a mortgagee to publish the new postponed foreclosure sale date, time, and location. In fact, numerous Hawaii judicial decisions prior to Hungate recognized that an oral announcement was adequate to postpone an auction. Additionally, Hungate establishes that this was not the correct means to postpone a nonjudicial foreclosure sale.

Lastly, as for holding (iii) referenced above, the Supreme Court reaffirmed and further clarified its previous decisions finding that a foreclosing mortgagee: (i) has a duty to use fair and reasonable means to obtain the best price for the property; and (ii) who acquires the property at its own foreclosure sale has the burden of establishing that the sale was fairly conducted and that the price paid for the property was adequate. However, the Supreme Court also provided some very useful discussion explaining what a fair and reasonable price is in a nonjudicial foreclosure: “We further clarify that the mortgagee’s duty to seek the best price under the circumstances does not require the mortgagee to obtain the fair market value of the property.” (Hungate, p. 30.) “[F]inal bids on foreclosed property need not equate to fair market values.” (Hungate, p. 31.) Thus, once a foreclosing mortgagee establishes that a sale “resulted in an adequate price under the circumstances” [Hungate, p. 32 (emphasis added)], the burden of establishing an injury would appear to shift to the former owner. In many instances, establishing such an injury would appear to be very difficult for the former owner.

Recent Wrongful Foreclosure Cases
Since early 2016, there have been close to one hundred wrongful foreclosure cases filed in Hawaii. These cases have been commenced by a group of attorneys led by James Bickerton, Esq. who are representing borrowers whose homes were previously foreclosed upon by a mortgagee via a nonjudicial foreclosure. The cases were commenced, in part, in anticipation of the Supreme Court’s decision in Hungate. The allegations in these cases are all similar and they all relate to nonjudicial foreclosures that were completed in Hawaii, in May 2011 or earlier.

The common theme in all of the Bickerton wrongful foreclosure cases is that they involve a postponed nonjudicial foreclosure sale (almost all nonjudicial foreclosures were postponed at least once) and an unpublished notice of postponement. As mentioned above, Hungate establishes that a failure to publish a postponed sale renders the nonjudicial foreclosure defective when the mortgage includes a power of sale clause requiring publication of a notice of sale.

Bickerton also alleges in some of his wrongful foreclosure cases (where the facts are applicable) that the nonjudicial foreclosure sale was wrongful because it was not held at the location identified in the publication; i.e., the publication indicated that the foreclosure sale would be held on the steps of the public courthouse, but the foreclosure sale was actually held on the sidewalk in front of the steps of the public courthouse. Depending on the facts of each case, Bickerton has alleged other nonjudicial foreclosure defects in his wrongful foreclosure actions.

There have been successful defenses against some of Bickerton’s wrongful foreclosure cases by asserting that the wrongful foreclosure actions are barred by either a two- or six-year statute of limitations period. Unfortunately, depending on which circuit court the case is in and which judge the case is before, the Hawaii circuit courts have been inconsistent in deciding these cases. Some courts have found that wrongful foreclosure claims are subject to a 20-year statute of limitations period.

Certainly, the unwinding of a nonjudicial foreclosure sale in these situations would be very problematic for the current owners of the property and the mortgagee who completed the nonjudicial foreclosure sale. The dramatic effect that the mere commencement of these wrongful foreclosure cases has had on the title insurance industry in Hawaii is discussed more fully in an article published in November 2016 by West Hawaii Today; view that article here. For those named as a defendant in a wrongful foreclosure action, legal counsel should be contacted promptly.

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