OneWest Bank, F.S.B. v. The Association of the Owners of the Kumulani at the Uplands at Mauna Kea. ICA s.d.o., filed 05/30/2018. Motion for Reconsideration, filed 06/12/2018.

Citation: Not availableDocket: SCWC-16-0000123

Court: Hawaii Supreme Court; January 8, 2020; Hawaii; State Supreme Court

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OneWest Bank, F.S.B. initiated a judicial foreclosure against Diana G. Brown for defaulting on a $548,000 mortgage related to a condominium property. The Association of the Owners of the Kumulani at the Uplands at Mauna Kea, a junior lienholder, participated in the proceedings, asserting a lien for unpaid common expenses. After a series of motions, the Circuit Court found OneWest liable for damages equivalent to its down payment for failing to close the sale and awarded this amount to the Association. However, the court's ruling was determined to be an abuse of discretion because, under Hawaiʻi Revised Statutes § 667-3, creditors in foreclosure must be paid according to the priority of their liens. The court had previously limited OneWest's recoverable amounts due to laches, allowing it to collect only a specific sum, and reserved jurisdiction to determine the distribution of any surplus from the sale.

The court's order permitted OneWest and other parties to purchase the property, mandating a down payment of at least ten percent of the highest bid, which OneWest could offset against its secured debt if it was the purchaser. The order stipulated that failure to pay the remaining purchase price could result in forfeiture of the down payment, with damages limited to this forfeiture. Following the initial auction on August 11, 2014, where the property sold for $50,000, OneWest successfully reopened bidding, resulting in a second auction on December 9, 2014, where it purchased the property for $815,098.42, pending court confirmation. The court confirmed the sale on March 6, 2015, requiring closing by April 10, 2015. Payments from the sale were to be distributed in a specified order, with any remaining funds going to Brown. OneWest did not close by the required date, prompting the Association to file a motion for civil contempt on May 12, 2015, which led to a July 24, 2015 ruling holding OneWest liable for damages. OneWest then filed its own motion to vacate the sale confirmation and adjust its bid, which was denied on September 22, 2015, resulting in a requirement for OneWest to pay damages to the Association. The appeal concerns the damages awarded to the Association. Additionally, the Association's motion sought an order for OneWest to explain its noncompliance and requested a new auction, along with recovery of various fees and costs.

The Association argued that if the court did not order a new sale and limited OneWest’s damages to $81,509.84, as dictated by a previous court order, it should enforce the sales contract requiring OneWest to pay the Association all requested fees, costs, interest, and proceeds. On July 24, 2015, the circuit court partially granted the Association's motion, denying a third auction but requiring OneWest to pay accrued monthly fees and confirming liability for $81,509.84, pending further court orders. 

On May 21, 2015, OneWest filed a motion under HRCP Rule 60(b) to vacate a March 6, 2015 order confirming a foreclosure sale. OneWest claimed it misunderstood the court's October 31, 2014 order regarding deficiency judgments, believing it could avoid paying excess proceeds to junior lienholders with its high bid of $815,098.42. OneWest argued it would have bid the actual debt amount of $581,972.26 had it known of this limitation, thus avoiding surplus proceeds and associated fees. It sought a court hearing to submit a reduced bid and limit damages to actual losses incurred due to delay.

In opposition, the Association contended that its claims should remain intact and argued for the distribution of ten percent of OneWest’s bid amount as damages. The Association asserted it was entitled to $116,011.95 in expectation damages from surplus sales proceeds if the sale had closed at the higher bid, plus additional costs from OneWest's breach. The court indicated at a hearing that the sale would not close and a new foreclosure action would be necessary.

On September 22, 2015, the circuit court denied OneWest's motion filed on May 21, 2015, ruling it was untimely and thus offered no grounds for relief under HRCP Rule 60. Additionally, even if considered timely, the court found no basis for relief and cited OneWest's unclean hands due to case delays. The court held OneWest liable for $81,509.84 in damages, ordering $8.00 in escrow fees and $81,501.84 to the Association as partial satisfaction of damages and its lien on the property. Subsequently, OneWest filed a motion for reconsideration, which was denied, leading to an appeal of prior orders to the Intermediate Court of Appeals (ICA).

In its appeal, OneWest identified four errors, with one concerning the circuit court's jurisdiction to award damages to the Association. The ICA agreed that the circuit court erred in denying OneWest's motion for reconsideration and lacked the subject matter jurisdiction to award damages, as the Association had not filed the necessary affirmative pleading or provided evidence of damages from the foreclosure sale's non-completion. The ICA noted its previous ruling that a successful bidder at a judicial foreclosure sale submits to the circuit court's jurisdiction for enforcement orders. However, it concluded that the issue of damages was not appropriately before the circuit court during OneWest's post-judgment motion for HRCP Rule 60 relief, as no damages had been awarded in the relevant judgments. The ICA subsequently ordered the striking of specific paragraphs from the circuit court’s September 22, 2015 order, reaffirming that OneWest was not liable for damages to the Association.

The ICA clarified that its ruling should not be interpreted as a decision on the merits regarding damages against OneWest Bank and does not affect any relief associated with the Order on Motion to Show Cause. The ICA partially affirmed and partially reversed a September 22, 2015 order that had denied OneWest's HRCP Rule 60(b) motion, specifically striking three paragraphs related to damages. The Association subsequently sought a writ of certiorari, contesting the ICA's decision to remove these paragraphs. It raised two questions: whether the ICA erred in determining that the Circuit Court improperly addressed OneWest's liability for damages and whether the ICA was incorrect in stating that the Circuit Court could not consider issues not previously addressed in prior judgments.

The appellate review of a circuit court's HRCP Rule 60 motion is grounded in an abuse of discretion standard, where a trial court's decision is deemed an abuse if it exceeds reasonable bounds or disregards legal principles. The analysis revealed that the ICA erred in stating the issue of OneWest's liability was not before the circuit court when it issued its September 22, 2015 order. Furthermore, it was determined that the Circuit Court abused its discretion in assessing OneWest's liability to the Association for $81,501.94, concluding that this amount should have been applied as a reduction to the debt owed to OneWest rather than awarded as damages to the Association. Consequently, the judgment of the ICA was affirmed in part and vacated in part regarding the stricken damages paragraphs. The Circuit Court had acted within its discretion by holding OneWest liable for failing to meet the foreclosure sale deadline, which included an order for OneWest to pay accrued fees and damages.

OneWest was the highest bidder at a December 9, 2014 auction for a property, offering $815,098.42. The March 6, 2015 order confirming the sale mandated the transfer of the property to OneWest at this bid price. However, the circuit court later found OneWest to be in default for refusing to complete the sale, classifying it as a breach of contract. In judicial sales, the confirmation of sale acts as a valid contract, allowing for the application of contract law principles. Consequently, OneWest was liable for damages resulting from its breach. 

A subsequent order on September 22, 2015, denied OneWest's HRCP Rule 60(b) motion and determined that OneWest owed $81,509.84 in damages to the Association, which claimed total damages of $116,011.95 due to OneWest’s non-completion of the sale. The court ordered OneWest to pay the specified amount as partial satisfaction of the Association’s damages and lien. The court concluded that the issue of damages was appropriately before it in relation to OneWest's motion. 

The circuit court's discretion to delay specifying the recipient of damages was justified, as it needed to address OneWest's motion first, which could affect the determination of damages entitlement. The court has broad authority in judicial foreclosure cases to enforce its judgments and make necessary orders to promote justice. It was deemed reasonable for the court to postpone the damage award until it ruled on OneWest’s motion, with no obligation for a separate order to clarify the recipient of damages.

OneWest argued in its post-judgment motion regarding its liability for damages related to a foreclosure sale contract, recognizing that denial of its HRCP Rule 60(b) request would leave it liable. The court noted that while a Rule 60(b) motion is not intended for introducing new claims, the damages issue was not new since the circuit court's terms of the sale created conditions for liability. The circuit court abused its discretion by awarding damages to the Association, a junior lienholder, rather than the first mortgagee. Under general mortgage law and HRS 667-3, the first lien mortgagee is entitled to recover all associated costs from sale proceeds before a junior lienholder. The statute prevents the court from reallocating sale proceeds to a junior lienholder without the consent of the first mortgagee. Therefore, the circuit court's decision to allow the Association to recover damages from the down payment violated HRS 667-3. The ruling aligns with both judicial and nonjudicial foreclosure processes outlined in HRS Chapter 667, including provisions for down payments and forfeiture in cases of default by the successful bidder.

The forfeited down payment from a foreclosure sale will first be applied to the foreclosing mortgagee's attorney's fees and costs, followed by fees related to the power of sale foreclosure, with any remaining balance credited against the moneys owed to the mortgagee. The foreclosing mortgagee retains the discretion to either accept the next highest bidder or restart the public sale process. The Association argued in opposition to OneWest's motion that it should receive the down payment for damages, citing a precedent where the court awarded damages to a mortgagee despite it not being a party to the sales contract. The case referenced involved First Hawaiian Bank (FHB), which was entitled to damages from a third-party purchaser's breach of contract, including a forfeited down payment. However, it was determined that OneWest, as the senior lienholder, should not award the forfeited down payment to the Association for damages related to obligations to which OneWest was not a party. The ICA concluded that while it was appropriate for OneWest to apply the forfeited down payment to reduce Brown’s debt due to the failure to close the sale, awarding it as damages to the Association constituted an abuse of discretion. The ICA's decision to strike certain paragraphs from the circuit court's order was found to be erroneous, and consequently, while affirming part of the ICA's order, it vacated other parts and remanded the case for proper handling of the down payment.