Santiago v. Tanaka. ( 2015 )

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Electronically Filed
Supreme Court
SCWC-11-0000697
29-DEC-2015
09:35 AM
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
---o0o---
LOUIS ROBERT SANTIAGO, as Trustee of the Louis Robert Santiago
Revocable Living Trust dated November 17, 1999, as amended, and
YONG HWAN SANTIAGO, as Trustee of the Yong Shimabukuro Revocable
Living Trust dated July 25, 1996, as amended,
Petitioners/Plaintiffs-Appellants/Cross-Appellees,
vs.
RUTH TANAKA, Respondent/Defendant-Appellee/Cross-Appellant.
SCWC-11-0000697
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-11-0000697; CIVIL NO. 08-1-0094)
DECEMBER 29, 2015
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON JJ.
OPINION OF THE COURT BY POLLACK, J.
I. Introduction
This case involves the adequacy of disclosures that
were made to the buyer during the sale of a commercial property
and the seller’s subsequent nonjudicial foreclosure and sale of
the property when the mortgage payments were briefly interrupted
because of an underlying dispute regarding mediation concerning
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the property. Two issues are presented: (1) whether the
seller’s failure to disclose certain facts regarding the
property’s sewer system is actionable under the common-law
causes of action of nondisclosure and misrepresentation and (2)
whether the seller’s nonjudicial foreclosure of the property and
ejectment of the Santiagos were wrongful under the facts of this
case. We answer both questions in the affirmative.
II. Background
A. The Santiagos’ Lease and Purchase of Nawiliwili Tavern
On January 1, 1998, Louis Santiago (Louis)1 entered
into a twenty-year commercial lease agreement to rent
approximately 2,560 square feet of ground floor space of the
Nawiliwili Tavern (Tavern) from owner Ruth Tanaka (Tanaka).
After leasing the Tavern for over seven years and making all
payments due under the lease, including his share of utilities,
taxes, assessments, and insurance, Louis and his wife, Yong Hwan
Santiago (collectively, the Santiagos), decided to submit an
offer to purchase the Tavern from Tanaka.2
1
Louis Santiago is referred to herein as “Louis” when he is acting
in his individual capacity. Louis Santiago and Yong Santiago, acting
together, are referred to as “the Santiagos.”
2
It does not appear that Tanaka personally participated in the
negotiations. All actions, unless otherwise noted, were taken by her real
estate agent, Wayne Richardson (Richardson) or her attorney.
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1. Negotiations for Purchase of Tavern
In November 2005, Louis, represented by realtor Glenn
Takase (Takase) of Coldwell Banker, submitted an offer to
purchase the Tavern for $1,000,000.00, in the form of a
“Deposit Receipt Offer and Acceptance” (DROA) to Tanaka’s
property manager and realtor, Wayne Richardson (Richardson).3
3
The DROA contained standard terms, including the following
pertinent provisions:
C-10 Prorations and Closing Adjustments. At closing,
Escrow shall prorate the following, if applicable, as of
the date of closing: real property tax, lease rents . . .
maintenance, private sewer, marina, and/or association
fees, tenant rents, and ANY OTHERS.
. . .
SELLER’S DISCLOSURES (Required by Hawaii Statute for
residential real property)
C-44 Seller’s Obligation to Disclose. Under Hawaii law,
Seller is obligated to fully and accurately disclose in
writing to Buyer any fact, defect, or condition, past or
present, that would be expected to measurably affect the
value of the Property to a reasonable person. . . . Such
Disclosure shall be prepared in good faith and with due
care and shall disclose all material facts relating to the
Property that: (i) are within the knowledge or control of
Seller; (ii) can be observed from visible, accessible
areas; or, (iii) which are required by Section 508D-15 of
the Hawaii Revised Statutes.
. . .
C-47 Buyer’s Remedies If Seller Fails to Comply with
Paragraphs C-44 or C44A. . . . If Seller negligently
fails to provide the required disclosure statement or
amended disclosure statement, Seller shall be liable to
Buyer for the amount of actual damages suffered as a result
of the negligence. In addition to the above remedies, a
court may also award the prevailing party’s attorneys’
fees, courts costs, and administrative fees.
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Tanaka did not accept Louis’ initial offer, and the parties
exchanged multiple counteroffers, all of which referenced and
incorporated the DROA.
In January 2006, Tanaka submitted a counteroffer with
an attached “Agreement of Sale Addendum to the DROA” (Agreement
of Sale Addendum). In her Agreement of Sale Addendum, Tanaka
made representations with respect to certain “Monthly
Installments (based on current estimates; exact figures to be
determined and adjusted at closing),” including “Sewer Fee &
Assessments” in the amount of $150.00.4 The Santiagos rejected
Tanaka’s January 2006 counteroffer.
2. Accepted Purchase Contract
Ultimately, after further negotiations, Louis accepted
a subsequent counteroffer from Tanaka (Accepted Counteroffer).
The Accepted Counteroffer expressly provided that Tanaka and
4
Tanaka provided the following accounting of “Monthly
Installments” within the Agreement of Sale Addendum:
2. Payment Terms:
. . .
A. Monthly Installments (based on current estimates; exact
figures to be determined and adjusted at closing)
[X] Buyer Collection Fee: $50.00
[X] Real Property Taxes: $300.00
[X] Insurance Premiums: $226.00
[X] Sewer Fee & Assessments: $150.00
[X] Other: Obatake-Lovell $50.00
[X] Principal and interest: $9,436.79
[X] Estimated Total Monthly Payment: $10,212.79
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Louis “agree[] to sell/buy the [Tavern] on the terms and
conditions set forth in the DROA as modified by this Counter
Offer.” The Accepted Counteroffer set the purchase price of the
Tavern at $1,300,000, $800,000 of which was to be paid as a down
payment, with the remaining $500,000 secured by a sixty-month
“Mortgage, Security Agreement and Financing Statement”
(Mortgage) financed by Tanaka. Attached to the Accepted
Counteroffer were two addenda: a “Purchase Money Mortgage
Addendum” (Mortgage Addendum) setting forth the provisions of
the Mortgage and an “Existing ‘As Is’ Condition Addendum” (“As
Is” Addendum).
The stated purpose of the “As Is” Addendum was to note
that the “Property [was] being sold in its existing condition”
and that “[e]xcept as may be agreed to elsewhere in [the] DROA,
[Tanaka] will make no repairs and will convey [the Tavern]
without any representations or warranties, either expressed or
implied.” The addendum stated, however, that “[b]y selling
Property in Existing ‘As Is’ Condition, [Tanaka] remains
obligated to disclose in writing any known defects or material
facts of Property or improvements.” (Emphases added).
3. Seller’s Disclosures
In April 2006, Tanaka sent Louis a “Seller’s Real
Property Disclosure Statement” (Disclosure Statement). The
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Disclosure Statement expressly stated that it was “intended to
assist [Tanaka] in organizing and presenting all material facts
concerning the Property” and that Tanaka is “obligated to fully
and accurately disclose in writing to a buyer all ‘material
facts’ concerning the property.”5
The Disclosure Statement further noted, “It is very
important that the Seller exercise due care in preparing
responses to questions posed in the Disclosure Statement, and
that all responses are made in good faith, are truthful and
complete to the best of Seller’s knowledge,” because “Seller’s
agent, Buyer and Buyer’s agent may rely upon Seller’s
disclosures.” Finally, the Disclosure Statement instructed
Tanaka, in her capacity as the Seller of the Tavern, to answer
all questions and explain all material facts known to her.
5
In full, the purpose of the Disclosure Statement is described as
follows:
Purpose of Disclosure Statement: Pursuant to Hawaii
Revised Statutes, Chapter 508D (for residential real
property), and under common law (for all other real estate
transactions, including the sale of vacant land) a seller
of residential real property is obligated to fully and
accurately disclose in writing to a buyer all “material
facts” concerning the property. “Material facts” are
defined as “any fact, defect, or condition, past or
present, that would be expected to measurably affect the
value to a reasonable person of the residential real
property being offered for sale.” This Disclosure
Statement is intended to assist Seller in organizing and
presenting all material facts concerning the Property.
(Emphasis added).
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As is relevant to the issues presented in this case,
question 77 of the Disclosure Statement asked, “What type of
waste water/sewage system do you have?” Tanaka checked boxes to
indicate that the Tavern was “Connected” to a “Private Sewer.”
The last page of the Disclosure Statement provided a space for
Tanaka to provide further explanation of any prior disclosure.
In addition to clarifications pertaining to other questions on
the Disclosure Statement, Tanaka referenced question 77 and
noted that the Tavern’s sewer is a “private sewer line owned by
Anchor Cove. We are connected.”6
Tanaka subsequently disclosed twenty documents
pertaining to different aspects of the Tavern, several of which
were related to the Tavern’s private sewer connection. One of
the disclosed documents was an agreement dated May 16, 1995,
between Tanaka and James Jasper Enterprises, LLP (Jasper), to
connect the Tavern to Jasper’s existing private sewer system.
The agreement, entitled “Agreement for Maintenance and Operation
of Wastewater System and Connection to Wastewater System Located
at Nawiliwili, Kauai, Hawaii” (Wastewater Agreement), provided
6
After Takase received and reviewed the Disclosure Statement,
Takase made a handwritten notation--“✓ on →”--in the margin next to Tanaka’s
reference to the private sewer system. Takase testified that his “notation
meant ‘Check on this private sewer line.’” Thereafter, Takase and Louis
reviewed the disclosed documents that related to the private sewer system.
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the following pertinent terms for the maintenance and cleanout
charges:
5. Tanaka agrees to pay Jasper monthly maintenance
charges in the amount of One Hundred Fifty Dollars
($150.00) per month, payable on or before the fifteenth day
of every month, commencing the month immediately after this
Agreement is executed by the parties hereto. Jasper
reserves the right to adjust the deposit annually in a sum
not exceeding twenty percent (20 percent) of the amount
paid in the year immediately preceding.
. . .
7. Tanaka agrees to pay Jasper the sum of One Hundred
Fifty Dollars ($150.00) as a bi-monthly cleanout charge for
the Jasper STP.[7] Such payments shall commence sixty (60)
days after the execution of this Agreement by the parties,
and shall be payable on or before the fifteenth day of
every other month thereafter. Jasper reserves the right to
adjust the deposit annually in a sum not exceeding twenty
percent (20 percent) of the amount paid in the year
immediately preceding.
8. Tanaka agrees to pay Jasper the sum of Three Hundred
Dollars ($300.00) as a deposit for those charges provided
for in paragraphs 5 and 7 hereinabove. Such amount shall
be paid upon the execution of this Agreement by the
parties. The deposit shall be refunded to Tanaka in the
event the Jasper STP is transferred or conveyed to the
County.
(Emphases added).
Based on Tanaka’s disclosures and the $150 estimated
monthly installment for sewer fees and assessments represented
in the Agreement of Sale Addendum, Takase and Louis believed the
costs associated with the Tavern’s private sewer system were the
amounts listed in the Wastewater Agreement--$150 for a monthly
7
“Jasper STP” is the short-form used in the agreement for Jasper’s
Anchor Cove Sewage Pump Station.
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maintenance fee and $150 for a bi-monthly cleaning fee. After
reviewing the disclosures with Takase and believing that Tanaka
had provided all documentation, Louis accepted the disclosed
documents.
4. Mortgage, Promissory Note, and Closing on Sale of Tavern
As noted, to finance a portion of the purchase price
of the Tavern, the Santiagos obtained a mortgage from Tanaka.
In the Mortgage, the Santiagos covenanted to pay the $500,000
loan pursuant to the terms of a Promissory Note.
The Mortgage provided that in the event of any default
“in the performance or observance of any covenant or condition”
of the Mortgage or the Promissory Note, “the whole amount of all
indebtedness owing” under the Mortgage “shall at the option of
the Mortgagee become at once due and payable without notice or
demand.” Additionally, the Mortgage provided as follows:
[T]he Mortgagee may, with or without taking possession,
foreclose [the] Mortgage, by court proceeding (with the
immediate right to a receivership with the aforesaid powers
on ex parte order and without bond pending foreclosure),
or, as now or then provided by law, by advertisement and
sale of the mortgaged property or any part or parts thereof
at public auction in the county in which the mortgaged
property are situated . . . .
(Emphases added).
The Promissory Note provided that payment of $9,724.63
was due on the tenth day of each month, commencing on August 10,
2006, until the satisfaction of the debt on August 10, 2011. It
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additionally stated that the failure to pay “any sum” due under
the Promissory Note constitutes an “Event of Default” and that
“[i]f any Event of Default shall occur and be continuing, the
entire principal sum and accrued interest thereon” shall
“immediately become due and payable.” (Emphasis added).
The parties closed the sale pursuant to the U.S.
Department of Housing and Urban Development Settlement Statement
(HUD Statement) on August 10, 2006, and the deed transferring
the Tavern’s title from Tanaka to the Santiagos was recorded on
the same day. The HUD Statement identified the prorated amounts
of property taxes and partial month rent due under the
Santiagos’ former lease agreement, but it was silent as to
“maintenance, private sewer, marina, and/or association fees”
required to be listed, if applicable, in accordance with
paragraph C-10 of the DROA.8 The HUD Statement additionally
indicated that the total amount due from the Santiagos,
including all prorations and closing costs, was $1,317,518.31,
an amount that the Santiagos paid as follows: $5,000 as an
8
See note 3 for the full text of paragraph C-10 of the DROA.
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initial deposit, $812,518.31 as an additional deposit, and the
remaining $500,000 in accordance to the Mortgage.9
B. Sewer Fee Dispute
At the beginning of October 2006, Jay Geffert
(Geffert), the Santiagos’ property manager for the Tavern,
received a bill from Jasper in the amount of $3,467.43--
$2,267.77 past due from August’s sewer maintenance fees and
$1,153.23 for September’s sewer maintenance fees, inclusive of
taxes.10 Geffert, believing Jasper’s bill to be a mistake--at
the time, he had been paying the Tavern’s utility bills,
including county sewage bills, since 1998--contacted Jasper to
inquire about the bill. In response, Jasper wrote to Louis,
noting that Tanaka had previously paid the sewer fees and that
the fees had increased twenty percent a year, every year, since
1995.11 Jasper stated that the Tavern could choose an
9
The $17,518.31 in excess of the agreed-upon purchase price of
$1.3 million constitute settlement charges, which included title and
recording charges, that the Santiagos had to pay at closing.
10
Less than two weeks after the Santiagos closed on the sale of the
Tavern, Jasper sent a bill to Tanaka totaling $2,314.20, $1,153.23 for
monthly private sewer maintenance and $1,153.23 for bi-monthly sewer
cleanout, plus excise taxes. Tanaka notified Jasper that the Tavern had been
sold and instructed that the bill, and all future billings, be sent to the
Santiagos.
11
In his letter, Jasper outlined the extent to which the monthly
maintenance charge and bimonthly cleanout charge had been increased since the
Wastewater Agreement was executed: in 1995, Jasper charged $156.25 for
monthly maintenance and the same amount for bimonthly cleanout, and in 2006,
(continued. . .)
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alternative method of sewage disposal but that, until then, the
Santiagos had to continue paying pursuant to the Wastewater
Agreement.
Louis’ counsel wrote to Tanaka to further inquire
about the bill that Louis received from Jasper. Counsel
maintained that although the Agreement of Sale Addendum listed a
$150.00 sewer assessment fee, Tanaka did not disclose the fact
that the sewer fees could, and in fact did, increase by twenty
percent per year. Counsel asserted that Tanaka never disclosed
the true amount of the fees for the Tavern’s sewer service. In
conclusion, counsel stated that had Louis known about the
possibility that the sewer maintenance charges could be
increased by twenty percent per year, he would not have agreed
to pay the amount that he agreed to for the Tavern.
Louis’ counsel also wrote to Jasper, stating that the
Wastewater Agreement was never assigned to the Santiagos when
Tanaka conveyed the Tavern to them. Counsel also requested from
Jasper an accounting of his cost and expenses in the maintenance
of the sewage system and suggested that the costs charged to the
Santiagos should be adjusted depending upon the parties’ usage
(. . .continued)
he was charging $1,160.94 for monthly maintenance and the same amount for
bimonthly cleanout.
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of the system. In a forceful response, Jasper intimated no
interest in negotiating for a lower price because “the price . .
. was agreed to be paid by . . . Tanaka” and because the
Wastewater Agreement “does not just provide for the recovery of
a pro-rated portion of costs.”12 Jasper also threatened that if
the Santiagos did not “want to be bound by the long standing
Agreement,” he would “arrange for [the] Tavern to be immediately
disconnected from the sewage disposal system.” Finally, Jasper
outlined three alternatives to which he was open: (1) the
Santiagos pay the total amount owing and agree to be bound to
the Wastewater Agreement; (2) the Santiagos accept a 50%
deferral of the amount due while they commence an action to
recover damages from Tanaka; or (3) the Santiagos disconnect the
Tavern from his sewer system and start building their own.
In 2007, the Santiagos filed a Complaint in the
circuit court against Jasper and Tanaka asserting claims
pertaining to the Wastewater Agreement. Tanaka filed a motion
to dismiss, and the court issued an order granting Tanaka’s
motion to dismiss without prejudice to allow the parties to
12
Jasper also questioned the Santiagos’ right to demand an
accounting since, at the outset, they were not assigned the Wastewater
Agreement.
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“engage in good-faith mediation in a prompt and cooperative
manner.”13
C. Attempts to Mediate and Initiation of Foreclosure
Over several months following the circuit court’s
dismissal of the Santiagos’ 2007 complaint, the parties failed
to reach an agreement as to the mediator, or the date, time or
location of mediation. Notably, the Santiagos were current with
their payments even after they commenced their 2007 action
against Tanaka and during the mediation negotiations between the
parties. However, when it became apparent that advances in the
mediation proceedings were not forthcoming, and out of
frustration from the inability of counsel to reach an agreement
as to scheduling the mediation and selection of the mediator, on
March 10, 2008, Louis sent Tanaka a handwritten note stating
that he halted payment on his account “due to litigation
problems,” that monthly payments of $10,000 are in a bank
account, and that this arrangement “will continue until
litigation is resolved.”14
13
All circuit court proceedings in this case were presided over by
Judge Kathleen N.A. Watanabe.
14
Specifically, Louis’ note stated, “I Louis Santiago has halted
payment on my acc’t due to litigation problems! Monthly payments of $10k are
in a bank acc’t + will continue until litigation is resolved.” As he had
indicated, Santiago “put the ten thousand dollars in a special fund.”
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On March 11, 2008, one day after Louis sent his
letter, Tanaka sent the Santiagos a “Notice of Default and
Intention to Foreclose.” Tanaka asserted that because the
Santiagos defaulted on the Promissory Note and Mortgage, “the
entire principal sum and accrued interest, plus attorneys’ fees
and costs, are hereby declared immediately due and payable.”
Tanaka additionally stated that she “has not granted any
extensions of time, renewals, waivers or modifications with
respect to payment or other provisions of the Note.”
On March 12, 2008, Tanaka’s mortgage servicer sent the
Santiagos a payment notice indicating an amount due of
$10,250.86--$9,764.63 for the principal and interest payment due
on March 10, 2008, and a late fee in the amount of $486.23. In
a subsequent letter dated April 3, 2008, Tanaka clarified that
she intended to foreclose under power of sale pursuant to HRS §
667-5 through 667-1015 at a public auction on May 9, 2008.
On April 11, 2008, the Santiagos submitted payment for
the March mortgage payment and the late fee, as well as payment
for the April mortgage payment.16 After receiving the Santiagos’
payment, Tanaka informed the Santiagos that she was willing to
15
See note 35 for the complete text of HRS § 667-5.
16
A small amount, $15.49, remained due on the account, which Louis
paid several days later, on April 15, 2008.
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postpone the public auction for sixty days, “expressly subject
to two conditions: (1) [the Santiagos] must meet their payment
obligations, including, but not limited to, attorneys’ fees and
costs; and (2) [the Santiagos] must not file any lawsuit.”
Tanaka additionally stated that she “ha[d] not postponed the
acceleration of the Note and Mortgage,” but “to facilitate the
mediation, [she] [was] willing to accept monthly payments,
without waiving [] rights and remedies in any respect.” The
Santiagos thereafter continued to make their monthly mortgage
payments, plus an additional $235.37 principal payment each
month, and paid Tanaka $15,146.11 in satisfaction of Tanaka’s
demand for attorneys’ fees.17
On May 5, 2008, a mediation session was scheduled for
June 12, 2008. However, on the same day, because Tanaka did not
cancel the scheduled auction sale of the Tavern but only
postponed it subject to two conditions, the Santiagos commenced
17
Preferred Contract Management, Inc., the agency responsible for
collecting the Santiagos’ mortgage payments and transmitting them to Tanaka,
notified the Santiagos that from September 2006 through June 2008, they had
paid the following on the mortgage:
Interest Paid to date: $ 48,125.96
Principal Pmt to date: $ 170,593.30
Late Charges to date: $ 486.23
Attorney Fees to date: $15,146.11
Collection fees to date: $810.00
Total amount of Money Received: $235,161.60
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an action against Tanaka asserting several claims. On May 7,
2008, the Santiagos filed a Motion for Temporary Restraining
Order and a Motion for Preliminary Injunction, both seeking to
“prevent and preclude” Tanaka from proceeding with the
foreclosure auction. The circuit court denied the Motion for
Temporary Restraining Order and scheduled a hearing on the
Santiagos’ Motion for Preliminary Injunction for June 17, 2008.
Upon learning of the Santiagos’ lawsuit, Tanaka’s
counsel informed the Santiagos’ counsel, on May 15, 2008, that
the postponement offer was being withdrawn, the note and
mortgage “ha[d] been duly accelerated,” and the “entire debt . .
. [wa]s due and payable immediately.” On June 3, 2008, the
Santiagos and Tanaka agreed to engage in mediation and to
postpone the foreclosure auction during the pendency of
mediation, subject to the Santiagos’ “full compliance with their
payment obligations” and withdrawal of their Motion for
Preliminary Injunction. Subsequently, on July 14, 2008, Tanaka
filed a mediator’s declaration of impasse and announced that she
was “proceed[ing] with the public auction” on August 14, 2008.
D. The Santiagos’ 2008 Complaint
On August 5, 2008, the Santiagos filed a First Amended
Verified Complaint in which they asserted claims of negligent
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misrepresentation and nondisclosure against Tanaka.18 On August
20, 2008, the Santiagos filed a Motion for Temporary Restraining
Order, again seeking to prevent Tanaka from proceeding with the
foreclosure auction. The circuit court denied the Santiagos’
motion later that day.19
On August 27, 2008, the parties stipulated that the
Santiagos would withdraw without prejudice their Motion for
Preliminary Injunction and that Tanaka would postpone the
foreclosure sale pending the circuit court’s ruling on Tanaka’s
yet to be filed motion to dismiss. The motion to dismiss was
subsequently filed, and after conducting a hearing on October
15, 2008, the circuit court granted in part and denied in part
Tanaka’s motion.
Two days later, on October 17, 2008, Tanaka sent the
Santiagos a letter informing them that the public auction of the
Tavern was to be held on October 24, 2008. On October 24, 2008,
the Santiagos filed a new Motion for Preliminary Injunction, and
Tanaka filed her Answer to the Santiagos’ First Amended Verified
18
The Santiagos additionally asserted claims for “breach of
agreement,” “breach of good faith and fair dealing,” “breach of duty of good
faith mediation,” and “violation of HRS § 667-42.” These claims were
dismissed by the circuit court.
19
The Santiagos filed a series of motions for temporary restraining
orders and motions for preliminary injunctions seeking to “prevent and
preclude” Tanaka from proceeding with the foreclosure auction, all of which
were denied by the circuit court.
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Complaint and asserted eleven counterclaims.20 On the same day,
Tanaka held a public foreclosure auction at which she purchased
the Tavern by submitting the highest bid of $365,000.00.
E. Trial on the Santiagos’ Claims for Nondisclosure and
Misrepresentation
A bench trial was conducted in May 2011, at the
conclusion of which, the circuit court issued its Findings of
Fact (FOF), Conclusions of Law (COL) and Order (Trial Order).
The court found, inter alia, that Tanaka had provided
disclosures indicating that the Tavern’s private wastewater and
sewer system’s monthly service fees may escalate up to twenty
percent annually. The court found that the Wastewater Agreement
“contains the necessary information to calculate Defendant’s
monthly and bi-monthly charges.” The court additionally found
that the Santiagos “signed off on these disclosures” and “did
not conduct due diligence with respect to sewer service.”
The court concluded that after Tanaka “disclosed the
private sewer system,” “she [was] not required to do anything
more.” In fact, according to the court, Tanaka “was not
required to disclose the Wastewater Agreement” in the first
20
Tanaka brought the following counterclaims: “Breach of Note,”
“Breach of Mortgage,” “Breach of Covenant of Good Faith and Fair Dealing,”
“Ejectment,” “Judicial Foreclosure,” “Failure to Mediate in Good Faith,”
“Breach of Confidentiality,” “Violation of Order,” “Waste,” “Impairment of
Security,” and “Rescission.”
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instance because that agreement “does not affect [the
Santiagos].” Instead, the circuit court concluded that the
Santiagos “had access to all material information” and that
Tanaka “provided timely and appropriate disclosures of all
material facts.” Accordingly, the circuit court ordered
judgment entered in favor of Tanaka on the Santiagos’ claim for
negligent misrepresentation and nondisclosure.
With respect to Tanaka’s counterclaims and the
Santiagos’ defenses thereto, the court concluded that HRS § 667-
5 does not require that the Mortgage contain “any particular
words” to effectuate a power of sale and further concluded that
the following language in the Mortgage gave Tanaka the ability
to foreclose by power of sale: “The mortgagee may . . .
foreclose this Mortgage, (1) by court proceeding . . . or, (2)
as now or then provided by law, by advertisement and sale of the
mortgaged property . . . at public auction . . . .” The court
additionally concluded that the Santiagos did not have a right
to cure the default under the loan documents or Hawai#i law.
Accordingly, the circuit court ordered judgment
entered in favor of Tanaka and against the Santiagos on Tanaka’s
counterclaims for “Breach of Note,” “Breach of Mortgage,”
“Breach of Covenant of Good Faith and Fair Dealing,” and
“Ejectment.” The court additionally ordered that Tanaka be
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awarded reasonable attorney’s fees and costs in the amount of
$152,246.61. By its rulings, the circuit court determined that
ownership and possession of the Tavern lawfully belonged to
Tanaka, who was at the same time allowed to keep the
approximately $1.4 million that the Santiagos paid to her
pursuant to the Mortgage and the Promissory Note.
On June 28, 2011, the circuit court filed its Entry of
Judgment (Judgment) and issued a Writ of Ejectment ordering the
Santiagos to vacate the Tavern. The Santiagos subsequently
vacated the premises pursuant to the court’s order.
On July 7, 2011, the Santiagos filed a Motion to
Reconsider, Alter, and/or Amend the Court’s [Trial Order] and
Judgment Thereon (Motion for Reconsideration). The Santiagos
argued that the law of Hawaiʻi “abhors forfeitures” and that the
court’s “decision and judgment thereon, if left to stand as is,
will result in an over $1.3 million cash forfeiture as the
result of [the Santiagos’] purchase of the [Tavern] and their
full performance under the” purchase contract and loan
documents.21
21
The evidence at trial established that the Santiagos paid Tanaka
$585,161.60 in principal, interest, and fees pursuant to the Promissory Note
and Mortgage as of May 6, 2011, in addition to the $800,000 down payment,
$17,518.31 closing charges, and $10,110.88 in taxes after Tanaka transferred
title to the Tavern back to herself.
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The Santiagos maintained that the court’s decision
“will result in a grossly inequitable windfall” to Tanaka, in
violation of Hawaiʻi law. Accordingly, the Santiagos concluded
that they were entitled to restitution of $1,342,455.72.22
In response, Tanaka argued that the Santiagos were in
effect seeking rescission of the 2006 sale, which, if granted by
the circuit court, would turn “the trial outcome upside-down,
converting [the Santiagos’] loss into a win (and [Tanaka’s] win
into a loss).”
In their reply, the Santiagos asserted that they were
entitled to restitution, not rescission of the purchase
contract. Relying on In re Parish, 2010 WL 1372387, at *2
(Bankr. D. Haw. Apr. 6, 2010), the Santiagos also argued that
the right to cure is an equitable right recognized in Hawaiʻi.
On August 4, 2011, the circuit court issued an Order Denying the
Santiagos’ Motion for Reconsideration.
22
The Santiagos reduced the total amount they had paid by
$80,355.99 to offset any actual damages Tanaka had incurred because of the
foreclosure sale: $2,323.64 principal, $12.04 interest, and $78,000.00 as
estimated costs to resell the property, which assumed a six percent broker’s
commission and a sale price of $1.3 million. The reduction was apparently in
light of the trial court’s ruling that the foreclosure had been lawfully
conducted.
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III. Appellate Proceedings
A. Arguments to the ICA
The Santiagos appealed to the ICA.23 The Santiagos
argued that the trial court erred in entering judgment for
Tanaka on their claims of nondisclosure and negligent
misrepresentation. Specifically, the Santiagos claimed that
Tanaka failed to disclose material facts during the course of
the negotiations for the sale of the Tavern, including the
$1,160.94 monthly sewer maintenance fees and the $1,160.94 bi-
23
The Santiagos appealed from the Trial Order; the circuit court’s
Judgment, filed June 28, 2011; the Writ of Ejectment, filed June 28, 2011
(Writ of Ejectment); Order Denying “Plaintiffs’ Ex Parte Motion for a
Temporary Stay Pending the July 19, 2011 Hearing on Plaintiffs’ ‘Emergency
Motion for a Temporary Stay of Enforcement of the Court’s Writ of Ejectment
Pending Disposition of Plaintiffs’ Motion to Reconsider, Alter, or Amend the
Judgment and Pending Disposition of Plaintiff’s Motion for Stay Pending
Appeal,’” filed July 14, 2011 (Order Denying the Santiagos’ Motion for a
Stay); Order Denying Plaintiffs’ Emergency Motion for a Temporary Stay of
Enforcement of the Court’s Writ of Ejectment Pending Disposition of
Plaintiffs’ Motion to Reconsider, Alter, or Amend the Judgment and Pending
Disposition of Plaintiffs’ Motion for Stay Pending Appeal, filed August 4,
2011 (Order Denying the Santiagos’ Motion to Stay Ejectment); Order Denying
Plaintiffs’ Motion for a Stay Pending Appeal, filed August 4, 2011; Order
Denying Plaintiffs’ Motion to Reconsider, Alter, and/or Amend the Court’s
Findings of Fact, Conclusions of Law and Order, and Judgment Thereon, filed
August 4, 2011 (Order Denying the Santiagos’ Motion for Reconsideration); and
Order Granting in Part and Denying in Part Defendant/Counter-Plaintiff Ruth
Tanaka’s Motion for Fees and Costs, filed August 22, 2011 (Order Granting
Tanaka’s Fees).
The Santiagos also challenged the circuit court’s judgment on
Tanaka’s counterclaims of breach of note, breach of mortgage, and ejectment,
and in denying the Motion for Reconsideration.
Tanaka filed a cross appeal, which is not before this court and,
thus, will not be discussed.
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monthly sewer cleanout charges that Tanaka had been required to
pay.
Alternatively, the Santiagos contended that Tanaka
failed to disclose that, if the Santiagos were to buy the
Tavern, they would be required either to negotiate with Jasper
for future sewer service or to build their own sewage disposal
system necessary to operate the Tavern. According to the
Santiagos, they were misled by the documents, included in
Tanaka’s Agreement of Sale Addendum to the DROA, that
represented $150 monthly sewer fee and assessment.
Additionally, the Santiagos asserted that the trial
court erred in entering judgment in favor of Tanaka on her
counterclaims of breach of note, breach of mortgage, and
ejectment, and in denying the Motion for Reconsideration. The
Santiagos maintained that the Mortgage did not accord Tanaka the
power of non-judicial foreclosure of the Tavern because the
Mortgage allowed such power only as “now or then provided by
law.” Hawaiʻi law, according to the Santiagos, does not
independently provide the power of non-judicial foreclosure, and
the Mortgage did not contain a power of sale.
Further, the Santiagos argued that the circuit court
erred because “the Santiagos cured the alleged default under the
note and [Mortgage] pursuant to” HRS § 667-5(c) over six months
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before the foreclosure auction. The Santiagos also contended
that the right to cure exists as an “equitable right” in Hawaiʻi.
Finally, the Santiagos maintained that the trial court
“erroneously awarded Tanaka an additional $152,246.61 in
attorneys’ fees and costs, even though any award of attorneys’
fees and costs should have been offset by the Santiagos’
forfeiture of over $1.4 million paid by them to Tanaka.”
In her Answering Brief, Tanaka first addressed the
Santiagos’ claim for nondisclosure and misrepresentation.
Tanaka argued that she provided adequate disclosure of the
Wastewater Agreement and that the Santiagos had “all the
information they needed to make further inquiry” but ultimately
failed to exercise due diligence. Tanaka contended that the
Santiagos “hang their case on a one-line entry of the County
fees (as opposed to the Jasper charges) on a pre-printed
Agreement of Sale form that was rejected and that never became
part of the contract.”
Additionally, Tanaka argued that the Santiagos’ claims
were moot because the Tavern had since been sold to a third
party.24 Tanaka also maintained that she did not act in bad
24
Tanaka moved to dismiss the Santiagos’ second point of error as
moot because according to Tanaka’s declaration in support of her dismissal
motion, the Tavern had been resold to a third party on May 1, 2012, after the
circuit court rendered its Judgment. On May 24, 2012, the Santiagos filed a
(continued. . .)
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faith by exercising her contractual right to accelerate the
Mortgage and foreclose upon the Santiagos’ default. Finally,
Tanaka argued that Hawaiʻi law does not provide for the “right to
cure” and maintained that she never consented to allow the
Santiagos the ability to cure their default.
In their reply, the Santiagos stated that while they
received a copy of the Wastewater Agreement, the agreement
“clearly did not establish such high payments.” The Santiagos
also reiterated that the Wastewater Agreement did not apprise
them that “they would . . . have to negotiate for sewer
service[] or construct their own sewage disposal system in order
to operate the [Tavern].”
The Santiagos further argued that the “plain reading
of [the Wastewater Agreement] establishes fees in the amount of
$150, and allowed only for an increase of the $300 ‘deposit.’”
In conclusion, the Santiagos maintained that the Judgment
“resulted in a forfeiture of the entire $1,412,790.79” that they
paid.
(. . .continued)
memorandum in opposition to the motion. Subsequently, on June 6, 2012, the
ICA issued an order denying the motion.
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B. The ICA’s Opinion
On November 28, 2014, the ICA issued its memorandum
opinion (Opinion) in which it affirmed the circuit court’s
Judgment; Trial Order; Writ of Ejectment; Order Denying the
Santiagos’ Motion for Reconsideration; and the Order Granting
Tanaka’s Fees in the circuit court.
The ICA found that the Santiagos did not show the
circuit court erred in concluding that Tanaka provided
sufficient disclosure of the sewer fees. The ICA reasoned that,
“[i]n light of Tanaka’s disclosures, the circuit court properly
concluded that the Santiagos should have exercised due
diligence,” which they failed to do by not further investigating
the sewer system. The ICA concluded that “the Santiagos were
put on notice of the monthly payments made to Jasper and that
Jasper reserved the right to raise payments 20 percent
annually.”
In evaluating the Santiagos’ nondisclosure claim under
Section 551 of the Restatement (Second) of Torts, the ICA
concluded that the Restatement “only requires a party to correct
a prior representation when the party knows clarification is
necessary to prevent the representation from being misleading.”
The ICA found that the Santiagos did not “make [any] argument
regarding Tanaka’s knowledge” and that “there is no evidence
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suggesting that Tanaka knew clarification was necessary.” Thus,
in finding that the Wastewater Agreement “provided actual notice
that the Jasper charges were separate from the County fees,” the
ICA concluded that the circuit court did not erroneously rule in
favor of Tanaka on the nondisclosure and misrepresentation
claims.
The ICA next considered whether the Santiagos’ claims,
that the Mortgage “did not contain a power of sale clause” and
that they “cured the alleged default,” were moot due to Tanaka’s
sale of the Tavern to a third party. The ICA concluded that it
could not “grant effective relief in terms of title or
possession of the property” in light of the sale of the Tavern.
Accordingly, the ICA did not reach the merits of the Santiagos’
arguments concerning power of sale and cure. However, the ICA
concluded that the case was not moot as to “the Santiagos’
contention that the circuit court improperly awarded to Tanaka
both the property and all amounts paid by the Santiagos.”
As to the Santiagos’ claim that Tanaka’s retention of
the Tavern and payments would amount to a windfall, the ICA
concluded that the Santiagos were unable to demonstrate their
entitlement to relief because they remained in possession of the
Tavern for almost three years after foreclosure and because they
did not proffer any evidence to establish the value of the
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Tavern at the time of default or foreclosure so “as to provide
support for an assertion that Tanaka reaped a windfall.” The
ICA concluded that the circuit court did not abuse its
discretion in denying the Santiagos’ Motion for Reconsideration.
Accordingly, the ICA affirmed the Judgment and issued
its Judgment on Appeal on January 6, 2015. The Santiagos filed
an application for writ of certiorari to this court on February
5, 2015.
IV. Standards of Review
A trial court’s findings of fact are reviewed under
the “clearly erroneous” standard of review. Beneficial Haw.,
Inc. v. Kida, 96 Hawaiʻi 289, 305, 30 P.3d 895, 911 (2001). A
finding of fact is determined to be clearly erroneous when “the
record lacks substantial evidence to support the finding,” or
“despite evidence in support of the finding, the appellate court
is left with a definite and firm conviction . . . that a mistake
has been committed.” Id. (first quoting Alejado v. City & Cty.
of Honolulu, 89 Hawaiʻi 221, 225, 971 P.2d 310, 314 (App. 1998);
and then quoting State v. Kane, 87 Hawaiʻi 71, 74, 951 P.2d 934,
937 (1998)). The circuit court’s conclusions of law are
reviewed de novo, under the right/wrong standard. Haw. Nat’l
Bank v. Cook, 100 Hawaiʻi 2, 7, 58 P.3d 60, 65 (2002).
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V. Discussion
A. Nondisclosure and Negligent Misrepresentation
In Hawaiʻi, claims for nondisclosure are governed by
the Restatement (Second) of Torts § 551 (Am. Law Inst. 1977).
See Molokoa Vill. Dev. Co. v. Kauai Elec. Co., 60 Haw. 582, 590,
593 P.2d 375 (1979); Pancakes of Haw., Inc. v. Pomare Props.
Corp., 85 Hawaiʻi 300, 318, 944 P.2d 97, 115 (App. 1997); Sung v.
Hamilton, 710 F. Supp. 2d 1036, 1047 (D. Haw. 2010) (noting
that, under Hawaiʻi law, fraud can be committed “by non-
disclosure as well as by an affirmative misrepresentation”).25
Section 551 of the Restatement provides, in pertinent part, as
follows:
(1) One who fails to disclose to another a fact that he
knows may justifiably induce the other to act or
refrain from acting in a business transaction is
subject to the same liability to the other as though
he had represented the nonexistence of the matter
that he has failed to disclose, if, but only if, he
is under a duty to the other to exercise reasonable
care to disclose the matter in question.
25
The allegations supporting the Santiagos’ negligent
misrepresentation claim are fundamentally the same as those supporting the
nondisclosure cause of action. For negligent misrepresentation, the
Santiagos assert that Tanaka misrepresented the true amount of sewer fees
that she was paying Jasper, stating that the amount was only $150 when in
fact it had increased to $1,160.94 for sewer maintenance and the same amount
for bi-monthly cleanout charges. For their nondisclosure claim, the
Santiagos allege that Tanaka failed to disclose the true amount of sewer fees
based on her agreement with Jasper.
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(2) One party to a business transaction is under a duty
to exercise reasonable care to disclose to the other
before the transaction is consummated,
(b) matters known to him that he knows to be necessary to
prevent his partial or ambiguous statement of the
facts from being misleading; . . . .
Restatement (Second) of Torts § 551 (1977) (emphases added).
The Restatement further explains the circumstances
under which a party in a business transaction has a duty to
disclose facts to the other in order to prevent a partial or
ambiguous statement from being misleading:
A statement that is partial or incomplete may be a
misrepresentation because it is misleading, when it
purports to tell the whole truth and does not. So also may
a statement made so ambiguously that it may have two
interpretations, one of which is false. When such a
statement has been made, there is a duty to disclose the
additional information necessary to prevent it from
misleading the recipient. In this case there may be
recovery either on the basis of the original misleading
statement or of the nondisclosure of the additional facts.
Restatement (Second) of Torts, § 551 cmt. g (emphasis added).
In this case, Tanaka’s disclosure duties to Santiago
under the DROA required Tanaka to “fully and accurately disclose
in writing to [the Santiagos] any fact, defect, or condition,
past or present, that would be expected to measurably affect the
value of the Property to a reasonable person.”26 (Emphases
added). In disclosing these facts, Tanaka was expected to, and
26
Although the parties exchanged numerous counteroffers, there was
only one DROA, dated November 23, 2005. Each counteroffer referenced and
incorporated the DROA’s terms, unless otherwise expressly amended by the
counteroffer.
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indeed was required to, prepare the disclosures “in good faith
and with due care” and ensure that she “disclose[d] all material
facts relating to the Property that [] [were] within [her]
knowledge or control.” (Emphasis added). The DROA further
provided, “At closing, Escrow shall prorate the following, if
applicable, as of the date of closing: real property tax, lease
rents . . . maintenance, private sewer, marina, and/or
association fees, tenant rents, and ANY OTHERS.” (Emphases
added).
Attached to the Accepted Counteroffer were a Mortgage
Addendum, which set forth the provisions of the seller-financed
Mortgage, and an “As Is” Addendum. Pursuant to the “As Is”
Addendum, Tanaka “remain[ed] obligated to disclose in writing
any known defects or material facts of [the Tavern].” (Emphasis
added).
As required by her duty under the DROA and “As Is”
Addendum, on April 4, 2006, Tanaka sent the Santiagos her
Disclosure Statement. The Disclosure Statement provided that
Tanaka, “[p]ursuant to Hawaii Revised Statutes, Chapter 508D
(for residential real property), and under common law (for all
other real estate transactions),” was “obligated to fully and
accurately disclose in writing to a buyer all ‘material facts’
concerning the property.” (Emphases added). It also defined
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“material facts” as “any fact, defect, or condition, past or
present, that would be expected to measurably affect the value
to a reasonable person of the residential real property being
offered for sale.” (Emphasis added). The Disclosure Statement
underscored that the “Seller’s agent, Buyer and Buyer’s agent
may rely upon Seller’s disclosures.” (Emphasis added).
In her responses in the Disclosure Statement, Tanaka
noted that the Tavern was connected to a private sewer system.
The last page of the Disclosure Statement provided space for
Tanaka to provide further explanation or clarification to her
answers. With respect to the sewer, Tanaka wrote only that
“it’s a private sewer line owned by Anchor Cove. We are
connected.”
Roughly a week after sending her Disclosure
Statement, Tanaka provided the Santiagos the Wastewater
Agreement dated May 16, 1995. The Wastewater Agreement provided
that Tanaka agreed to pay Jasper $150 per month for monthly
maintenance charges and $150 as a bi-monthly cleanout charge.
Also indicated in the Wastewater Agreement was Jasper’s
reservation of “the right to adjust the deposit annually in a
sum not exceeding twenty percent (20%) of the amount paid in the
year immediately preceding.” (Emphasis added).
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After the Santiagos reviewed Tanaka’s Disclosure
Statement and other disclosed documents with Takase, the
Santiagos signed off on the disclosures, believing that Tanaka
“provided all of the documentation.” Based on Tanaka’s
disclosures, specifically the Wastewater Agreement, and
representations during negotiations--namely, Tanaka’s estimate
of monthly expenses provided in her Agreement of Sale Addendum--
Takase and the Santiagos believed that the costs associated with
the private sewer system were $150.00 per month for maintenance
and $150.00 bi-monthly for cleanout charges.
At closing, pursuant to paragraph C-10 of the DROA,27
escrow prepared an HUD Statement, based on information provided
by Tanaka, that itemized the fees and prorated amounts due from
the Santiagos to complete the sale, including prorated property
taxes and partial month rent due under the Santiagos’ former
lease agreement. However, the HUD Statement did not include
prorated private sewer fees even though the sale closed in the
middle of the month and the DROA expressly required such an
itemization. Takase testified that had the sewer fees been
prorated on the HUD statement, he and the Santiagos “would have
27
See supra note 3.
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found out” about the actual amount due for Jasper’s private
sewer service.
The foregoing facts clearly establish that Tanaka did
not disclose to the Santiagos the true amount of the private
sewer fees while they were negotiating for the sale of the
Tavern in 2006. Further, the uncontroverted evidence
demonstrates that Tanaka paid the private sewer fees prior to
the Santiagos’ purchase of the Tavern and, thus, knew not only
the amount of the monthly and bi-monthly charges but also that
the fees had increased each year by 20%.
Despite her knowledge, Tanaka never informed the
Santiagos that the amount due under the Wastewater Agreement was
(1) the single largest ownership expense of the Tavern,
approximately equal to 20% of the agreed-to monthly mortgage
payments,28 or (2) subject to an increase of 20% each year, which
Jasper had implemented annually since the inception of the
Wastewater Agreement in 1995. Further, although Richardson
testified that the Santiagos were “not bound by [the]
agreement,” Tanaka did not disclose that if the Santiagos chose
not to accept the terms of the Wastewater Agreement, they would
28
Richardson acknowledged that the Jasper sewer fees were the
highest operating expense for the Tavern.
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be required to (1) attempt to negotiate a new agreement with
Jasper or (2) construct their own sewer system.
It cannot be seriously disputed that the difference
between a sewer service fee of $225 monthly and the true price
of approximately $1,700 per month,29 and the possibility of
having to build a completely new sewer system if the Santiagos
were to refuse binding themselves to the Wastewater Agreement,
are facts that “may justifiably induce” the Santiagos, or any
reasonable person standing in their shoes, to “act or refrain
from acting” in the purchase of the Tavern, Restatement (Second)
of Torts § 551(1), by seeking to renegotiate the terms of the
Promissory Note and Mortgage, recalibrating the agreed-upon
price, or walking away from the transaction altogether. Indeed,
Louis testified that he and his wife would not have purchased
the Tavern for $1.3 million had they known the actual sewer fees
and the terms under which those fees could be increased
annually. The substance and significant character of the
undisclosed facts, and the incomplete and misleading nature of
29
Because the disclosed sewer fees are composed of $150 for
maintenance fees per month and $150 bi-monthly (or $75 per month) for
cleanout charges, the total monthly sewer fees based on Tanaka’s disclosures
is $225. The $1,700 per month figure is the sum of the $1,160.94 monthly
maintenance fees and half of the $1,160.94 bi-monthly cleanout charges (or
approximately $600 per month) that Jasper was actually charging for his sewer
service.
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the disclosed facts, leave little room for doubt that they may
have “justifiably induce[d]” the Santiagos to “act or refrain”
from taking actions in their purchase of the Tavern. Id.
Tanaka’s knowledge that these facts would cause
justifiable inducement on the Santiagos’ part was established by
Tanaka’s awareness of the actual, non-disclosed price for
Jasper’s sewer service, the disparity between the actual price
and the disclosed price, the failure to clarify that the price
had been actually subject to significant annual increases
although the Wastewater Agreement provided that the increase was
to be applied only to the deposit, and the fact that the
Disclosure Statement that Tanaka completed unequivocally stated
that the Santiagos and Takase may rely upon her representations
therein. See Jones v. Great Am. Life Ins. Co., No. 2:13-CV-
02153, 2015 WL 417909, at *5 (W.D. Ark. Jan. 30, 2015)
(inferring from the facts and circumstances the defendant’s
knowledge of the falsity of the representation). The aggregate
of these facts demonstrates Tanaka’s knowledge that her
inaccurate and incomplete disclosure could have been relied upon
by, and thus may have justifiably induced, the Santiagos to act
or to refrain to act.
Additionally, Tanaka’s representation in the Agreement
of Sale Addendum--that “based on current estimates,” the “Sewer
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Fee & Assessments” were $150--proved to be a partial, ambiguous,
and misleading statement.30 Richardson testified that the amount
reflected under “Sewer Fee & Assessments” constituted the county
sewer fees, not the private sewer fees. But Geffert, who had
been paying county sewer fees for eight years at the time the
parties were negotiating for the sale of the Tavern, testified
that county sewer fees were more than double the amount under
“Sewer Fee & Assessments.” Further, based in part on the size
of the Tavern and the Santiagos’ knowledge of the building and
expenses paid during their seven-year tenancy, the Santiagos
believed Tanaka’s estimate of $150 reflected the amount of the
private sewer fees.
Because Tanaka’s representation on the Agreement of
Sale lacked additional information or clarification, the
estimated “Sewer Fee & Assessments” was ambiguous. Thus, under
comment g of Section 551 of the Restatement, because Tanaka’s
statement was subject to two possible interpretations, one of
30
Although the Agreement of Sale Addendum was part of a rejected
counteroffer and thus did not become part of the contract between the
parties, her representations therein are relevant to the Santiagos’ claims
for nondisclosure and misrepresentation.
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which was false, Tanaka was required to provide further
disclosures to prevent her statement from being misleading.31
Tanaka subsequently disclosed the Wastewater Agreement
that, on its face, appeared to confirm the Santiagos’
interpretation of Tanaka’s “Sewer Fee & Assessments” estimate.
The Wastewater Agreement provided that Tanaka paid Jasper $150
in monthly private sewer maintenance charges and $150 in bi-
monthly sewer cleanout charges, the same numerical amount
indicated in Tanaka’s estimate. Consequently, Tanaka’s
representation on the Agreement of Sale Addendum appeared to
confirm that the fees listed within the Wastewater Agreement
were accurate.
Tanaka’s contention throughout this case, that the
express terms of the Wastewater Agreement provided that Jasper
could increase the monthly and bi-monthly fees by up to 20%
annually and that the Santiagos therefore had adequate notice
that the sewer fees may be greater than $150, is unavailing; the
plain language of the Wastewater Agreement provides that Jasper
only “reserve[d] the right to adjust the deposit annually in a
sum not exceeding twenty percent (20%).” Thus, contrary to
31
Additionally, “[t]his court has affirmed the general rule that,
in interpreting contracts, ambiguous terms are construed against the party
who drafted the contract.” Luke v. Gentry Realty, Ltd., 105 Hawaiʻi 241, 249,
96 P.3d 261, 269 (2004).
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Tanaka’s argument, the Wastewater Agreement provides a
reservation to increase the deposit, not the monthly sewer
maintenance fees or the bi-monthly sewer cleanout fees.
Tanaka’s contention is further refuted by trial
testimony supporting the conclusion that the terms of the
Wastewater Agreement were, at best, ambiguous and misleading.
Richardson acknowledged that the plain terms of the agreement
did not state that the monthly and bi-monthly fees could be
increased by 20% per year. Richardson specifically testified
that “perhaps the people who drafted [the agreement] made an
error” by providing that the “deposit” rather than the
“maintenance fee” could be increased by up to 20% a year.
On the other hand, the Santiagos’ realtor, Takase,
testified that based on all the disclosures he received, he
believed that the sewer fees were “$150 for a maintenance fee,
and $150 cleaning fee,” as stated on the face of the Wastewater
Agreement. Thus, if in fact the Wastewater Agreement provided
that Jasper had the ability to increase the monthly and bi-
monthly fees by 20% a year, the drafting “mistake” rendered the
otherwise plain and clear provisions of the Wastewater Agreement
ambiguous and misleading. Thus, Tanaka had a “duty to disclose
the additional information necessary to prevent” the Wastewater
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Agreement from misleading the Santiagos. Restatement (Second)
of Torts § 551(2)(c).
An additional opportunity for Tanaka to apprise the
Santiagos of the true price for Jasper’s sewer service arose at
closing, when Tanaka was contractually bound, in accordance with
paragraph C-10 of the DROA, to direct escrow to complete the HUD
form to reflect, among other things, private sewer fees. At
this juncture, Tanaka again failed to clarify the ambiguity and
inaccuracy of her previous disclosures by not specifying the
appropriate proration of Jasper’s sewer fees, which, according
to Takase, could have alerted the Santiagos to the true costs.
Thus, under Section 551 of the Restatement, to prevent
her partial and ambiguous statements from being misleading,
Tanaka had a duty to disclose the monthly amount of the sewer
fees. By failing to disclose the amount of the Tavern’s monthly
sewer fees, Tanaka breached this duty.
Accordingly, for the reasons discussed, the circuit
court’s Trial Order was based on multiple erroneous findings and
misapprehension as to the applicable law. First, contrary to
the circuit court’s findings and conclusions that the Santiagos’
alleged failure to conduct due diligence barred their claims for
nondisclosure and misrepresentation, “[the] duty to avoid
misrepresentations is so strong that the deceived party is not
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charged with failing to discover the truth.” V.S.H. Realty,
Inc. v. Texaco, Inc., 757 F.2d 411, 415 (1st Cir. 1985) (citing
Snyder v. Sperry & Hutchinson Co., 333 N.E.2d 421 (Mass. 1975))
(“[I]f the seller’s representations are such as to induce the
buyer not to undertake an independent examination of the
pertinent facts, lulling him into placing confidence in the
seller’s assurances, his failure to ascertain the truth through
investigation does not preclude recovery.”); see also Yorke v.
Taylor, 124 N.E.2d 912, 916 (Mass. 1955) (“The recipient in a
business transaction of a fraudulent misrepresentation of fact
is justified in relying on its truth, although he might have
ascertained the falsity of the representation had he made an
investigation.”). Thus, Tanaka’s partial and ambiguous
disclosures are not excused by any alleged failure on the
Santiagos’ part to further investigate the information provided
to them.32 The circuit court’s contrary conclusions and findings
are therefore erroneous.
Tanaka also had an affirmative duty, based on the
clear contractual terms of the DROA, “As Is” Addendum, and
32
Despite the circuit court’s finding that the Santiagos failed to
exercise appropriate due diligence because they “did not take care to protect
their own interest, or obtain professional advice,” the Santiagos were
represented throughout the purchase by Takase, an experienced professional
broker, who guided and assisted them in their purchase of the Tavern. Thus,
the court’s contrary finding is clearly erroneous.
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Seller’s Disclosures, to “fully and accurately disclose in
writing” “all material facts” to the Santiagos prior to
finalizing the sale of the Tavern. Therefore, Tanaka’s failure
to disclose material facts, standing alone, clearly violated her
duty to disclose, and the circuit court’s conclusion that Tanaka
“was not required to disclose the Wastewater Agreement” is
erroneous.
Additionally, the circuit court’s finding that the
Wastewater Agreement “provides for annual escalation (up to 20%)
of both the monthly maintenance charges and the bi-monthly
cleanout charge” was clearly erroneous because, as discussed,
the plain, unambiguous language of the Wastewater Agreement
established monthly sewer maintenance fees in the amount of $150
and bi-monthly sewer maintenance fees in the same amount.
Although the agreement provided that Jasper reserved the right
to increase the “deposit” by up to 20% per year, the Wastewater
Agreement did not provide for any increase to the monthly or bi-
monthly sewer fees. Thus, the circuit court’s conclusion that
the Wastewater Agreement provides for annual escalation of the
sewer fees, and that the agreement “contains the necessary
information to calculate [the Santiagos’] monthly and bi-monthly
charges,” was clearly erroneous. Similarly erroneous is the
circuit court’s related conclusion that the Santiagos “had
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access to all material information” and that Tanaka “provided
timely and appropriate disclosures of all material facts.”
For these reasons, the circuit court and the ICA both
erred in concluding that Tanaka did not have a duty to disclose,
and did not breach her duty to disclose, the actual monthly fees
of the private sewer system and the fact that the Santiagos, if
they chose not to accept the terms of the Wastewater Agreement,
would be required to negotiate a new private sewer contract or
otherwise construct their own sewer system. See Restatement
(Second) of Torts § 551(1). Additionally, once Tanaka made
partial or ambiguous statements as to the amount of the private
sewer fees, she breached her duty by subsequently failing to
disclose the additional information necessary to prevent her
disclosures and statements from misleading the Santiagos. See
Restatement (Second) of Torts § 551(2)(b), cmt. g.
The foregoing facts also establish proof of the
Santiagos’ negligent misrepresentation cause of action.
Negligent misrepresentation has the following elements: “(1)
false information be supplied as a result of the failure to
exercise reasonable care or competence in communicating the
information; (2) the person for whose benefit the information is
supplied suffered the loss; and (3) the recipient relies upon
the misrepresentation.” Blair v. Ing, 95 Hawaiʻi 247, 269, 21
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P.3d 452, 474 (2001) (citing Restatement (Second) of Torts §
552); Zanakis-Pico v. Cutter Dodge, Inc., 98 Hawaiʻi 309, 321, 47
P.3d 1222, 1234 (2002); see also Chun v. Park, 51 Haw. 462, 468,
462 P.2d 905, 909 (1969) (“We believe § 552 of Restatement
(Second) of Torts . . . is a fair and just restatement of the
law on the issue of negligent misrepresentation.”).
As discussed, Tanaka provided false information
regarding the sewer charges to the Santiagos by only disclosing
that Jasper’s sewer fees were $150.00 per month for maintenance
and $150.00 bi-monthly for cleanout charges when in fact Tanaka
had been paying Jasper $1,153.23 for monthly private sewer
maintenance and the same amount for bi-monthly sewer cleanout.
Further, Tanaka did not clarify that the express terms of the
Wastewater Agreement, which allowed Jasper to increase the
deposit every year, was inaccurate because the contractual
annual increase was actually being applied to the sewer fees.
With respect to the loss element, the Santiagos were required to
pay substantially more for sewer fees than what Tanaka
represented and what the Wastewater Agreement reflected. The
reliance element is also established by Louis’ testimony that he
and his wife would not have bought the Tavern had they known the
true amount of sewer fees associated with ownership of the
Tavern. Accordingly, the uncontroverted evidence established
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that Tanaka is liable for negligent misrepresentation, and the
circuit court and the ICA erred in entering judgment against the
Santiagos on this claim.
B. The Non-Judicial Foreclosure of the Tavern Under HRS § 667-
5 Was Unauthorized
In 2008, Tanaka conducted a nonjudicial foreclosure
under the provisions of HRS § 667-5 (Supp. 2008). The circuit
court held that Tanaka “complied with applicable foreclosure
statutes” and that the Santiagos “did not establish any defense
to foreclosure.” Specifically, the circuit court determined
that the Santiagos’ arguments related to their defense of
wrongful foreclosure to Tanaka’s ejectment counterclaim--that
there was no power of sale in the Mortgage and that they cured
their default--were without merit.33 Accordingly, the court
issued a writ of ejectment, which the ICA later affirmed.
33
On appeal, the ICA did not reach these two issues after
determining that the Santiagos’ challenges to the circuit court’s decision on
Tanaka’s counterclaims were rendered moot by the resale of the Tavern to a
third party, making it impossible to return title and possession to the
Santiagos. Santiago v. Tanaka, No. CAAP-11-0000697 (App. Nov. 28, 2014)
(mem).
The ICA may have concluded that any challenge to ejectment and
the underlying nonjudicial foreclosure had been rendered moot because it was
not possible to award the classic remedy for such a cause of action: return
of title and possession. However, money damages, which the ICA found were
within its purview to award, may be substituted for title and possession in
certain instances pursuant to the equitable powers of a court in adjudicating
a case arising from a mortgage foreclosure, see infra. Thus, the ICA should
have addressed the Santiagos’ argument as to their right to cure a default
and the lack of a nonjudicial power of sale in the Mortgage.
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1. The Authority to Contract a Power of Sale under HRS § 667-5
Prior to its repeal in 2012,34 HRS § 667-5 authorized
the non-judicial foreclosure of mortgaged property only “[w]hen
a power of sale is contained in a mortgage.” HRS § 667-5(a).35
This court examined HRS § 667-5 in Lee v. HSBC Bank USA, 121
Hawaiʻi 287, 218 P.3d 775 (2009), and found that that it
“authorize[d] nonjudicial foreclosure under a power of sale
34
HRS §§ 667-5 to 667-10 governed the process of foreclosure by
power of sale (i.e., non-judicial foreclosure) and were within Part I of
Chapter 667. HRS §§ 667-5 to 667-8 were repealed by the legislature in 2012.
2012 Haw. Sess. Law Act 182, § 50 at 684.
35
In 2008, HRS §§ 667-5 provided in relevant part as follows:
(a) When a power of sale is contained in a mortgage, and
where . . . any person authorized by the power to act
in the premises, desires to foreclose under power of
sale upon breach of a condition of the mortgage, the
. . . person shall be represented by an attorney who
is licensed to practice law in the State and is
physically located in the State. . . .
. . .
(c) Upon the request of any person entitled to notice
pursuant to this section and sections 667-5.5 and 667-
6, the attorney, the mortgagee, successor, or person
represented by the attorney shall disclose to the
requestor the following information:
(1) The amount to cure the default, together with
the estimated amount of the foreclosing
mortgagee’s attorneys’ fees and costs, and all
other fees and costs estimated to be incurred
by the foreclosing mortgagee related to the
default prior to the auction within five
business days of the request; and
(2) The sale price of the mortgaged property once
auctioned.
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clause contained in a mortgage.” Id. at 289, 218 P.3d at 777
(emphases added). In Lee, the plaintiffs argued, and this court
agreed, that “no state statute creates a right in mortgagees to
proceed by non-judicial foreclosure; the right is created by
contract.” Id. at at 292, 218 P.3d at 780.
Thus, this court has held that HRS § 667-5 does not
provide the nonjudicial power of foreclosure but only allows its
creation, if the parties choose to do so, within the four
corners of a contract. See id.; see also Apao v. Bank of N.Y.,
324 F.3d 1091, 1095 (9th Cir. 2003) (finding that HRS § 667-5
“did not confer the power of sale, but merely authorized the
parties to contract for the express terms of foreclosure upon
default”).
Here, the mortgage states as follows:
But upon any default . . . the Mortgagee may with or
without taking possession, foreclose this Mortgage,
by court proceeding . . . , or,
as now or then provided by law, by advertisement and sale
of the mortgaged property . . . at public auction . . . .
(Emphasis added). The right to sell the Tavern under the
Mortgage is qualified by the phrase “now or as then provided by
law.” Thus, we analyze the import of “now or as then provided
by law.”
Under principles of contract interpretation, an
agreement should be construed as a whole and its meaning
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determined from the entire context and not from any particular
word, phrase, or clause. Ching v. Hawaiian Rests., Ltd., 50
Haw. 563, 565, 445 P.2d 370, 372 (1968). “Since an agreement is
interpreted as a whole, it is assumed in the first instance that
no part of it is superfluous.” Restatement (Second) of
Contracts § 203 (1981), cmt. b. Contract terms should be
interpreted according to their plain, ordinary, and accepted
sense in common speech. Found. Int’l, Inc. v. E.T. Ige Constr.,
Inc., 102 Hawaiʻi 487, 495, 78 P.3d 23, 31 (2003). Where a term
or a clause remains open to more than one reading, we construe
any ambiguity “against the party who drafted the contract.”
Luke v. Gentry Realty, Ltd., 105 Hawaiʻi 241, 249, 96 P.3d 261,
269 (2004).
The Mortgage--the relevant contract in this case--
states that “upon any default . . . the Mortgagee may with or
without taking possession, foreclose this Mortgage . . . as now
or then provided by law . . . . ” (Emphasis added). As
written, HRS § 667-5 is the only source from which the
Mortgage’s power to foreclose may be derived. However, HRS
§ 667-5 does not independently provide for a power of sale, and,
as noted, it only authorizes a sale where such a power is
contained in a mortgage. Lee, 121 Hawaiʻi at 289, 218 P.3d at
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777. Thus, the Mortgage does not provide for a power of sale
that would have authorized Tanaka’s nonjudicial foreclosure.
Alternatively, the clause “as now or then provided by
law” at a minimum creates an ambiguity for two reasons. First,
as noted, the Mortgage defers to the statute, but the statute
similarly defers to the Mortgage. The plain language of the
Mortgage creates a chicken-and-egg situation where it is not
clear whether the power of sale is created within the document
(as required by the statute) or created within the statute (as
contemplated by the Mortgage). Second, the meaning of the
clause “as now or then provided by law” is unclear. The
Santiagos have represented that the phrase only “allows”
foreclosure as otherwise provided by law. Another meaning could
be that the phrase “the Mortgagee may . . . foreclose this
Mortgage” creates the power of sale, and the succeeding phrase
“as now or then provided by law” sets forth the manner in which
the power of sale must be exercised.
Where there is an ambiguity, the ambiguity is
construed against the drafter--Tanaka. Luke, 105 Hawaiʻi at 249,
96 P.3d at 269. Thus, if “as now or then provided by law” is
interpreted as an ambiguity, the clause should be given the
meaning that the Mortgage only allows nonjudicial foreclosure as
provided by law. Since HRS § 667-5, the section under which the
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nonjudicial foreclosure sale was conducted, requires a power of
sale to be contained in a mortgage, Lee, 121 Hawaiʻi at 289, 218
P.3d at 777, a power that the Mortgage in this case did not
provide, Tanaka’s nonjudicial foreclosure was unlawful. Thus,
the conclusions of law of the circuit court in its Trial Order--
that Tanaka “complied with the applicable foreclosure statutes,”
that the Santiagos “did not establish any defense to
foreclosure,” and that the Santiagos’ “‘power of sale’ argument
is meritless”--are incorrect.
2. The Right to Cure
The Santiagos have asserted that there is a statutory
right to cure default under HRS § 667-5 and that, pursuant to
that statutory right, they cured any default under the Mortgage,
making the ensuing foreclosure wrongful. When construing a
statute, courts are bound to give effect to all parts of a
statute, and no clause, sentence, or word shall be construed as
“superfluous, void, or insignificant” if a construction can be
legitimately found that will give force to and preserve all
words of the statute. Fagaragan v. State, 132 Hawaiʻi 224, 241,
320 P.3d 889, 906 (2014).
HRS § 667-5(c) provides that “[u]pon the request of
any person entitled to notice . . . the mortgagee . . . shall
disclose to the requestor . . . the amount to cure the default
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. . . .” Thus, subsection (c) clearly imposes certain
disclosure requirements on the mortgagee intending to foreclose.
The fact that, upon the mortgagor’s request, the mortgagee must
disclose the amount to cure the default, together with the
related obligation to disclose such amount before the auction
sale, implies a right of the defaulting party to cure in order
to prevent foreclosure. Construing HRS § 667-5(c) as not
providing a right to cure would essentially render meaningless
the express statutory requirement that “[t]he amount to cure the
default” be disclosed upon a mortgagor’s request. Under such a
construction, the requirement that a mortgagee should disclose
the amount to cure would be superfluous, since that requirement
would have no practical application if there were no predicate
right to cure. Viewed another way, it is plainly illogical to
have a statutory requirement mandating disclosure of the amount
to cure if, in actuality, there is no statutory right to cure.
See HRS § 667-5(c) (utilizing the word “shall” to signify an
imperative command instead of the permissive modal verb “may”).
Additionally, unlike a power of sale, which HRS §
667-5 explicitly required to be “contained in a mortgage,” the
amount to cure that a mortgagee must disclose upon the
mortgagor’s request was not statutorily required to have an
independent contractual source. If the legislature intended a
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right to cure to be agreed upon contractually, it could have
added to HRS § 667-5(c)(1) the qualifier “when contained in a
mortgage,” as it did in the power of sale provision. The
absence of such a qualifier is supportive of the interpretation
that the right to cure is statutorily provided by HRS § 667-
5(c)(1).
Finally, our interpretation is consonant with HRS
§ 677-5(c)’s codification of the common-law right to cure a
default. The purpose that prompted the addition of HRS § 667-
5(c) to the foreclosure statute in 2008 was to “ensure that the
different nonjudicial foreclosure processes include provisions
for interested parties to receive sufficient notice and obtain
information about the intent to foreclose [and] amounts to cure
the mortgage default.” Conf. Comm. Rep. No. 3-08, in 2008 House
Journal at 1710, 2008 Senate Journal at 793 (emphases added).
Evident from the legislative history of HRS § 667-5(c) is the
recognition that the right to cure a default is intrinsic in the
law and that, therefore, HRS § 677-5(c) merely codified this
right to ensure that interested parties were adequately apprised
of it.
The common-law right to cure a default originated from
the fundamental premise that “[m]ortgage foreclosure is a
proceeding equitable in nature and is thus governed by the rules
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of equity.” Beneficial Haw., Inc. v. Kida, 96 Hawaiʻi 289, 312,
30 P.3d 895, 918 (2001). Because equity abhors forfeitures,
Jenkins v. Wise, 58 Haw. 592, 597, 574 P.2d 1337, 1341 (1978),
and “regards and treats as done what ought to be done,” Bank of
Haw. v. Horwoth, 71 Haw. 204, 211, 787 P.2d 674, 679 (1990), it
is typical in foreclosure cases that a right to cure a default
and stop the foreclosure continues up to the day of the
confirmation of the sale. Hoge v. Kane, 4 Haw. App. 533, 541,
670 P.2d 36, 41 (1983). Thus, Hawaii’s courts “would not
prevent a mortgagor from curing the default and halting the
foreclosure prior to the entry of a written order confirming the
foreclosure sale.” In re Parish, No. 10-00086, 2010 WL 1372387,
at *1 (Bankr. D. Haw. Apr. 6, 2010) (emphasis added); see also
Graf v. Hope Bldg. Corp., 171 N.E. 884 (N.Y. 1930) (Cardozo, J.,
dissenting) (“Equity declines to give effect to a covenant,
however formal, whereby in the making of a mortgage, the
mortgagor abjures and surrenders the privilege of
redemption.”).36 Accordingly, our interpretation that HRS § 667-
5(c) provides a right to cure is directed by HRS § 667-5(c)’s
codification of the same right under the common law. To hold
36
Federal law recognizes an equitable right of redemption and cure.
In re Parish, 2010 WL 1372387, at *1 (“The right of redemption is an
equitable interest that is included in the bankruptcy estate under section
541(a)(1).”).
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otherwise would be to disregard the emanating purpose of HRS
§ 667-5(c) and to indirectly nullify the common-law right to
cure as incorporated in HRS § 667-5(c).37
3. The Santiagos Cured the Default, and Tanaka’s Nonjudicial
Foreclosure was Wrongful
Based on the statutory right provided in HRS § 667-5,
the Santiagos had a right to cure the default occasioned by
their non-payment. Thus, the circuit court’s conclusion of law
that there is no right to cure in Hawaiʻi law is incorrect.
Although the Santiagos indicated on March 10, 2008,
that they were halting payment to the mortgage servicer based on
concerns regarding mediation, they were continuing to set aside
payment. The record further indicates that the Santiagos cured
any event of default as of May 8, 2008, some four months prior
to the sale.
Default is a necessary precondition for nonjudicial
foreclosure under HRS § 667-5. Lee, 121 Hawaiʻi at 290, 218 P.3d
at 778 (“This section specifically requires breach of a
condition of the mortgage as a condition precedent to
37
The circuit court’s citation to Weinberg v. Mauch, 78 Hawaiʻi 40,
52, 890 P.2d 277, 289 (1995), for the proposition that there is no “right to
cure” is incorrect. That case is inapposite because it did not concern a
statutory or common-law right to cure but only whether an assignment of a
right to cure was consented to in the contract.
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foreclosure.”) Lee found that a sale pursuant to HRS § 667-5
was invalid where a breach of a mortgage contract had been cured
because, in that instance, the mortgagors “were no longer in
breach of a condition of the mortgage” and, thus, the mortgagee
“could not invoke the mortgage’s power of sale clause.” Id. at
291, 218 P.3d at 779. A foreclosure sale conducted when the
default had already been cured, according to Lee, “did not
comply with the requirements of HRS section 667–5 and was, thus,
invalid.” Id. at 291, 218 P.3d at 779 (emphasis added).
Accordingly, since Tanaka’s foreclosure was conducted
after the Santiagos had cured their default, the sale pursuant
to HRS § 667-5 was unlawful, and the circuit court’s conclusion
that Tanaka “complied with the applicable foreclosure statutes”
was incorrect.38 It was also incorrect for the circuit court to
conclude that Tanaka was “entitled to a writ of ejectment.”
C. The Santiagos’ Damages
Where it is determined that the nonjudicial
foreclosure of a property is wrongful, the sale of the property
38
The Santiagos argue that the circuit court should have granted
their Motion for Reconsideration because its decision “resulted in an over
$1.3 million cash forfeiture as a result of [the Santiagos’] purchase of the
subject property and their full performance” under the Mortgage. In light of
our disposition of this case, it is unnecessary to reach this argument.
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is invalid and voidable at the election of the mortgagor, who
shall then regain title to and possession of the property. See
Ulrich v. Sec. Inv. Co., 35 Haw. 158, 168 (1939) (holding that
where a self-dealing mortgagee fails to exercise its right to
non-judicial foreclosure in a manner that is fair, reasonably
diligent, and in good faith and to demonstrate that an adequate
price was procured for the property, the resulting sale is
void); Lee v. HSBC Bank USA, 121 Hawaiʻi 287, 292, 218 P.3d 775,
780 (2009) (concluding “that an agreement created at a
foreclosure sale conducted pursuant to HRS section 667–5 is void
and unenforceable where the foreclosure sale is invalid under
the statute”). Voiding the foreclosure sale at this time,
however, has been rendered impracticable because the Tavern has
already been resold by Tanaka to a third party. See 123 Am.
Jur. Proof of Facts 3d § 31 (2011) (“It has long been held that
if the property has passed into the hands of an innocent
purchaser for value, an action at law for damages is generally
the appropriate remedy.”). Thus, based on our power to fashion
an equitable relief in foreclosure cases, see Beneficial Haw.,
Inc. v. Kida, 96 Hawaiʻi 289, 312, 30 P.3d 895, 918 (2001)
(reiterating that mortgage foreclosure is a proceeding equitable
in nature), we consider appropriate relief.
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Jenkins v. Wise, 58 Haw. 592, 574 P.2d 1337 (1978), is
instructive. In that case, even though this court found the
purchaser to be in default, we disapproved of the circuit
court’s disposition that essentially effectuated a total
forfeiture of the purchaser’s interest, in part because the
seller’s “security interests in the property were never in
jeopardy.” Id. at 598, 574 P.2d at 1342. In this context, the
court found that “where no injustice would thereby result to the
injured party, equity will generally favor compensation rather
than forfeiture against the offending party.” Id. at 597, 574
P.2d at 1341. Thus, instead of cancelling the purchase contract
and depriving the purchaser of the property and the significant
amount of money that she already paid, this court ordered the
purchaser of the property to pay the seller the entire unpaid
balance of the purchase price and accrued interests in exchange
for specific performance by the seller under the purchase
contract. Id. at 604, 574 P.2d at 1345.
Similar to Jenkins, Tanaka’s security interests in the
Tavern were never in jeopardy. At the time of their ejectment,
the Santiagos had made virtually full payment to Tanaka for the
Tavern, including an $800,000 down payment and $585,161.60 in
mortgage payments. Hence, we exercise our equitable power in
awarding restitution to the Santiagos so as to prevent
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forfeiture of their interests. Accordingly, we conclude that
the Santiagos are entitled to restitution of their proven out-
of-pocket losses from Tanaka’s wrongful foreclosure of the
Mortgage and subsequent sale of the Tavern. See Fleming v.
Napili Kai, Ltd., 50 Haw. 66, 70, 430 P.2d 316, 319 (1967)
(declaring that equity jurisprudence “is not bound by the strict
rules of the common law, but can mold its decrees to do justice
amid all the vicissitudes and intricacies of life” (quoting
Bowen v. Hockley, 71 F.2d 781, 786 (4th Cir. 1934)). This
amount is equal to the undisputed $800,000 down payment that the
Santiagos paid for the Tavern, $585,161.60 in mortgage payments
from September 2006 to March 2011, consisting of principal,
interest, and fees, $17,518.31 that the Santiagos were required
to pay in closing charges associated with the sale, and
$10,110.88 in property taxes that the Santiagos paid after
Tanaka had wrongfully sold the Tavern back to herself.39 In sum,
the Santiagos suffered total out-of-pocket losses of
39
The Santiagos suggested to both the circuit court and the ICA
that Tanaka’s “actual damages,” which they estimated at $80,335, should be
deducted from their gross damages. This deduction proceeded upon the premise
that the nonjudicial foreclosure was valid and that the purchase price at the
foreclosure sale would be $1.3 million. Because both assumptions are
incorrect, the proposed deduction is not applicable.
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$1,412,790.79 as a result of Tanaka’s wrongful foreclosure of
the Mortgage and subsequent sale of the Tavern.40
In cases involving fraud or deceit, which includes
nondisclosure claims, this court has previously stated that the
measure of damages “is usually confined to either the ‘out-of-
pocket’ loss or the ‘benefit of the bargain.’” Ellis v.
Crockett, 51 Haw. 45, 53, 451 P.2d 814, 820 (1969); Zanakis-Pico
v. Cutter Dodge, Inc., 98 Hawaiʻi 309, 320, 47 P.3d 1222, 1233
(2002) (same). Under the out-of-pocket rule, “the damages are
the difference between the actual value of the property received
and the price paid for the property, along with any special
damages naturally and proximately caused by the fraud prior to
its discovery, including expenses incurred in mitigating the
damages.” B.F. Goodrich Co. v. Mesabi Tire Co., 430 N.W.2d 180,
182 (Minn. 1988); see generally 37 Am. Jur. 2d Fraud and Deceit
§ 434 (2013). In contrast, the benefit-of-the-bargain rule
“allows the [recipient of the fraud or deceit] to recover the
40
Relatedly, because unlawful foreclosure is an action in the
nature of assumpsit, see Sharp v. Hui Wahine, Inc., 49 Haw. 241, 243, 413
P.2d 242, 245 (1966), the Santiagos, who should have been the prevailing
parties, are also entitled to attorneys’ fees and costs they incurred at the
circuit court. HRS § 607-14 (Supp. 1997). Conversely, because Tanaka should
have been the losing party, the circuit court’s award of attorneys’ fees and
costs to her, based on HRS § 607-14, is erroneous. We therefore remand this
case to the circuit court for a determination of the amount of attorneys’
fees and costs due the Santiagos.
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difference between the value of the property received and the
value to plaintiff that the property would have had if the
representation had been true.” Id.; see generally 37 Am. Jur.
2d Fraud and Deceit § 432 (2013).41 It is unnecessary to decide
the applicable measure of nondisclosure damages due the
Santiagos because, based on the trial record, the total amount
of damages to which the Santiagos are entitled on their
nondisclosure claim is included within the $1,412,790.79 amount
that this court has already awarded to them.
With respect to damages for negligent
misrepresentation, the Santiagos “may recover the pecuniary
losses caused by their justifiable reliance on a negligent
misrepresentation.” Zanakis-Pico, 98 Hawaiʻi at 321, 47 P.3d at
1234 (citing State ex rel. Bronster v. U.S. Steel Corp., 82
Hawaiʻi 32, 919 P.2d 294 (1996) (recognizing that “pecuniary
losses are recoverable in a claim for negligent
misrepresentation”)); see Chun v. Park, 51 Haw. 462, 468, 462
41
Inherent in the foregoing formulations is the presupposition that
the recipient of fraud or deceit retains some value as a result of the
transaction in which the fraud or deceit was made. Where the recipient of
fraud or deceit is left with no value whatsoever, the proper measure of
damages is “the amount . . . paid with interest from the date of payment,
plus incidental losses and expenses suffered as a result of the seller’s
misrepresentations.” Salmon v. Brookshire, 301 S.W.2d 48, 54 (Mo. Ct. App.
1957); accord Kerr v. Vatterott Educ. Ctrs., Inc., 439 S.W.3d 802, 813-14
(Mo. Ct. App. 2014); see Anderson v. Heasley, 148 P. 738 (Kan. 1915).
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P.2d 905, 909 (1969) (approving “out of pocket” expenses
incurred in connection with the purchase of a property in
reliance upon a negligent misrepresentation). The Zanakis court
adopted the following formulation from the Restatement (Second)
of Torts for damages recoverable for a negligent
misrepresentation:
[T]hose damages necessary to compensate the plaintiff for
the pecuniary loss to him or her of which the
misrepresentation is a legal cause, including
(a) the difference between the value of what he or she has
received in the transaction and its purchase price or other
value given for it; and
(b) pecuniary loss suffered otherwise as a consequence of
the plaintiff’s reliance upon the misrepresentation.
Zanakis-Pico, 98 Hawaiʻi at 322, 47 P.3d at 1235 (2002)
(alterations and emphasis omitted) (quoting Restatement (Second)
of Torts § 552B (1977)). Although the Santiagos are entitled to
damages for negligent misrepresentation, similar to the damages
for nondisclosure, we need not decide the applicable amount due
the Santiagos because based on the trial record, the total
amount of damages to which the Santiagos are entitled on their
negligent misrepresentation claim is included within the
$1,412,790.79 amount that they have already been awarded.
VI. Conclusion
Based on the foregoing, we vacate the ICA Judgment on
Appeal and the circuit court’s Judgment, Writ of Ejectment,
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Order Denying the Santiagos’ Motion for Reconsideration, and
Order Granting Tanaka’s Fees. The circuit court’s Trial Order,
which incorporates the FOF and COL, is vacated insofar as it is
inconsistent with this opinion; otherwise, it is affirmed. The
case is remanded to the circuit court (1) for entry of judgment
in favor of the Santiagos on their negligent misrepresentation
and nondisclosure causes of action; (2) for entry of judgment in
favor of the Santiagos on Tanaka’s breach of note, breach of
mortgage, breach of covenant of good faith and fair dealing, and
ejectment causes of action; and (3) for determination of
interest, attorneys’ fees, and costs in favor of the Santiagos,
as appropriate.
Gary Victor Dubin and /s/ Mark E. Recktenwald
Frederick J. Arensmeyer
for petitioner /s/ Paula A. Nakayama
Robert Goldberg /s/ Sabrina S. McKenna
for respondent
/s/ Richard W. Pollack
/s/ Michael D. Wilson
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