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

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Electronically Filed
Supreme Court
SCWC-XX-XXXXXXX
09-JAN-2020
08:12 AM
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
---o0o---
________________________________________________________________
ONEWEST BANK, F.S.B.,
Respondent/Plaintiff-Appellant,
vs.
THE ASSOCIATION OF THE OWNERS OF THE KUMULANI AT THE UPLANDS AT
MAUNA KEA, an unincorporated association,
Petitioner/Defendant-Appellee,
and
DIANA G. BROWN; D. MICHAEL DUNNE, SUCCESSOR TRUSTEE OF THE
REVOCABLE LIVING TRUST OF HAROLD G. STRAND AND MARGARET M.
STRAND; JERRY IVY; OMNI FINANCIAL, INC.; CITIBANK (SOUTH
DAKOTA), N.A.,
Respondents/Defendants-Appellees.
________________________________________________________________
SCWC-XX-XXXXXXX
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-XX-XXXXXXX; CIVIL NO. 11-1-410K)
January 9, 2020
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.
OPINION OF THE COURT BY WILSON, J.
In response to a pair of post-judgment motions filed
in this foreclosure case, the Circuit Court of the Third Circuit
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(“circuit court”) filed two orders. The first found
Respondent/Plaintiff-Appellant OneWest Bank, F.S.B. (“OneWest”),
the foreclosing mortgagee and winning bidder at the foreclosure
auction, liable for damages in an amount equal to its down
payment for its failure to close the foreclosure sale. The
second awarded that down payment amount as expectation damages
to Petitioner/Defendant-Appellee the Association of the Owners
of the Kumulani at the Uplands at Mauna Kea (“the Association”),
a junior lienholder. Because creditors in a judicial
foreclosure action are “entitled to payment according to the
priority of their liens,” Hawaiʻi Revised Statutes (“HRS”) § 667-
3 (2016), we hold that the circuit court abused its discretion
by awarding damages to the Association, rather than by applying
the down payment amount to reduce the debt owed to OneWest.
I. BACKGROUND
A. Circuit Court Proceedings
1. Foreclosure Action, Auctions, and Confirmation of Sale
On September 23, 2011, OneWest commenced a judicial
foreclosure action by filing a complaint in the circuit court.
OneWest alleged that Diana G. Brown (“Brown”) had defaulted on a
$548,000.00 note and mortgage assigned to OneWest that covered
Brown’s fee simple interest in an apartment in a condominium
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project called the Kumulani at the Uplands at Mauna Kea. 1
OneWest alleged that Brown was in breach of the note and
mortgage, and that it was entitled to foreclosure of the
mortgage, payment from the sale of the mortgaged property, and
monetary judgment against Brown.
On October 21, 2011, the Association, one of the
defendants in the foreclosure action, filed its answer. The
Association claimed that it had “a lien for all sums assessed
but unpaid for the share of common expenses chargeable to the
subject property” under HRS § 514B-146(a) (Supp. 2011). It
asked that the circuit court determine the priority of the
parties’ claims, but did not ask for any other relief except for
reasonable attorneys’ fees and costs and further relief as the
court deemed just and equitable.
On July 5, 2013, OneWest moved for summary judgment
against the Association and for an order for an interlocutory
1
OneWest also named as defendants D. Michael Dunne, successor
trustee of the revocable living trust of Harold G. Strand and Margaret M.
Strand; Jerry Ivy; Omni Financial, Inc.; Citibank (South Dakota), N.A.; the
Association; and various John Does and Doe entities “who have or may claim
some right, title or interest in the property which is the subject of this
action.” OneWest stated that the other named defendants “may have or claim
an interest in the Mortgaged Property,” but that any of these interests were
junior to its own.
Defendants Brown, Dunne, Ivy, Omni Financial, and Citibank failed
to plead or otherwise defend their claims and defaults were entered against
them on August 6, 2012. In its July 5, 2013 motion, discussed below, OneWest
moved for entry of default judgment against all the defaulted defendants.
That part of the motion was granted in the circuit court’s June 3, 2014
order. Nonetheless, Brown later filed memoranda in opposition to some of the
post-judgment motions in this case.
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decree of foreclosure. At an August 26, 2013 hearing on this
motion,2 the circuit court found that OneWest’s delay in
initiating the proceedings constituted laches and allowed it to
collect only the remaining principal amount of the mortgage, two
years interest at a rate of seven percent, and pre-acceleration
late charges. It barred OneWest from collecting any additional
interest, escrow advances and taxes, property preservation fees,
property inspection fees, broker price opinion fees, or
appraisal fees. The total amount it permitted OneWest to
collect was $581,972.26.
On June 3, 2014, the circuit court filed its findings
of fact, conclusions of law, and order granting OneWest’s
summary judgment motion. It directed that the summary judgment
and interlocutory decree of foreclosure requested by OneWest be
entered as a final judgment to OneWest’s complaint. It
foreclosed on the mortgage and appointed a commissioner to take
possession of the property and to sell it, and expressly
“reserve[d] jurisdiction to determine the party or parties to
whom any surplus shall be awarded.” The court’s order
authorized OneWest and all other parties to purchase the
property, requiring the successful bidder to make a down payment
of no less than ten percent of the highest successful bid price,
2
The Honorable Elizabeth A. Strance presided.
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but providing that OneWest could satisfy the down payment by way
of offset up to the amount of its secured debt if it was the
purchaser, and ordering that “[a]t the Court’s discretion, the
ten percent (10%) down payment may be forfeited in full or in
part if the purchaser fails to pay the balance of the purchase
price as hereinafter set forth.” It provided further that “[i]n
no event shall the purchaser be liable for damages greater than
the forfeiture of the ten percent (10%) down payment.” The
circuit court’s judgment was filed the same day.
At the first public auction of the property, held on
August 11, 2014, the property was sold to a couple, the only
bidding party, for $50,000.00, subject to confirmation by the
circuit court. OneWest filed a motion to re-open bidding, which
the court granted on October 31, 2014. At the second auction,
held on December 9, 2014, the property was sold to OneWest, the
highest bidder, for $815,098.42, subject to confirmation by the
circuit court.
On January 12, 2015, OneWest filed a motion for an
order confirming the foreclosure sale and directing conveyance.
On March 6, 2015, the circuit court filed an order granting
OneWest’s motion. The court approved the sale of the property
to OneWest at the offered price of $815,098.42, and required
that the closing date be within 35 days of the filing of its
order—that is, on or before April 10, 2015. The court approved
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payments from the sale in the following order: to the
commissioner, to OneWest, to the Association, and to the escrow
account for the closing of the sale, with any remainder to
Brown. Pursuant to the order, final judgment was entered in
favor of OneWest on March 27, 2015.
However, OneWest refused to close the sale by the
court-ordered date of April 10, 2015. OneWest’s failure to
comply with the March 6, 2015 order led to the filing of two
motions in May 2015. The first motion was the Association’s May
12, 2015 “Motion for an Order to Show Cause and for Civil
Contempt and for Other Relief[.]” The Association’s motion
resulted in an order on July 24, 2015 holding OneWest liable for
damages. The second motion was OneWest’s May 21, 2015 “Motion
for an Order (1) Vacating Order Confirming the Foreclosure Sale
Filed March 6, 2015; (2) Determining Deductions to Plaintiff’s
Credit Bid Deposit; (3) Reopening Bid at Hearing on Motion; (4)
Confirming Sale to Plaintiff at Adjusted Credit Bid Amount; (5)
for Other HRCP Rule 60(b) Relief; Alternatively (6) Instructing
Commissioner to Conduct a New Auction[.]” OneWest’s motion was
ultimately denied on September 22, 2015 in an order that
required OneWest to pay damages to the Association. The award
of damages to the Association is at issue in this appeal.
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2. The Association’s Motion for an Order to Show Cause
On May 12, 2015, the Association filed a motion for an
order for OneWest to show cause why it had refused to comply
with the court’s March 6, 2015 order and why it should not be
held in civil contempt for its refusal. The Association also
moved for an order that another public auction on the property
be held and that OneWest be required to pay the commissioner the
difference between its winning bid at the December 9, 2014
auction and the winning bid obtained at the new auction. It
also requested that OneWest pay the Association accrued fees and
dues on the property, the Association’s attorneys’ fees and
costs, post judgment interest on OneWest’s bid, all costs of the
prior and requested future sale, and amounts paid to the
commissioner as rental proceeds. In the alternative, it
requested that specific compliance be enforced against OneWest.
In its memorandum supporting the motion, the
Association argued that if the court chose not to hold a new
sale and determined that OneWest’s damages should be limited to
$81,509.84 (because the court’s June 3, 2014 order required
damages to be limited to the down payment amount of ten percent
of the purchase price), the court should specifically enforce
OneWest’s compliance with the sales contract and make OneWest
pay the Association all the fees, costs, interest, and proceeds
the Association was requesting.
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On July 24, 2015, the circuit court filed its order
granting in part and denying in part the Association’s motion.
It denied the Association’s request for a third auction,
required OneWest to pay the Association’s accrued monthly fees
and dues, and held that OneWest was liable for $81,509.84 in
damages, “with disposition of said amount subject to further
order of the Court[.]”
3. OneWest’s HRCP Rule 60(b) Motion
On May 21, 2015, shortly after the Association filed
its motion for an order to show cause, OneWest, pursuant to
Hawaiʻi Rules of Civil Procedure (“HRCP”) Rule 60(b) (2006),
moved for an order vacating the March 6, 2015 order confirming
the foreclosure sale, determining deductions to its credit bid
deposit, reopening bidding at the hearing on the motion,
confirming the sale to OneWest at the adjusted credit bid
amount, and for other relief, or, in the alternative, for
instructions to the commissioner to hold a new auction.
The crux of OneWest’s argument was that, at the time
of its $815,098.42 bid, it mistakenly believed that when the
court stated in its October 31, 2014 order re-opening bidding
that OneWest would not be entitled to a deficiency judgment, it
meant that OneWest would not have to pay excess proceeds to
junior lienholders if it made a bid equal to the total amount of
the debt. OneWest stated that if it had realized that the June
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3, 2014 decree of foreclosure, which limited its recovery on the
debt to $581,972.26, had “fixed” its credit bid at that amount,
it would have bid $581,972.26, and still won the auction, rather
than overbidding at $815,098.42. OneWest claimed that under
this alternative scenario, where it made a bid equal to the
total amount of the debt, it would not have had any surplus
proceeds and would not have been required to pay the Association
condominium dues and expenses that were not reduced to a final
judgment. OneWest asked the court to hold a hearing to re-open
the bidding and allow it to submit a reduced bid, and asked that
the court limit its damages only to actual damages caused by its
delay.
On June 5, 2015, the Association filed its memorandum
in opposition to OneWest’s HRCP Rule 60(b) motion. The
Association argued that the orders recognizing its claims should
not be disturbed and that ten percent of OneWest’s bid amount
should be distributed to the Association as damages suffered
from OneWest’s breach of its contract to buy the property.
The Association’s argument that it was entitled to ten
percent of OneWest’s bid amount (i.e., $81,509.84) was as
follows. The court’s July 24, 2015 order on the Association’s
motion held that OneWest was liable for $81,509.84 in damages
because of its breach of the sales contract and that disposition
of the damages would be subject to further order of the court.
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The Association had expectation damages of $116,011.95 that it
would have received from the surplus sales proceeds if OneWest
had closed at $815,098.42, plus additional costs and fees
incurred as a result of OneWest’s default. Thus, the $81,509.84
that OneWest was ordered to pay in damages should be paid
towards the Association’s expectation damages. OneWest itself
was not entitled to receipt of that amount because the default
and all damages were solely its fault.
At a hearing on the motion,3 the court made it clear
that the sale was not going to close and that a new foreclosure
action would be necessary, stating, “It’s not gonna close. It
hasn’t closed within time period. The plaintiff’s gonna have to
file a new foreclosure action. That’s what they’re gonna have
to do.”
On September 22, 2015, the circuit court filed its
order denying OneWest’s May 21, 2015 motion. It held that the
motion was not timely filed, so OneWest was not entitled to any
relief under HRCP Rule 60. It held further that, even if the
motion was considered timely filed, there was no basis for HRCP
Rule 60 relief, and that OneWest had unclean hands due to delays
in the case. It held that OneWest was liable for $81,509.84 in
damages, and ordered that it pay $8.00 in escrow fees and
3
The Honorable Melvin H. Fujino presided.
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$81,501.84 to the Association “to be regarded as partial
satisfaction of the Association’s damages and partial
satisfaction of the Association’s lien on the Property.”
On October 2, 2015, OneWest filed a motion for
reconsideration of the circuit court’s September 22, 2015 order,
which the court denied. OneWest appealed the March 6, 2015
order confirming the foreclosure sale, the March 27, 2015 final
judgment, and the February 12, 2016 order denying its motion for
reconsideration to the Intermediate Court of Appeals (“ICA”).
B. ICA Proceedings
In its opening brief before the ICA, OneWest
identified four points of error, only one of which was
ultimately decided in its favor. That point of error concerned
the circuit court’s jurisdiction to assess damages against
OneWest and award them to the Association:
The circuit court erred in denying [OneWest’s] motion for
reconsideration, and relatedly its motion to vacate,
because the circuit court lacked subject matter
jurisdiction to award the [Association] damages since the
[Association] never filed any affirmative pleading
sufficient to be awarded damages, and, alternatively, the
[Association] presented no evidence of any damages caused
by non-completion of the foreclosure sale.
The ICA held that OneWest’s argument that the circuit
court erred in entering damages awards against OneWest in the
September 22, 2015 order denying HRCP Rule 60(b) relief had
merit. OneWest Bank, F.S.B. v. Brown, No. CAAP-XX-XXXXXXX, 2018
WL 2433688, at *5 (App. May 30, 2018) (SDO). The ICA noted that
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it had previously “held that a successful bidder at a judicial
foreclosure sale submits himself or herself to the jurisdiction
of the circuit court and is subject to subsequent enforcement
orders by the circuit court upon entry of an order confirming
the sale.” Id. (citing First Hawaiian Bank v. Timothy, 96
Hawaiʻi 348, 357, 31 P.3d 205, 214 (App. 2001); HRS §§ 603-
21.7(1)(c), 603-21.9(1) (2016)). It held that the circuit court
erred in granting damages to the Association in its September
22, 2015 order because the issue was not properly before it:
In this case, the issue of OneWest Bank’s potential
liability for damages was before the Circuit Court in
conjunction with the Association’s post-judgment motion
that resulted in the July 24, 2015 Order on Motion to Show
Cause, which is not before the court on this appeal.
However, the issue of the amount of damages incurred by the
Association was not properly before the Circuit Court in
conjunction with OneWest Bank’s post-judgment motion for
HRCP Rule 60(b) relief from the Judgment on Foreclosure
Decree and the Judgment on Confirmation Order, as there
were no damages awarded against OneWest in those judgments,
or their respective underlying orders. OneWest Bank’s
motion sought to limit the amount forfeited from its credit
bid deposit. Thus, we conclude that the Circuit Court
erred in the Order Denying the Rule 60(b) Motion, in
finding that OneWest Bank is liable for payment of damages
to the Association, and that the Association has incurred
damages in a certain amount, and ordering OneWest Bank to
pay damages to the Association.
Id. (footnote omitted).
The ICA ordered paragraphs e, g, and 9 stricken from
the circuit court’s September 22, 2015 order. 4 Id. Those
paragraphs read:
4
The ICA’s original summary disposition order (“SDO”) also struck
paragraph 7 of the circuit court’s order, which read: “Plaintiff’s request
(continued . . .)
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e. Plaintiff is liable for payment of $81,509.84 in
damages;
. . .
g. The Association has incurred damages of
$116,011.95 due to Plaintiff’s failure to complete the sale
of the property foreclosed upon in this action (the
“Property”).
. . . .
9. Plaintiff shall pay to the Association forthwith
the sum of $81,501.84 for damages suffered by the
Association and said amount shall be regarded as partial
satisfaction of the Association’s damages and partial
satisfaction of the Association’s lien on the Property.
The ICA stated that its ruling “should not be construed as a
ruling on the merits of an award of damages against OneWest Bank
and is without prejudice to any relief granted in conjunction
with the Order on Motion to Show Cause or any other such
proceedings.” Id. at *5 n.5.
The ICA affirmed in part and reversed in part the
September 22, 2015 order denying OneWest’s HRCP Rule 60(b)
motion, affirming the entire order except for the three
paragraphs relating to damages that it struck. Id. at *7.
C. Supreme Court Proceedings
The Association filed an application for writ of
certiorari with this court, requesting that we reverse the
(. . . continued)
that it be required to forfeit only $12,130.80 of its 10% credit bid amount
of $81,509.84, is denied.” The ICA removed this part of the SDO after the
Association moved for reconsideration, and issued an amended SDO that did not
strike paragraph 7 of the order.
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portions of the ICA’s opinion that struck paragraphs e, g, and 9
from the September 22, 2015 order. It presented the following
two questions in its application:
A. Whether the ICA gravely erred in holding that the
Circuit Court improperly decided the issues of the amount
of damages incurred by the Association and OneWest Bank’s
liability for said damages where OneWest Bank’s Motion
specifically raised and asked the Circuit Court to decide
these issues.
B. Whether the ICA gravely erred in holding that the
Circuit Court could not decide issues in the September 22,
2015 Order that were not previously addressed in the prior
Judgment on Foreclosure Decree and Judgment on Confirmation
Order.
II. STANDARD OF REVIEW
“An appellate court reviews a circuit court’s
determination of an HRCP Rule 60 motion for an abuse of
discretion.” Buscher v. Boning, 114 Hawaiʻi 202, 211, 159 P.3d
814, 823 (2007) (quoting Amantiad v. Odum, 90 Hawaiʻi 152, 158,
977 P.2d 160, 166 (1999)). “An abuse of discretion occurs where
the trial court has clearly exceeded the bounds of reason or
disregarded rules or principles of law or practice to the
substantial detriment of a party litigant.” Id. (brackets
omitted) (quoting Office of Hawaiian Affairs v. State, 110
Hawaiʻi 338, 351, 133 P.3d 767, 780 (2006)).
III. DISCUSSION
The first question we consider is whether the ICA
erred when it held that the issue of OneWest’s liability for
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damages was not properly before the circuit court in conjunction
with OneWest’s May 21, 2015 motion for HRCP Rule 60(b) relief.
We conclude that the ICA did err in this regard. Having so
concluded, we next consider whether the circuit court abused its
discretion by finding OneWest liable to the Association in the
amount of $81,501.94. We conclude that this was an abuse of its
discretion, and that the amount should have been applied as a
reduction to Brown’s debt to OneWest, the mortgagee, rather than
awarded as damages to the Association, a junior lienholder.
Therefore, we affirm in part and vacate in part the ICA’s
judgment striking the damages paragraphs from the circuit
court’s September 22, 2015 order on OneWest’s motion for HRCP
Rule 60(b) relief.
A. The ICA erred in holding that the issue of damages was not
properly before the circuit court when the circuit court issued
its September 22, 2015 order on OneWest’s HRCP Rule 60(b)
motion.
The first of the two post-judgment orders the circuit
court filed was its July 24, 2015 order granting in part and
denying in part the Association’s motion for an order to show
cause, for civil contempt against OneWest, and for other relief.
That order denied most of the Association’s requests, but did
order that OneWest pay the Association $11,791.12 in accrued
monthly fees and dues and held that OneWest was “liable for
$81,509.84 or ten percent (10%) of its bid price of $815,098.42
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as damages, with disposition of said amount subject to further
order of the Court[.]” (Emphasis added.)
The circuit court was acting within its discretion
when it held OneWest liable for its failure to close the
foreclosure sale by the court-ordered deadline. The June 3,
2014 foreclosure order required the successful bidder at the
foreclosure sale to “make a down payment to the Commissioner in
an amount not less than ten percent (10%) of the highest
successful bid price,” providing that OneWest could satisfy the
down payment by way of offset up to the amount of its secured
debt, and ordered that “[a]t the Court’s discretion, the ten
percent (10%) down payment may be forfeited in full or in part
if the purchaser fails to pay the balance of the purchase
price[.]” OneWest was the highest bidder at the second auction
of the property on December 9, 2014 with a bid of $815,098.42.
The March 6, 2015 order confirming sale ordered the sale of the
property to OneWest at its offered price of $815,098.42. And in
the order on the Association’s post-judgment motion, the circuit
court found that OneWest had refused to complete the sale and
was “a defaulting purchaser in breach of the sales contract and
. . . liable for damages arising from its default.”
In judicial sales, “[t]he confirmation of sale is the
equivalent of a valid contract of sale[,]” and the “application
of contract law is appropriate[.]” First Tr. Co. of Hilo v.
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Reinhardt, 3 Haw. App. 589, 592, 655 P.2d 891, 893 (1982).
Here, OneWest breached the confirmation of sale “contract” by
refusing to complete the sale. It is “a basic precept of
contract law . . . that a party who sustains a loss by the
breach of another is entitled to compensation that will
‘actually or as precisely as possible compensate the injured
party.’” Hi Kai Inv., Ltd. v. Aloha Futons Beds & Waterbeds,
Inc., 84 Hawaiʻi 75, 80-81, 929 P.2d 88, 93-94 (1996) (quoting
Amfac v. Waikiki Beachcomber Inv. Co., 74 Haw. 85, 128, 839 P.2d
10, 32 (1992)).
Following the filing of the order on the Association’s
show cause motion, the circuit court filed its order denying
OneWest’s HRCP Rule 60(b) motion on September 22, 2015. That
second post-judgment order included a finding of fact that
OneWest was “liable for payment of $81,509.84 in damages[.]”
Presumably, this finding was based on the circuit court’s prior
order, which imposed the liability on OneWest. Further finding
that “[t]he Association has incurred damages of $116,011.95 due
to Plaintiff’s failure to complete the sale of the property
foreclosed upon in this action[,]” the circuit court then
ordered that OneWest “shall pay to the Association forthwith the
sum of $81,501.84 for damages suffered by the Association and
said amount shall be regarded as partial satisfaction of the
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Association’s damages and partial satisfaction of the
Association’s lien on the Property.”
Contrary to the ICA’s holding, the issue of damages
was “properly before the Circuit Court in conjunction with
OneWest Bank’s post-judgment motion for HRCP Rule 60(b)
relief[,]” OneWest, 2018 WL 2433688, at *5, because its order on
the Association’s show cause motion was written explicitly to
allow for “disposition of said amount subject to further order
of the Court.” In other words, the further disposition of the
amount discussed in the court’s order on the Association’s
motion was included in its order on OneWest’s motion.
It was not an abuse of the circuit court’s discretion
for it to delay the order specifying the party to whom the
damages would be paid. In a judicial foreclosure action, the
circuit court has broad discretion to order execution on its own
judgments. See HRS § 667-1.5 (2016). And the circuit courts
generally have discretion in civil actions to make such orders
“as may be necessary to carry into full effect the powers which
are or shall be given to them by law or for the promotion of
justice in matters pending before them.” HRS § 603-21.9(6)
(2016); see Timothy, 96 Hawaiʻi at 357, 31 P.3d at 214 (holding
that “the circuit court in this case was statutorily authorized,
in aid of its original jurisdiction over mortgage foreclosure
actions, to enter appropriate orders against [the purchaser]
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after he defaulted on his agreement to purchase the mortgaged
property at the foreclosure sale”).
It was a reasonable exercise of the circuit court’s
discretion for it to delay the award of damages until after it
had ruled on OneWest’s motion, the outcome of which might have
affected who was entitled to damages. There was nothing
requiring the circuit court to issue a separate order deciding
which party should receive the damages. In fact, OneWest,
apparently recognizing that denial of its request for HRCP Rule
60(b) relief would have left it liable for damages for breach of
the foreclosure sale contract, made arguments about the issue of
its liability in its post-judgment motion. It is true that “[a]
Rule 60(b) motion for reconsideration is not a vehicle for
introducing entirely new claims into an action.” Stoller v.
Marsh, 682 F.2d 971, 981 (D.C. Cir. 1982) (referring to the
corresponding federal rule). But in this case, the damages
issue was not new; the circuit court created the condition that
led to liability for damages when it set the terms of the sale,
and OneWest set in motion the liability analysis when it failed
to close the court-ordered sale.
B. It was abuse of discretion for the circuit court to award
damages to the Association.
Although it was within the circuit court’s discretion
to award damages in its September 22, 2015 order on OneWest’s
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HRCP Rule 60(b) motion, we hold further that its decision to
award those damages to the Association was an abuse of its
discretion.
It is a general principle of mortgage law that “[t]he
mortgagee with first lien priority is entitled to recover the
mortgage and all associated costs and fees according to the
terms of the mortgage agreement, from the proceeds of the
foreclosure sale before the mortgagee with second lien priority
could recover its mortgage, fees, and associated costs[.]” 55
Am. Jur. 2d Mortgages § 705 (2019). To that end, the Hawaiʻi
statute controlling the distribution of proceeds in judicial
foreclosure sales provides that “[m]ortgage and other creditors
shall be entitled to payment according to the priority of their
liens[.]” HRS § 667-3. This statute prevents the circuit court
from distributing the proceeds of a foreclosure sale to a junior
lienholder, rather than the foreclosing mortgagee, before the
first lien is fully satisfied. Fujii v. Osborne, 67 Haw. 322,
323, 687 P.2d 1333, 1335 (1984) (“Under HRS § 667–3, a circuit
court lacks power to terminate a valid and subsisting first
mortgage lien in a foreclosure action and order the proceeds of
a foreclosure sale paid to the second mortgagee, rather than the
first, without the consent of the first mortgagee.”) By its
plain language, HRS § 667-3 applies to the down payment ordered
by the circuit court in this case. Thus, the circuit court
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violated HRS § 667-3 by allowing the Association, a junior
lienholder, to recover the down payment as damages.
Although this case involved the judicial foreclosure
process, governed by Part I of HRS Chapter 667, our holding is
consistent with the more recently enacted and more detailed
statutory provisions regarding the nonjudicial foreclosure
process, governed by Part II. See Timothy, 96 Hawaiʻi at 356
n.8, 31 P.3d at 213 n.8 (noting that Part II “establishes a much
more detailed process for foreclosing upon a mortgage than part
I”); Lee v. HSBC Bank USA, 121 Hawaiʻi 287, 292 n.4, 218 P.3d
775, 780 n.4 (2009) (“The legislative history behind this
alternative process gives some insight into the purposes behind
HRS section 667-5.”); Kondaur Capital Corp. v. Matsuyoshi, 136
Hawaiʻi 227, 238, 361 P.3d 454, 465 (2015) (citing a presumption
in a section in Part II as evidence that the legislature could
have fashioned a similar presumption for judicial foreclosures).
Part II expressly provides that “the successful bidder at the
public sale, as the purchaser, shall make a nonrefundable
downpayment to the foreclosing mortgagee of not less than ten
per cent of the highest successful bid price[,]” and that “[i]f
the successful bidder is the foreclosing mortgagee . . . , the
downpayment requirement may be satisfied by offset and a credit
bid up to the amount of the mortgage debt.” HRS § 667-29 (2016)
(emphasis added). It further provides that the down payment of
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a defaulting purchaser goes to the foreclosing mortgagee before
another lienholder damaged by the breach:
If the successful bidder later fails to comply with
the terms and conditions of the public sale or fails to
complete the purchase within forty-five days after the
public sale is held, the downpayment shall be forfeited by
that bidder. The forfeited downpayment shall be credited
by the foreclosing mortgagee first towards the foreclosing
mortgagee’s attorney’s fees and costs, then towards the
fees and costs of the power of sale foreclosure, and any
balance towards the moneys owed to the foreclosing
mortgagee. The foreclosing mortgagee, in its discretion,
may then accept the bid of the next highest bidder who
meets the requirements of the terms and conditions of the
public sale or may begin the public sale process again.
HRS § 667-30 (2016).
In its memorandum in opposition to OneWest’s HRCP Rule
60(b) motion, the Association cited Timothy in support of its
argument that it should receive distribution of the down payment
for damages suffered. In that case, the Association noted, the
ICA approved of the circuit court awarding First Hawaiian Bank
(“FHB”) benefit of the bargain damages even though FHB was not a
party to the sales contract because the property was sold to a
third-party bidder. See Timothy, 96 Hawaiʻi at 363, 31 P.3d at
220. But FHB was the foreclosing mortgagee in Timothy, id. at
351, 31 P.3d at 208, and was entitled to damages resulting from
a breach of the foreclosure sale contract by the third-party
purchaser. In fact, in Timothy, the third-party purchaser
forfeited and FHB received the down payment when the purchaser
failed to close the sale. Id. Furthermore, the ICA also
concluded that, while FHB was entitled to damages in excess of
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the forfeited down payment for fees and costs attributable to
the failure to close the sale, “the circuit court improperly
awarded damages [(i.e., per diem interest, etc.)] to FHB based
on [the mortgagor’s] underlying loan obligation to FHB to which
[the third-party purchaser] was not a party.” Id. at 363, 31
P.3d at 220. Likewise in the present case, while it would be
appropriate for OneWest to “recover” the forfeited down payment
by applying the amount to reduce Brown’s debt as a penalty for
its failure to close the sale, it would not be appropriate to
award the forfeited down payment as damages to the Association
based on Brown’s underlying obligations to the Association to
which OneWest was not a party, particularly when OneWest is the
senior lienholder.5
IV. CONCLUSION
In the ICA’s judgment on appeal, it struck paragraphs
e, g, and 9 from the circuit court’s September 22, 2015 order on
OneWest’s motion for HRCP Rule 60(b) relief. Although we hold
that the ICA erred in striking those paragraphs for the reasons
stated in its amended summary disposition order, we find that
the circuit court’s award of the forfeited down payment as
5
Our holding does not affect the Association’s ability to recover,
in whole or in part, on its lien of $116,011.95 if a sufficient price for the
mortgaged property is obtained at a subsequent foreclosure auction, nor does
it invalidate the sanctions imposed for OneWest’s lack of diligence in the
circuit court’s July 24, 2015 order.
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damages to the Association was an abuse of its discretion.
Thus, only paragraph 9 of the circuit court’s September 22, 2015
order should have been stricken, and the case should have been
remanded to the circuit court for proper disposition of the down
payment amount.
For the foregoing reasons, we affirm in part and
vacate in part the ICA’s June 22, 2018 Amended Summary
Disposition Order and September 11, 2018 Judgment on Appeal, and
remand the case to the Circuit Court of the Third Circuit for
further proceedings consistent with this opinion.
Cid H. Inouye /s/ Mark E. Recktenwald
Kristi L. Arakaki
for Petitioner /s/ Paula A. Nakayama
Charles R. Prather /s/ Sabrina S. McKenna
Peter T. Stone
for Respondent /s/ Richard W. Pollack
OneWest Bank, F.S.B.
/s/ Michael D. Wilson
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