The following is an update analyzing a recent case of interest:
The Supreme Court of Hawaii, over a strong dissent, altered the procedure and proof necessary to establish the amount of a deficiency judgment after a foreclosure sale due to default on a mortgage. Rather than establishing the amount of deficiency by subtracting the foreclosure sale price from the balance due on the mortgage, the majority adopted the approach favored by a majority of other jurisdictions and the Restatement (Third) of Property, in which the greater of the fair market value as of the date of the foreclosure sale or the sale price of the property is deducted from the amount due. HawaiiUSA Federal Credit Union v. Monalim, 2020 WL 2079890 (HI Supr. 4/30/20). To view the opinion, click here.
Jonnaven and Misty Marie Monalim purchased the subject property, a condominium in Kapolei, Hawaii, as an investment in 2008 with two loans from HawaiiUSA, secured by mortgages on the property. The Monalims defaulted on the mortgages in 2010 and HawaiiUSA filed an action seeking to foreclose on the mortgages. The circuit court granted a summary judgment motion in August 2011 and entered a Foreclosure Order that established the amounts due on both mortgages, gave HawaiiUSA the right to foreclose, and allowed HawaiiUSA to seek a deficiency judgment if the sale proceeds fell short. Pursuant to the Foreclosure Order, a commissioner took possession of the property and it was auctioned at a public sale in October 2011. Prior to the sale, the City and County of Honolulu issued a tax assessment, valuing the property at $703,600. After active bidding, the sale price at the auction was $760,000.
Despite the price shortfall, HawaiiUSA waited four years before filing a motion for a deficiency judgment. The Monalims opposed the motion, asserting it was barred by the doctrine of laches due to the long delay and also challenging the method used for calculating the deficiency judgment. Rather than just subtracting the auction sale price from the amount due, they contended that an evidentiary hearing should be held to determine the fair market value of the property at the time of the sale in order to avoid the mortgagee obtaining a windfall. The circuit court did not rule on the laches argument and issued an order (Deficiency Judgment) granting the motion in part, modifying the amount claimed due by not allowing accrued interest after the sale date, then subtracting the foreclosure sale price from that sum to establish the deficiency. In doing so, it followed the well-established practice of accepting the sale price as the property’s value on the foreclosure date.
The Monalims appealed to the Intermediate Appellate Court which summarily affirmed, rejecting both the laches argument and the need for an evidentiary hearing. The Monalims again appealed to the Supreme Court, which vacated the Deficiency Judgment and remanded to the circuit court.
The Supreme Court first addressed the failure of the circuit court to address the Monalims’ laches argument, finding error. The Monalims’ argument met the necessary elements for a laches defense, creating a factual question whether prejudice occurred that only a trial court could determine upon remand.
The Court then addressed as a matter of law the Monalims’ contention that an evidentiary hearing was required to establish the “true” market value of the foreclosed property at the time of sale. Breaking from the long-standing practice in Hawaii of accepting the sale price as the market value, the Court ruled that an evidentiary hearing was required to avoid the potential inequity between mortgagors and mortgagees which would occur if the sale price was below the market value. The Court opined this could occur if a lender credit bid an artificially low amount when there were no other bidders or other circumstances caused the sale amount to be less than the actual property value. Whatever the cause, the result would be a windfall to the lender, who could turn around and resell the property at a higher value, thereby receiving more than the amount due on the defaulted note.
The Court noted that this procedure had been accepted by the majority of other jurisdictions either through legislation or through judicial decisions, as well as being adopted in the Restatement (Third) of Property to avoid inequity. Although the opinion is a scholarly review of the judicial and legislative landscape on the reasons to require the hearing – to avoid inequity or a lender’s windfall – nowhere in the opinion does it apply the facts of this case to that potential inequity.
The lengthy and adamant dissent of one justice, joined by the Chief Justice, takes the majority to task for using a case where no inequity or potential windfall occurred to change the landscape of foreclosure law in Hawaii. The dissent notes that after active bidding at auction, the eventual sale price here exceeded the assessed value of the property by almost $60,000. It also expressed concern about the additional costs to the parties and burden on the court system that mandating an evidentiary hearing for every deficiency judgment would cause. Such a drastic change should be made by the legislature, not the courts.
One could consider the judicial goal of the Supreme Court here as laudable, attempting to avoid inequity which could occur to homeowners who not only lose their home but also get hit by an inflated deficiency judgment due to an artificially low sale price. Jumping aboard with the majority of other jurisdictions to provide a fair process to those with little bargaining power seems very consumer-friendly. However, I can certainly see merit in the reasoning of the dissent. Recognizing that this decision will cause a sea change in how deficiencies are established in Hawaii, it does seem odd that the Supreme Court chose a case where no inequity occurred as its platform. In addition, this type of modification to a long-established procedure arguably should have been debated in the legislature, where public policy is generally made in the open forum of public debate. When one considers the costs entailed in holding an evidentiary hearing in every deficiency case, plus the added burden on the courts, a full vetting of all aspects of the decision seems warranted.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section. These materials were authored by the Hon. Meredith Jury (United State Bankruptcy Judge, C.D. Cal, Ret.) a member of the ad hoc group, with editorial contributions by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee of Business Law Section of the California Lawyers Association to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.