SB191 SD2

SECTION 1. The legislature passed Act 282, Session Laws of Hawaii 2019 (Act 282), to confirm its intent that condominium associations should be able to use nonjudicial foreclosure to collect delinquencies regardless of the presence or absence of power of sale language in an association's governing documents in response to Sakal v. Association of Apartment Owners of Hawaiian Monarch, 143 Haw. 219, 426 P.3d 443 (App. 2018). The Sakal court held that a condominium must have specific authority in its declaration, bylaws, or in an agreement with the owner, to conduct a nonjudicial foreclosure. Specifically, section 1 of Act 282 stated that the legislative history indicated this was not the intent of the legislature in 1999, nor of subsequent amendments.

The Supreme Court of Hawai‘i decided Malabe v. Ass'n of Apartment Owners of Exec. Ctr. by & through Bd. of Directors, 147 Haw. 330, 465 P.3d 777 (2020, as corrected June 18, 2020), after the effective date of Act 282. In Malabe, the court stated that: "We hold the ICA did not err in reinstating Count I, the Malabes’ wrongful foreclosure claim, based on its ruling in Sakal, which correctly held that in order for an association to utilize the nonjudicial power of sale foreclosure procedures set forth in Hawaii Revised Statutes chapter 667, a power of sale in its favor must have existed in association bylaws or in another enforceable agreement with unit owners." Id. at 333, 465 P.3d at 780 (citation omitted).

Notably, the Malabe court did not regard the legislative intent of Act 282 and its legislative intent as affecting its holding because the Malabes’ based their claims on section 667‑5, Hawaii Revised Statutes, which was repealed in 2012. The Malabe court misread the intent of the legislature in construing Act 282 in the narrow manner as described in its holding. The Malabe court did not address the Malabes' challenges to Act 282 on constitutional grounds, and relied instead on the holding from another case that Act 282 is unconstitutional because it violates plaintiffs' rights under the Contracts Clause of the United States Constitution. Id. at 334, 465 P.3d at 781 (citing Galima v. Ass'n of Apartment Owners of Palm Court by & through Bd. of Directors, 453 F. Supp. 3d 1334, 1356 (D. Haw. 2020)).

However, Section 6 of Act 282 provides that: "This Act shall not be applied so as to impair any contract existing as of the effective date of this Act in a manner violative of either the Hawaii State Constitution or Article I, section 10, of the United States Constitution." Moreover, Section 7 of Act 282 provides that the provisions of the act are severable. Nevertheless, the Malabe and Galima courts have continued to cast doubt upon the legislature's intent in passing Act 282. Therefore, the legislature finds it necessary to clarify the legislative intent that the explicit grant of power of sale to associations is not required for the purposes of enforcing association liens through the nonjudicial foreclosure process in any part of chapter 667, Hawaii Revised Statutes.

SECTION 2. Chapter 514B, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§514B- Incorporation of power of sale language into governing instruments; procedure; effect. (a) Notwithstanding any other provision of this chapter or of any other statute or instrument, an association may incorporate power of sale language into declaration or bylaws of the association, in accordance with the terms of this section.

(b) Power of sale language, in the following form, may be adopted by the board, after giving notice and an opportunity to be heard to the unit owners:

"The governing documents of the association shall be deemed to include a power of sale, sufficient in form and substance to enable the foreclosure of the lien of the association. Exercise of the power of sale shall be in compliance with any requirements of Chapters 514B and 667 of the Hawaii Revised Statutes."

(c) The notice to owners shall, no less than fourteen days in advance of a board meeting at which adoption of power of sale language will be considered, be:

(1) Hand-delivered;

(2) Sent prepaid by United States mail to the mailing address of each unit or to any other mailing address designated in writing by the unit owner; or

(3) At the option of the unit owner, expressed in writing, by electronic mail to the electronic mailing address designated in writing by the unit owner.

Notice shall include the text of the proposed power of sale language and inform the owners of the opportunity to be heard on the proposal. Notice shall also include the following language:

"An owner may preserve a potential defense that the exercise of a power of sale included in the declaration or bylaws of the association by board action constitutes an impairment of contract, by:

(1) Delivering a written objection to the association by certified or registered mail, return receipt requested, within sixty days after a meeting at which the board adopts a proposal to include such language; and

(2) Producing, to the association, a return receipt demonstrating such delivery within thirty days after service of a notice of default and intention to foreclose upon that owner."

The notice shall include an address where the written objection may be delivered.

(d) The board may adopt the proposal to incorporate the power of sale language into the declaration or bylaws of the association at any board meeting for which notice of the proposal is given in compliance with this section; provided that owners are first given an opportunity to be heard on the proposal.

(e) If the board adopts the proposal to incorporate power of sale language into the declaration or bylaws of the association, then the power of sale language, designated as an amendment to the association's declaration or bylaws, may be recorded.

(f) Power of sale language so recorded shall be deemed to be effective upon recording.

(g) The procedures provided for in this section shall be the exclusive procedures for the incorporation of power of sale language into the declaration or bylaws of an association after , 2021; provided that the power of sale language incorporated into the declaration or bylaws of an association, or any other agreement with an owner, in accordance with law prior to that date shall remain valid."

SECTION 3. Section 514B-146, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) All sums assessed by the association but unpaid for the share of the common expenses chargeable to any unit shall constitute a lien on the unit with priority over all other liens, except:

(1) Liens for real property taxes and assessments lawfully imposed by governmental authority against the unit; and

(2) Except as provided in subsection (j), all sums unpaid on any mortgage of record that was recorded prior to the recordation of a notice of a lien by the association, and costs and expenses including attorneys' fees provided in such mortgages;

provided that a lien recorded by an association for unpaid assessments shall expire six years from the date of recordation unless proceedings to enforce the lien are instituted prior to the expiration of the lien; provided further that the expiration of a recorded lien shall in no way affect the association's automatic lien that arises pursuant to this subsection or the declaration or bylaws. Any proceedings to enforce an association's lien for any assessment shall be instituted within six years after the assessment became due; provided that if the owner of a unit subject to a lien of the association files a petition for relief under the United States Bankruptcy Code (11 U.S.C. §101 et seq.), the period of time for instituting proceedings to enforce the association's lien shall be tolled until thirty days after the automatic stay of proceedings under section 362 of the United States Bankruptcy Code (11 U.S.C. §362) is lifted.

The lien of the association may be foreclosed by action or by nonjudicial or power of sale foreclosure[, ~~regardless of the presence or absence of~~] if power of sale language [in] is contained within an association's governing documents[,] or any other agreement between the association and the owner of the unit that is the subject of the foreclosure, by the managing agent or board, acting on behalf of the association and in the name of the association; provided that no association may exercise the nonjudicial or power of sale remedies provided in chapter 667 to foreclose a lien against any unit that arises solely from fines, penalties, legal fees, or late fees, and the foreclosure of any such lien shall be filed in court pursuant to part IA of chapter 667.

In any such foreclosure, the unit owner shall be required to pay a reasonable rental for the unit, if so provided in the bylaws or the law, and the plaintiff in the foreclosure shall be entitled to the appointment of a receiver to collect the rental owed by the unit owner or any tenant of the unit. If the association is the plaintiff, it may request that its managing agent be appointed as receiver to collect the rent from the tenant. The managing agent or board, acting on behalf of the association and in the name of the association, unless prohibited by the declaration, may bid on the unit at foreclosure sale, and acquire and hold, lease, mortgage, and convey the unit. Action to recover a money judgment for unpaid common expenses shall be maintainable without foreclosing or waiving the lien securing the unpaid common expenses owed."

SECTION 4. This Act shall not be applied so as to impair any contract existing as of its effective date in a manner violative of either the Hawaii State Constitution or Article I, section 10, of the United States Constitution.

SECTION 5. If any provision of this Act, or the application thereof to any person or circumstance, is held invalid, the invalidity does not affect other provisions or applications of the Act that can be given effect without the invalid provision or application, and to this end the provisions of this Act are severable.

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 7. This Act shall take effect upon its approval.

THE SENATE	S.B. NO.	191
THIRTY-FIRST LEGISLATURE, 2021		S.D. 2
STATE OF HAWAII