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Electronically Filed Supreme Court SCAP-XX-XXXXXXX 29-FEB-2024 08:17 AM Dkt. 28 OP
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
---o0o---
STEPHEN P.H. WONG, Plaintiff-Appellant,
vs.
ASSOCIATION OF APARTMENT OWNERS OF HARBOR SQUARE, by and through its Board of Directors, Defendant-Appellee,
and
ASSOCIATION OF APARTMENT OWNERS OF HARBOR SQUARE, by and through its Board of Directors, Third-Party Plaintiff-Appellee,
PORTER McGUIRE KIAKONA, LLP (fka Porter Tom Quitiquit Chee & Watts) and EKIMOTO & MORRIS, ALLLC, Third-Party Defendants-Appellees.
SCAP-XX-XXXXXXX
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CAAP-XX-XXXXXXX; CASE NO. 1CCV-XX-XXXXXXX)
FEBRUARY 29, 2024
RECKTENWALD, C.J., McKENNA, EDDINS, JJ., CIRCUIT JUDGE SOMERVILLE AND CIRCUIT JUDGE WONG, ASSIGNED BY REASON OF VACANCIES
OPINION OF THE COURT BY EDDINS, J. *** FOR PUBLICATION IN WEST’S HAWAI‘I REPORTS AND PACIFIC REPORTER ***
I.
This case is about calculating damages when a condominium
association wrongfully forecloses on a unit owner.
Stephen Wong bought a condominium in the Harbor Square
complex. The Association of Apartment Owners (AOAO) of Harbor
Square governs the development. Wong financed his purchase with
a mortgage. Eventually the mortgage balance exceeded the
condo’s value.
Wong fell behind on his association assessments. Because
Wong owed fees, the AOAO non-judicially foreclosed under Hawaiʻi
Revised Statutes (HRS) Chapter 667. Turns out, the foreclosure
surpassed the AOAO’s statutory authority.
Wong sued for wrongful foreclosure. The AOAO said he had
no case, because he suffered no damages. The Circuit Court of
the First Circuit agreed. It granted the AOAO’s motion for
summary judgment.
This case explains what a plaintiff who suffers a wrongful
foreclosure by an AOAO that had no authority to foreclose at all
must show to satisfy the damages element of the tort. We hold
that damages are the plaintiff’s positive equity in the
property, if any, (property’s market value minus outstanding
mortgage debt), plus lost use arising from the wrongful
foreclosure, minus assessments owed to the AOAO. This places
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the plaintiff in their pre-tort position with a remedy tethered
to the wrong.
In many cases, the homeowner who suffers a wrongful AOAO
foreclosure will be “underwater” – owing more on their mortgage
than the home’s fair market value. This does not necessarily
mean they forego a remedy where an AOAO lacked authority to
foreclose. If an underwater plaintiff shows that the value of
their wrongly taken use exceeds what they owe the AOAO in
assessments, they may pursue their claim.
Here, Wong made no such showing. He failed to establish
lost use value. Thus, we affirm the circuit court’s grant of
summary judgment to the AOAO.
II.
We lay out the factual background, the legal context for
non-judicial foreclosures by an AOAO, and the parties’ appellate
arguments.
A. Factual Background
The parties dispute several monetary amounts, including how
much Wong paid for the condo. Because the AOAO moved for
summary judgment, we view the facts in the light most favorable
to Wong. See Stanford Carr Dev. Corp. v. Unity House, Inc., 111
Hawaiʻi 286, 295, 141 P.3d 459, 468 (2006). Thus, we adopt
Wong’s presented numbers for purposes of this appeal. Our
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analysis though would not change even if we used the AOAO’s
numbers.
Wong purchased a Honolulu condominium in 2005. He says he
paid roughly $500,000, financing the purchase in part with a
$420,750 mortgage.
In 2006, Wong refinanced, increasing his mortgage debt to
$450,000.
By August 2009, Wong stopped paying both his monthly
mortgage and his AOAO fees. In 2010, mortgagee Wells Fargo
assigned Wong’s mortgage to HSBC Bank.
The AOAO initiated a non-judicial foreclosure on Wong’s
property in July 2011. The AOAO believed that HRS chapter 667
empowered it to conduct non-judicial foreclosures on properties
whose owners were delinquent on their assessments. Not so.
This court ruled that those non-judicial foreclosures were
unlawful unless the AOAO had a power of sale. Malabe v. Ass’n
of Apartment Owners of Exec. Ctr., 147 Hawaiʻi 330, 339, 465 P.3d
777, 786 (2020).
By the time the AOAO initiated foreclosure, Wong owed
$29,335 in unpaid association and maintenance fees. His
mortgage debt totaled $481,298.
The AOAO conducted the non-judicial foreclosure in October
2011. It held a public auction. At $1, the AOAO was the
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highest bidder. It sold the condo to itself. Wong lost title.
Soon the AOAO rented out the unit.
Though Wong had long ago stopped paying his mortgage,
mortgagee HSBC Bank waited until May 2016 to start foreclosure
proceedings. The case took a while. The circuit court entered
final judgment for HSBC in February 2020. At that time, HSBC
discharged Wong’s mortgage debt, now $711,699. Then in October
2021, HSBC sold the condo for $576,000.
Hawaiʻi law instructs AOAOs to turn over excess rental
income collected following a final foreclosure judgment. HRS
§ 514B-146(n) (2018 & Supp. 2019). The AOAO certified that it
had no excess rents. It gave HSBC nothing. And the AOAO kept
all the pre-foreclosure excess rents.
Though Wong had long lost his property, he did not sue the
AOAO until December 2019.
Wong alleged that the AOAO wrongfully foreclosed. He says
it conducted a non-judicial foreclosure under Part I of HRS
Chapter 667; yet those foreclosures are only available to
mortgage creditors holding a power of sale. See HRS § 667-5
(Supp. 2011), repealed by 2012 Haw. Sess. Laws Act 182, § 50 at
684. The AOAO had no power of sale. It acted unlawfully and
owes him, Wong insists.
In April 2021, the AOAO filed a third-party complaint
against its prior legal counsel. The AOAO alleged that its
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counsel orchestrated and directed the wrongful non-judicial
foreclosure. So, the AOAO says, the lawyers are liable for
Wong’s damages, if any.
The AOAO moved for summary judgment in January 2022. Wong
was underwater when the AOAO non-judicially foreclosed. Thus,
he suffered no compensatory damages, the AOAO argued. Although
Wong’s condo was worth $448,000 in 2011, $481,298 of mortgage
debt encumbered it. Citing Lima, the AOAO said a mortgagor
receives a substantial benefit from discharged mortgage debt.
Lima v. Deutsche Bank Nat’l Tr. Co., 149 Hawaiʻi 457, 467, 494
P.3d 1190, 1200 (2021). Therefore, per the AOAO, the forgiven
debt offsets Wong’s out-of-pocket loss.
The lawyers joined the AOAO’s MSJ.
Wong countered. He says the AOAO lost nothing when his
mortgage debt was discharged. It shouldn’t get a windfall
because someone else forgave his debt.
Wong maintains the AOAO owes him the property’s value. He
says Lima entitles him to recover his out-of-pocket losses. A
figure Wong calculates as his purchase price (roughly $500,000),
offset only by the dollar the AOAO paid at the foreclosure sale.
Wong also argued that the collateral source rule applies.
The collateral source rule directs that benefits received post-
tort from an independent source do not diminish a wrongdoer’s
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liability. Bynum v. Magno, 106 Hawaiʻi 81, 86, 101 P.3d 1149,
1154 (2004).
The AOAO responded that the collateral source rule’s
purpose is to prevent a wrongdoer from receiving a windfall.
The AOAO explained that it receives no windfall from offsetting
the discharged mortgage debt. True, its dollar purchased the
property, but only as encumbered by HSBC’s mortgage.
In contrast, the AOAO says, paying Wong un-offset out-of-
pocket losses - $500,000 for a property whose mortgage he could
not pay - gives him an undeserved windfall.
The AOAO’s former lawyers later chimed in. The collateral
source rule does not apply to discharged mortgage debt. The
lawyers cited the Restatement (Second) of Torts § 920A cmt c
(1979).
The circuit court granted the AOAO’s MSJ in March 2022. It
dismissed the case with prejudice.
The court applied Lima. It included Wong’s discharged
mortgage debt in its compensatory damages calculations. Because
the discharged debt, totaling $711,699, exceeded Wong’s out-of-
pocket loss, Wong had no compensatory damages. And no suit.
First Circuit Court Judge Jeffrey Crabtree understood that
unlike Lima, the foreclosing party here (the AOAO) was not the
party that discharged Wong’s mortgage debt. But the court did
not find the distinction meaningful. The mortgage debt is
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“completely intertwined” with the foreclosed-upon unit,
regardless of who discharged the debt, the court reasoned.
The circuit court considered special damages, like lost
rent. But Wong “offered no evidence of [those] damages.” Thus,
the court ruled that Wong’s damages do not include “lost rents
or other harms from being unable to rent out or live in” the
condo. At oral argument before us, appellate counsel conceded
that Wong had waived any damages claim related to lost rent and
use, or the AOAO’s receipt of the property’s rental income.
Wong appealed to the Intermediate Court of Appeals. Then
he applied for transfer to this court. The AOAO and the lawyers
supported the request. We accepted transfer.
B. Legal Background
For backdrop, we discuss HRS chapter 667, titled
Foreclosures, and HRS chapter 514B, titled Condominiums.
In 2011, chapter 667 provided two ways to conduct non-
judicial foreclosures, Part I and Part II. See HRS §§ 667-5 to
667-10 (Part I) repealed by 2012 Haw. Sess. Laws Act 182, § 50
at 684; HRS §§ 667-21 to 667-42 (Part II).
Part I permitted mortgagees with a power of sale to conduct
non-judicial foreclosures and property auctions. A power of
sale mortgage clause permits the mortgagee to sell foreclosed
properties to recover on a delinquent loan. Part I provided
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property owners few protections because it required a power of
sale.
Part II opens non-judicial foreclosures to parties not
holding a power of sale. Part II provides property owners
greater protections as compared to Part I because it has a lower
barrier to entry. These protections include heightened notice
and auction requirements. HRS §§ 667-25 to 667-29.
HRS chapter 514B makes chapter 667 non-judicial
foreclosures available to AOAOs. HRS § 514B-146(a). Unpaid
common expenses “constitute a lien on the unit.” Id. That lien
“may be foreclosed by action or by nonjudicial or power of sale
foreclosure” procedures described in chapter 667. Id. Chapter
514B did not specify whether associations could access Part I,
Part II, or both.
Following chapter 514B’s enactment, some apartment
associations conducted Part I non-judicial foreclosures. The
Hawaiʻi Legislature reacted. In 2012, it repealed HRS § 667-5,
and HRS § 667-5.7 to § 667-8. This shut down Part I
foreclosures.
In Malabe, we ruled that because the AOAO lacked a power of
sale, and therefore the authority to conduct Part I non-judicial
foreclosures, the AOAO’s foreclosure was improper. Malabe, 147
Hawaiʻi at 340, 465 P.3d at 787.
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Here, Wong alleges that the AOAO wrongfully foreclosed on
his property by conducting a Part I non-judicial foreclosure.
He says Part I non-judicial foreclosures were only available to
those holding a power of sale. And the AOAO lacked a power of
C. The Parties’ Arguments on Appeal
On appeal, Wong challenges the circuit court’s case-ending
conclusion that his extinguished mortgage debt offsets his
available damages. He argues that the circuit court erred by
ruling that he failed to show compensatory damages. Lima, he
thinks, is materially different. There the defendants were
mortgage-holders. Because the mortgage debt was forgiven as
part of the foreclosure, that benefit offset those plaintiffs’
recovery. Moreover, the Lima mortgage included a power of sale,
and therefore the foreclosure in that case, he says, was merely
procedurally defective.
In contrast, Wong maintains, the AOAO did not hold his
mortgage and therefore could not foreclose upon his unit under
his mortgage’s power of sale. His mortgage debt was
extinguished nine years later, and not by the wrongful non-
judicial foreclosure. Thus, the only change between Wong’s pre-
and post-tort positions was the loss of his property. Post-
tort, he still owed the mortgage debt.
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The AOAO counters that Lima applies. Wong benefitted when
HSBC forgave the mortgage loan. That perk offsets his recovery.
The AOAO says this court should assess Wong’s current position
against his pre-tort position. And in the present day, Wong
received substantial mortgage forgiveness.
III.
A wrongful foreclosure plaintiff must show that they
suffered compensatory damages. Compensatory damages return the
plaintiff to their pre-tort position. We detail how a plaintiff
establishes these damages when an AOAO wrongfully forecloses.
We also consider the collateral source rule. It does not
apply to mortgage debt.
A. Wong Must Show Compensatory Damages
To establish a wrongful foreclosure, a plaintiff must
establish: “(1) a legal duty owed to the mortgagor by the
foreclosing party; (2) a breach of that duty; (3) a causal
connection between the breach of that duty and the injury
sustained; and (4) damages.” Bank of America, N.A. v. Reyes-
Toledo, 143 Hawaiʻi 249, 264 n.12, 428 P.3d 761, 776 n.12 (2018).
Wong alleges facts that satisfy the first three elements.
The question is whether Wong - and similarly situated underwater
mortgagors who suffered a wrongful AOAO foreclosure – can show
damages.
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Tort actions under Hawaiʻi law have three categories of
damages: compensatory, nominal, and punitive. Lima, 149 Hawaiʻi
at 465, 494 P.3d 1198. Nominal damages cannot prove a wrongful
foreclosure action’s damages element. Id. And generally,
punitive damages “must be supported by an award of nominal or
compensatory damages.” Id.
Thus, to survive summary judgment, Wong must present
evidence that establishes compensatory damages.
Plaintiffs in a wrongful foreclosure case must show that
the damages “will restore [them] to the position [they] would be
in if the wrong had not been committed.” Id. at 467, 494 P.3d
at 1200 (cleaned up). Otherwise, a plaintiff cannot satisfy the
damages element.
B. Compensatory Damages Put the Plaintiff in their Pre-Tort Position
A plaintiff’s pre-tort position controls. But how does a
court identify that position when it includes mortgage debt?
The answer begins with Lima. A plaintiff mortgagor “may
not establish the damages elements of their wrongful foreclosure
or [unfair or deceptive acts or practices (UDAP)] claims without
accounting for their remaining mortgage debts.” Lima, 149
Hawaiʻi at 467, 494 P.3d at 1200. To prove compensatory damages,
the mortgagor must factor in the mortgage’s value. Before the
non-judicial foreclosure, mortgages encumbered the Lima
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plaintiffs’ property. And they could not repay their debts.
“[T]he debts constitute a portion of their pre-tort positions.”
Id.
Lima repeats “the basic principle that the purpose and goal
of compensatory damages is to restore injured parties to their
position prior to the wrongful conduct.” In re Tirso, No. 11-
01873 (RJF), 2022 WL 567704, at *2 (Bankr. D. Haw. Feb. 23,
2022), aff’d, 642 B.R. 833 (D. Haw. 2022). But, Lima “did not
discuss every issue about the calculation of compensatory
damages because the district court’s certified question was
narrower than that.” Id.
Lima answered a certified question. That question
structured this court’s answer. The certifying court asked:
Is the effect of the mortgage considered only as a matter of setoff that a lender has the burden of proving after the borrower establishes the amount of the borrower’s damages, or does a borrower with no preforeclosure rights in property except as encumbered by a mortgage bear the burden of accounting for the effect of the mortgage in establishing the element of harm in the liability case?
Lima, 149 Hawaiʻi at 464, 494 P.3d at 1197.
Lima’s question was procedural. Does the outstanding
mortgage come into play as a setoff, or is it an element to the
claim? This court was clear. “Plaintiff Borrowers may not
establish the damages elements of their wrongful foreclosure or
UDAP claims without accounting for their remaining mortgage
debts.” Id. at 467, 494 P.3d at 1200.
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Our decision though had limited scope. Id. at 466, 494
P.3d at 1199 (“it would be inappropriate to resolve” plaintiff’s
questions on what damages are recoverable and how damages are
measured).
We now address the questions Lima left untouched: when an
AOAO wrongfully forecloses, what damages are recoverable and how
are damages calculated?
Before Lima, this court also addressed wrongful foreclosure
damages in Santiago v. Tanaka, 137 Hawaiʻi 137, 366 P.3d 612
(2016). The plaintiffs in that case were entitled to “their
proven out-of-pocket losses from Tanaka’s wrongful foreclosure
of the Mortgage.” Id. at 158, 366 P.3d at 633. Out-of-pocket
losses “are the difference between the actual value of the
property received and the price paid for the property, along
with any special damages . . . including expenses incurred in
mitigating the damages.” Id. at 159, 366 P.3d at 634.
Santiago’s “out-of-pocket losses” language described how to
put the unusually-situated Santiagos in their pre-tort position.
See id. Santiago did not depart from the basic principle that
compensatory damages aim to return the plaintiff to their pre-
tort position.
The Santiagos bought a tavern from Tanaka. Id. at 140, 366
P.3d at 615. The Santiagos financed the purchase with a large
down payment and a mortgage from Tanaka. Id. Tanaka
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misrepresented the cost of the tavern’s sewer service. Id. at
151, 366 P.3d at 626. The parties tried to mediate the sewer
fee issue. When mediation hit an impasse, Santiago withheld one
mortgage payment and deposited it in an escrow account. Id. at
144, 366 P.3d at 619. Tanaka sent the Santiagos a notice of
default and intent to foreclose. The Santiagos cured their
default and resumed paying their mortgage. Id.
Still, Tanaka non-judicially foreclosed. Id. at 145, 366
P.3d at 620. She bought the tavern at the ensuing foreclosure
sale, and resold it to a third party. Id. at 145, 158, 366 P.3d
at 620, 633. This court held that Tanaka unlawfully foreclosed.
Id. at 157, 366 P.3d at 632. The mortgage lacked a power of
sale and the Santiagos had cured their default on the mortgage.
Id. at 155, 157, 366 P.3d at 630, 632.
The Santiagos should not have lost the tavern. But it was
too late to get the property back. Tanaka had resold it to
someone else. Id. at 158, 366 P.3d at 633.
Still, the Santiagos had a remedy. This court awarded
damages that put the Santiagos in the position they would have
been in had they not bought the tavern. Id. Because the value
the Santiagos received in the foreclosure was zero (they had
made “virtually full payment” on the mortgage to Tanaka), the
measure of their position before they bought the tavern was
their “out-of-pocket losses.” Id. We awarded the Santiagos
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“the price paid for the property”: their downpayment, mortgage
payments, closing costs, property taxes, and attorney fees. Id.
at 158–59, 366 P.3d at 633–34.
There are two reasons the Santiagos’ proper pre-tort
position was their pre-purchase position. First, no lender
could foreclose. The Santiagos were current on their mortgage.
Second, the Santiagos relied on Tanaka’s falsehoods when they
bought the tavern. So awarding the Santiagos what they spent in
reliance on the misrepresentations was appropriate. Id. at 159,
366 P.3d at 634.
But not all plaintiffs are like the Santiagos. For damages
purposes, they do not automatically slot into a pre-tort world
where they never bought the property.
The United States Bankruptcy Court for the District of
Hawaiʻi delivers a useful example. Consider a homeowner who
defaults on the mortgage, but the mortgagee’s foreclosure is
procedurally defective. There, the mortgagee is entitled to
foreclose; the wrong is how the sale takes place. Tirso, 2022
WL 567704, at *3. Thus, the appropriate measure of damages is
“the difference between the price that the property would have
brought in a proper foreclosure sale and the price paid at the
defective foreclosure sale.” Id. at *4.
This measure of damages is “tethered to the wrong.” In re
Simon, No. 11-02788, 2023 WL 1971587, at *5 (Bankr. D. Haw. Feb.
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11, 2023). It restores the plaintiff “to the position [they]
would be in if the wrong had not been committed.” Lima, 149
Hawaiʻi at 467, 494 P.3d at 1200.
Santiago’s “out-of-pocket losses” method does not make
defendants cough up every dollar a plaintiff spends acquiring
and maintaining the property. None of this court’s cases
applying Santiago’s “out-of-pocket losses” language awarded the
plaintiffs every item of damages the Santiagos won.
Lima built on Santiago’s foundation. Lima noted that
Santiago’s “out-of-pocket losses” calculation accounted for the
Santiago’s mortgage debt. 149 Hawaiʻi 468-69, 494 P.3d at 1201-
02. Because there was no mortgage debt, there was nothing to
account for. Id.
Lima recognized that although foreclosed mortgagors with
outstanding debt don’t “receive any actual property, they
nevertheless received significant value in the form of forgiven
mortgage debts.” Id. at 469, 494 P.3d at 1202. Each dollar no
longer owed is a dollar gained. Thus, a plaintiff’s outstanding
mortgage debt must be accounted for. That is, it offsets the
property’s market value at the time of the wrongful foreclosure.
Wong believes Lima aids his cause. Lima involved a
wrongful non-judicial foreclosure by a mortgagee bank. Wong
distinguishes his case. It involves a non-judicial foreclosure
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by a non-mortgagee AOAO for unpaid association fees. Wong says
he received no benefit from the AOAO’s foreclosure because his
mortgagee did not concurrently discharge his debt. He was still
liable on the mortgage. Yet he lost title to the property.
Wong calculates his out-of-pocket losses as: the condo’s
roughly $500,000 purchase price, offset only by the dollar the
AOAO paid for it. But this calculation improperly restores Wong
to a Santiago-like pre-condo-purchase position.
Two differences separate Wong’s pre-purchase position and
his position had the AOAO not wrongfully foreclosed (his proper
pre-tort position).
First, without the AOAO’s wrongful foreclosure, Wong still
owed a mortgage he was seemingly unable to repay. Therefore,
his pre-tort position still includes a looming foreclosure by
HSBC.
Second, Wong had no equity in his condo during the non-
judicial foreclosure. If he tried to sell his property in 2011,
he would not have pocketed the condo’s full market value because
of the debt encumbering the property. We therefore decline to
award him the property’s un-offset value (minus one dollar).
Further, we believe it’s unjust to make the AOAO pay Wong
the condo’s full value. Mortgage foreclosures are equitable
proceedings governed by equity rules. Santiago, 137 Hawaiʻi at
157, 366 P.3d at 632. When the AOAO bought the unit for a
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dollar at the foreclosure sale, it didn’t buy an unencumbered
interest. It purchased the property subject to the mortgage.
The AOAO owned the property for only the time it took HSBC to
foreclose. Unwinding the wrongful foreclosure – redressing the
wrong to Wong - should not cost the AOAO the full unencumbered
value of the condo.
Wong warns that offsetting debt when there is a non-debt-
holder wrongful taking will lead to doomsday. He says this
approach incentivizes predatory behavior and immunizes
wrongdoers who take advantage of underwater debtors. Debt-
financed new cars, for example, may attract car thieves. Wong
forecasts that a car thief, if sued, would pay no damages if the
car’s loan exceeds its value.
Wong’s fears are misplaced. (Notwithstanding the rarity of
lawsuits against car thieves.) Our decision and Lima only apply
to wrongful foreclosures of real property. For Wong’s dire
scenarios, the remedy is conversion. Conversion applies only to
chattels. See Restatement (Second) of Torts § 222A (1965)
(“Conversion is an intentional exercise of dominion or control
over a chattel.”). A conversion plaintiff receives the item’s
full value. Id. Our decision and Lima leave conversion law
undisturbed.
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C. How a Plaintiff May Show Damages for Wrongful Foreclosure by an AOAO
To establish the damages element of a claim for wrongful
foreclosure by an AOAO lacking foreclosure authority, plaintiffs
must account for their remaining mortgage debts. The mortgage
offsets the property’s market value at the time of the wrongful
foreclosure. Lima, 149 Hawaiʻi at 469, 494 P.3d at 1202. But
negative equity does not thwart every path to relief. The
plaintiff’s pre-tort position includes use of the property until
the mortgagee’s foreclosure. Though behind on loan obligations,
the plaintiff still has title. Plaintiffs may seek compensation
for use even if they’re underwater on their mortgage. But this
lost use is offset by what the plaintiff owes the AOAO for
assessments until the mortgagee forecloses.
A plaintiff’s pre-tort position also includes their
equitable right to redeem the property before a final
foreclosure judgment. See Fed. Home Loan Mortg. Corp. v.
Transamerica Ins. Co., 89 Hawaiʻi 157, 164, 969 P.2d 1275, 1282
(1998) (recognizing equitable redemption). If a plaintiff can
clearly show that they would have redeemed their property absent
the AOAO’s wrongful foreclosure, they may assert damages from
losing their equitable right. (Wong did not.)
In Lima, the mortgage debt discharge was contemporaneous
with the non-judicial foreclosure. So Lima did not anticipate
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time elapsing between the wrongful foreclosure and the mortgage
discharge. It doesn’t account for plaintiff’s lost use of the
property between the wrongful foreclosure and the mortgagee’s
valid foreclosure. Part of plaintiff’s pre-tort position in a
wrongful AOAO foreclosure is the continued use and enjoyment of
the property until the mortgagee’s ultimate foreclosure.
Once a mortgagee validly forecloses, that foreclosure cuts
off the plaintiff’s use right. Here, for example, had Wong
established lost use damages, he would be owed them through
February 2020, when HSBC concluded foreclosure proceedings.
Nationstar Mortg., LLC v. Ass’n of Apartment Owners of Elima
Lani Condos., 152 Hawaiʻi 406, 413, 526 P.3d 383, 390 (2023)
(“[T]he foreclosure judgment . . . cut off AOAO’s right to
possession.”).
So we add to Lima. Lima’s holding still applies. The
property value must be offset by the mortgage debt. But Lima
did not obstruct other methods of showing compensatory damages.
We lay out how a plaintiff who suffers a wrongful AOAO
foreclosure may establish damages. A plaintiff shows damages if
the following exceeds $0:
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Positive equity in the property when wrongfully foreclosed, if any
+ Lost rents or use from the time between the wrongful foreclosure and a valid foreclosure
- Unpaid association fees and assessments up until the valid foreclosure.
A plaintiff’s equity is the property’s fair market value
when wrongfully foreclosed, less outstanding mortgage debt owed
then.
For this calculation, a valid foreclosure occurs when a
final foreclosure judgment is entered. See Nationstar, 152
Hawaiʻi at 413, 526 P.3d at 390 (final foreclosure judgment ends
AOAO’s right to possession). If a plaintiff sues an AOAO before
a valid foreclosure occurs, the plaintiff calculates lost use
and unpaid assessments when they file their complaint.
Also, for this calculation, the AOAO may only recoup
assessments for common expenses and fees resulting from the
plaintiff’s failure to timely pay. Attorney fees and any other
costs for processing the wrongful foreclosure are excluded.
Those costs do not count against the plaintiff. Picking up the
tab for attorneys who wrongfully foreclose flips equity
principles.
To recap: when an AOAO wrongfully forecloses without
foreclosure authority, mortgage debt offsets the property’s
market value, but does not count against the plaintiff’s lost
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use, net of assessments and fees owed to the AOAO. The debt
doesn’t foil every path to relief.
Yet under this framework, Wong still fails to establish
compensatory damages. When the AOAO conducted its non-judicial
foreclosure, Wong owed more on his now-discharged mortgage than
the property was worth. He offered no evidence that he lost
rents or use from the wrongful foreclosure.
We therefore conclude that Wong did not satisfy his burden
to show compensatory damages. The circuit court properly
dismissed his claim.
D. The Collateral Source Rule Does Not Apply
Wong also argues that the collateral source rule saves him.
The collateral source rule states “that benefits or
payments received on behalf of a plaintiff, from an independent
source, will not diminish recovery from the wrongdoer.” Bynum,
106 Hawaiʻi at 86, 101 P.3d at 1154.
Wong says the benefit of the discharged debt should go to
him, the wronged party, and not to the tortfeasor. Wong cites
Bynum, which in turn quoted the Restatement (Second) of Torts
§ 920(A): “[B]enefits conferred on the injured party from other
sources are not credited against the tortfeasor’s liability.”
Id. Thus, Wong argues that when HSBC discharged his mortgage
balance, it independently conferred a benefit to him. The AOAO
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lost nothing from HSBC’s discharge, Wong says. So, the
discharged debt shouldn’t count against his recovery.
We hold that the collateral source rule does not apply to
mortgage debt. Sure, Bynum adopted the collateral source rule
from the Restatement (Second) of Torts. 106 Hawaiʻi at 86, 101
P.3d at 1154. But the Restatement (Second) of Torts is plain:
the collateral source rule applies to insurance policies,
employment benefits, gratuities, and social legislation.
Restatement (Second) of Torts § 920A, cmt. c. Not mortgage
debt. Section 920A doesn’t mention mortgages. (Bynum applied
comment c to hold that Medicare and Medicaid payments fall under
the rule as social legislation benefits. 106 Hawaiʻi at 89, 101
P.3d 1157.)
The collateral source rule does not apply to forgiven
mortgage debt.
IV.
Wong has not demonstrated damages. We affirm the Circuit
Court of the First Circuit’s orders.
Steven K.S. Chung /s/ Mark E. Recktenwald (Anthony F.T. Suetsugu on the /s/ Sabrina S. McKenna briefs) for appellant /s/ Todd W. Eddins /s/ Paul B.K. Wong Mary Martin and Carlos D. Perez-Mesa, Jr. /s/ Rowena A. Somerville for appellee Association of Apartment Owners of Harbor Square
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Duane R. Miyashiro for appellee Porter McGuire Kiakona, LLP
James Shin (Jodie D. Roeca on the briefs) for appellee Ekimoto & Morris, ALLLC