Santiago v. Tanaka, 137 Haw. 137

Background

Louis and Yong H. Santiago (the Santiagos) leased and then agreed to buy the Nawiliwili Tavern from Ruth Tanaka for $1.3M in 2006; $800,000 down and $500,000 seller-financed by a promissory note and mortgage. Closing occurred August 10, 2006.
During negotiations Tanaka completed a seller Disclosure Statement indicating the Tavern was connected to a private sewer and produced a 1995 Wastewater Agreement showing $150 monthly maintenance and $150 bi-monthly cleanout, plus language reserving Jasper’s right to “adjust the deposit” up to 20% annually.
Shortly after closing Jasper billed the Santiagos roughly $1,160.94 monthly and the same amount bi-monthly (far above the disclosed $150 figures); Jasper stated fees had been rising ~20% annually and threatened disconnection if not paid.
The Santiagos sued Jasper and Tanaka in 2007; mediation stalled. In March 2008 Louis halted mortgage payments pending litigation; Tanaka accelerated the loan and conducted a nonjudicial foreclosure by power of sale in October 2008, buying the Tavern at auction and later reselling it to a third party.
The circuit court found for Tanaka on nondisclosure/negligent misrepresentation and granted Tanaka counterclaims (breach of note/mortgage, ejectment), ordering ejectment and awarding Tanaka attorneys’ fees; the ICA affirmed. The Hawai‘i Supreme Court granted certiorari.

Issues

Issue	Plaintiff's Argument (Santiago)	Defendant's Argument (Tanaka)	Held
Whether Tanaka’s disclosures about sewer fees were actionable nondisclosure/ negligent misrepresentation	Tanaka withheld material facts: true sewer charges (~$1,700/month), annual ~20% increases in practice, and that buyer would need to renegotiate or build sewer; her partial/ambiguous statements induced reliance.	Tanaka disclosed connection and produced the Wastewater Agreement; Santiagos failed to do due diligence; any ambiguity did not require further disclosure.	Held for Santiagos: Tanaka breached disclosure duty and made negligent misrepresentations because statements were partial/ambiguous and she knew (or should have known) they misled.
Whether the Mortgage contained a valid power-of-sale authorizing nonjudicial foreclosure under HRS § 667-5	Mortgage language did not clearly contain an unqualified power of sale; clause referring to foreclosure “as now or then provided by law” is ambiguous and insufficient.	Mortgage authorizes foreclosure and the foreclosure complied with statutes; Santiagos’ challenges are moot because property resold.	Held for Santiagos: mortgage lacked an independent, unambiguous power-of-sale; ambiguity construed against drafter (Tanaka); nonjudicial foreclosure was unauthorized.
Whether HRS § 667-5(c) provides a statutory right to cure default	Santiagos: statutory disclosure requirement of ‘‘amount to cure’’ reflects and codifies a mortgagor’s right to cure; they cured default before sale.	Tanaka: no statutory right to cure; she had properly accelerated and foreclosed.	Held for Santiagos: § 667-5(c) codifies a right to cure consistent with equitable common law; Santiagos cured default before sale, invalidating the foreclosure.
Appropriate remedy and damages after wrongful foreclosure	Santiagos seek restitution of payments (down payment, mortgage payments, closing costs, taxes) rather than rescission because property resold to third party.	Tanaka argued foreclosure and sale were lawful; ICA deemed some issues moot given resale.	Held for Santiagos: foreclosure wrongful; award restitution of proven out-of-pocket losses ($1,412,790.79) and remand for interest, attorneys’ fees, costs; reversal of ejectment and related judgments.

Key Cases Cited

Beneficial Haw., Inc. v. Kida, 30 P.3d 895 (Haw. 2001) (standard for reviewing trial FOF/COL; foreclosure equity principles)
Lee v. HSBC Bank USA, 218 P.3d 775 (Haw. 2009) (HRS § 667-5 authorizes nonjudicial foreclosure only when power of sale is contained in the mortgage)
Zanakis-Pico v. Cutter Dodge, Inc., 47 P.3d 1222 (Haw. 2002) (negligent misrepresentation damages follow Restatement formulation)
Jenkins v. Wise, 574 P.2d 1337 (Haw. 1978) (equity disfavors forfeiture; restitution/compensation preferred when security not jeopardized)
Luke v. Gentry Realty, Ltd., 96 P.3d 261 (Haw. 2004) (ambiguities construed against drafter)
Molokoa Vill. Dev. Co. v. Kauai Elec. Co., 593 P.2d 375 (Haw. 1979) (applying Restatement § 551 for nondisclosure)
Chun v. Park, 462 P.2d 905 (Haw. 1969) (adopting Restatement principles for negligent misrepresentation)
Fleming v. Napili, Ltd., 430 P.2d 316 (Haw. 1967) (equitable remedies in property disputes)