HAWAIIUSA FEDERAL CREDIT UNION, Respondent/Plaintiff-Appellee, vs. JONNAVEN JO MONALIM; MISTY MARIE MONALIM, Petitioners/Defendants-Appellants, and ASSOCIATION OF APARTMENT OWNERS OF BEACH VILLAS AT KO OLINA, by its Board of Directors; KO OLINA COMMUNITY ASSOCIATION, INC., a Hawai‘i nonprofit corporation; Respondents/Defendants-Appellees.
SCWC-16-0000807
IN THE SUPREME COURT OF THE STATE OF HAWAI‘I
APRIL 30, 2020
McKENNA, POLLACK, AND WILSON, JJ., WITH NAKAYAMA, J., CONCURRING AND DISSENTING, WITH WHOM RECKTENWALD, C.J., JOINS
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-16-0000807; CIV. NO. 10-1-1388)
OPINION OF THE COURT
The law has long permitted a borrower, or mortgagor, to pledge real property to a lender, or mortgagee, as security for a loan. In the event of a default, the mortgagee may sell the property to generate funds that will go toward paying what is owed. In some instances, however, the proceeds of the sale are insufficient to pay what is due under the mortgage, and the mortgagee is entitled to a deficiency judgment holding the mortgagor liable for the remaining balance.
Such a deficiency occurred in this case. The mortgagors defaulted on the loans, the property was sold, and the foreclosure sale price was less than the amount due on the mortgage. Thereafter, the mortgagee waited over four years, without explanation, before attempting to collect a deficiency judgment. The mortgagors contend that this delay was unreasonable and prejudiced them because they had begun to rebuild their lives in the years since the sale, and the mortgagee should therefore be barred from now seeking a deficiency judgment by the doctrine of laches. They also argue that, because the circumstances of a foreclosure auction are likely to result in the sale of the property for less than its fair market value, the process by which Hawai‘i courts calculate a deficiency judgment is unfair. They ask that we instead adopt 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 money owed when calculating the deficiency.
On review, we hold that the mortgagors’ challenge to the deficiency judgment is not barred by res judicata and that the circuit court erred by failing to rule on their laches defense. We also hold that, because the traditional approach can result in unjust enrichment and the majority rule protects all parties to the mortgage, the equities weigh in favor of adopting the method of calculating a deficiency judgment employed by a majority of other jurisdictions. However, our adoption of the majority rule is prospective in effect and applies only to foreclosure cases in which a deficiency judgment is entered after the date of this opinion.
I. FACTS AND PROCEDURAL HISTORY
A. Background
In 2008, Jonnaven Jo Monalim and Misty Marie Monalim (the Monalims) received two loans from HawaiiUSA Federal Credit Union (HawaiiUSA) to purchase a property located in Kapolei, Hawai‘i (the Property). The Property was a three bedroom, three bathroom unit of the Beach Villas at Ko Olina Condominium built in 2008. The first loan (Note 1) was for $911,200.00; the second loan (Note 2) was for $113,900.00. Each loan was secured
On June 24, 2010, HawaiiUSA filed a complaint in the Circuit Court of the First Circuit (circuit court) against the Monalims,1 alleging that thе Monalims had defaulted on the notes and seeking to foreclose on the mortgages. Thereafter, HawaiiUSA filed a motion for summary judgment, which the circuit court granted on August 29, 2011 (Foreclosure Order). The circuit court found that the Monalims owed $1,024,428.04 on Note 1 and $121,547.20 on Note 2 and that HawaiiUSA was entitled to foreclose upon the mortgages securing the notes. On the same day, the circuit court entered its judgment on the Foreclosure Order (Foreclosure Judgment).
In the Foreclosure Order, the circuit court appointed a commissioner to take possession of the Property and oversee its sale, subject to confirmation by the court. HawaiiUSA was allowed under the Foreclosure Order to request a deficiency judgment in the event that the proceeds recovered from the Property‘s auction were insufficient to cover the Monalims’ outstanding debt on the notes:
At the hearing for confirmation of sale, if it appears that the proceeds of the sale of the Mortgaged Property are insufficient to pay all amounts due and owing to [HawaiiUSA], [HawaiiUSA] may request a deficiency judgment in its favor and against the [Monalims] for the amount of the deficiency which shall be determined at the time of confirmation and have immediate execution thereafter.
The Monalims filed an appeal of the Foreclosure Order and Foreclosure Judgment to the Intermediate Court of Appeals (ICA) on September 28, 2011. The appeal was dismissed on September 20, 2012, for failure to submit an opening brief.
The Property was auctionеd at public sale on October 24, 2011. Prior to the sale, the Property received a 2011 tax assessment from the City and County of Honolulu in which it was valued at $703,600.00. According to the commissioner‘s report, only three people attended the auction and sixteen bids were received. The last bid was for $760,000.00. In the report, the commissioner stated that $760,000.00 was a fair and reasonable bid price based on comparable sales and recommended that the court confirm the sale. HawaiiUSA filed a motion to confirm the sale and for deficiency judgment. After a hearing, the circuit court entered an order granting the motion on December 22, 2011.
The circuit court outlined the amounts outstanding and directed the commissioner to disburse the proceeds of the sale in order of priority.2 The court further ordered
that since the proceeds from the sale of the Mortgaged Property are insufficient to fully satisfy the amounts due to [HawaiiUSA], that a motion for deficiency judgment may
subsequently be filed by [HawaiiUSA] against [the Monalims], jointly and severally.
The record indicates that the circuit court--based on the Monalims’ objection--ordered a further hearing on the matter of the deficiency judgment. The judgment confirming the sale was also entered on December 22, 2011.
B. HawaiiUSA‘s Motion for Deficiency Judgment
Over four years later, on January 12, 2016, HawaiiUSA filed a motion for deficiency judgment. In its motion, HawaiiUSA requested $355,687.07 on Note 1 and $131,755.87 on Note 2, which it alleged remained outstanding as of December 30, 2011, the closing date of the sale.3 The amount outstanding on Note
The Monalims filed a memorandum opposing HawaiiUSA‘s motion for deficiency judgment, contending that the motion was untimely because HawaiiUSA waited “for more than an unprecedented four [] years” to bring the motion and that HawaiiUSA was therefore barred by the doctrine of laches. According to the Monalims, HawaiiUSA was required by the Foreclosure Order to request the amount of any deficiency immediately following the sale of confirmation, “which it [] deliberately chose [] not to do.” The Monalims averred that they could have filed for Chapter 7 Bankruptcy and suffered no deficiency judgment had HawaiiUSA filed its motion in 2011. Instead, the Monalims contended, “in reliance upon there being no deficiency judgment they [had] set out to rebuild their lives.” They each started a business, began saving for their daughter‘s college tuition, and were only a few months from clearing the foreclosure from their credit reports, the Monalims stated in an appended declaration. HawaiiUSA‘s unexplained delay in filing its motion for deficiency judgment would “overwhelming[ly] prejudice” them, they argued.
The Monalims also challenged the method used for calculating the deficiency judgment and contended that an evidentiary hearing should be held to determine the fair market value of the Property at the time of the sale. According to the Monalims, Hawai‘i courts currently calculate the amount of a deficiency judgment by “mathematically” subtracting the net proceeds of the sale from the mortgage debt without considering any evidence of a higher property valuation or any subsequent sales for higher prices. Hawai‘i courts will set aside the earlier auction price only if it is said to “shock the conscience of the Court,” the Monalims related. The Monalims contended that this “completely ignores reality and equity” because lenders have the ability to routinely “credit bid” for the property at the foreclosure auction, thereby scaring away competition.4 This enables a mortgagee to recover the property at less than fair market value and secure a windfall, the Monalims asserted. The result, the Monalims argued, is that borrowers are penalized beyond what the foreclosing mortgagee actually lost.
The Monalims contended that this procedure for calculating deficiency judgments violates both procedural and substantive due process because mortgagees are constitutionally entitled to no more than payment in full. The Monalims maintained that Hawai‘i‘s method represents the minority view among states and that the circuit court should instead conduct a separate evidentiary hearing to determine the fair market value of the Property, which would be deducted from the mortgage debt in lieu of the sale price if it is the greater of the two. (Citing Sostaric v. Marshall, 766 S.E.2d 396 (W.Va. 2014).)
In its reply, HawaiiUSA argued that its motion for deficiency judgment was proper because Hawai‘i law does not require such a mоtion to be filed within a certain time from the date of confirmation. Further, HawaiiUSA argued, the Monalims did not suffer any prejudice because HawaiiUSA did not prevent the Monalims from filing bankruptcy or make representations that it would not seek a deficiency judgment, and the Monalims could still file for bankruptcy. HawaiiUSA also contended that under Hawai‘i caselaw, the court may refuse to confirm the sale if the highest bid “is so grossly inadequate as to shock the conscience,” which it was not in this case. (Quoting Wodehouse v. Hawaiian Trust Co., 32 Haw. 835, 854 (Haw. Terr. 1933).) HawaiiUSA maintained that third party bidders were not discouraged from bidding; HawaiiUSA did not receive a windfall; and the Monalims’ due process rights were not violated.
On October 13, 2016, the circuit court entered its “Order Granting in Part and Denying in Part [HawaiiUSA‘s] Motion for Deficiency Judgment Against [the Monalims] Filed January 12, 2016” (Order Granting Deficiency Judgment) and the “Deficiency Judgment Against the [the Monalims] and in Favor of [HawaiiUSA]” (Deficiency Judgment). The Order Granting Deficiency Judgment awarded HawaiiUSA a deficiency judgment of $493,282.04.5 “[D]ue to the delay in filing” the motion, however, the circuit court denied HawaiiUSA‘s request for interest for the period between the closing date of the sale and the entry of the Deficiency Judgment, as well as its request for statutory interest for the period after the entry of the Deficiency Judgment. The Order Granting Deficiency Judgment did not address the laches defense raised by the Monalims or their request for a hearing as to the market value of the Property. The Monalims appealed to the ICA.
C. ICA Proceedings
On appeal, the Monalims maintained that HawaiiUSA‘s motion for deficiency judgment was barred by laches and that the circuit court should have held evidentiary hearings on prejudice resulting from the untimely motion and on the amount owed.
The ICA entered its Summary Disposition Order (SDO) on May 17, 2018.6 The ICA held that the Monalims’ assertion that the deficiency judgment was required to be determined at the time of the confirmation of sale was without merit because the Monalims objected and sought a further hearing in regard to the deficiency judgment.
The ICA also stated that the Monalims made no discernable argument about laches. Nevertheless, the ICA addressed the prejudice posed by HawaiiUSA‘s delay in filing the motion, concluding that the order confirming the sale of the Property gave the Monalims notice of the possibility of a deficiency judgment such that their contentions related to prejudice were without merit. The ICA additionally found that the Monalims had not requested a hearing on prejudice and held that the circuit court therefore did not deny their request for a hearing. Further, the ICA noted, the circuit court did address potential prejudice to the Monalims when it denied HawaiiUSA‘s request for continuing interest from the closing date of the sale to the entry of the Deficiency Judgment and for statutory interest after the entry of the Deficiency Judgment. The ICA also pointed to the Monalims’ failure to seek a dismissal under
The ICA likewise rejected the Monalims’ contention that the circuit court should have held an evidentiary hearing on the amount owed. The ICA ruled that the method for calculating the deficiency was not determined by the Deficiency Judgment but rather the amount was incident to the enforcement of the Foreclosure Judgment. The ICA found
II. STANDARDS OF REVIEW
A. Questions of Law
“Questions of law are reviewed de novo under the right/wrong standard of review.” Roes v. FHP, Inc., 91 Hawai‘i 470, 473, 985 P.2d 661, 664 (1999) (quoting Francis v. Lee Enters., Inc., 89 Hawai‘i 234, 236, 971 P.2d 707, 709 (1999)).
B. Courts Sitting in Equity
The extent of the relief granted by a court in equity rests within the sound discretion of the circuit court and will not be disturbed unless the circuit court abused its discretion. Peak Capital Grp., LLC, v. Perez, 141 Hawai‘i 160, 172, 407 P.3d 116, 128 (2017); Hawaii Nat‘l Bank v. Cook, 100 Hawai‘i 2, 7, 58 P.3d 60, 66 (2002). A court abuses its discretion by “issuing a decision that clearly exceeds the bounds of reason or disregard[ing] rules or principles of law or practice to the substantial detriment of the appellant.” Cook, 100 Hawai‘i at 7, 58 P.3d at 66 (quoting Shanghai Inv. Co. v. Alteka Co., 92 Hawai‘i 482, 493, 993 P.2d 516, 526 (2000)).
C. Statutory Interpretation
The interpretation of a statute is a question of law that is reviewed de novo. Deutsche Bank Nat‘l Trust Co. v. Greenspon, 143 Hawai‘i 237, 243, 428 P.3d 749, 755 (2018).
III. DISCUSSION
A. The Monalims’ Challenge to the Deficiency Judgment Is Not Barred by Res Judicata.
The ICA held that res judicata barred the Monalims from challenging the method in which the Deficiency Judgment was calculated because they failed to raise the issue in their appeal of the Foreclosure Judgment. It is true that the doctrine of res judicata prohibits parties from relitigating a previously adjudicated cause of action or claims that could have been brought in a previous action between the same parties but were not. Mortg. Electr. Registration Sys., Inc. v. Wise, 130 Hawai‘i 11, 17-18, 304 P.3d 1192, 1198-99 (2013). However, under this court‘s precedents, “foreclosure cases are bifurcated into two separately appealable parts: (1) the decree of foreclosure and the order of sale, if the order of sale is incorporated within the decree, and (2) all other orders.” Id. at 16, 304 P.3d at 1197 (quoting Sec. Pac. Mortg. Corp. v. Miller, 71 Haw. 65, 70, 783 P.2d 855, 857 (1989)). And the bifurcated nature of mortgage foreclosure proceedings is treated as two separate proceedings for res judicata purposes. Id. at 17, 304 P.3d at 1198.
Additionally,
of a deficiency judgment provided that the appeal does not raise issues related to the judgment debtor‘s right to the deficiency judgment or affect the finality of the transfer of title of the foreclosed property. It is thus unsurprising that in Wise, this court held that the defendant‘s “timely appeal from the Deficiency Judgments would entitle it to challenge errors unique to it, such as an erroneous upset price or miscalculation of deficiency.”10 130 Hawai‘i at 16, 304 P.3d at 1197 (second emphasis added) (quoting Miller, 71 Haw. at 71, 783 P.2d at 858).
The ICA misapprehended this holding in concluding that because the Monalims failed to challenge the method for calculating the deficiency in their appeal of the Foreclosure Judgment--which was dismissed--they were barred by res judicata from challenging it in an appeal of the Deficiency Judgment. In Wise, the petitioner appealed from an order confirming sale, challenging the respondent‘s standing to bring the foreclosure suit “in the first place.” 130 Hawai‘i at 15, 17, 304 P.3d at 1196, 1198. We concluded that because the issue of standing could have been raised at any time, it was not “unique” to the confirmation of sale and should therefore have been challenged in an appeal from the judgment of foreclosure. Id. at 17, 304 P.3d at 1198.
In contrast to the standing issue before the Wise court, the Monalims’ appellate challenge is to the method by which the circuit court calculated the deficiency judgment, which pertains to the amount of the deficiency judgment--not HawaiiUSA‘s right to collect it “in the first place.” See id. at 15, 17, 304 P.3d at 1196, 1198. When the Monalims’ appeal of the Foreclosure Judgment was dismissed by the ICA, the Monalims lost the ability to contest HawaiiUSA‘s right to a deficiency judgment pursuant to the Foreclosure Judgment. However, pursuant to
B. The Circuit Court Failed To Address the Monalims’ Laches Argument.
“Mortgage foreclosure is a proceeding equitable in nature and is thus governed by the rules of equity.” Beneficial Hawaii, Inc. v. Kida, 96 Hawai‘i 289, 312, 30 P.3d 895, 918 (2001). An equity court‘s sound discretion is not bound by strict rules of law, but it can be molded to do justice. Id. Although laches was originally a doctrine reserved for equitable proceedings like the present case, this court has stated that, in the State of Hawai‘i, “laches is a defense in all civil actions.” Ass‘n of Apartment Owners of Royal Aloha v. Certified Mgmt., Inc., 139 Hawai‘i 229, 235, 386 P.3d 866, 872 (2016). Therefore, laches is a defense against a motion for deficiency judgment. See BayBank Conn., N.A., v. Thumlert, 610 A.2d 658, 662 (Conn. 1992) (“[A] defendant who is demonstrably prejudiced by a plaintiff‘s delay in filing a motion for deficiency judgment may invoke the equitable defense of laches.“); E. Banking Co. v. Robbins, 149 N.W. 779, 780 (Neb. 1914) (holding that “a court of equity in the exercise of its inherent power to deny relief on account of laches, independently of the statute of limitations, should refuse to enter a deficiency judgment” when the petitioner had waited more than 14 years).
The doctrine of laches reflects the maxim that equity aids the vigilant, not those who slumber on their rights. Small v. Badenhop, 67 Haw. 626, 640, 701 P.2d 647, 656 (1985). There are two prongs of the laches defense, both of which must be satisfied in order for the doctrine to become applicable:
First, there must have been a delay by the plaintiff in bringing his claim, and that delay must have been unreasonable under the circumstances. Delay is reasonable if the claim was brought without undue delay after plaintiff knew of the wrong or knew of facts and circumstances sufficient to impute such knowledge to him. Second, that delay must have resulted in prejudice to defendant.
Herrmann v. Herrmann, 138 Hawai‘i 144, 153, 378 P.3d 860, 869 (2016) (quoting Adair v. Hustace, 64 Haw. 314, 321, 640 P.2d 294, 300 (1982)).
Despite ruling that the Monalims made no discernable argument as to a laches defense, the ICA also stated that the Monalims’ arguments as to prejudice--the second prong of laches--were without merit. However, a review of the record demonstrates that the Monalims raised substantive arguments as to both of the defense‘s requirements.
When evaluating the first prong of laches, a court considers whether, under the circumstances, the delay in bringing the claim was unreasonable. Id. In this case, the judgment confirming the sale was entered on December 22, 2011. More than four years later, on January 12, 2016, HawaiiUSA filed its motion for deficiency judgment. The Monalims argued in their opposition to HawaiiUSA‘s motion that the four-year delay was unprecedented, and that HawaiiUSA had provided no explanation for the delay in its submissions to the court. And when asked directly during the hearing on the motion, counsel for HawaiiUSA declined to provide an explanation for the delay, citing attorney-client privilege. The Monalims’ establishment of a four-year delay in HawaiiUSA seeking to recover a deficiency amount from the Monalims and the lack of any explanation for this delay by HawaiiUSA satisfied the Monalims’ burden to adduce sufficient facts to raise a laches defense with regard to the first prong. Cf. Herrmann, 138 Hawai‘i at 153-54, 378 P.3d at 869-70 (noting that the plaintiff did not proffer a satisfactory excuse for the almost seven-year delay in bringing suit); see also In re Kawai, 36 Haw. 533, 536 (Haw. Terr. 1943) (observing that a party who waited nearly five years after the final order of distribution before commencing an action to revoke a will did not provide a “satisfactory excuse“).
As to the second prong, that the delay must have resulted in prejudice to the defendant, we have stated, “What qualifies as prejudice for purposes of the laches doctrine
invariably depends on the facts and circumstances of a particular case, but it is ordinarily understood as anything that places the defendant ‘in a less favorable position.’” Herrmann, 138 Hawai‘i at 154, 378 P.3d at 870 (citing 27A Am.Jur.2d Equity § 143 (2008)).
At the circuit court, the Monalims averred in a declaration that they had planned to file a Chapter 7 Bankruptcy Petition to discharge the potential deficiency judgment but had abandoned their plan “after waiting close to a year” in anticipation of the deficiency judgment. In the interim, the Monalims explained, they had each started а business, started saving for their daughter’s college tuition, and were only months from clearing the foreclosure from their credit reports. The Monalims argued to the circuit court that the deficiency judgment would “wipe out” all of
The Monalims thus alleged facts concerning each prong of their laches defense. See Kerrigan v. Kerrigan, 642 A.2d 1324, 1327 (D.C. App. 1994) (holding that the defendant made a prima facie showing sufficient to establish that injustice would result from the plaintiff’s unexplained eight-year delay in bringing suit based on evidence that the defendant’s financial situation had greatly changed in the interim). The ICA in this case thus clearly erred in holding that the Monalims made no discernable argument as to a laches defense. Additionally, despite the presentation of the defense, the circuit court did not render findings of fact and conclusions of law or otherwise rule upon the applicability of the Monalims’ laches defense in its Order Granting Deficiency Judgment or the Deficiency Judgment.
The present case is analogous to Herrmann v. Herrmann, in which the plaintiff brought a motion for post-decree relief against the defendant to recover overpaid child support approximately seven years after being notified about the overpayments. 138 Hawai‘i at 147-48, 378 P.3d at 863-64. The defendant argued that the seven-year delay was unreasonable and that the plaintiff provided no explanаtion for waiting to bring the action for reimbursement. Id. at 148, 378 P.3d at 864. The family court denied the plaintiff’s motion, citing the seven-year delay in raising the issue and concluding that the plaintiff was “estopped” from pursuing the claim. Id. at 150, 378 P.3d at 866. On appeal, the ICA determined that the family court’s decision was based on “estoppel by laches” and that the family court had not made an independent conclusion as to prejudice. Id. at 150, 378 P.3d at 866. Applying its own judgment, the ICA held that both requirements of “estoppel by laches” were not present, and it accordingly vacated the family court’s decision. Id. at 150-53, 378 P.3d at 866-69.
On review, this court determined that there were three possible explanations for the family court’s failure to make findings of fact as to prejudice: (1) the family court did not apply the laches doctrine; (2) the court implicitly found that the prejudice prong had been satisfied; or (3) the family court failed to recognize that prejudice was a required prong for the application of laches. Id. at 155, 378 P.3d at 871. Because of the family court’s silence, we stated that it was uncertain whether the prejudice prong had been satisfied, and the case was remanded to the family court to render factual findings with respect to whether the defendant was prejudiced by the delay. Id.
Similarly, there are at least three possible explanations for the circuit court’s silence regarding the Monalims’ laches defense: (1) the circuit court implicitly concluded that laches was inapplicable because it determined that there was no unreasonable delay or that the Monalims suffered no prejudice; (2) the circuit court failed to properly apply the laches defense; or (3) the circuit court failed to duly consider the Monalims’ laches defense. That is to say, based on the circuit court’s lack of findings as to the laches defense, we are unable to determine on review whether the circuit court appropriately considered this defense presented by the Monalims.12 See 138 Hawai‘i at 155, 378 P.3d at 871.
In sum, we hold that the ICA erred in affirming the circuit court’s Deficiency Judgment without thе circuit court having demonstrably addressed the Monalims’ laches defense.14
And thus, the Order Granting Deficiency Judgment and the Deficiency Judgment must be vacated, and on remand the circuit court shall consider and render a determination on the Monalims’ laches defense.15
C. The Traditional Approach to Determining a Deficiency Judgment May Hold Mortgagors Liable for More than What Is Owed and Grant Mortgagees a Windfall.
In what appears to be a matter of first impression before this court, we review the method by which Hawai‘i courts calculate deficiency judgments. The Monalims argue that courts in Hawai‘i “matter-of-factly” calculate a deficiency judgment by subtracting the net proceeds of the foreclosure sale from the mortgage debt owed without considering evidence of the foreclosed property’s true market value at the time of sale. The Monalims contend that lower courts should be instructed to hold an evidentiary hearing to determine the true value of a property when calculating a deficiency judgment, and that this amount should be deducted from the mortgage debt in lieu of the sale price if it is the greater of the two.
Determination of the amount of a deficiency judgment generally follows two approaches.
(. . . continued)
(Emphases added.)
On its face, the term “shall” in the provision relates only to when the court intended to determine the amount of the deficiency judgment should one be requested. By contrast, the order specified that HawaiiUSA “may” request a deficiency judgment at the hearing on the confirmation of sale--a right HawaiiUSA appears to have exercised. We therefore hold that these arguments are without merit.
Scholars of foreclosure law have observed that the price obtained at a foreclosure sale is often far below the fair market value of the property as a result of the forced nature of a foreclosure sale. Robert M. Washburn, The Judicial and Legislative Response to Price Inadequacy in Mortgage Foreclosure Sales, 53 S. Cal. L. Rev. 843, 848 (1980); Nelson & Whitman, supra. In times of economic depression a foreclosed property is likely to bring an even lower price. Nelson & Whitman, supra. Measuring the deficiency judgment based on the foreclosure sаle price therefore may result in a double-loss to the deficiency debtor: the debtor has lost the foreclosed property, and the debtor has not been credited the actual value of the property against the outstanding mortgage debt. See Restatement (Third) of Property: Mortgages § 8.4 cmt. a; Washburn, supra, at 850.
Conversely, these conditions may allow a mortgagee to potentially recover more than the original mortgage debt owed to it. This situation occurs, for example, when a mortgagee purchases the property during a foreclosure sale at a price below its fair market value, obtains a deficiency judgment for the difference between the foreclosure price and the outstanding mortgage debt, and then resells the property at or above its fair market value. Restatement (Third) of Property: Mortgages § 8.4 cmt. a; Nelson & Whitman, supra; Washburn, supra, at 849. The traditional approach to calculating a deficiency judgment thus may produce inequity between mortgagors and mortgagees by holding a mortgagor liable for more than what is owed and granting mortgagees a windfall they are not due. This has prompted several state legislatures since the 1930s to abandon the traditional approach and instead mandate the use of a property’s fair market value as the minimum measure for determining a deficiency judgment.18 Nelson & Whitman, supra.
In addition to the states that have adopted the majority view through legislation, several state courts have adopted the majority view through judicial decisiоn. In Trustees of Washington-Idaho-Montana-Carpenters Employers Retirement Trust Fund v. Galleria Partnership, for example, the Supreme Court of Montana was called upon to review a $1,308,193.35 deficiency judgment against the defendants, whose foreclosed property had been valued at $1,100,000 two years prior to a sheriff’s sale but was sold for $565,000. 780 P.2d 608, 609, 611 (Mont. 1989). The court determined that its own statutes were silent as to the duty of the court to determine whether the sheriff’s sale reflected the fair market value of the foreclosed property. Id. at 616-17. The court observed, however, that the majority of the neighboring states had statutes that “limited [a deficiency judgment] to the difference between the fair market value of the secured property at the time of the foreclosure sale, regardless of a lesser amount realized at the sale, and the outstanding debt for which the property was secured.” Id. at 616-17. The Ninth Circuit had recognized that the purpose of two of those states’ statutes was to prevent the injustice that befalls the judgment debtor whose foreclosed property brings a price significantly less than its fair market value, the Montana court noted. Id. at 617 (citing U.S. v. MacKenzie, 510 F.2d 39, 41 (9th Cir. 1975)). In the exercise of its equity jurisdiction, the court deemed it proper to remand the case for determination of the property’s fair market value as of the time of the sheriff’s sale, which would then be used to calculate the deficiency judgment. Id.
The Supreme Court of West Virginia has similarly adopted the majority view through judicial decision. In Sostaric v. Marshall, the court noted that, while the governing state statute was silent as to whether the value of real property could be challenged at a deficiency judgment proceeding, the court had previously applied common law principles of equity to set aside foreclosure sales. 766 S.E.2d at 403. Concluding that adoption of the majority view would, inter alia, prevent a creditor from receiving a windfall at the expense of a deficiency defendant, the court overruled its previous precedent in favor of adopting the majority view. Id. at 405. Thus, state supreme courts have not shied from using their inherent equity powers to adopt the majority view to create fairness between the parties in foreclosure proceedings. See also Wansley v. First Nat. Bank of Vicksburg, 566 So.2d 1218, 1223-25 (Miss. 1990) (holding that every aspect of the foreclosure sale must be “commercially reasonable”); Vantium Capital, Inc. v. Hobson, 137 So.3d 497, 499 (Fla. Ct. App. 2014) (utilizing the “fair market value” as the measure for awarding a deficiency decree); Licursi v. Sweeney, 594 A.2d 396, 398-99 (Vt. 1991) (using the “value” of the property as the measure to determine whether a deficiency existed).
In 1997, the American Law Institute also adopted the majority approach in the Restatement (Third) of Property: Mortgages § 8.4. As set forth in the Restatement, the deficiency judgment debtor may request a determination of the “fair market value” of foreclosed property as of the date of the foreclosure sale. Restatement (Third) of Property: Mortgages § 8.4(c). If the fair market value is greater than the foreclosure price, the deficiency judgment debtor is entitled to offset the deficiеncy against the fair market value. Id. § 8.4(d). Determination of a property’s fair market value is not automatic and must be requested by a deficiency judgment debtor. Id. § 8.4 cmt. b. Thus, the Restatement “adopts the position of the substantial number of states that, by legislation or judicial decision,” allow for the calculation of the deficiency award using the greater of the fair market value or foreclosure price. Id. § 8.4 cmt. a.
In adopting the majority view, the Restatement’s approach is aimed at making the mortgagee whole while simultaneously preventing the unjust enrichment that could result from the traditional approach:
This approach enables the mortgagee to be made whole where the mortgaged real estate is insufficient to satisfy the mortgage obligation, but at the same time protects against the mortgagee purchasing the property at a deflated price, obtaining a deficiency judgment and, by reselling the real estate at a profit, achieving a recovery that exceeds the obligation.
Id. Logically, the majority rule protects a mortgagee against any loss that would occur from a sale of the property at less than its fair market value because the mortgagee retains the option of tendering a credit bid for the amount of the outstanding mortgage debt and obtaining the property without additional monetary payment if there are no greater bids. The dissent disagrees, arguing that “the mortgagee will still not be made whole if the
Thus, section 8.4 of the Restatement provides a greater balance of the equities between mortgagor and mortgagee in the foreclosure process than the traditional approach.
D. We Adopt the Majority Approach Because It Is Consistent with Principles of Equity and Hawai‘i Law.
In Hawai‘i,
The circuit court may assess the amount due upon a mortgage, whether of real or personal property, without the intervention of a jury, and shall render judgment for the amount awarded, and the foreclosure of the mortgage. Execution may be issued on the judgment, as ordered by the court.
Our interpretation of statutes is guided by the following well settled principles:
First, the fundamental starting point for statutory interpretation is the language of the statute itself. Second, where the statutory language is plain and unambiguous, our sole duty is to give effect to its plain and obvious meaning. Third, implicit in the task of statutory construction is our foremost obligation to ascertain and give effect to the intention of the legislature, which is to be obtained primarily from the language contained in the statute itself. Fourth, when there is doubt, doubleness of meaning, or indistinctiveness or uncertainty of an expression used in a statute, an ambiguity exists.
State v. Castillon, 144 Hawai‘i 406, 411, 443 P.3d 98, 103 (2019) (quoting Panado v. Bd. of Trs., Emps.’ Ret. Sys., 134 Hawai‘i 1, 11, 332 P.3d 144, 154 (2014)). Therefore, our interpretation of
The Monalims contend that courts in Hawai‘i currently determine a deficiency judgment by mechanically subtracting the price obtained at a foreclosure sale from the outstanding mortgage debt. They ask that this court follow the approach of the majority of states and the Restatement by requiring lower courts to conduct an evidentiary hearing to determine the fair market value of a foreclosed property when calculating a deficiency judgment. Citing Wodehouse v. Hawaiian Trust Co., 32 Haw. 835, 854 (Haw. Terr. 1933), HawaiiUSA argues that no such inquiry is required under Hawai‘i law and contends that our caselaw requires the mortgagor to bear the burden of any loss unless the foreclosure price “is so grossly inadequate as to shock the conscience.”
In Wodehouse, the trial court ordered the foreclosure and sale of property at a public auction with an upset price of $82,000. Id. at 840. After the property twice failed to receive any bids, the court gave the mortgagees a choice between taking possession of the mortgaged property as credit for $82,000 of the debt or postponing the sale to a later date. Id. The mortgagees declined both options, but the court nonetheless ordered the conveyance of the property to the mortgagees and credited the mortgagor $82,000 toward their outstanding debt. Id.
On appeal, the Supreme Court of the Territory of Hawai‘i concluded that while a court may refuse to confirm a sale where “the highest bid offered is so grossly inadequate as to shock the conscience,” the trial court could not compel the mortgagee to purchase the property at a price set by the court because the mortgagee had a contractual right to foreclose on the property. Id. at 852-54. The court therefore set aside the trial court’s decree and remanded the case to the lower court with instructions to have the property offered at public auction under foreclosure. Id. at 854.
Wodehouse thus dealt with the court’s discretion with regard to the sale and confirmation of sale of a foreclosed property and not with the separate question of whether and for what amount a deficiency judgment is due. See Wansley, 566 So.2d at 1224 (holding that the rule that “a foreclosure sale may not be set aside unless the sales price is so inadequate as to shock the conscience . . . . has nothing whatsoever to do with the separate and distinct question of what, if any, deficiency judgment may be allowed” (citations omitted)). Wodehouse is therefore not controlling with regard to the question presently before the court.
“Mortgage foreclosure is a proceeding equitable in nature and is thus governed by the rules of equity.” Beneficial Hawaii, Inc. v. Kida, 96 Hawai‘i 289, 312, 30 P.3d 895, 918 (2001). A court sitting in equity has the power to mold its decrees to conserve the equities of the parties under the circumstances. Peak Capital Grp., LLC v. Perez, 141 Hawai‘i 160, 179, 407 P.3d 116, 135 (2017). When considering the equities in a foreclosure case, “all of the equities must be considered” including “[t]he equities affecting the mortgagees . . . as well as those affecting the mortgagors.” Wodehouse, 32 Haw. at 842. The equitable discretion provided to our courts by
As observed in the commentary to the Restatement, the majority rule “enables the mortgagee to be made whole” and “also protects the mortgagor from the harsh consequences of suffering both the loss of the real estate and the burden of a deficiency judgment that does not fairly recognize the value of that real estate.” Restatement (Third) of Property: Mortgages § 8.4 cmt. a. By contrast, the traditional approach is susceptible to abuse, potentially permitting a mortgagee to reap an undue windfall at a mortgagor’s expense. Id. The commentary goes on to note that “[t]he approach of this section is embodied in statutes in many jurisdictions, but the principles of this section are applicable whether a statute requires it or not.” Id. (emphasis added). Because the equities clearly weigh in favor of the majority approach, we now adopt section 8.4 of the Restatement (Third) of Property as Hawai‘i
The dissent asserts that by adopting section 8.4 of the Restatement (Third) of Property, which accords with the rule in the majority of jurisdictions and the modern trend, this court usurps the legislature’s role. Dissent at 10, 13, 13 n.4, 22-23. The dissent’s contention is groundless in light of the fact that the legislature, through
(. . . continued)
a capitalization of net income; and (3) the current cost of reproducing the property less depreciation.
Additionally, we adopt section 8.4’s prohibition on the advance waiver of the right to a determination of the fair market value because “[i]f such waiver were permitted, most mortgage forms would routinely incorporate waiver language and the impact of this section would be significantly weakened.” Id. § 8.4 Reporters’ Note to cmt. b.
the foreclosed property.21 The dissent’s assertion reflects a core misunderstanding of the legal principle at the foundation of this opinion--the application of a statute to the facts of a case. It is axiomatic that it is “the province and duty of the judicial department to say what the law is.” Marbury v. Madison, 5 U.S. 137, 177 (1803). And accordingly, “[t]hose who apply the rule to particular cases, must of necessity expound and interpret that rule.” Id.
Despite the clear language of the statute, the dissent claims that our interpretation of
added) (citing Indep. Mortg. Tr. v. Glenn Constr. Corp., 57 Haw. 554, 555 n.1, 560 P.2d 488, 489 n.1 (1977)).22
The dissent next relies upon 2012 “legislative history” to
Additionally, the dissent disagrees with our adoption of the Restatement‘s approach because “the new rule will not . . . protect both parties to the mortgage.” Dissent at 10. However, the dissent‘s view has been overwhelmingly rejected by the majority of jurisdictions, legal scholars, and the American Law Institute. See Washburn, supra, at 939 (“Fairness in the mortgage foreclosure process can be achieved only by balancing the rights of the mortgagee with the need to protect the mortgagor. The fulcrum of this balance is the market value of the foreclosed property.“); Restatement (Third) of Property: Mortgages § 8.4 cmt. a (adopting position of the substantial number of jurisdictions providing the deficiency defendant with the right to have “the greater of the fair market value of the real estate or the foreclosure sale price be used in calculating the deficiency“).
The dissent also posits that our adoption of the majority rule “will unnecessarily burden parties to a foreclosure action,” and that tasking the trial court with assessing the fair market value of real property is unduly burdensome because it will “require[] additional time and force[] all parties to incur additional costs.” Dissent at 20-21. Despite the dissent‘s speculative concerns, the experience of jurisdictions following the majority rule is quite the contrary:
[W]e find no authority or data demonstrating that our trustee foreсlosure laws would be unsettled were we to allow a trust deed grantor to challenge the value of real property at a deficiency judgment proceeding. A majority of states allow grantors to challenge the value of real property at a deficiency judgment proceeding. We have found no authority suggesting that the states that follow the majority rule suffer from unsettled foreclosure laws, nor have we found any data demonstrating that the banking institutions in those states have been negatively affected as a result of their jurisdictions adhering to the majority rule.
Sostaric, 766 S.E.2d at 404 (emphases added). Moreover, any administrative concerns entailed by our adoption of section 8.4 are more than offset by the equity and fairness gained in determining a deficiency judgment based on the fair market value of the property, as manifestly demonstrated by the widespread adoption of the majority approach.26
limiting the application of the fair value determination to mortgagee purchasers may discourage mortgagees who contemplate obtaining deficiency judgments from taking part in the foreclosure bidding and hence may remove a significant impetus to higher bidding by third parties. In addition, even when a third party is the purchaser, the mortgagor may still suffer the unjustifiable double burden imposed by the loss of his or her real estate and an unfairly measured deficiency judgment. Consequently, under this section foreclosing mortgagees are subject to the fair value limitation on deficiency judgments irrespective of who purchases at the sale.
Restatement (Third) of Property: Mortgages § 8.4 Reporters’ Note to cmt. b (emphases added). Thus, while section 8.4‘s primary purpose is “preventing the unjust enrichment of the mortgagee . . . [section 8.4] also protects the mortgagor from the harsh consequences of suffering both the loss of the real estate and the burden of a deficiency judgment that does not fairly recognize the value of that real estate.” Restatement (Third) of Property: Mortgages § 8.4 cmt. a. This second purpose is served even when a third party is the purchaser because the fair value determination protects the mortgagor from a deficiency judgment that does not fairly recognize the value of the lost real estate.28
We observe that both the dissent and HawaiiUSA argue that the deficiency judgment awarded against the Monalims fairly recognizes the value of the Property because the sale price at the foreclosure auction exceeded the City and County‘s valuation of the Property for purposes of tax assessment. Dissent at 11. The reliance by HawaiiUSA and the dissent on the tax-assessed value of the Property to demonstrate market value does not recognize the longstanding and “overwhelming weight of authority that assessed value is not competent direct evidence of value for purposes other than taxation.” C. C. Marvel, Annotation, Valuation for Taxation Purposes as Admissible to Show Value for Other Purposes 39 A.L.R.2d 209 § 4[a] (1955); see also Mettee v. Urban Renewal Agency, 518 P.2d 555, 557 (Kan. 1974) (“Although the assessor is required to appraise the value of the property, it is an open secret that the assessment rarely approaches the true market value.” (quoting 5 Nichols on Eminent Domain § 22.1 (3d ed.))). For over a century, courts in this country have recognized that tax assessments of real estate are not always aimed at estimating fair market value, and even when that is the case it is well understood that the custom of assessors is to assess property in comparison with the surrounding land. Wray v. Knoxville, L.F. & J.R. Co., 82 S.W. 471, 475 (Tenn. 1904) (“This court knows judicially and as a part of the financial history of the State that
In any event we need not resolve whether the deficiency judgment awarded against the Monalims fairly accounted for the value of the Property. Of more fundamental importance, there is little disagreement that the equitable considerations of foreclosure proceedings warrant affording the mortgagee the right to apply the fair market value of mortgaged property towards the amount due on the mortgage, as section 8.4 provides. The majority of jurisdictions and the growing consensus regarding a mortgagor‘s right to a fair market value determination firmly establishes that, by adopting section 8.4, we advance the fundamental fairness of foreclosure proceedings in Hawaiʻi, protect mortgagors from the double burden of losing their land and suffering an unfairly measured deficiency judgment, and enable mortgagees to be made whole.
Because our adoption of section 8.4 “announce[s] a new rule . . . we are free to apply this new rule with or without retroactivity.”30 Lewi v. State, 145 Hawaiʻi 333, 349 n.21, 452 P.3d 330, 346 n.21 (2019) (internal quotations and alterations omitted) (quoting State v. Jess, 117 Hawaiʻi 381, 401, 184 P.3d 133, 153 (2008)). Regarding the retroactive effect of our holdings, we have adopted the following approach:
This court has generally considered three primary alternatives in deciding to what degree a new rule is to have retroactive effect. First, this court may give a new rule purely prospective effect, which means that the rule is applied neither to the parties in the law-making decision nor to those others against or by whom it might be applied to conduct or events occurring before that decision. Second, this court may give a new rule limited or “pipeline” retroactive effect, under which the rule applies to the parties in the decision and all cases that are on direct review or not yet final as of the date of the decision. Third, this court may give a new rule full retroactive effect, under which the rule applies both to the parties before the court and to all others by and against whom claims may be pressed. . . .
In exercising our discretion in deciding the effect of a new rule, we weigh the merits and demerits of retroactive application of the particular rule in light of (a) the purpose of the newly announced rule, (b) the extent of reliance . . . on the old standards, and (c) the effect on the administration of justice of a retroactive application of the new standards.
Id. (internal citations and quotations omitted). Here, we adopt the majority approach to calculating deficiency judgments in order to properly balance the equities between mortgagors and mortgagees, protect mortgagors from double-loss by not fairly recognizing the value of the foreclosed property, and prevent undue windfalls at mortgagors’ expense. However, parties have relied on the finality of the many deficiency judgments that have occurred within this state over the years, and allowing petitions to reоpen finalized deficiency judgments would impose a significant effect on the administration of
IV. CONCLUSION
Based on the foregoing, we vacate the ICA‘s August 16, 2018 Judgment on Appeal, the circuit court‘s Order Granting Deficiency Judgment, and the Deficiency Judgment, and the case is remanded to the circuit court for proceedings consistent with this opinion.
Gary Victor Dubin
(Frederick J. Arensmeyer with him on the briefs, application, and reply) for petitioners
Thomas J. Berger
(Jonathan W.Y. Lai and Tracey L. Ohta with him on the briefs and response) for respondent
/s/ Sabrina S. McKenna
/s/ Richard W. Pollack
/s/ Michael D. Wilson
Notes
(a) Without limiting the class of orders not specified in section 641-1 from which appeals may also be taken, the following orders entered in a foreclosure case shall be final and appealable:
(1) A judgment entered on a decree of foreclosure, and if the judgment incorporates an order of sale or an adjudication of a movant‘s right to a deficiency judgment, or both, then the order of sale or the adjudication of liability for the deficiency judgment also shall be deemed final and appealable[.]
Additionally,
(3) A deficiency judgment; provided that no appeal from a deficiency judgment shall raise issues relating to the judgment debtor‘s liability for the deficiency judgment (as opposed to the amount of the deficiency judgment), nor shall the appeal affect the finality of the transfer of title to the foreclosed property pursuant to the order confirming sale.
(continued . . .)At the hearing for confirmation of sale, if it appears that the proceeds of the sale of the Mortgaged Property are insufficient to pay all аmounts due and owing to [HawaiiUSA], [HawaiiUSA] may request a deficiency judgment in its favor and against the [Monalims] for the amount of the deficiency which shall be determined at the time of confirmation and have immediate execution thereafter.
Sostaric, 766 S.E.2d at 404 n.17 (quoting First Bank v. Fischer & Frichtel, Inc., 364 S.W.3d 216, 227 n.5 (Mo. 2012) (Teitelman, C.J., dissenting)).A lender compensates for risk by charging an interest rate that is set both by the financial markets and by the lender’s assessment of the borrower’s creditworthiness. The lender also manages risk by appraising the fair market value of the property to ensure that the loan is adequately secured. Changing to a fair market value approach certainly would lessen the lender’s chance of a large windfall and would mean only that [the mortgagee], like the borrower, is losing or gaining money based on fair market value of property. The risk of loss is part of the risk of lending. That risk of loss should not be borne solely by the borrower and then amplified by measuring the deficiency by reference to the foreclosure sale price.
The determination of fair market value may appropriately utilize a variety of approaches including (1) the “market data” approach indicated by recent sales of comparable properties; (2) the “income approach,” or the value which the real estate’s net earning power will support based upon (continued . . .)