Lee v. Hsbc Bank Usa

• Decision Date: 05 November 2009
• Docket Number: No. 29744.,29744.
• Citation: 218 P.3d 775,121 Haw. 287
• Parties: Steven D. LEE and KMK Holdings, LLC, Plaintiffs-Appellants, v. HSBC BANK USA, National Association as Trustee Under Pooling and Servicing Agreement Dated as of April 1, 2007 SG Mortgage Securities Trust 2007 NC1 Asset Backed Certificates, Series 2007 NC1, Defendants-Appellees, and John Does 1-10; Jane Does 1-10; Doe Corporations 1-10; Doe Partnerships 1-10; Doe Trusts 1-10; and Doe Entities 1-10, Defendants.
• Court: Hawaii Supreme Court

218 P.3d 775

121 Haw. 287

Steven D. LEE and KMK Holdings, LLC, Plaintiffs-Appellants, v. HSBC BANK USA, National Association as Trustee Under Pooling and Servicing Agreement Dated as of April 1, 2007 SG Mortgage Securities Trust 2007 NC1 Asset Backed Certificates, Series 2007 NC1, Defendants-Appellees, and John Does 1-10; Jane Does 1-10; Doe Corporations 1-10; Doe Partnerships 1-10; Doe Trusts 1-10; and Doe Entities 1-10, Defendants.

No. 29744.

Supreme Court of Hawai`i.

November 5, 2009.

Steven K.S. Chung and Chanelle M. Chung (of Steven Chung and Associates LLLC), Honolulu, on the briefs, for plaintiffs-appellants Steven D. Lee and KMK Holdings, LLC.

Paul Alston and J. Blaine Rogers (of Alston Hunt Floyd & Ing), Honolulu, on the briefs, for defendants-appellees HSBC Bank USA, National Association as Trustee under Pooling and Servicing Agreement Dated as of April 1, 2007 SG Mortgage Securities Trust 2007 NC1 Asset Backed Certificates, Series 2007 NC1.

MOON, C.J., NAKAYAMA, ACOBA, and DUFFY, JJ. and Intermediate Court of Appeals Judge FUJISE, assigned by Reason of Vacancy.

Opinion of the Court by DUFFY, J.

The United States District Court for the District of Hawai`i (District Court) certified the following question of law to the Hawai`i Supreme Court:

Where a mortgagor cures its default prior to a foreclosure proceeding pursuant to [Hawai`i Revised Statutes (HRS)] § 667-5, but an auction inadvertently goes forward, is a valid agreement created entitling the high bidder at the auction to lost profits?

Based on the analysis below, we hold that a valid agreement is not created in such a situation and that the high bidder is entitled only to a return of his or her downpayment plus interest.

I. BACKGROUND

A. Factual Background

Defendants-Appellees HSBC Bank USA, National Association as Trustee under Pooling and Servicing Agreement Dated as of April 1, 2007 SG Mortgage Securities Trust 2007 NC1 Asset Backed Certificates, Series 2007 NC1; John Does 1-10; Jane Does 1-10; Doe Corporations 1-10; Doe Partnerships 1-10; Doe Trusts 1-10; and Doe Entities 1-10 (collectively Defendant) is the holder of a mortgage (the mortgage) dated October 2, 2006, recorded in the State of Hawai`i Bureau of Conveyances, on real property located at 1228 Nohea Street in Kalaheo, County of Kaua`i, Hawai`i (the Property). The mortgage secures a loan of $134,500 to mortgagors James and Claudette Muchmore (the Muchmores).

Prior to August 22, 2008, the Muchmores were in default on the loan secured by the Mortgage. Defendant, through its servicing agent HomEq Servicing (HomEq), began nonjudicial foreclosure on the Property. To that end, in July and August 2008, Defendant's foreclosure counsel, Leu & Okuda, published notice of Defendant's intent to foreclose pursuant to Hawai`i Revised Statutes (HRS) sections 667-5 through 667-10 by public auction to be held on August 26, 2008.

On August 20, 2008, HomEq faxed a letter to the Muchmores providing them a reinstatement quote to bring their payments on the loan current. The letter calculated that the Muchmores owed $14,399.86, through August 26, 2008. The letter explained that HomEq

expressly reserves its right to continue with any enforcement action until the loan is fully reinstated (no longer delinquent) or is paid in full. Nothing herein constitutes nor shall be construed as a waiver of the rights of the lender pursuant to the terms of your loan documents.

The Muchmores wired $14,399.86 to HomEq on August 22, 2008, which HomEq accepted, as indicated by its internal system noting that the Muchmores' loan was reinstated. On August 25, 2008, HomEq advised its vendor to stop the foreclosure sale, but the vendor failed to advise Defendant's foreclosure counsel, Leu & Okuda, to stop the foreclosure sale.

On August 26, 2008, Leu & Okuda — unaware that the Muchmores had brought their loan current — conducted the foreclosure auction on the Property. Plaintiff Steven Lee (Lee), attending the auction individually and in his capacity as manager of Plaintiff KMK Holdings, LLC (KMK) (collectively Plaintiffs), submitted the winning bid of $302,000 for the Property. Lee gave Leu & Okuda checks totaling $33,000 as a downpayment on the Property. In return, Leu & Okuda provided Lee a Receipt and Disclosure stating that the Property was to be conveyed by Defendant's quitclaim conveyance within 35 days of recording the Affidavit of Sale and upon payment by Lee of all costs related to the sale of the Property.

Leu & Okuda later informed Lee that the Muchmores had reinstated the loan prior to the auction and therefore returned Lee's downpayment checks totaling $33,000 as well as a check for $99.45 representing accrued interest. On September 10, 2008, counsel for Plaintiffs sent a demand letter to Leu & Okuda stating that Lee was ready, willing, and able to purchase the Property and therefore rejected Defendant's attempted rescission of the auction sale. Defendant has since asserted that the sale of the Property is void due to the loan reinstatement, resulting in Plaintiffs being entitled only to the return of their downpayment checks and accrued interest.

B. Procedural Background

On October 15, 2008, Plaintiffs filed their Complaint in the State of Hawai`i Circuit Court of the First Circuit, alleging claims for breach of contract seeking specific performance or damages (counts I-II), and violation of HRS section 480-2(a) (count III). On December 4, 2008, Defendant removed the case to the District Court.

On January 8, 2009, Plaintiffs filed their Motion for Partial Summary Judgment on their breach of contract claim for damages. On February 12, 2009, Defendant filed its Counter Motion for Summary Judgment and Opposition to Plaintiffs' Motion for Summary Judgment. On February 19, 2009, Plaintiffs filed their Opposition to Defendant's Counter Motion for Summary Judgment and Reply in support of their Motion for Summary Judgment. On February 25, 2009, Defendant filed its Reply in support of its Counter Motion. A hearing was held on the parties' respective Motions for Summary Judgment on March 2, 2009. The District Court issued its Certified Question on April 6, 2009. This court issued its Order On Certified Question on April 20, 2009, allowing the parties to file briefs on the Certified Question in accordance with Hawai`i Rules of Appellate Procedure (HRAP) Rule 28.

II. STANDARD OF REVIEW

A. Certified Question

"The supreme court shall have jurisdiction and powers . . . [t]o answer, in its discretion . . . any question or proposition of law certified to it by a federal district or appellate court if the supreme court shall so provide by rule[.]" HRS § 602-5(a)(2) (Supp.2008).

"When a federal district court or appellate court certifies to the Hawai`i Supreme Court that there is involved in any proceeding before it a question concerning the law of Hawai`i that is determinative of the cause and that there is no clear controlling precedent in the Hawai`i judicial decisions, the Hawai`i Supreme Court may answer the certified question by written opinion." HRAP 13(a).

An issue of law presented by a certified question is reviewed by this court de novo under the right/wrong standard of review. Francis v. Lee Enter., Inc., 89 Hawai`i 234, 236, 971 P.2d 707, 709 (1999).

III. DISCUSSION

A. The Foreclosure Sale was Invalid Under HRS Section 667-5.

HRS section 667-5 authorizes nonjudicial foreclosure under a power of sale clause contained in a mortgage. HRS § 667-5 (Supp. 2008). Section 667-5 reads in relevant part:

Foreclosure under power of sale; notice; affidavit after sale. (a) When a power of sale is contained in a mortgage, and where the mortgagee, the mortgagee's successor in interest, or any person authorized by the power to act in the premises, desires to foreclose under power of sale upon breach of a condition of the mortgage, the mortgagee, successor, or person shall be represented by an attorney who is licensed to practice law in the State and is physically located in the State. The attorney shall:

(1) Give notice of the mortgagee's, successor's, or person's intention to foreclose the mortgage and of the sale of the mortgaged property, by publication of the notice once in each of three successive weeks (three publications) the last publication to be not less than fourteen days before the day of sale, in a newspaper having a general circulation in the county in which the mortgaged property lies; and

(2) Give any notices and do all acts as are authorized or required by the power contained in the mortgage.

Id. (emphasis added). This section specifically requires breach of a condition of the mortgage as a condition precedent to foreclosure. Id.

The Muchmores' mortgage contains a power of sale clause, which reads in relevant part:

22. Acceleration; Remedies. Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement in this Security Instrument . . . The notice shall specify: (a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument and sale of the Property. The notice shall further inform Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale. If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may invoke the power of sale and any other remedies permitted by Applicable Law.

This clause requires the Muchmores to be in default and to have failed to cure the default by the date...