296 P.3d 1062 (Hawai'i 2013), SCAP-30686, Eastern Savings Bank, FSB v. Esteban
|Citation:||296 P.3d 1062, 129 Hawai'i 154|
|Opinion Judge:||McKENNA, J.|
|Party Name:||EASTERN SAVINGS BANK, FSB, Respondent/Plaintiff-Appellee, v. Eduardson ESTEBAN and Emalyn P. Gabriel-Esteban, Petitioners/Defendants-Appellants.|
|Attorney:||Gary Victor Dubin and Frederick J. Arensmeyer, Honolulu, for petitioners. Francis P. Hogan and Gary P. Quiming, Honolulu, for respondent.|
|Judge Panel:||RECKTENWALD, C.J., NAKAYAMA, ACOBA, and McKENNA, JJ., and Circuit Judge LEE, in Place of DUFFY, J., Recused.|
|Case Date:||March 15, 2013|
|Court:||Superior Court of Hawai'i|
[129 Hawai'i 155] I. Introduction
Defendants-Appellants Eduardson Esteban and Emalyn P. Gabriel-Esteban ("the Estebans"), borrowers and mortgagors under a residential mortgage loan, appeal the Circuit Court of the Fifth Circuit's ("circuit court") judgment confirming the foreclosure sale of real property to Plaintiff-Appellee Eastern Savings Bank, FSB ("Eastern").1 This court accepted a discretionary transfer of the case.
The issue presented is whether Hawai‘i res judicata principles prohibit a debtor from asserting federal Truth in Lending Act ("TILA") rescission rights after a foreclosure judgment has become final, even if TILA's three-year time limit for rescission has not expired.
For the reasons discussed below, we answer in the affirmative. Therefore, we affirm the judgment of the circuit court confirming sale of the foreclosed property to Eastern, granting a writ of possession, and entering a deficiency judgment against the Estebans.
This case arises out of a foreclosure 2 on a mortgage on property located on Kaua‘i ("the Property"), granted by the Estebans to Eastern as security for a $489,000 loan obtained on August 15, 2007. The Estebans defaulted on the loan and, on January 27, 2009, Eastern filed a state court action to foreclose the mortgage.
Although properly served, the Estebans failed to appear before the court and the clerk of the court entered their default. Eastern, thereafter, moved for summary judgment, interlocutory decree of foreclosure, and order of sale.
On April 24, 2009, the court entered judgment in favor of Eastern and against the Estebans, foreclosing on the mortgage ("Foreclosure Judgment"). The Estebans [129 Hawai'i 156]
did not appeal the Foreclosure Judgment. On November 17, 2009, the foreclosure commissioner held a public auction to sell the Property. Eastern submitted the only bid, for $420,000. On December 14, 2009, Eastern filed a Motion for Confirmation of Sale, Writ of Possession, and Deficiency Judgment ("Motion for Confirmation of Sale"). The motion was scheduled for hearing on April 22, 2010.
On April 22, 2010, the Estebans mailed Eastern a letter stating they were exercising their alleged right to rescind the residential mortgage transaction "based on numerous federal Truth-in-Lending Act violations, including in part (1) the failure to deliver to each of them at closing any copies of notices of their right to cancel, [ ](2) instead funding their loan based upon an unlawfully inadequate and contrived so-called hardship waiver of their right to cancel, and (3) the failure to provide them with accurate good faith disclosures." Four hours before the confirmation hearing, the Estebans filed a complaint against Eastern in the United States District Court for the District of Hawai‘i (Civ. No. 10-00234-HG-LEK), seeking a declaratory judgment that the promissory note and mortgage had been timely cancelled pursuant to TILA prior to any sale or dispositive state court judgment.
On May 3, 2010, the Estebans submitted a brief opposing the Motion for Confirmation of Sale and urging the circuit court to await disposition of the federal case before confirming the sale. They argued that their federal TILA case against Eastern was not barred by res judicata principles and that they had timely exercised their rescission rights by filing their federal claim prior to the expiration of TILA's three-year deadline and before entry of the state court's final confirmation of sale.3
The circuit court took judicial notice of the Estebans' pending federal case, but declined to stay confirmation of the foreclosure sale in the meantime. On May 20, 2010, the circuit court held a hearing on the Motion for Confirmation of Sale.
Citing Albano v. Norwest Financial Hawaii, Inc., 244 F.3d 1061, 1064 (9th Cir.2001), Eastern argued that a judgment of foreclosure had been entered on April 24, 2009, the Estebans had not appealed that judgment and, therefore, the Estebans' TILA claim was barred by res judicata. The Estebans, on the other hand, argued that the state court was not bound by the Ninth Circuit's interpretation of Hawai‘i law in Albano and maintained that a borrower retains the right to rescind a mortgage prior to confirmation of sale despite a judgment of foreclosure. They contended that Albano was unpersuasive because the Ninth Circuit's interpretation of Hawai‘i res judicata law erroneously relied on Pacific Concrete Federal Credit Union v. Kauanoe, 62 Haw. 334, 614 P.2d 936 (1980), a case that did not involve a foreclosure action. In addition, they claimed that Albano conflicted with federal decisions from other states. Finally, they suggested that Albano should not be followed because it misread Hawai‘i res judicata law.
The circuit court acknowledged that Albano was not binding on state courts but agreed with the Ninth Circuit's analysis of Hawai‘i law and concluded that the Estebans' pending TILA case did not bar confirmation of the sale of the Property. On July 15, 2010, the court entered a judgment confirming sale of the Property to Eastern, granting a writ of possession, and entering a deficiency judgment against the Estebans.4
[129 Hawai'i 157] The Estebans filed a notice of appeal on August 16, 2010. They posed the following question on appeal:
As a matter of Hawaii res judicata law, during judicial foreclosures pending sale confirmation, does a Hawaii borrower lose his or her federal Truth-in-Lending Act right to rescind a mortgage loan refinancing transaction within three years of loan consummation where there otherwise may exist TILA violations and a timely notice of cancellation is sent to lenders up to and until final judicial confirmation, simply because of a prior entry of a decree of foreclosure, whether appealed or not, and simply because of the occurrence of a prior nonbinding auction sale?
This court accepted a discretionary transfer of the appeal pursuant to HRS § 602-58(b)(1).
III. Standard of Review
Application of res judicata is a question of law. See Exotics Hawai‘i-Kona, Inc. v. E.I. Dupont De Nemours & Co., 104 Hawai‘i 358, 364, 90 P.3d 250, 256 (2004). Questions of law are reviewed de novo under the right/wrong standard. Best Place, Inc. v. Penn Am. Ins. Co., 82 Hawai‘i 120, 123, 920 P.2d 334, 337 (1996).
The issue presented is whether Hawai‘i res judicata principles prohibit a debtor from asserting federal TILA rescission rights 5 after a Foreclosure Judgment has become final, even if TILA's three-year time limit for rescission has not expired.
A. TILA Rescission Rights
TILA, as contained in Title I of the Consumer Credit Protection Act, provides consumers with various protections "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." 15 U.S.C. § 1601(a).
One protection available to consumers under TILA is a right of rescission in any consumer credit transaction in which a security interest is acquired in property used as the principal dwelling of the person to whom credit is extended; this "buyer's remorse" provision extends for three business days following consummation of the transaction or [129 Hawai'i 158]
delivery of the relevant disclosures to the consumer.615 U.S.C. § 1635(a).
TILA requires that creditors clearly and conspicuously disclose information regarding the right to rescind and provide borrowers with appropriate forms to exercise this right. 15 U.S.C. § 1635(a). Where a creditor fails to make the required disclosures under TILA, the act extends the borrower's right to rescind for three years after consummation of the subject transaction. 715 U.S.C. § 1635(f).
The Estebans' attempt to rescind occurred within this three-year time limit, but after a state court judgment foreclosing on the subject Property. In order to determine whether the circuit court erred in confirming sale of the Property, this court must determine whether Hawai‘i res judicata law barred the Estebans from asserting a rescission claim after the circuit court's Foreclosure Judgment became final.
B. Res Judicata Principles
Res judicata, or claim preclusion, and collateral estoppel, or issue preclusion, are doctrines that limit a litigant to one opportunity to litigate aspects of the case to prevent inconsistent results and multiplicity of suits and to promote finality and judicial economy. Dorrance v. Lee, 90 Hawai‘i 143, 148-49, 976 P.2d 904, 909-10 (1999). 8 Claim preclusion and issue preclusion are, however, separate doctrines that involve distinct questions of law. Claim preclusion prohibits the parties or their privies from relitigating a previously adjudicated cause of action; issue preclusion, by contrast, prevents the parties or their...
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