In re Malabe

• Decision Date: 17 June 2020
• Docket Number: SCWC-17-0000145
• Citation: 465 P.3d 777
• Parties: Gilbert V. MALABE and Daisy D. Malabe, Respondents/Plaintiffs-Appellants, v. ASSOCIATION OF APARTMENT OWNERS OF EXECUTIVE CENTRE, BY AND THROUGH its BOARD OF DIRECTORS, Petitioner/Defendant-Appellee.
• Court: Hawaii Supreme Court

465 P.3d 777

Gilbert V. MALABE and Daisy D. Malabe, Respondents/Plaintiffs-Appellants,

v.ASSOCIATION OF APARTMENT OWNERS OF EXECUTIVE CENTRE, BY AND THROUGH its BOARD OF DIRECTORS, Petitioner/Defendant-Appellee.

SCWC-17-0000145

Supreme Court of Hawai‘i.

JUNE 17, 2020

As Corrected June 18, 2020

I. Introduction

This certiorari proceeding arises out of a civil lawsuit brought by condominium owners whose unit was nonjudicially foreclosed by their association of apartment owners. The unit was then sold by their association for substantially less than fair market value, leaving the owners not only without their home, but also with mortgage liability.

On December 13, 2016, Gilbert V. Malabe and Daisy D. Malabe ("Malabes") then filed a complaint in the Circuit Court of the First Circuit ("circuit court") against the Association of Apartment Owners of Executive Centre, by and through its Board of Directors ("AOAO"). The complaint asserted claims for wrongful foreclosure and unfair or deceptive acts or practices ("UDAP") based on the AOAO's nonjudicial foreclosure and December 17, 2010 public sale of the Malabes’ condominium apartment due to unpaid assessment fees. On February 17, 2017, the circuit court¹ granted the AOAO's Hawai‘i Rules of Civil Procedure ("HRCP") Rule 12(b)(6) (1996) motion to dismiss the complaint for "failure to state a claim upon which relief can be granted," and entered final judgment.

The Malabes appealed to the Intermediate Court of Appeals ("ICA"). The ICA concluded that based on its decision in Sakal v. Ass'n of Apartment Owners of Hawaiian Monarch, 143 Hawai‘i 219, 426 P.3d 443 (App. 2018), cert. denied, 2018 WL 6818901 (Dec. 28, 2018), cert. granted, 2019 WL 245225 (Jan. 17, 2019),² because the AOAO lacked a power of sale, the circuit court erred in dismissing Count I, the Malabes’ wrongful foreclosure claim. See Malabe v. Ass'n of Apartment Owners of Executive Ctr., CAAP-17-0000145, 2018 WL 6258564, at 7 (App. Nov. 29, 2018) (SDO). The ICA affirmed the circuit court, however, with respect to its dismissal of Count II, holding the Malabes’ UDAP claim time-barred and equitable tolling for fraudulent concealment inapplicable. See Malabe, SDO at 9–10.

On certiorari, the AOAO asserts the ICA erred in vacating the circuit court's dismissal of Count I, the wrongful foreclosure claim. The Malabes assert the ICA erred in affirming the circuit court's dismissal of Count II, the UDAP claim.

We hold the ICA did not err in reinstating Count I, the Malabes’ wrongful foreclosure claim, based on its ruling in Sakal, which correctly held that in order for an association to utilize the nonjudicial power of sale foreclosure procedures set forth in Hawai‘i Revised Statutes ("HRS") Chapter 667, a power of sale in its favor must have existed in association bylaws or in another enforceable agreement with unit owners. 143 Hawai‘i at 220-21, 426 P.3d at 444-45.

We further hold Act 282 of 2019 ("Act 282")³ does not affect this holding, as the statutory changes therein do not affect the Malabes’ claims, which are based on HRS § 667-5 repealed in 2012. We therefore do not address the Malabes’ constitutional challenges to Act 282, as "[a] fundamental and longstanding principle of judicial restraint requires that courts avoid reaching constitutional questions in advance of the necessity of deciding them." Rees v. Carlisle, 113 Hawai‘i 446, 456, 153 P.3d 1131, 1141 (2007). We note, however, that on April 10, 2020, the United States District Court for the District of Hawai‘i held Act 282 unconstitutional as violative of the Contracts Clause of Article I, § 10 of the United States Constitution.⁴

We further hold the ICA erred in affirming the circuit court's dismissal of Count II by deeming the Malabes’ UDAP claim time-barred. Based on "notice pleading" standards and the principle that in ruling on HRCP 12(b)(6) motions to dismiss, allegations within a complaint must be accepted as true, Bank of America, N.A. v. Reyes-Toledo, 143 Hawai‘i 249, 257, 428 P.3d 761, 769 (2018), the Malabes’ UDAP claim should not have been dismissed.

We therefore remand this matter to the circuit court for further proceedings consistent with this opinion.

II. Background

A. Factual and procedural background

1. Complaint

As this case was dismissed via a HRCP Rule 12(b)(6) (2000)⁵ motion to dismiss, the following allegations within the Malabes’ December 13, 2016 complaint must be accepted as true. Reyes-Toledo, 143 Hawai‘i at 257, 428 P.3d at 769. The following are relevant allegations of the Malabes’ complaint.

In or around May 2005, the Malabes purchased Apartment 1907 in the Executive Centre condominium project located at 1088 Bishop Street, Honolulu, Hawai‘i ("Apartment"). The purchase price was $225,000, paid in part with a $180,000 loan secured by a mortgage on the Apartment. The AOAO is the homeowner association for Executive Centre. The AOAO did not hold a mortgage containing a power of sale on or secured by the Apartment.

On or about December 17, 2010, without providing the Malabes actual or adequate notice of default and an opportunity to cure the default, acting on advice it received, the AOAO published notice that it would sell the Apartment at a public sale pursuant to HRS § 667-5 (repealed 2012)⁶ and HRS Chapters 514A and 514B.⁷ The AOAO pursued a nonjudicial foreclosure through HRS § 667-5 to circumvent the consumer protection provisions contained in HRS §§ 667-21 through 667-42 (Supp. 2008).⁸ The AOAO had fraudulently concealed the wrongfulness of the foreclosure proceedings by implying, stating, and misrepresenting that it held a mortgage with a power of sale when it did not, or that it was authorized to use HRS § 667-5 when it could not. The Malabes relied on the false statements and representations of the AOAO concerning the AOAO's right to conduct a public sale pursuant to HRS § 667-5. The Malabes were entitled to so rely because they were members of the AOAO, because of the AOAO's trustee-like relationship with the Malabes, and because the AOAO was acting as an agent or attorney on behalf of the Malabes pursuant to HRS § 667-10 (1993).⁹

At the sale, the AOAO successfully bid on the Apartment in an amount that did not constitute adequate consideration, and on January 4, 2011, the AOAO executed a quitclaim deed for the Apartment as both the grantor and grantee. The quitclaim deed was recorded on January 7, 2011. As a result of the public sale, the Malabes lost the Apartment, but remain liable for the amount secured by the mortgage. The Malabes did not discover their claims against the AOAO until sometime in or around July 2016. On January 11, 2017, the AOAO filed a motion to dismiss the Malabes’ complaint. With respect to Count I, the AOAO argued that the Malabes’ wrongful foreclosure claim, based on their allegations that the AOAO improperly relied on HRS § 667-5 as a basis for the foreclosure, failed as a matter of law because (1) the Malabes’ claim should have been raised as a defense to the foreclosure action, instead of belatedly raised as an affirmative cause of action; (2) the AOAO properly conducted the foreclosure pursuant to HRS § 514B-146 (2006)¹⁰ and HRS § 667-5 ; and (3) Hawai‘i had not recognized a cause of action for wrongful foreclosure.¹¹

With respect to Count II, the AOAO argued that the Malabes’ UDAP claim (1) was time-barred by the four-year limitations period set forth in HRS § 480-24 (2008),¹² which began to run "in or around December 2010/January 2011," and equitable tolling under HRS § 657-20 (1993) did not apply; and (2) failed as a matter of law because the AOAO did not conduct trade or commerce and the Malabes are not consumers in an adversarial foreclosure procedure.

In opposition, in summary, with respect to Count I, the Malabes argued that (1) wrongful foreclosure is a valid and recognized claim and is not required to be raised as a defense to a nonjudicial foreclosure, and their claim was timely raised within the applicable six-year statute of limitations period; and (2) because the AOAO was not authorized to foreclose pursuant to HRS § 667-5, the AOAO's compliance with the statute did not bar a claim of wrongful foreclosure.

Regarding Count II, the Malabes did not controvert the AOAO's assertion that the limitations period began in December 2010/January 2011, but instead argued that equitable tolling for fraudulent concealment applied. The Malabes emphasized they were not accusing the AOAO of concealing the law, but rather of concealing a fact.

At the February 2, 2017 hearing on the motion to dismiss, the AOAO summarized the issue as being "whether 514B-146 [ (2006) ] gives the Association authority for the purposes of utilizing nonjudicial foreclosure." The AOAO argued that HRS § 514B-146 gives broad authority to associations to use all forms of foreclosure available in HRS Chapter 667. The Malabes argued that even if the AOAO could foreclose "in like manner as a mortgage," the AOAO was required to use statutes that explicitly allow their use because the AOAO did not have a power of sale. The Malabes maintained that if the AOAO wanted to conduct a nonjudicial foreclosure, it would have to have been under Part II of HRS Chapter 667.¹³ They argued the AOAO could not rely on HRS § 667-5 because it did not have a mortgage containing a power of sale. The Malabes also argued that the statute of limitations did not begin to run until they discovered the violations in 2016, arguing that the discovery rule is an equitable principle.

At the hearing, the circuit court indicated it was granting the motion to dismiss, but did not state the grounds for its ruling.

The circuit court granted the motion to dismiss in its entirety by an order filed on February 17, 2017. Final judgment in favor of the AOAO was entered the same day.

B. Appeal to the ICA

The Malabes appealed the dismissal of their complaint to the ICA.

The ICA agreed with the Malabes that Count I, the wrongful foreclosure claim, should not have been dismissed. See M...