SUSAN OKI MOLLWAY, District Judge.
Pursuant to section 602-5(a)(2) of Hawai'i Revised Statutes and Rule 13 of Hawai'i Rules of Appellate Procedure, this court respectfully certifies the following question to the Hawai'i Supreme Court:
The gist of the above question may be restated (assuming but not including the underlying factual predicates) as a question about which party has the burden of proof:
This question of substantive Hawai'i law is "determinative of the cause" in three putative class actions before this court and is not answered by "clear controlling precedent in the Hawai'i judicial decisions." Haw. R. App. P. 13(a).
The three cases are Lionel Lima, et al. v. Deutsche Bank National Trust Company, Civ. No. 12-00509 SOM-WRP ("Lima"); Evelyn Jane Gibo, et al. v. U.S. Bank National Association, Civ. No. 12-00514 SOM-WRP ("Gibo"); and David Emory Bald, et al. v. Wells Fargo Bank, N.A., Civ. No. 13-00135 SOM-RT ("Bald").
A negative answer to the certified question will dispose of all claims in each case. This court therefore respectfully asks the Hawai'i Supreme Court to exercise its discretion to accept and decide the certified question.
The Hawai'i Supreme Court has jurisdiction and power "[t]o answer, in its discretion, any question of law reserved by a circuit court, the land court, or the tax appeal court, or 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[.]" Haw. Rev. Stat. § 602-5(a)(2).
"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." Haw. R. App. P. 13(a).
The court certifying a question must provide "a statement of prior proceedings in the case, a statement of facts showing the nature of the cause, the question of law to be answered, and the circumstances out of which the question arises." Haw. R. App. P. 13(b).
These three putative class actions
Lima arises from alleged conduct relating to the nonjudicial foreclosure of properties owned by Plaintiffs Lionel Lima, Jr., Barbara-Ann Delizo-Lima, Calvin Jon Kirby II, Leneen Kron, Deirdre-Dawn K. Cabison, James C. Clay, Scott A. Coryea, Katheryn Coryea, Richard H. Farnham, Nancy L. Farnham, Timothy Ryan, Donna Ryan, Kaniala Salis, and Brian S. Weatherly (all fourteen plaintiffs referred to collectively as "the Lima Plaintiffs"). The Lima Plaintiffs are suing Defendant Deutsche Bank National Trust Company ("Deutsche Bank"). See Lima, ECF No. 238 (Second Amended Complaint).
Gibo arises from alleged conduct relating to the nonjudicial foreclosure of property owned by Plaintiffs Evelyn Jane Gibo, Patrick Stephen Hemmens, Deanne Davidson Hemmens, Vincent Labasan, and Jennifer Strike (all five plaintiffs referred to collectively as "the Gibo Plaintiffs"). The Gibo Plaintiffs are suing Defendant U.S. Bank National Association ("U.S. Bank"). See Gibo, ECF No. 196 (Second Amended Complaint).
Finally, Bald arises from alleged conduct relating to the nonjudicial foreclosure of property owned by Plaintiffs David Emory Bald, Emily Lelis, James L.K. Dahlberg, Michael John Myers, Jr., Tham Nguyen Myers, David Levy, and Thomas T. Au (all seven plaintiffs referred to collectively as "the Bald Plaintiffs"). The Bald Plaintiffs are suing Defendant Wells Fargo Bank, N.A. ("Wells Fargo"). See Bald, ECF No. 99 (First Amended Complaint).
This order refers to the Lima Plaintiffs, Gibo Plaintiffs, and Bald Plaintiffs collectively as "Plaintiff Borrowers" and to Deutsche Bank, U.S. Bank, and Wells Fargo collectively as "Defendant Banks."
When removed, the cases included claims not only against Defendant Banks, but also against David Rosen, Defendant Banks' attorney in the foreclosure proceedings. Plaintiff Borrowers alleged that Defendant Banks and Rosen had breached their duties in selling the properties when they advertised the foreclosure sales as sales by quitclaim deed and postponed the sales without publishing notices of new dates and times.
Plaintiff Borrowers owned properties in Hawai'i encumbered by mortgages. Each Plaintiff Borrower defaulted on his or her mortgage. Each Bald Plaintiff's mortgage debt exceeded the amount obtained through the foreclosure sale. Bald, ECF No. 170-1, PageID # 3297. Although this court has less detailed information for the Lima and Gibo Plaintiffs, they also appear to have had mortgage balances exceeding the foreclosure sales prices. Lima, ECF No. 238-1, PageID #s 10594-96; Gibo, ECF No. 260-1, PageID #s 11089-90. Further, Wells Fargo described some Bald Plaintiffs as having deliberately chosen to default, as they were investors who owned multiple properties and decided to spend their funds on more profitable properties. Bald, ECF No. 170-1, PageID # 3297.
Following the defaults, Defendant Banks, as mortgagees, initiated nonjudicial foreclosure proceedings, and the properties were sold in foreclosure between 2008 and 2011. Third parties purchased some of the properties. Defendant Banks purchased other properties themselves at the foreclosure sales and later sold them to third-party purchasers.
Plaintiff Borrowers sued Defendant Banks, asserting violations of the mortgages' power of sale clause, violations of section 667-5 of Hawai'i Revised Statutes, and unfair and deceptive acts or practices ("UDAP") in violation of section 480-2 of Hawai'i Revised Statutes. Lima, ECF No. 1-2; Gibo, ECF No. 1-2; Bald, ECF No. 1-3.
This court granted motions to dismiss filed by Defendant Banks and Rosen in each case, dismissing all claims.
The Ninth Circuit withheld any ruling pending the Hawai'i Supreme Court's decision in Hungate v. Law Office of David B. Rosen, 139 Haw. 394, 391 P.3d 1 (2017). Ultimately, in unpublished decisions, the Ninth Circuit, relying on Hungate, reversed the dismissal of claims against Defendant Banks and remanded the cases to this court. Bald v. Wells Fargo Bank, N.A., 688 F. App'x 472 (9th Cir. 2017); Lima v. Deutsche Bank Nat'l Tr. Co., 690 F. App'x 911 (9th Cir. 2017). The Ninth Circuit held that Plaintiff Borrowers had standing as "consumers" under section 480-2 of Hawai'i Revised Statutes, had adequately alleged that Defendant Banks' advertising and postponement practices were unfair within the meaning of section 480-2, and had alleged sufficient facts showing injury under section 480-2. See Bald, 688 F. App'x at 474-77; Lima, 690 F. App'x at 913. In the Lima/Gibo appeal, the Ninth Circuit also held that the Lima and Gibo Plaintiffs had sufficiently alleged Deutsche Bank's and U.S. Bank's liability for the alleged conduct. Lima, 690 F. App'x at 913-14. The Ninth Circuit affirmed the dismissal of the claims against Rosen. Id. at 915.
On remand, this court gave Plaintiff Borrowers leave to file amended complaints. The amended complaints removed Rosen as a defendant, added new plaintiffs, and added other practices that Defendant Banks had allegedly wrongfully engaged in during the nonjudicial foreclosure proceedings. Plaintiff Borrowers complained of the following practices:
Lima, ECF No. 182, PageID #s 6540-41; Gibo, ECF No. 196, PageID #s 6520-21; see also Bald, ECF No. 99, PageID #s 2577-78 (complaining of roughly half of the listed practices).
In their amended complaints, Plaintiff Borrowers now assert: (1) a tort claim for wrongful foreclosure, and (2) a UDAP claim under section 480-2.
Plaintiff Borrowers seek damages "at law and in equity, including but not limited to rescissory or equitable damages intended to be equivalent to restoration of title and possession unlawfully taken from Plaintiffs and the other members of the Class, market value, lost rental value and sums expended by Plaintiffs and other members of the Class in the acquisition and/or improvement of their wrongfully sold properties, moving or rental of alternate properties." Lima, ECF No. 182, PageID # 6570; Gibo, ECF No. 196, PageID # 6547; see also Bald, ECF No. 99, PageID # 2608.
Defendant Banks in each case filed motions for summary judgment, arguing, among other things, that Plaintiff Borrowers' claims fail because they cannot prove the harm element of either their wrongful foreclosure claim or their section 480-2 claim. Lima, ECF No. 238; Gibo, ECF No. 260; Bald, ECF No. 170. Defendant Banks argue that, assuming that Defendant Banks engaged in the alleged practices and that those practices violated the powers of sale and the statutes governing nonjudicial foreclosure proceedings, Plaintiff Borrowers offer no evidence that they suffered any harm as a result of the practices. Lima, ECF No. 238-1, PageID #s 10587-10600, 10601-02, 10610-11; Gibo, ECF No. 260-1, PageID #s 11081-94, 11095-96, 11104-05; Bald, ECF No. 170-1, PageID #s 3295-3300. Defendant Banks argue that Plaintiff Borrowers provide no evidence that Plaintiff Borrowers would have been able to keep their properties had the allegedly wrongful actions not occurred, that the sales prices of the properties would have been higher had the actions not occurred, and/or that the properties' sales prices or fair market values exceeded the amounts owed on Plaintiff Borrowers' mortgages.
Plaintiff Borrowers respond that evidence that each Plaintiff Borrower lost title, possession, and the value of investments in that Plaintiff Borrower's property is sufficient to survive summary judgment. Lima, ECF No. 247, PageID #s 13966-80; Gibo, ECF No. 268, PageID #s 13125-39; Bald, ECF No. 185, PageID #s 4704-13. Plaintiff Borrowers argue that they were harmed by the loss of title and possession of the properties that they had before Defendant Banks foreclosed. According to Plaintiff Borrowers, their mortgage debts are relevant only after Defendant Banks' liability has been proven at trial—i.e., as a matter of setoff that Defendant Banks have the burden of proving in the damages stage.
After hearing argument on the summary judgment motions, this court issued a minute order on April 30, 2019, asking the parties to submit briefs on whether to certify a question to the Hawai'i Supreme Court. The order explained:
Lima, ECF No. 267; Gibo, ECF No. 288; Bald, ECF No. 198. The parties submitted their briefs on May 6, 2019. Lima, ECF Nos. 273, 274; Gibo, ECF Nos. 292, 293; Bald, ECF Nos. 200, 201.
The court has concluded that the most appropriate course of action is to seek guidance from the Hawai'i Supreme Court. In doing so, this judge recognizes her duty to decide the matters before her. This judge does not lightly impose on another court while doing that. However, in the interest of deciding correctly and promptly, this judge, for the first time in over 20 years on the bench, certifies a question.
The question to which an answer is sought asks:
The intended focus of the certified question is on the nature of the harm required to prove liability, not on the calculation of the amount or extent of damages. The court is unsure whether the effect of the mortgage may be effectively ignored in determining whether a borrower has established liability.
The question may be restated as asking about the allocation of burdens between the parties:
If the Hawai'i Supreme Court concludes that the effect of a mortgage must be considered in determining whether a borrower establishes the harm element of a prima facie liability case for wrongful foreclosure or a section 480-2 claim, this court anticipates granting summary judgment for Defendant Banks because Plaintiff Borrowers' only evidence of harm relates to the loss of title, possession, and investments in the properties without regard to any mortgage. A grant of summary judgment on these grounds would dispose of all claims.
If the Hawai'i Supreme Court arrives at a different conclusion, that ruling will not dispose of the cases. Instead, this court will need to address the remaining arguments in Defendant Banks' motions for summary judgment, as well as the issues in motions to dismiss filed by Deutsche Bank and U.S. Bank. Lima, ECF No. 232; Gibo, ECF No. 257. Wells Fargo has also filed a separate motion for partial summary judgment. Bald, ECF No. 171. These motions are substantial and together raise dozens of complicated and often related issues. The effect of the mortgage on establishing harm is the only matter common to all Plaintiff Borrowers' claims. That is, even if this court addressed all of the other issues, it is unlikely that the claims of all named Plaintiff Borrowers would be disposed of by motions.
Notably, Plaintiff Borrowers in all three cases have filed for class certification. Lima, ECF No. 237; Gibo, ECF No. 259; Bald, ECF No. 124. In the aggregate, the motions involve over 1,500 borrowers whose properties were foreclosed. In support of their class certification motions, Plaintiff Borrowers submitted an expert report on damages, specifically with respect to calculations of lost rental value. Defendant Banks have filed motions to strike the report on Daubert grounds. Lima, ECF No. 234; Gibo, ECF No. 237; Bald, ECF No. 181. The harm issue raised in Defendant Banks' summary judgment motions is directly relevant to the class certification motions and may also affect the Daubert motions.
If this court denies summary judgment on liability and grants class certification, the trials in these cases will be lengthy. Multiple trials may be required if certain issues need to be tried separately. For example, there could be separate trials to determine the amount of damages for each Plaintiff Borrower if damages are tied to the value of each Plaintiff Borrower's property and/or to the date of foreclosure of that property.
These cases are very old and have gone up on appeal to the Ninth Circuit once already. Defendant Banks argue that certifying a question will cause further delay. This court understands that a federal court typically tries to predict how a state supreme court would rule on an issue. However, if this court predicts incorrectly, the length of the resulting delay and the extent and complexity of the required proceedings would far eclipse any delay flowing from certification of a question.
Although an affirmative answer to the question being certified here is expected to dispose of the three cases before this court, such an answer would not necessarily leave borrowers in other cases with no remedy against lenders who have not strictly complied with nonjudicial foreclosure requirements. The question as framed here goes to the legal issue of who has the burden of proof, and the effect of the answer in the three cases in issue turns on whether, if Plaintiff Borrowers have the burden, they have met or failed to meet their burden. Even if Plaintiff Borrowers are unsuccessful in the three cases in issue here, that in no way precludes borrowers in other cases with different records from meeting any burden the law may place on them. In short, clarifying the law will not inexorably rob all borrowers of any remedy.
Recently, the Hawai'i Supreme Court has issued several opinions relating to wrongful foreclosure and UDAP claims, some with factual allegations similar to those raised in Lima, Gibo, and Bald. The Ninth Circuit and federal district judges in this jurisdiction have also applied Hawai'i substantive law to analyze such claims. However, the case law addressing nonjudicial foreclosures does not provide a clear answer to the certified question.
This court views as unsettled how the harm issue should be addressed in the context of both the wrongful foreclosure tort claims and the UDAP claims before it. Stated in its starkest terms, resolving the parties' dispute (and answering the certified question) could leave Plaintiff Borrowers with no recovery or with a windfall. In other words, in trying to discern where the burdens lie, this court is not engaging in a purely philosophical exercise. One might think that everything will sort itself out if this court simply allows the cases to proceed, and that whether the mortgage debt is considered as a liability issue or as a setoff issue will not matter to the final judgments. That would ignore the status of the three cases, particularly the class action issues. Far from trying to determine how many angels can dance on the head of a pin, this court is trying to parse the governing law in a manner that will allow these cases to proceed in an orderly fashion.
"Hawaii law requires strict compliance with statutory foreclosure procedures" enumerated in section 667-5 of Hawai'i Revised Statutes, the now-repealed nonjudicial foreclosure statute. In re Kekauoha-Alisa, 674 F.3d 1083, 1090 (9th Cir. 2012) (citing Lee v. HSBC Bank USA, 121 Haw. 287, 218 P.3d 775 (2009)). In the past few years, the Hawai'i Supreme Court has formally recognized the tort of wrongful foreclosure arising out of violations of section 667-5. See Bank of America, N.A. v. Reyes-Toledo, 143 Haw. 249, 263, 428 P.3d 761, 775 (2018) (citing Hungate v. Law Office of David B. Rosen, 139 Haw. 394, 407, 391 P.3d 1, 14 (2017); Santiago v. Tanaka, 137 Haw. 137, 157-58, 366 P.3d 612, 632-33 (2016); and Mount v. Apao, 139 Haw. 167, 180, 384 P.3d 1268, 1281 (2016), as examples of the Court's "past consideration of potential circumstances in which a wrongful foreclosure claim may exist in non-judicial foreclosures").
The Hawai'i Supreme Court has not yet identified the elements of a wrongful foreclosure claim specifically in the nonjudicial foreclosure context, but it has stated that "[g]enerally, if a foreclosure is conducted negligently or in bad faith to the detriment of the mortgagor, the mortgagor may assert a claim of wrongful foreclosure by establishing the following elements: (1) a legal duty owed to the mortgagor by the foreclosing party; (2) a breach of that duty; (3) a causal connection between the breach of that duty and the injury sustained; and (4) damages." Reyes-Toledo, 143 Haw. at 264 n.12, 428 P.3d at 776 n.12 (citing James Buchwalter et al., 59 C.J.S. Mortgages § 650 (2009)). Thus, "to assert a wrongful foreclosure claim, . . . the mortgagor must have suffered an `injury in fact' and damages as a result." Id. at 264, 28 P.3d at 776.
It is unclear whether the effect of the mortgage must be considered when determining whether a borrower has provided evidence of injury and damages in its prima facie case of wrongful foreclosure. As stated above, the only evidence of harm provided by Plaintiff Borrowers is evidence of the loss of title, possession, and investments in the properties, as if all of these attach to property owned free and clear.
Generally, tort claims require "the plaintiff to show `that the harm would not have occurred' in the absence of—that is, but for—the defendant's conduct." Univ. of Tex. Sw. Med. Ctr. v. Nassar, 570 U.S. 338, 346-47 (2013) (citing Restatement of Torts § 431, Comment a (negligence); § 432(1), and Comment a (same)) (other citations omitted). It is undisputed that Plaintiff Borrowers defaulted on their mortgages and were subject to foreclosure. If Plaintiff Borrowers' harm is the loss of title, possession, and investments in their properties, that loss might well have occurred even if Defendant Banks had not engaged in the alleged advertising, publication, and postponement practices. That is, even if Defendant Banks had conducted the nonjudicial foreclosure proceedings according to all applicable requirements,
Plaintiff Borrowers argue that O'Grady v. State, 140 Haw. 36, 398 P.3d 625 (2017), precludes this type of "but for" analysis. See, e.g., Lima, ECF No. 274, PageID # 17173. In O'Grady, falling rocks and a related car accident on a state highway led to a negligence claim. See 140 Haw. at 40, 398 P.3d at 629. The Hawai'i Supreme Court applied "a two-step analysis for determining whether the defendant's conduct was the legal cause of the plaintiff's injuries." Id. at 44, 398 P.3d at 633. "[T]he defendant's conduct is the legal cause of the harm to the plaintiff if `(a) the actor's conduct is a substantial factor in bringing about the harm, and (b) there is no rule of law relieving the actor from liability because of the manner in which his or her negligence has resulted in the harm.'" Id. (alterations omitted) (quoting Taylor-Rice v. State, 91 Haw. 60, 74, 979 P.2d 1086, 1100 (1999)). O'Grady did not address foreclosures, but assuming the "substantial factor" test applies in the present context, it is unclear whether Plaintiff Borrowers can show that Defendant Banks' alleged conduct was a substantial factor in bringing about the loss of title, possession, and investments in Plaintiff Borrowers' properties if Plaintiff Borrowers fail to account for the mortgages they indisputably defaulted on.
Possibly, the harm to Plaintiff Borrowers should be viewed as the loss of title, possession, and investments in their properties earlier than the loss would have occurred with properly conducted foreclosures. This interpretation recognizes that the foreclosure sales of the properties were inevitable given Plaintiff Borrowers' defaults, but that the sales should have been redone to comply with all requirements governing the manner of foreclosure. In other words, even if Plaintiff Borrowers' properties would have eventually been sold (absent evidence that they could have cured their defaults had the sales been postponed), they suffered harm from Defendant Banks' premature selling of the properties.
However, even this characterization of harm raises the question of how to deal with Plaintiff Borrowers' mortgages. If Plaintiff Borrowers can claim only the loss of something they had in the first place, then how can they ignore the mortgages, as they never had unencumbered interests in their properties?
Absent the foreclosure sales, Plaintiff Borrowers would have continued to be obligated to make their mortgage payments. And absent any noncompliance with foreclosure requirements, Plaintiff Borrowers' mortgages would have been taken into account. Under this line of reasoning, Plaintiff Borrowers themselves arguably must include evidence of their outstanding mortgage debt in claiming harm in the form of loss of title, possession, and investments. That is, they cannot claim as harm the loss of something they never had.
But this court cannot say that this line of reasoning reflects Hawai'i law on the appropriate remedy in all wrongful foreclosure cases. Critical to this court's uncertainty is Santiago v. Tanaka, which involved a wrongful foreclosure of property owned by the Santiagos. The Santiagos had a purchase money mortgage from their seller, who proceeded to foreclose even though the Santiagos were not in default when their property was sold. See 137 Haw. at 140, 157-58, 366 P.3d at 615, 632-33. The Hawai'i Supreme Court noted that "the classic remedy" in such circumstances would be "return of title and possession," but that "money damages . . . may be substituted for title and possession in certain instances pursuant to the equitable powers of a court in adjudicating a case arising from a mortgage foreclosure." Id. at 154 n.33, 366 P.3d at 629 n.33. To "prevent forfeiture of [the Santiagos'] interests," the Hawai'i Supreme Court "exercise[d] [its] equitable power in awarding restitution." Id. at 158, 366 P.3d at 633. It concluded that "the Santiagos are entitled to restitution of their proven out-of-pocket losses." Id. Having purchased the property in 2006 for $1,317,518.31, the Santiagos were entitled to $1,412,790.79, which included the Santiagos' $800,000 down payment on the property, $585,161.60 covering "mortgage payments from September 2006 to March 2011," $17,518.31 in closing charges associated with the sale, and $10,110.88 in property taxes that the Santiagos paid following the foreclosure sale. See id. at 142, 158, 366 P.3d at 617, 633. It is not clear from the opinion why mortgage payments that ended up totaling $585,161.60 were made up to March 2011. The foreclosure sale occurred in October 2008. See id. at 145, 366 P.3d at 620. Moreover, mortgage payments from 2006, when the Santiagos bought the property, through June 2008 totaled $235,161.60. Id. at 144 n.17, 366 P.3d at 619 n.17. That means that more than half of the $585,161.60 in mortgage payments were made after the foreclosure sale.
Later, in Mount v. Apao, the Hawai'i Supreme Court directed the circuit court on remand "to apply Santiago to determine an appropriate remedy for the wrongful foreclosure." 139 Haw. at 180, 384 P.2d at 1281. Hungate also cited Santiago, stating that, "[w]hen voiding the foreclosure is not possible, the mortgagor is entitled to `restitution of their proven out-of-pocket losses' through a wrongful foreclosure claim." 139 Haw. at 407, 391 P.3d at 14.
Plaintiff Borrowers rely on Santiago for the proposition that the harm in a wrongful foreclosure is the loss of title and possession in the property, and that, if return of title and possession is not feasible, then a court may award restitution to the borrower pursuant to the court's equitable powers. Plaintiff Borrowers conclude that a borrower's outstanding mortgage debt is not relevant to determining whether a borrower is harmed by a violation of foreclosure requirements; Plaintiff Borrowers view mortgages as relevant only as a matter of setoff. See, e.g., Lima, ECF No. 247, PageID #s 13970-80.
The Santiago decision makes no mention of the effect of any remaining mortgage obligation owed by the Santiagos. The wrongful foreclosure was premised on mortgage provisions allowing the lender to declare all outstanding amounts immediately due and payable upon the Santiagos' default. 137 Haw. at 144, 366 P.3d at 619. But there is no discussion in the Santiago opinion going to the satisfaction of any mortgage obligation, even after the holder of the purchase money mortgage bought the property for $365,000 at the foreclosure auction in 2008. See id. at 145, 366 P.3d at 620.
That foreclosure price was far below the more than $1.3 million that the Santiagos had paid just two years earlier. The Hawai'i Supreme Court appears to have been intent on avoiding a huge windfall to the lender. The Court did not expressly refer to any windfall to the victimized borrowers, but the "total out-of-pocket losses of $1,412,790.79" resulting from the wrongful foreclosure appears to have disregarded any remaining mortgage obligation, and to have ended up compensating the Santiagos for payments made even during the years they occupied the property. Thus, the Santiagos were repaid whatever they had spent, were left with no debts, and were in effect given rent-free occupancy before losing title. Plaintiff Borrowers therefore read Santiago as establishing that, under Hawai'i law, borrowers who have been subjected to wrongful foreclosures may end up debt-free, and reimbursed for all payments made relating to the property or to the foreclosure.
As added support for their reading, Plaintiff Borrowers point to Beneficial Hawaii, Inc. v. Kida, 96 Haw. 289, 30 P.3d 895 (2001), in which a mortgage was declared void because it had issued through the services of an unlicensed mortgage broker. That left the purchaser owning property free and clear of a mortgage. But this purported windfall resulted from the mortgagee's failure "to adduce evidence sufficient to prove that it was entitled to any equitable relief." Id. at 296, 30 P.3d at 902. This court therefore questions whether Plaintiff Borrowers should rely on Kida as establishing what Plaintiff Borrowers may recover. It was the failure of proof, not some unassailable borrower's right, that resulted in the purported windfall to the borrower.
Notably, Santiago and Mount involved borrowers who had cured their defaults or were denied the opportunity to cure. The decisions do not expressly limit the remedies discussed to those for whom no foreclosure at all should have occurred, but this court recognizes that not all wrongful foreclosures are the same. Like the three cases before this court, Hungate involved wrongdoing in the manner in which the nonjudicial foreclosure was conducted, not foreclosure that never should have occurred even had the lender strictly complied with procedural requirements. The borrower in Hungate had defaulted, and the opinion gives no indication that the borrower could have cured the default. The borrower's remedy for wrongful foreclosure remained "out-of-pocket losses." See Hungate, 139 Haw. at 399, 391 P.3d at 6. Plaintiff Borrowers read "out-of-pocket losses" as allowing them to recover title, possession, and investments in their properties in the same manner that the nondefaulting Santiagos did. See, e.g., Lima, ECF No. 247, PageID #s 13969-72.
Although relying on Santiago, Plaintiff Borrowers do not appear to be seeking a full extinguishing of mortgage debt. They instead seek to avoid having to take that debt into account at the summary judgment stage or the class certification stage. Defendant Banks argue that if a borrower has an "underwater" mortgage (i.e., a mortgage with an outstanding balance that exceeds the value of the property) or if a borrower deliberately chooses to default, the borrower cannot ignore the mortgage debt when challenged at the summary judgment stage.
The conundrum before this court is how, if at all, the "out-of-pocket losses" restitution analysis bears on whether a borrower can prove the harm element in the liability portion of a wrongful foreclosure claim. Santiago may suggest that any remaining mortgage debt be disregarded, and the investment value in the property be returned to borrowers without setoff. See 137 Haw. at 158, 366 P.3d at 633. The Hawai'i Supreme Court recognized that, "[a]t the time of their ejectment, the Santiagos had made virtually full payment to Tanaka for the Tavern, including an $800,000 down payment and $585,161.60 in mortgage payments." Id. It is not clear whether the result would have been the same if the mortgage debt had substantially exceeded the value of the property.
If the effect of the mortgage does matter in the harm analysis, such that a borrower whose debt exceeds the value of the property does not suffer harm, that of course leaves the question of how to determine the value of the property. Defendant Banks offer the foreclosure prices as evidence of value, but this court is not here adopting that approach or including that issue in the certified question. This court notes that Santiago appeared to disregard the foreclosure price of $365,000. See 137 Haw. at 145, 366 P.3d at 620.
To state a UDAP claim, a plaintiff must demonstrate: "(1) a violation of section 480-2; (2) injury to the consumer caused by such a violation; and (3) proof of the amount of damages." Isagawa v. Homestreet Bank, 769 F.Supp.2d 1225, 1237 (D. Haw. 2011) (citing Davis v. Wholesale Motors, Inc., 86 Haw. 405, 417, 949 P.2d 1026, 1038 (App. 1997)). "[W]hile proof of a violation of chapter 480 is an essential element of an action under HRS § 480-13, the mere existence of a violation is not sufficient ipso facto to support the action; forbidden acts cannot be relevant unless they cause [some] private damage." Robert's Haw. Sch. Bus, Inc. v. Laupahoehoe Transp. Co., Inc., 91 Haw. 224, 254 n.30, 982 P.2d 853, 883 n.30 (1999) (second alteration in original) (quoting Ai v. Frank Huff Agency, Ltd., 61 Haw. 607, 618, 620-21, 607 P.2d 1304, 1312, 1313 (1980)), superseded by statute on other grounds as noted in Davis v. Four Seasons Hotel Ltd., 122 Haw. 423, 428 n.9, 228 P.3d 303, 308 n.9 (2010).
"HRS chapter 480 does not define injury or damages, but `Hawai'i courts have not set a high bar for proving' injury." Hungate, 139 Haw. at 412, 391 P.3d at 19 (quoting Compton v. Countrywide Fin. Corp., 761 F.3d 1046, 1053 (9th Cir. 2014)). However, "[a]ny injury must be fairly traceable to the defendant's actions." Kekauoha-Alisa, 674 F.3d at 1092 (citing Flores v. Rawlings Co., LLC, 117 Haw. 153, 167 n.23, 177 P.3d 341, 355 n.23 (2008)).
In Kekauoha-Alisa, the Ninth Circuit addressed injury in a UDAP claim in an adversary proceeding in bankruptcy court. The claim was founded on alleged violations of section 667-5's publication requirements. The Ninth Circuit stated, "Under HRS § 480-13, the injury is measured through standard expectation damages, i.e., damages sufficient to make the plaintiff whole." Kekauoha-Alisa, 674 F.3d at 1092 (citing Leibert v. Fin. Factors, Ltd., 71 Haw. 285, 290-91, 788 P.2d 833, 836-37 (1990)). Because the bankruptcy court "made no finding— explicit or otherwise—that the enumerated damages were caused by and fairly traceable to Lenders' improper postponement," the Ninth Circuit remanded the case to the bankruptcy court to make such findings. Id. at 1093.
The Ninth Circuit said it was not enough for a debtor to "simply list[] as damages Debtor's loss of equity in her property, the rental value of the property for the time Debtor was apparently excluded from possession, and attorneys' fees accrued in the state court ejectment action." Id. It reasoned:
Id. (citing Haw. Med. Ass'n v. Haw. Med. Serv. Ass'n, Inc., 113 Haw. 77, 114, 148 P.3d 1179, 1216 (2006)).
On remand, to "properly narrow[] the inquiry to the damage caused by Lenders' deceptive postponement," the bankruptcy court was directed to "determine the difference, if any, between Debtor's situation had Lenders properly postponed the foreclosure sale and Debtor's actual situation, given that the sale was improperly postponed."
The Ninth Circuit in Kekauoha-Alisa therefore considered the borrower's default when analyzing the harm element in a UDAP claim and appeared to require the borrower to offer evidence of harm beyond the loss of title, possession, and investment in the property. The Ninth Circuit's "interpretation of Hawai'i law remains binding in the Ninth Circuit `in the absence of any subsequent indication from the Hawai'i courts that our interpretation was incorrect.'" Kona Enters., Inc. v. Estate of Bishop, 229 F.3d 877, 884 n.7 (9th Cir. 2000) (alteration omitted) (quoting Owen v. United States, 713 F.2d 1461, 1464 (9th Cir. 1983)).
However, Hungate, decided five years after the Ninth Circuit decided Kekauoha-Alisa, may suggest that the Ninth Circuit's interpretation of UDAP claims was incorrect. In discussing whether the borrower in Hungate had alleged sufficient facts to show the requisite harm supporting his UDAP claim, the Hawai'i Supreme Court stated that the borrower "need only allege that `he has, as a direct and proximate result of [the lender's] violation of section 480-2, sustained special and general damages' to withstand a motion to dismiss.'" 139 Haw. at 412, 391 P.3d at 19 (alterations omitted) (quoting Compton, 761 F.3d at 1054). The Hawai'i Supreme Court held that the borrower sufficiently stated a UDAP claim because "[b]ased on the allegations in the complaints, the factfinder could determine [the borrower] was injured by the foreclosure sale, which eliminated equity that [the borrower] held in the property and prevented him from using the property." Id.
This court recognizes that Hungate addressed the factual allegations required to survive a motion to dismiss, not the evidence required to survive a motion for summary judgment. In Kekauoha-Alisa, the Ninth Circuit was reviewing a decision made after a bench trial. It is unclear to this court whether the Hawai'i Supreme Court's language in Hungate should be read as stating that, to demonstrate harm under section 480-2, a borrower need only provide evidence of lost use of the property and/or lost equity or investment in the property. As a result, this court seeks guidance from the Hawai'i Supreme Court on how, if at all, the effect of a mortgage should be factored into determining whether a borrower bringing a UDAP claim has suffered injury for purposes of presenting its liability case in the summary judgment context.
The Clerk of Court is directed to transmit a copy of this order to the Hawai'i Supreme Court under official seal of the United States District Court of the District of Hawaii. See Haw. R. App. P. 13(c). The Clerk is also directed to provide "original or copies of all or any portion of the record" in this case as "[t]he Hawai'i Supreme Court may, in its discretion, require." Id.
The parties in each case shall file a joint notice in this court within one week of the Hawai'i Supreme Court's decision to accept or reject certification. If the Hawai'i Supreme Court accepts the certified question, the parties in each case shall file a joint status report to this court every six months after the date of acceptance, or more frequently if circumstances warrant.
Further proceedings in this court are stayed pending action by the Hawai'i Supreme Court. The pending motions in Lima, Gibo, and Bald are hereby terminated without prejudice. After the Hawai'i Supreme Court's decision, the motions may be reinstated without filing additional papers. A party wishing to reinstate a motion should submit a letter to the court specifying the motions to be reinstated. All upcoming dates and deadlines in these cases are vacated. Deadlines that have already expired are not affected by this order, meaning that, if new dates are later set, expired deadlines are not automatically extended.
The court directs the Clerk to administratively close all three cases while the matter is pending in the Hawai'i Supreme Court.
IT IS SO ORDERED.
Bald, ECF No. 99, PageID # 2608 (emphasis added).
In re Kekauoha-Alisa, Bankr. No. 467,468, 2012 WL 3061511, at *2 (Bankr. D. Haw. Jul. 26, 2012). The bankruptcy court went on to award "the fair rental value of the property from the date that she wrongfully lost ownership of the property pursuant to the invalid foreclosure sale until the Lenders restore title to her and the attorneys' fee she incurred in [a related] ejectment case." Id. at *4. The award was trebled under section 480-2. See id.
The lenders sought reconsideration of the award, arguing that "their misconduct—the invalid notice of postponement of the foreclosure sale—did not cause this damage, because the Debtor was still in default and they were still entitled to foreclose." In re Kekauoha-Alisa, Bankr. No. 05-01215, 2013 WL 773057, at *1 (Bankr. D. Haw. Feb. 27, 2013). The bankruptcy court denied the lenders' motion, reasoning that "[t]he Lenders' misconduct did cause these losses," and that "[w]hether or not the Debtor was able to make the mortgage payments, the Debtor was entitled to the use and ownership of the property until the Lenders properly foreclosed their mortgage." Id. at *2.
Thus, the bankruptcy court did not consider the effect of the mortgage in determining whether the lenders caused the debtor harm. See also Paresa v. HSBC Bank USA, N.A., Civ. No. 17-00248 DKW-RLP, 2018 WL 2090605, at *10 (D. Haw. May 4, 2018) (referring to a premature nonjudicial foreclosure sale and noting that "this particular type of harm may be caused by the failure of a foreclosing mortgagee to give proper notice of postponement," but declining to address, on a less explicit record of harm than exists in the three cases in issue here, "the applicable measure of damages").
