Written by Bruce D. Voss

Residential mortgage lenders operating in Hawaii may be held liable for unfair and deceptive trade practices and treble damages for failing to strictly follow Hawaii’s foreclosure law, the Ninth Circuit has ruled.

In Kekauoha-Alisa v. Ameriquest Mortgage Co., the borrower had defaulted on her $127,000 loan eight times, prompting the lender Ameriquest to begin foreclosure proceedings. Three days before the scheduled foreclosure sale, the borrower filed for Chapter 13 bankruptcy. Hawaii foreclosure law required the lender to make a “public announcement” that the foreclosure sale had been postponed.

On the day of the scheduled auction, the lender’s law firm sent a legal secretary to the auction site to make the required announcement. The legal secretary had never before postponed a foreclosure sale, and did not know the usual process. Although the secretary spoke to a few people at the auction site, she did not shout out to everyone that the auction was being postponed for two months. The lender subsequently obtained relief from the bankruptcy stay; submitted a credit bid at the rescheduled auction date; and took title to the borrower’s house from the foreclosure commissioner.

On appeal, the Ninth Circuit found that the lender failed to comply with the plain meaning of the “public announcement” requirement under Hawaii’s non-judicial foreclosure statute, and therefore had violated state law. The Court stated: “A mortgagee violation of the nonjudicial foreclosure requirements of HRS § 667-5, whether those violations are grievously prejudicial or merely technical, voids a subsequent foreclosure sale.” The Ninth Circuit reiterated that “Hawaii law requires strict compliance with statutory foreclosure procedures.”

As a consequence, the Ninth Circuit voided the foreclosure sale, and found that the lenders’ “improper postponement was a deceptive practice” under Hawaii’s unfair and deceptive trade practices law. That statute permits a plaintiff to recover treble (triple) damages; the Ninth Circuit remanded the case to the bankruptcy court to determine the borrower’s actual damages.

The Kekauoha-Alisa decision is an ominous wake-up call for mortgage lenders in Hawaii. Given the volume of foreclosure cases, many lenders have attempted to process their foreclosures as cheaply and quickly as possible. But if a lender may face liability for treble damages for failing to strictly follow each and every provision of the foreclosure statute-even for a technical violation that apparently caused no actual prejudice to the borrower-then Hawaii lenders would be well-advised to proceed more cautiously, and slowly, to ensure that every required step is satisfied.