Court Opinion

ID: 9946454
Source: CourtListenerOpinion
Date Created: 2024-02-29 19:05:44.850157+00
Date Added: 2024-06-11T14:25:27.667345
License: Public Domain

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                                                         Electronically Filed
                                                         Supreme Court
                                                         SCAP-XX-XXXXXXX
                                                         29-FEB-2024
                                                         08:17 AM
                                                         Dkt. 28 OP

           IN THE SUPREME COURT OF THE STATE OF HAWAIʻI

                              ---o0o---

              STEPHEN P.H. WONG, Plaintiff-Appellant,

                                  vs.

ASSOCIATION OF APARTMENT OWNERS OF HARBOR SQUARE, by and through
           its Board of Directors, Defendant-Appellee,

                                  and

ASSOCIATION OF APARTMENT OWNERS OF HARBOR SQUARE, by and through
     its Board of Directors, Third-Party Plaintiff-Appellee,

                                  vs.

  PORTER McGUIRE KIAKONA, LLP (fka Porter Tom Quitiquit Chee &
               Watts) and EKIMOTO & MORRIS, ALLLC,
                Third-Party Defendants-Appellees.

                           SCAP-XX-XXXXXXX

        APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
            (CAAP-XX-XXXXXXX; CASE NO. 1CCV-XX-XXXXXXX)

                          FEBRUARY 29, 2024

             RECKTENWALD, C.J., McKENNA, EDDINS, JJ.,
         CIRCUIT JUDGE SOMERVILLE AND CIRCUIT JUDGE WONG,
                  ASSIGNED BY REASON OF VACANCIES

                 OPINION OF THE COURT BY EDDINS, J.
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                                  I.

     This case is about calculating damages when a condominium

association wrongfully forecloses on a unit owner.

     Stephen Wong bought a condominium in the Harbor Square

complex.   The Association of Apartment Owners (AOAO) of Harbor

Square governs the development.     Wong financed his purchase with

a mortgage.   Eventually the mortgage balance exceeded the

condo’s value.

     Wong fell behind on his association assessments.       Because

Wong owed fees, the AOAO non-judicially foreclosed under Hawaiʻi

Revised Statutes (HRS) Chapter 667.     Turns out, the foreclosure

surpassed the AOAO’s statutory authority.

     Wong sued for wrongful foreclosure.      The AOAO said he had

no case, because he suffered no damages.      The Circuit Court of

the First Circuit agreed.    It granted the AOAO’s motion for

summary judgment.

     This case explains what a plaintiff who suffers a wrongful

foreclosure by an AOAO that had no authority to foreclose at all

must show to satisfy the damages element of the tort.       We hold

that damages are the plaintiff’s positive equity in the

property, if any, (property’s market value minus outstanding

mortgage debt), plus lost use arising from the wrongful

foreclosure, minus assessments owed to the AOAO.      This places

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the plaintiff in their pre-tort position with a remedy tethered

to the wrong.

     In many cases, the homeowner who suffers a wrongful AOAO

foreclosure will be “underwater” – owing more on their mortgage

than the home’s fair market value.      This does not necessarily

mean they forego a remedy where an AOAO lacked authority to

foreclose.   If an underwater plaintiff shows that the value of

their wrongly taken use exceeds what they owe the AOAO in

assessments, they may pursue their claim.

     Here, Wong made no such showing.      He failed to establish

lost use value.   Thus, we affirm the circuit court’s grant of

summary judgment to the AOAO.

                                  II.

     We lay out the factual background, the legal context for

non-judicial foreclosures by an AOAO, and the parties’ appellate

arguments.

A.   Factual Background

     The parties dispute several monetary amounts, including how

much Wong paid for the condo.     Because the AOAO moved for

summary judgment, we view the facts in the light most favorable

to Wong.   See Stanford Carr Dev. Corp. v. Unity House, Inc., 111

Hawaiʻi 286, 295, 141 P.3d 459, 468 (2006).     Thus, we adopt

Wong’s presented numbers for purposes of this appeal.       Our

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analysis though would not change even if we used the AOAO’s

numbers.

     Wong purchased a Honolulu condominium in 2005.        He says he

paid roughly $500,000, financing the purchase in part with a

$420,750 mortgage.

     In 2006, Wong refinanced, increasing his mortgage debt to

$450,000.

     By August 2009, Wong stopped paying both his monthly

mortgage and his AOAO fees.    In 2010, mortgagee Wells Fargo

assigned Wong’s mortgage to HSBC Bank.

     The AOAO initiated a non-judicial foreclosure on Wong’s

property in July 2011.    The AOAO believed that HRS chapter 667

empowered it to conduct non-judicial foreclosures on properties

whose owners were delinquent on their assessments.        Not so.

This court ruled that those non-judicial foreclosures were

unlawful unless the AOAO had a power of sale.       Malabe v. Ass’n

of Apartment Owners of Exec. Ctr., 147 Hawaiʻi 330, 339, 465 P.3d

777, 786 (2020).

     By the time the AOAO initiated foreclosure, Wong owed

$29,335 in unpaid association and maintenance fees.        His

mortgage debt totaled $481,298.

     The AOAO conducted the non-judicial foreclosure in October

2011.   It held a public auction.       At $1, the AOAO was the

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highest bidder.    It sold the condo to itself.     Wong lost title.

Soon the AOAO rented out the unit.

       Though Wong had long ago stopped paying his mortgage,

mortgagee HSBC Bank waited until May 2016 to start foreclosure

proceedings.    The case took a while.     The circuit court entered

final judgment for HSBC in February 2020.       At that time, HSBC

discharged Wong’s mortgage debt, now $711,699.       Then in October

2021, HSBC sold the condo for $576,000.

       Hawaiʻi law instructs AOAOs to turn over excess rental

income collected following a final foreclosure judgment.       HRS

§ 514B-146(n) (2018 & Supp. 2019).       The AOAO certified that it

had no excess rents.    It gave HSBC nothing.     And the AOAO kept

all the pre-foreclosure excess rents.

       Though Wong had long lost his property, he did not sue the

AOAO until December 2019.

       Wong alleged that the AOAO wrongfully foreclosed.     He says

it conducted a non-judicial foreclosure under Part I of HRS

Chapter 667; yet those foreclosures are only available to

mortgage creditors holding a power of sale.       See HRS § 667-5

(Supp. 2011), repealed by 2012 Haw. Sess. Laws Act 182, § 50 at

684.    The AOAO had no power of sale.     It acted unlawfully and

owes him, Wong insists.

       In April 2021, the AOAO filed a third-party complaint

against its prior legal counsel.       The AOAO alleged that its

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counsel orchestrated and directed the wrongful non-judicial

foreclosure.   So, the AOAO says, the lawyers are liable for

Wong’s damages, if any.

     The AOAO moved for summary judgment in January 2022.       Wong

was underwater when the AOAO non-judicially foreclosed.       Thus,

he suffered no compensatory damages, the AOAO argued.       Although

Wong’s condo was worth $448,000 in 2011, $481,298 of mortgage

debt encumbered it.    Citing Lima, the AOAO said a mortgagor

receives a substantial benefit from discharged mortgage debt.

Lima v. Deutsche Bank Nat’l Tr. Co., 149 Hawaiʻi 457, 467, 494

P.3d 1190, 1200 (2021).    Therefore, per the AOAO, the forgiven

debt offsets Wong’s out-of-pocket loss.

     The lawyers joined the AOAO’s MSJ.

     Wong countered.    He says the AOAO lost nothing when his

mortgage debt was discharged.     It shouldn’t get a windfall

because someone else forgave his debt.

     Wong maintains the AOAO owes him the property’s value.       He

says Lima entitles him to recover his out-of-pocket losses.       A

figure Wong calculates as his purchase price (roughly $500,000),

offset only by the dollar the AOAO paid at the foreclosure sale.

     Wong also argued that the collateral source rule applies.

The collateral source rule directs that benefits received post-

tort from an independent source do not diminish a wrongdoer’s

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liability.   Bynum v. Magno, 106 Hawaiʻi 81, 86, 101 P.3d 1149,

1154 (2004).

     The AOAO responded that the collateral source rule’s

purpose is to prevent a wrongdoer from receiving a windfall.

The AOAO explained that it receives no windfall from offsetting

the discharged mortgage debt.     True, its dollar purchased the

property, but only as encumbered by HSBC’s mortgage.

     In contrast, the AOAO says, paying Wong un-offset out-of-

pocket losses - $500,000 for a property whose mortgage he could

not pay - gives him an undeserved windfall.

     The AOAO’s former lawyers later chimed in.      The collateral

source rule does not apply to discharged mortgage debt.       The

lawyers cited the Restatement (Second) of Torts § 920A cmt c

(1979).

     The circuit court granted the AOAO’s MSJ in March 2022.        It

dismissed the case with prejudice.

     The court applied Lima.    It included Wong’s discharged

mortgage debt in its compensatory damages calculations.       Because

the discharged debt, totaling $711,699, exceeded Wong’s out-of-

pocket loss, Wong had no compensatory damages.      And no suit.

     First Circuit Court Judge Jeffrey Crabtree understood that

unlike Lima, the foreclosing party here (the AOAO) was not the

party that discharged Wong’s mortgage debt.      But the court did

not find the distinction meaningful.     The mortgage debt is

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“completely intertwined” with the foreclosed-upon unit,

regardless of who discharged the debt, the court reasoned.

     The circuit court considered special damages, like lost

rent.    But Wong “offered no evidence of [those] damages.”     Thus,

the court ruled that Wong’s damages do not include “lost rents

or other harms from being unable to rent out or live in” the

condo.    At oral argument before us, appellate counsel conceded

that Wong had waived any damages claim related to lost rent and

use, or the AOAO’s receipt of the property’s rental income.

     Wong appealed to the Intermediate Court of Appeals.       Then

he applied for transfer to this court.     The AOAO and the lawyers

supported the request.    We accepted transfer.

B.   Legal Background

     For backdrop, we discuss HRS chapter 667, titled

Foreclosures, and HRS chapter 514B, titled Condominiums.

     In 2011, chapter 667 provided two ways to conduct non-

judicial foreclosures, Part I and Part II.      See HRS §§ 667-5 to

667-10 (Part I) repealed by 2012 Haw. Sess. Laws Act 182, § 50

at 684; HRS §§ 667-21 to 667-42 (Part II).

     Part I permitted mortgagees with a power of sale to conduct

non-judicial foreclosures and property auctions.      A power of

sale mortgage clause permits the mortgagee to sell foreclosed

properties to recover on a delinquent loan.      Part I provided

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property owners few protections because it required a power of

sale.

     Part II opens non-judicial foreclosures to parties not

holding a power of sale.    Part II provides property owners

greater protections as compared to Part I because it has a lower

barrier to entry.   These protections include heightened notice

and auction requirements.    HRS §§ 667-25 to 667-29.

     HRS chapter 514B makes chapter 667 non-judicial

foreclosures available to AOAOs.       HRS § 514B-146(a).    Unpaid

common expenses “constitute a lien on the unit.”       Id.    That lien

“may be foreclosed by action or by nonjudicial or power of sale

foreclosure” procedures described in chapter 667.       Id.    Chapter

514B did not specify whether associations could access Part I,

Part II, or both.

     Following chapter 514B’s enactment, some apartment

associations conducted Part I non-judicial foreclosures.         The

Hawaiʻi Legislature reacted.    In 2012, it repealed HRS § 667-5,

and HRS § 667-5.7 to § 667-8.     This shut down Part I

foreclosures.

     In Malabe, we ruled that because the AOAO lacked a power of

sale, and therefore the authority to conduct Part I non-judicial

foreclosures, the AOAO’s foreclosure was improper.       Malabe, 147

Hawaiʻi at 340, 465 P.3d at 787.

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     Here, Wong alleges that the AOAO wrongfully foreclosed on

his property by conducting a Part I non-judicial foreclosure.

He says Part I non-judicial foreclosures were only available to

those holding a power of sale.     And the AOAO lacked a power of

sale.

C.   The Parties’ Arguments on Appeal

     On appeal, Wong challenges the circuit court’s case-ending

conclusion that his extinguished mortgage debt offsets his

available damages.    He argues that the circuit court erred by

ruling that he failed to show compensatory damages.       Lima, he

thinks, is materially different.       There the defendants were

mortgage-holders.    Because the mortgage debt was forgiven as

part of the foreclosure, that benefit offset those plaintiffs’

recovery.   Moreover, the Lima mortgage included a power of sale,

and therefore the foreclosure in that case, he says, was merely

procedurally defective.

     In contrast, Wong maintains, the AOAO did not hold his

mortgage and therefore could not foreclose upon his unit under

his mortgage’s power of sale.     His mortgage debt was

extinguished nine years later, and not by the wrongful non-

judicial foreclosure.    Thus, the only change between Wong’s pre-

and post-tort positions was the loss of his property.       Post-

tort, he still owed the mortgage debt.

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     The AOAO counters that Lima applies.      Wong benefitted when

HSBC forgave the mortgage loan.     That perk offsets his recovery.

The AOAO says this court should assess Wong’s current position

against his pre-tort position.     And in the present day, Wong

received substantial mortgage forgiveness.

                                 III.

     A wrongful foreclosure plaintiff must show that they

suffered compensatory damages.     Compensatory damages return the

plaintiff to their pre-tort position.     We detail how a plaintiff

establishes these damages when an AOAO wrongfully forecloses.

     We also consider the collateral source rule.      It does not

apply to mortgage debt.

A.   Wong Must Show Compensatory Damages

     To establish a wrongful foreclosure, a plaintiff must

establish: “(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.”    Bank of America, N.A. v. Reyes-

Toledo, 143 Hawaiʻi 249, 264 n.12, 428 P.3d 761, 776 n.12 (2018).

     Wong alleges facts that satisfy the first three elements.

The question is whether Wong - and similarly situated underwater

mortgagors who suffered a wrongful AOAO foreclosure – can show

damages.

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     Tort actions under Hawaiʻi law have three categories of

damages: compensatory, nominal, and punitive.       Lima, 149 Hawaiʻi

at 465, 494 P.3d 1198.    Nominal damages cannot prove a wrongful

foreclosure action’s damages element.      Id.   And generally,

punitive damages “must be supported by an award of nominal or

compensatory damages.”    Id.

     Thus, to survive summary judgment, Wong must present

evidence that establishes compensatory damages.

     Plaintiffs in a wrongful foreclosure case must show that

the damages “will restore [them] to the position [they] would be

in if the wrong had not been committed.”      Id. at 467, 494 P.3d

at 1200 (cleaned up).    Otherwise, a plaintiff cannot satisfy the

damages element.

B.   Compensatory Damages Put the Plaintiff in their Pre-Tort
     Position

     A plaintiff’s pre-tort position controls.       But how does a

court identify that position when it includes mortgage debt?

     The answer begins with Lima.      A plaintiff mortgagor “may

not establish the damages elements of their wrongful foreclosure

or [unfair or deceptive acts or practices (UDAP)] claims without

accounting for their remaining mortgage debts.”       Lima, 149

Hawaiʻi at 467, 494 P.3d at 1200.      To prove compensatory damages,

the mortgagor must factor in the mortgage’s value.       Before the

non-judicial foreclosure, mortgages encumbered the Lima

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plaintiffs’ property.      And they could not repay their debts.

“[T]he debts constitute a portion of their pre-tort positions.”

Id.

      Lima repeats “the basic principle that the purpose and goal

of compensatory damages is to restore injured parties to their

position prior to the wrongful conduct.”          In re Tirso, No. 11-

01873 (RJF), 2022 WL 567704, at *2 (Bankr. D. Haw. Feb. 23,

2022), aff’d, 642 B.R. 833 (D. Haw. 2022).          But, Lima “did not

discuss every issue about the calculation of compensatory

damages because the district court’s certified question was

narrower than that.”      Id.

      Lima answered a certified question.         That question

structured this court’s answer.        The certifying court asked:

            Is the effect of the mortgage considered only as a matter
            of setoff that a lender has the burden of proving after the
            borrower establishes the amount of the borrower’s damages,
            or does a borrower with no preforeclosure rights in
            property except as encumbered by a mortgage bear the burden
            of accounting for the effect of the mortgage in
            establishing the element of harm in the liability case?

Lima, 149 Hawaiʻi at 464, 494 P.3d at 1197.

      Lima’s question was procedural.        Does the outstanding

mortgage come into play as a setoff, or is it an element to the

claim?    This court was clear.      “Plaintiff Borrowers may not

establish the damages elements of their wrongful foreclosure or

UDAP claims without accounting for their remaining mortgage

debts.”    Id. at 467, 494 P.3d at 1200.

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     Our decision though had limited scope.      Id. at 466, 494

P.3d at 1199 (“it would be inappropriate to resolve” plaintiff’s

questions on what damages are recoverable and how damages are

measured).

     We now address the questions Lima left untouched: when an

AOAO wrongfully forecloses, what damages are recoverable and how

are damages calculated?

     Before Lima, this court also addressed wrongful foreclosure

damages in Santiago v. Tanaka, 137 Hawaiʻi 137, 366 P.3d 612

(2016).   The plaintiffs in that case were entitled to “their

proven out-of-pocket losses from Tanaka’s wrongful foreclosure

of the Mortgage.”   Id. at 158, 366 P.3d at 633.      Out-of-pocket

losses “are the difference between the actual value of the

property received and the price paid for the property, along

with any special damages . . . including expenses incurred in

mitigating the damages.”    Id. at 159, 366 P.3d at 634.

     Santiago’s “out-of-pocket losses” language described how to

put the unusually-situated Santiagos in their pre-tort position.

See id.   Santiago did not depart from the basic principle that

compensatory damages aim to return the plaintiff to their pre-

tort position.

     The Santiagos bought a tavern from Tanaka.       Id. at 140, 366

P.3d at 615.   The Santiagos financed the purchase with a large

down payment and a mortgage from Tanaka.      Id.   Tanaka

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misrepresented the cost of the tavern’s sewer service.       Id. at

151, 366 P.3d at 626.    The parties tried to mediate the sewer

fee issue.   When mediation hit an impasse, Santiago withheld one

mortgage payment and deposited it in an escrow account.       Id. at

144, 366 P.3d at 619.    Tanaka sent the Santiagos a notice of

default and intent to foreclose.       The Santiagos cured their

default and resumed paying their mortgage.       Id.

     Still, Tanaka non-judicially foreclosed.       Id. at 145, 366

P.3d at 620.    She bought the tavern at the ensuing foreclosure

sale, and resold it to a third party.       Id. at 145, 158, 366 P.3d

at 620, 633.    This court held that Tanaka unlawfully foreclosed.

Id. at 157, 366 P.3d at 632.    The mortgage lacked a power of

sale and the Santiagos had cured their default on the mortgage.

Id. at 155, 157, 366 P.3d at 630, 632.

     The Santiagos should not have lost the tavern.       But it was

too late to get the property back.       Tanaka had resold it to

someone else.    Id. at 158, 366 P.3d at 633.

     Still, the Santiagos had a remedy.       This court awarded

damages that put the Santiagos in the position they would have

been in had they not bought the tavern.       Id.   Because the value

the Santiagos received in the foreclosure was zero (they had

made “virtually full payment” on the mortgage to Tanaka), the

measure of their position before they bought the tavern was

their “out-of-pocket losses.”     Id.    We awarded the Santiagos

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“the price paid for the property”: their downpayment, mortgage

payments, closing costs, property taxes, and attorney fees.       Id.

at 158–59, 366 P.3d at 633–34.

     There are two reasons the Santiagos’ proper pre-tort

position was their pre-purchase position.      First, no lender

could foreclose.    The Santiagos were current on their mortgage.

Second, the Santiagos relied on Tanaka’s falsehoods when they

bought the tavern.    So awarding the Santiagos what they spent in

reliance on the misrepresentations was appropriate.       Id. at 159,

366 P.3d at 634.

     But not all plaintiffs are like the Santiagos.       For damages

purposes, they do not automatically slot into a pre-tort world

where they never bought the property.

     The United States Bankruptcy Court for the District of

Hawaiʻi delivers a useful example.     Consider a homeowner who

defaults on the mortgage, but the mortgagee’s foreclosure is

procedurally defective.    There, the mortgagee is entitled to

foreclose; the wrong is how the sale takes place.      Tirso, 2022

WL 567704, at *3.    Thus, the appropriate measure of damages is

“the difference between the price that the property would have

brought in a proper foreclosure sale and the price paid at the

defective foreclosure sale.”    Id. at *4.

     This measure of damages is “tethered to the wrong.”       In re

Simon, No. 11-02788, 2023 WL 1971587, at *5 (Bankr. D. Haw. Feb.

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11, 2023).   It restores the plaintiff “to the position [they]

would be in if the wrong had not been committed.”      Lima, 149

Hawaiʻi at 467, 494 P.3d at 1200.

      Santiago’s “out-of-pocket losses” method does not make

defendants cough up every dollar a plaintiff spends acquiring

and maintaining the property.     None of this court’s cases

applying Santiago’s “out-of-pocket losses” language awarded the

plaintiffs every item of damages the Santiagos won.

       Lima built on Santiago’s foundation.     Lima noted that

Santiago’s “out-of-pocket losses” calculation accounted for the

Santiago’s mortgage debt.     149 Hawaiʻi 468-69, 494 P.3d at 1201-

02.   Because there was no mortgage debt, there was nothing to

account for.   Id.

      Lima recognized that although foreclosed mortgagors with

outstanding debt don’t “receive any actual property, they

nevertheless received significant value in the form of forgiven

mortgage debts.”     Id. at 469, 494 P.3d at 1202.   Each dollar no

longer owed is a dollar gained.     Thus, a plaintiff’s outstanding

mortgage debt must be accounted for.     That is, it offsets the

property’s market value at the time of the wrongful foreclosure.

Id.

      Wong believes Lima aids his cause.    Lima involved a

wrongful non-judicial foreclosure by a mortgagee bank.       Wong

distinguishes his case.     It involves a non-judicial foreclosure

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by a non-mortgagee AOAO for unpaid association fees.       Wong says

he received no benefit from the AOAO’s foreclosure because his

mortgagee did not concurrently discharge his debt.       He was still

liable on the mortgage.    Yet he lost title to the property.

     Wong calculates his out-of-pocket losses as: the condo’s

roughly $500,000 purchase price, offset only by the dollar the

AOAO paid for it.   But this calculation improperly restores Wong

to a Santiago-like pre-condo-purchase position.

     Two differences separate Wong’s pre-purchase position and

his position had the AOAO not wrongfully foreclosed (his proper

pre-tort position).

     First, without the AOAO’s wrongful foreclosure, Wong still

owed a mortgage he was seemingly unable to repay.      Therefore,

his pre-tort position still includes a looming foreclosure by

HSBC.

     Second, Wong had no equity in his condo during the non-

judicial foreclosure.    If he tried to sell his property in 2011,

he would not have pocketed the condo’s full market value because

of the debt encumbering the property.     We therefore decline to

award him the property’s un-offset value (minus one dollar).

     Further, we believe it’s unjust to make the AOAO pay Wong

the condo’s full value.    Mortgage foreclosures are equitable

proceedings governed by equity rules.     Santiago, 137 Hawaiʻi at

157, 366 P.3d at 632.    When the AOAO bought the unit for a

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dollar at the foreclosure sale, it didn’t buy an unencumbered

interest.     It purchased the property subject to the mortgage.

The AOAO owned the property for only the time it took HSBC to

foreclose.     Unwinding the wrongful foreclosure – redressing the

wrong to Wong - should not cost the AOAO the full unencumbered

value of the condo.

     Wong warns that offsetting debt when there is a non-debt-

holder wrongful taking will lead to doomsday.      He says this

approach incentivizes predatory behavior and immunizes

wrongdoers who take advantage of underwater debtors.       Debt-

financed new cars, for example, may attract car thieves.       Wong

forecasts that a car thief, if sued, would pay no damages if the

car’s loan exceeds its value.

     Wong’s fears are misplaced. (Notwithstanding the rarity of

lawsuits against car thieves.)     Our decision and Lima only apply

to wrongful foreclosures of real property.      For Wong’s dire

scenarios, the remedy is conversion.     Conversion applies only to

chattels.    See Restatement (Second) of Torts § 222A (1965)

(“Conversion is an intentional exercise of dominion or control

over a chattel.”).     A conversion plaintiff receives the item’s

full value.    Id.   Our decision and Lima leave conversion law

undisturbed.

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C.   How a Plaintiff May Show Damages for Wrongful Foreclosure
     by an AOAO

     To establish the damages element of a claim for wrongful

foreclosure by an AOAO lacking foreclosure authority, plaintiffs

must account for their remaining mortgage debts.      The mortgage

offsets the property’s market value at the time of the wrongful

foreclosure.   Lima, 149 Hawaiʻi at 469, 494 P.3d at 1202.        But

negative equity does not thwart every path to relief.       The

plaintiff’s pre-tort position includes use of the property until

the mortgagee’s foreclosure.    Though behind on loan obligations,

the plaintiff still has title.     Plaintiffs may seek compensation

for use even if they’re underwater on their mortgage.       But this

lost use is offset by what the plaintiff owes the AOAO for

assessments until the mortgagee forecloses.

     A plaintiff’s pre-tort position also includes their

equitable right to redeem the property before a final

foreclosure judgment.    See Fed. Home Loan Mortg. Corp. v.

Transamerica Ins. Co., 89 Hawaiʻi 157, 164, 969 P.2d 1275, 1282

(1998) (recognizing equitable redemption).      If a plaintiff can

clearly show that they would have redeemed their property absent

the AOAO’s wrongful foreclosure, they may assert damages from

losing their equitable right.     (Wong did not.)

     In Lima, the mortgage debt discharge was contemporaneous

with the non-judicial foreclosure.     So Lima did not anticipate

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time elapsing between the wrongful foreclosure and the mortgage

discharge.   It doesn’t account for plaintiff’s lost use of the

property between the wrongful foreclosure and the mortgagee’s

valid foreclosure.   Part of plaintiff’s pre-tort position in a

wrongful AOAO foreclosure is the continued use and enjoyment of

the property until the mortgagee’s ultimate foreclosure.

     Once a mortgagee validly forecloses, that foreclosure cuts

off the plaintiff’s use right.     Here, for example, had Wong

established lost use damages, he would be owed them through

February 2020, when HSBC concluded foreclosure proceedings.

Nationstar Mortg., LLC v. Ass’n of Apartment Owners of Elima

Lani Condos., 152 Hawaiʻi 406, 413, 526 P.3d 383, 390 (2023)

(“[T]he foreclosure judgment . . . cut off AOAO’s right to

possession.”).

     So we add to Lima.    Lima’s holding still applies.     The

property value must be offset by the mortgage debt.       But Lima

did not obstruct other methods of showing compensatory damages.

     We lay out how a plaintiff who suffers a wrongful AOAO

foreclosure may establish damages.     A plaintiff shows damages if

the following exceeds $0:

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          Positive equity in the property when wrongfully
          foreclosed, if any

          + Lost rents or use from the time between the wrongful
          foreclosure and a valid foreclosure

          - Unpaid association fees and assessments up until the
          valid foreclosure.

     A plaintiff’s equity is the property’s fair market value

when wrongfully foreclosed, less outstanding mortgage debt owed

then.

     For this calculation, a valid foreclosure occurs when a

final foreclosure judgment is entered.     See Nationstar, 152

Hawaiʻi at 413, 526 P.3d at 390 (final foreclosure judgment ends

AOAO’s right to possession).    If a plaintiff sues an AOAO before

a valid foreclosure occurs, the plaintiff calculates lost use

and unpaid assessments when they file their complaint.

     Also, for this calculation, the AOAO may only recoup

assessments for common expenses and fees resulting from the

plaintiff’s failure to timely pay.     Attorney fees and any other

costs for processing the wrongful foreclosure are excluded.

Those costs do not count against the plaintiff.      Picking up the

tab for attorneys who wrongfully foreclose flips equity

principles.

     To recap: when an AOAO wrongfully forecloses without

foreclosure authority, mortgage debt offsets the property’s

market value, but does not count against the plaintiff’s lost

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use, net of assessments and fees owed to the AOAO.       The debt

doesn’t foil every path to relief.

      Yet under this framework, Wong still fails to establish

compensatory damages.    When the AOAO conducted its non-judicial

foreclosure, Wong owed more on his now-discharged mortgage than

the property was worth.    He offered no evidence that he lost

rents or use from the wrongful foreclosure.

      We therefore conclude that Wong did not satisfy his burden

to show compensatory damages.     The circuit court properly

dismissed his claim.

D.    The Collateral Source Rule Does Not Apply

      Wong also argues that the collateral source rule saves him.

      The collateral source rule states “that benefits or

payments received on behalf of a plaintiff, from an independent

source, will not diminish recovery from the wrongdoer.”       Bynum,

106 Hawaiʻi at 86, 101 P.3d at 1154.

      Wong says the benefit of the discharged debt should go to

him, the wronged party, and not to the tortfeasor.       Wong cites

Bynum, which in turn quoted the Restatement (Second) of Torts

§ 920(A): “[B]enefits conferred on the injured party from other

sources are not credited against the tortfeasor’s liability.”

Id.   Thus, Wong argues that when HSBC discharged his mortgage

balance, it independently conferred a benefit to him.       The AOAO

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lost nothing from HSBC’s discharge, Wong says.       So, the

discharged debt shouldn’t count against his recovery.

     We hold that the collateral source rule does not apply to

mortgage debt.    Sure, Bynum adopted the collateral source rule

from the Restatement (Second) of Torts.       106 Hawaiʻi at 86, 101

P.3d at 1154.    But the Restatement (Second) of Torts is plain:

the collateral source rule applies to insurance policies,

employment benefits, gratuities, and social legislation.

Restatement (Second) of Torts § 920A, cmt. c.       Not mortgage

debt.   Section 920A doesn’t mention mortgages.      (Bynum applied

comment c to hold that Medicare and Medicaid payments fall under

the rule as social legislation benefits.       106 Hawaiʻi at 89, 101

P.3d 1157.)

     The collateral source rule does not apply to forgiven

mortgage debt.

                                  IV.

     Wong has not demonstrated damages.       We affirm the Circuit

Court of the First Circuit’s orders.

Steven K.S. Chung                       /s/ Mark E. Recktenwald
(Anthony F.T. Suetsugu on the
                                        /s/ Sabrina S. McKenna
briefs)
for appellant                           /s/ Todd W. Eddins
                                        /s/ Paul B.K. Wong
Mary Martin and Carlos D.
Perez-Mesa, Jr.                         /s/ Rowena A. Somerville
for appellee Association of
Apartment Owners of Harbor
Square

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Duane R. Miyashiro
for appellee Porter McGuire
Kiakona, LLP

James Shin
(Jodie D. Roeca on the briefs)
for appellee Ekimoto & Morris,
ALLLC

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