Background
Cynthia and Troy Smith owned a condominium unit at Haleakala Gardens in Maui and had defaulted on their mortgage since 2009. They also fell behind on maintenance fees owed to the Association of Apartment Owners of Haleakala Gardens (AOAO). In June 2013, the Smiths transferred the property to the AOAO by quitclaim deed to settle their maintenance fee debt. The AOAO then rented and maintained the unit, collecting rental income for over a decade.
In June 2022, US Bank Trust National Association — as trustee holding the mortgage — commenced a judicial foreclosure action. The circuit court granted summary judgment in favor of US Bank in November 2023 and appointed a commissioner. In April 2024, US Bank moved for confirmation of the foreclosure sale. The circuit court’s Confirmation Order directed the AOAO to provide a full accounting of all rental proceeds collected from June 2013 through June 2024 and to disgorge any “excess rental income” to senior lienholders, citing HRS § 514B-146(n) and the Hawaii Supreme Court’s decision in Nationstar Mortgage, LLC v. AOAO Elima Lani Condominiums, 152 Hawaiʻi 406 (2023). The AOAO moved for reconsideration, which the circuit court denied, and this appeal followed.
The AOAO argued on appeal that the circuit court misapplied HRS § 514B-146(n) and Elima because those authorities govern rental income collected after an AOAO acquires a unit through foreclosure — not through a voluntary quitclaim deed settlement.
The Court’s Holding
The Hawaii Intermediate Court of Appeals vacated the judgment and the rental-accounting and disgorgement provisions of the Confirmation Order. The court held that HRS § 514B-146(n) plainly applies only “[a]fter any judicial or nonjudicial foreclosure proceeding in which the association acquires title to the unit.” Because the AOAO acquired the Haleakala Gardens unit by quitclaim deed as part of a settlement — not through any foreclosure proceeding — the statute did not apply. The court likewise held that Elima provided no authority for the accounting and disgorgement order, as that case also concerned an association that had foreclosed on a property.
The court vacated the specific paragraphs of the Confirmation Order requiring the AOAO to file a detailed accounting of rental proceeds from 2013 through 2024 and to disburse any excess in a specified order of priority. The case was remanded to the circuit court with instructions to consider whether its equitable authority — independent of HRS § 514B-146(n) and Elima — might support an accounting and disgorgement order on some other basis.
Key Takeaways
- HRS § 514B-146(n)’s rental-income accounting and disgorgement requirements apply only when a condominium association acquires a unit through judicial or nonjudicial foreclosure, not through a voluntary deed transfer such as a quitclaim in settlement of a maintenance fee debt.
- The Hawaii Supreme Court’s Elima decision, which requires an AOAO to account for rents collected after its own foreclosure, does not extend to scenarios where the AOAO obtained title by deed rather than by foreclosure.
- Even where a statutory basis is lacking, the circuit court retains equitable discretion on remand to consider whether to order an accounting and disgorgement of rental proceeds on independent equitable grounds.
Why It Matters
This decision draws a clear line between AOAOs that foreclose on delinquent units and those that receive units through negotiated deed transfers. Lenders and condominium associations alike need to understand that the statutory rental-income disgorgement framework in HRS § 514B-146(n) is triggered only by the mechanism of acquisition. An AOAO that accepts a deed in lieu of foreclosure or as a settlement does not automatically become subject to the same accounting obligations that a foreclosing association faces under Hawaii’s condominium statute.
The remand language also signals that the circuit court’s equitable powers may still provide a vehicle for lenders to seek rental income disgorgement outside the statutory framework — leaving open the question of how broadly Hawaii courts will exercise equity jurisdiction in this context. Attorneys advising condominium associations or mortgage servicers in Hawaii should monitor whether the circuit court exercises that discretion on remand and how future courts define the equitable limits of rental-proceeds recovery in non-foreclosure acquisition scenarios.