LOUIS ROBERT SANTIAGO, as Trustee of the Louis Robert Santiago Revocable Living Trust dated November 17, 1999, as amended, and YONG HWAN SANTIAGO, as Trustee of the Yong Shimabukuro Revocable Living Trust dated July 25, 1996, as amended, Petitioners/Plaintiffs-Appellants/Cross-Appellees,
RUTH TANAKA, Respondent/Defendant-Appellee/Cross-Appellant.
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS (CAAP-11-0000697; CIVIL NO. 08-1-0094)
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON JJ.
This case involves the adequacy of disclosures that were made to the buyer during the sale of a commercial property and the seller's subsequent nonjudicial foreclosure and sale of the property when the mortgage payments were briefly interrupted because of an underlying dispute regarding mediation concerning the property. Two issues are presented: (1) whether the seller's failure to disclose certain facts regarding the property's sewer system is actionable under the common-law causes of action of nondisclosure and misrepresentation and (2) whether the seller's nonjudicial foreclosure of the property and ejectment of the Santiagos were wrongful under the facts of this case. We answer both questions in the affirmative.
A. The Santiagos' Lease and Purchase of Nawiliwili Tavern
On January 1, 1998, Louis Santiago (Louis) entered into a twenty-year commercial lease agreement to rent approximately 2, 560 square feet of ground floor space of the Nawiliwili Tavern (Tavern) from owner Ruth Tanaka (Tanaka). After leasing the Tavern for over seven years and making all payments due under the lease, including his share of utilities, taxes, assessments, and insurance, Louis and his wife, Yong Hwan Santiago (collectively, the Santiagos), decided to submit an offer to purchase the Tavern from Tanaka.
1. Negotiations for Purchase of Tavern
In November 2005, Louis, represented by realtor Glenn Takase (Takase) of Coldwell Banker, submitted an offer to purchase the Tavern for $1, 000, 000.00, in the form of a "Deposit Receipt Offer and Acceptance" (DROA) to Tanaka's property manager and realtor, Wayne Richardson (Richardson). Tanaka did not accept Louis' initial offer, and the parties exchanged multiple counteroffers, all of which referenced and incorporated the DROA.
In January 2006, Tanaka submitted a counteroffer with an attached "Agreement of Sale Addendum to the DROA" (Agreement of Sale Addendum). In her Agreement of Sale Addendum, Tanaka made representations with respect to certain "Monthly Installments (based on current estimates; exact figures to be determined and adjusted at closing), " including "Sewer Fee & Assessments" in the amount of $150.00. The Santiagos rejected Tanaka's January 2006 counteroffer.
2. Accepted Purchase Contract
Ultimately, after further negotiations, Louis accepted a subsequent counteroffer from Tanaka (Accepted Counteroffer). The Accepted Counteroffer expressly provided that Tanaka and Louis "agree to sell/buy the [Tavern] on the terms and conditions set forth in the DROA as modified by this Counter Offer." The Accepted Counteroffer set the purchase price of the Tavern at $1, 300, 000, $800, 000 of which was to be paid as a down payment, with the remaining $500, 000 secured by a sixty-month "Mortgage, Security Agreement and Financing Statement" (Mortgage) financed by Tanaka. Attached to the Accepted Counteroffer were two addenda: a "Purchase Money Mortgage Addendum" (Mortgage Addendum) setting forth the provisions of the Mortgage and an "Existing 'As Is' Condition Addendum" ("As Is" Addendum).
The stated purpose of the "As Is" Addendum was to note that the "Property [was] being sold in its existing condition" and that "[e]xcept as may be agreed to elsewhere in [the] DROA, [Tanaka] will make no repairs and will convey [the Tavern] without any representations or warranties, either expressed or implied." The addendum stated, however, that "[b]y selling Property in Existing 'As Is' Condition, [Tanaka] remains obligated to disclose in writing any known defects or material facts of Property or improvements." (Emphases added).
3. Seller's Disclosures
In April 2006, Tanaka sent Louis a "Seller's Real Property Disclosure Statement" (Disclosure Statement). The Disclosure Statement expressly stated that it was "intended to assist [Tanaka] in organizing and presenting all material facts concerning the Property" and that Tanaka is "obligated to fully and accurately disclose in writing to a buyer all
'material facts' concerning the property."
The Disclosure Statement further noted, "It is very important that the Seller exercise due care in preparing responses to questions posed in the Disclosure Statement, and that all responses are made in good faith, are truthful and complete to the best of Seller's knowledge, " because "Seller's agent, Buyer and Buyer's agent may rely upon Seller's disclosures." Finally, the Disclosure Statement instructed Tanaka, in her capacity as the Seller of the Tavern, to answer all questions and explain all material facts known to her.
As is relevant to the issues presented in this case, question 77 of the Disclosure Statement asked, "What type of waste water/sewage system do you have?" Tanaka checked boxes to indicate that the Tavern was "Connected" to a "Private Sewer." The last page of the Disclosure Statement provided a space for Tanaka to provide further explanation of any prior disclosure. In addition to clarifications pertaining to other questions on the Disclosure Statement, Tanaka referenced question 77 and noted that the Tavern's sewer is a "private sewer line owned by Anchor Cove. We are connected."
Tanaka subsequently disclosed twenty documents pertaining to different aspects of the Tavern, several of which were related to the Tavern's private sewer connection. One of the disclosed documents was an agreement dated May 16, 1995, between Tanaka and James Jasper Enterprises, LLP (Jasper), to connect the Tavern to Jasper's existing private sewer system. The agreement, entitled "Agreement for Maintenance and Operation of Wastewater System and Connection to Wastewater System Located at Nawiliwili, Kauai, Hawaii" (Wastewater Agreement), provided the following pertinent terms for the maintenance and cleanout charges:
5. Tanaka agrees to pay Jasper monthly maintenance charges in the amount of One Hundred Fifty Dollars ($150.00) per month, payable on or before the fifteenth day of every month, commencing the month immediately after this Agreement is executed by the parties hereto. Jasper reserves the right to adjust the deposit annually in a sum not exceeding twenty percent (20 percent) of the amount paid in the year immediately preceding.
7. Tanaka agrees to pay Jasper the sum of One Hundred Fifty Dollars ($150.00) as a bi-monthly cleanout charge for the Jasper STP. Such payments shall commence sixty (60) days after the execution of this Agreement by the parties, and shall be payable on or before the fifteenth day of every other month thereafter. Jasper reserves the right to adjust the deposit annually in a sum not exceeding twenty percent (20 percent) of the amount paid in the year immediately preceding.
8. Tanaka agrees to pay Jasper the sum of Three Hundred Dollars ($300.00) as a deposit for those charges provided for in paragraphs 5 and 7 hereinabove. Such amount shall be paid upon the execution of this Agreement by the parties. The deposit shall be refunded to Tanaka in the event the Jasper STP is transferred or conveyed to the County.
Based on Tanaka's disclosures and the $150 estimated monthly installment for sewer fees and assessments represented in the Agreement of Sale Addendum, Takase and Louis believed the costs associated with the Tavern's private sewer system were the amounts listed in the Wastewater Agreement--$150 for a monthly maintenance fee and $150 for a bi-monthly cleaning fee. After reviewing the disclosures with Takase and believing that Tanaka had provided all documentation, Louis accepted the disclosed documents.
4. Mortgage, Promissory Note, and Closing on Sale of Tavern
As noted, to finance a portion of the purchase price of the Tavern, the Santiagos obtained a mortgage from Tanaka. In the Mortgage, the Santiagos covenanted to pay the $500, 000 loan pursuant to the terms of a Promissory Note.
The Mortgage provided that in the event of any default "in the performance or observance of any covenant or condition" of the Mortgage or the Promissory Note, "the whole amount of all indebtedness owing" under the Mortgage "shall at the option of the Mortgagee become at once due and payable without notice or demand." Additionally, the Mortgage provided as follows:
[T]he Mortgagee may, with or without taking possession, foreclose [the] Mortgage, by court proceeding (with the immediate right to a receivership with the aforesaid powers on ex parte order and without bond pending foreclosure), or, as now or then provided by law, by advertisement and sale of the mortgaged property or any part or parts thereof at public auction in the county in which the mortgaged property are situated ....
The Promissory Note provided that payment of $9, 724.63 was due on the tenth day of each month, commencing on August 10, 2006, until the satisfaction of the debt on August 10, 2011. It additionally stated that the failure to pay "any sum" due under the Promissory Note constitutes an "Event of Default" and that "[i]f any Event of Default shall occur and be continuing, the entire principal sum and accrued interest thereon" shall "immediately become due and payable." (Emphasis added) .
The parties closed the sale pursuant to the U.S. Department of Housing and Urban Development Settlement Statement (HUD Statement) on August 10, 2006, and the deed transferring the Tavern's title from Tanaka to the Santiagos was recorded on the same day. The HUD Statement identified the prorated amounts of property taxes and partial month rent due under the Santiagos' former lease agreement, but it was silent as to "maintenance, private sewer, marina, and/or association fees" required to be listed, if applicable, in accordance with paragraph C-10 of the DROA. The HUD Statement additionally indicated that the total amount due from the Santiagos, including all prorations and closing costs, was $1, 317, 518.31, an amount that the Santiagos paid as follows: $5, 000 as an initial deposit, $812, 518.31 as an additional deposit, and the remaining $500, 000 in accordance to the Mortgage.
B. Sewer Fee Dispute
At the beginning of October 2006, Jay Geffert (Geffert), the Santiagos' property manager for the Tavern, received a bill from Jasper in the amount of $3, 467.43--$2, 267.77 past due from August's sewer maintenance fees and $1, 153.23 for September's sewer maintenance fees, inclusive of taxes. Geffert, believing Jasper's bill to be a mistake--at the time, he had been paying the Tavern's utility bills, including county sewage bills, since 1998--contacted Jasper to inquire about the bill. In response, Jasper wrote to Louis, noting that Tanaka had previously paid the sewer fees and that the fees had increased twenty percent a year, every year, since 1995. Jasper stated that the Tavern could choose an alternative method of sewage disposal but that, until then, the Santiagos had to continue paying pursuant to the Wastewater Agreement.
Louis' counsel wrote to Tanaka to further inquire about the bill that Louis received from Jasper. Counsel maintained that although the Agreement of Sale Addendum listed a $150.00 sewer assessment fee, Tanaka did not disclose the fact that the sewer fees could, and in fact did, increase by twenty percent per year. Counsel asserted that Tanaka never disclosed the true amount of the fees for the Tavern's sewer service. In conclusion, counsel stated that had Louis known about the possibility that the sewer maintenance charges could be increased by twenty percent per year, he would not have agreed to pay the amount that he agreed to for the Tavern.
Louis' counsel also wrote to Jasper, stating that the Wastewater Agreement was never assigned to the Santiagos when Tanaka conveyed the Tavern to them. Counsel also requested from Jasper an accounting of his cost and expenses in the maintenance of the sewage system and suggested that the costs charged to the Santiagos should be adjusted depending upon the parties' usage of the system. In a forceful response, Jasper intimated no interest in negotiating for a lower price because "the price . . . was agreed to be paid by . . . Tanaka" and because the Wastewater Agreement "does not just provide for the recovery of a pro-rated portion of costs." Jasper also threatened that if the Santiagos did not "want to be bound by the long standing Agreement, " he would "arrange for [the] Tavern to be immediately disconnected from the sewage disposal system." Finally, Jasper outlined three alternatives to which he was open: (1) the Santiagos pay the total amount owing and agree to be bound to the Wastewater Agreement; (2) the Santiagos accept a 50% deferral of the amount due while they commence an action to recover damages from Tanaka; or (3) the Santiagos disconnect the Tavern from his sewer system and start building their own.
In 2007, the Santiagos filed a Complaint in the circuit court against Jasper and Tanaka asserting claims pertaining to the Wastewater Agreement. Tanaka filed a motion to dismiss, and the court issued an order granting Tanaka's motion to dismiss without prejudice to allow the parties to "engage in good-faith mediation in a prompt and cooperative manner. "
C. Attempts to Mediate and Initiation of Foreclosure
Over several months following the circuit court's dismissal of the Santiagos' 2007 complaint, the parties failed to reach an agreement as to the mediator, or the date, time or location of mediation. Notably, the Santiagos were current with their payments even after they commenced their 2007 action against Tanaka and during the mediation negotiations between the parties. However, when it became apparent that advances in the mediation proceedings were not forthcoming, and out of frustration from the inability of counsel to reach an agreement as to scheduling the mediation and selection of the mediator, on March 10, 2008, Louis sent Tanaka a handw0 are in a bank account, and that this arrangement "ritten note stating that he halted payment on his account "due to litigation problems, " that monthly payments of $10, 00will continue until litigation is resolved."
On March 11, 2008, one day after Louis sent his letter, Tanaka sent the Santiagos a "Notice of Default and Intention to Foreclose." Tanaka asserted that because the Santiagos defaulted on the Promissory Note and Mortgage, "the entire principal sum and accrued interest, plus attorneys' fees and costs, are hereby declared immediately due and payable." Tanaka additionally stated that she "has not granted any extensions of time, renewals, waivers or modifications with respect to payment or other provisions of the Note."
On March 12, 2008, Tanaka's mortgage servicer sent the Santiagos a payment notice indicating an amount due of $10, 250.86--$9, 764.63 for the principal and interest payment due on March 10, 2008, and a late fee in the amount of $486.23. In a subsequent letter dated April 3, 2008, Tanaka clarified that she intended to foreclose under power of sale pursuant to HRS § 667-5 through 667-10 at a public auction on May 9, 2008.
On April 11, 2008, the Santiagos submitted payment for the March mortgage payment and the late fee, as well as payment for the April mortgage payment. After receiving the Santiagos' payment, Tanaka informed the Santiagos that she was willing to postpone the public auction for sixty days, "expressly subject to two conditions: (1) [the Santiagos] must meet their payment obligations, including, but not limited to, attorneys' fees and costs; and (2) [the Santiagos] must not file any lawsuit." Tanaka additionally stated that she "ha[d] not postponed the acceleration of the Note and Mortgage, " but "to facilitate the mediation, [she] [was] willing to accept monthly payments, without waiving  rights and remedies in any respect." The Santiagos thereafter continued to make their monthly mortgage payments, plus an additional $235.37 principal payment each month, and paid Tanaka $15, 146.11 in satisfaction of Tanaka's demand for attorneys' fees.
On May 5, 2008, a mediation session was scheduled for June 12, 2008. However, on the same day, because Tanaka did not cancel the scheduled auction sale of the Tavern but only postponed it subject to two conditions, the Santiagos commenced an action against Tanaka asserting several claims. On May 7, 2008, the Santiagos filed a Motion for Temporary Restraining Order and a Motion for Preliminary Injunction, both seeking to "prevent and preclude" Tanaka from proceeding with the foreclosure auction. The circuit court denied the Motion for Temporary Restraining Order and scheduled a hearing on the Santiagos' Motion for Preliminary Injunction for June 17, 2008.
Upon learning of the Santiagos' lawsuit, Tanaka's counsel informed the Santiagos' counsel, on May 15, 2008, that the postponement offer was being withdrawn, the note and mortgage "ha[d] been duly accelerated, " and the "entire debt . . . [wa]s due and payable immediately." On June 3, 2008, the Santiagos and Tanaka agreed to engage in mediation and to postpone the foreclosure auction during the pendency of mediation, subject to the Santiagos' "full compliance with their payment obligations" and withdrawal of their Motion for Preliminary Injunction. Subsequently, on July 14, 2008, Tanaka filed a mediator's declaration of impasse and announced that she was "proceed[ing] with the public auction" on August 14, 2008.
D. The Santiagos' 2008 Complaint
On August 5, 2008, the Santiagos filed a First Amended Verified Complaint in which they asserted claims of negligent misrepresentation and nondisclosure against Tanaka. On August 20, 2008, the Santiagos filed a Motion for Temporary Restraining Order, again seeking to prevent Tanaka from proceeding with the ...