Disclaimer: This article is for informational purposes only and does not constitute legal advice.
Detailed Answer
When co-owners of real property in Hawaii file a partition action under Hawaii Revised Statutes (HRS) Chapter 669, they seek to divide the property or its sale proceeds. If the property carries one or more mortgages or other liens, those encumbrances remain attached and must be addressed before distributing proceeds to co-owners.
1. Priority of Mortgages and Liens
Under HRS Chapter 501, recorded mortgages and liens have priority based on the order and date of recording. The partition sale cannot defeat a valid mortgage. Consequently, the court will direct the sale agent or commissioner to pay off mortgages in the order of their priority:
- First mortgage (oldest recorded) is paid in full.
- Subsequent mortgages or liens are paid in sequence.
- Any remaining liens (e.g., judgment liens) follow.
Reference: HRS § 501-63 (Lien priorities) (link).
2. Sale of the Property
The court may order a public sale or private sale of the entire property. A licensed real estate agent or a court-appointed commissioner typically handles the sale. Net sale proceeds—gross sale price minus sale costs (auction fees, broker commissions, taxes, insurance, and closing costs)—are then distributed.
3. Satisfaction of Mortgage Obligations
From the net proceeds, the clerk of court or commissioner pays off the mortgages and liens in priority order. After all encumbrances are satisfied, any expenses of the partition are paid next. Finally, the remaining funds are divided among co-owners based on their ownership interests.
4. Distribution to Co-owners
If the mortgage was obtained by one co-owner (the mortgagor) only, the creditor receives full payment from the sale proceeds. Any surplus after paying the mortgage and costs goes to the mortgagor. Non-mortgagor co-owners receive their share of net proceeds free of that mortgage.
If multiple co-owners jointly authorized the mortgage, they share any surplus or deficiency according to their ownership interests. In rare cases where the sale proceeds do not cover the mortgage balance, the lender may seek a deficiency judgment against the mortgagor(s) under HRS §§ 502-92 to 502-93.
Reference: HRS § 669-7 (Application of proceeds in partition) (link).
Helpful Hints
- Review the county’s land records to identify all recorded mortgages and liens.
- Obtain a payoff statement from the mortgagee to confirm the exact amount due.
- Consult a licensed real estate professional for sale preparation (e.g., appraisal, disclosures).
- Consider mediation among co-owners to agree on sale terms and avoid court delays.
- Track all partition expenses and file documentation with the court to ensure proper deductions.
- Check HRS Chapter 501 and 669 online to stay current on statutory requirements.