Why the difference matters, in money

HRS § 514B-146(n) applies “[a]fter any judicial or nonjudicial foreclosure proceeding in which the association acquires title to the unit,” and defines excess rental income as net income received “after a court has issued a final judgment determining the priority of a senior mortgagee.”

In AOAO of Kawaihae Crescent East v. Yang (July 22, 2026), the ICA held that judgment need not be the lender’s: “Nothing in this language requires the judgment be the senior mortgagee’s foreclosure judgment.” In that case it was the association’s own 2013 decree — eleven years before the lender’s sale was confirmed. The association had collected $230,792.90 in rent; the court found $65,701.37 of it was excess.

SB 2765 would have moved that start date forward by years. The association’s position under the bill and its position under Yang are separated by roughly a decade of accrual.

And the route the bill did not address

In US Bank Trust N.A. v. AOAO Haleakala Gardens (June 8, 2026), the ICA held § 514B-146(n) does not reach a unit the association acquired by deed in lieu at all: “the AOAO did not acquire the Property through judicial or nonjudicial foreclosure proceedings.”

SB 2765 was drafted around foreclosure. It said nothing about settlement conveyances — which, after Haleakala Gardens, is where an association that intends to hold and rent a unit is materially better off.

What a board can actually do now

Plan on the case law, not the bill.

• Identify the first judgment determining a senior mortgagee’s priority for every unit the association took through foreclosure. It is frequently the association’s own decree, and its date is the accounting start.
• Run the § 514B-146(n) waterfall annually rather than at the end. The statute pays the delinquent-assessment lien first, then the other deductions; the residue goes to lienholders by priority, not pro rata.
• Segregate the surplus. An association that has already spent it has a cash problem stacked on a legal one.
• Consider a deed in lieu where the association intends a long hold — but do not treat it as immunity: the Haleakala Gardens panel expressly preserved the possibility of an equitable accounting on some other basis.
• Remember the lender has twenty years. The Hawaii Supreme Court held in August 2025 that HRS § 657-31 governs mortgage foreclosure. Silence from a mortgagee is not abandonment.

The wider pattern worth naming

This is the second area in a single session where Hawaii’s condominium law was settled by an unpublished appellate decision rather than by a statute the Legislature had in front of it. The other is the fining-authority question in the Waikiki Banyan litigation.

The consequence for boards is practical: the operative rule may live in a summary disposition order that, under Hawaii Rules of Appellate Procedure Rule 35, has limited citation value — and there is no published decision to point to instead. That is an uncomfortable place for a volunteer board to make a six-figure decision, and it is where several of them now are.

What to watch

Whether a 2027 bill returns with both routes addressed — foreclosure and deed in lieu — and whether certiorari is sought in either 2026 decision. Neither showed a disposition on record as of this writing.