A federal appellate court yesterday reinstated a lawsuit that may allow 36 current or former owner-occupants in Waikiki's Discovery Bay condominium to buy the fee in their leasehold units or collect damages from the city.

The decision by the U.S. Court of Appeals also may give new hope to as many as 130 others who were in the middle of using a city ordinance to acquire the fee in their O'ahu leasehold condos when the City Council repealed the ordinance in 2005.

The case involves the city's lease-to-fee condo conversion law that allowed groups of leasehold unit owners to use the city's power of eminent domain to acquire fee-simple interest in land under condo projects from landowners by force for fair market value.

Condo leaseholders own their units, but lease the land under the buildings. A 1991 law allowed them to force landowners to sell them the land in cases where at least 25 owners or 50 percent of owners petitioned for a sale.

Though the City Council in January 2005 voted to repeal the law, many leasehold unit owners in the middle of acquiring their fee complained that the repeal shouldn't apply to them. Some sued the city to block the repeal or have their conversions completed on grounds that they had binding contracts with the city to acquire their fee.

U.S. District Judge David Ezra in July 2005 dismissed those claims brought by owners at Discovery Bay and Kahala Beach Apartments, ruling that the city lawfully repealed the ordinance, though he also commented that in fairness the city should have allowed pending lease-to-fee conversions to be grandfathered from the repeal.

Yesterday, the appellate court said Ezra inaccurately concluded that a legal doctrine allowed the city to impair contracts. The appellate court sent the case back to the lower court for consideration under a different doctrine governing contracts.

David Nakashima, an attorney with Alston Hunt Floyd & Ing representing 36 Discovery Bay plaintiffs, said the decision was a significant step forward in a difficult case for leasehold condo owners.

"It's a major victory, but we still have to go back to court," he said.

Nakashima added that he is optimistic that plaintiffs will eventually be awarded damages or be allowed to complete their fee acquisitions, possibly through a special ordinance.

Don Kitaoka, a city attorney who worked on the case, said the city is disappointed with yesterday's order, but will await further findings from the court as the case continues.

The decision applied only to 36 plaintiffs from Discovery Bay because Kahala Beach plaintiffs were dismissed from the suit over another issue. However, Nakashima said the decision could possibly help others who had signed contracts with the city to initiate the condemnation process when the repeal occurred.

About 160 people had such contracts at the time, he said.

Ralph Mitchell, one of the Discovery Bay plaintiffs, said he hopes for a settlement with the city and noted that some plaintiffs have since sold their units and moved away.

"They probably would have stayed if they were allowed to get their fee interest," he said. "We had a signed contract with the city."

The 1991 condo conversion law was modeled on a state law covering single-family homes that is much older and is still in existence.

Both laws aimed to serve a public purpose by allowing individuals to buy land under their homes. The land was once mostly concentrated in the hands of a relatively few large trusts.

Reach Andrew Gomes at agomes@honoluluadvertiser.com.