California Mediation and Arbitration

Arbitration, Vacatur, Public Policy: Second Dist., Div. 6 Holds Arbitrator Award Violated Public Policy in HOA/Developer Dispute

And Now There Is A Split Between The 4th District, Div. 3, And The 2nd District, Div. 2.

          In Branches Neighborhood Corp. v. CalAtlantic Group, Inc., 26 Cal.App.5th 743 (2018), a homeowner's association began a construction defects arbitration with a developer without first getting a vote of 51% of its membership, despite association documents requiring such approval. When the developer sought to dismiss the arbitration, the association obtained a ratifying vote. The arbitrator dismissed the arbitration based on the failure to get the required vote before initiating the arbitration, the trial court entered judgment against the association, and the Court of Appeal, 4th District, Div. 3, affirmed.

          Now Aldea Dos Vientos v. CalAtlantic Group, Inc., No. B291731 (2nd Dist., Div. 6  2/6/20) (Gilbert, Yegan, Tangeman) holds otherwise. Note: (1) the facts of the two cases are essentially the same; (2) the developer defendant is the same; (3) the 51% voting requirement is in the governing documents of the HOA in both cases; (4) the arbitrator in both cases dismissed the arbitration; (5) the trial court in both cases affirmed judgment in favor of the developer; (6) the law firm representing the developer is the same in both cases. The differences are the outcome (affirmance in the earlier case, reversal in the later case), the legal arguments, and the courts.

          In the later case, Justice Gilbert explains that the arbitrator exceeded his power, a basis for vacating an award under Cal. Code Civ. Proc., section 1286.2. "Arbitrators exceed their power by issuing an award that violates a party's unwaivable statutory rights or that contravenes an explicit legislative expression of public policy."

           First, provisions that require a 51% vote before initiating arbitration or litigation "contravene statutory policy by giving the Developer the unilateral power to bar actions for construction defects", contrary to housing policy. The developer here argued that the majority voting requirement of an early vote was for the good of the homeowner. However, Justice Gilbert sees the voting requirement as an issue between the HOA and its members, one that was taken care of by ratification, and not one that the Developer could take advantage of after ratification had occurred. 

          Second, Civ. Code section 5975(a) provides that "unreasonable" equitable servitudes shall not be enforced. Justice Gilbert views as unreasonable a covenant that "gives the Developer veto power over the Association's claims in spite of the members' vote to proceed with the arbitration." The provision, if not interpreted to allow for ratification, "amounts to a trap for the unwary set by the Developer to bar claims against it. The Developer is burdened with no similar hurdle prior to seeking a determination of its rights."

          Third, Senate Bill No. 326, signed by the Governor on August 30, 2019, "bars the use of provisions such as section 7.01B [the 51% member voting requirement to initiate legal action] as a defense for developers against claims of condominum associations."

          The judgment is reversed.

Arbitration/Appealability/Homeowners: Court Of Appeal Dismisses Appeal Of Order Denying Motion To Compel Arbitration Because Order Did Not Effectively Terminate Arbitration

Ordinarily, Denial Of A Motion To Compel Arbitration Is Appealable – But Not Here, And The Court Explains Why . . .

     Hayward Renaissance Walk Corporation v. Olson Urban Housing, LLC, A148372 (2/1 12/20/16) (Margulies, Humes, Dondero) (unpublished) does something satisfying that we like cases to do:  it makes sense and imposes order on somewhat confusing rules.   In this instance, the rules are those governing the appeal of arbitration rulings under Code of Civ. Proc., section 1294. 

     Here is the context.  Plaintiff, a homeowners association, sued various parties, alleging construction defects.  Plaintiff then filed a petition for an order staying its action and compelling arbitration.  However, plaintiff and defendants, while ultimately agreeing about a right to arbitrate, disagreed over which provision in the CC&Rs governed the arbitration.  The trial court agreed that the provision preferred by defendants, a so-called limited warranty provision, governed.  Because that provision required a demand for arbitration, the trial court gave plaintiff 14 days to submit a demand for arbitration.  When the association failed to submit proof of a timely demand, the court denied the petition to arbitrate, and plaintiff appealed the denial of its petition.

     As the Court of Appeal helpfully explains for those of us who could not otherwise remember all the rules governing the appeal of arbitration rulings, “what each of these appealable orders has in common is that they effectively terminate further proceedings with respect to the arbitration.”  In other words, the orders are sufficiently final to be appealable.  For that very reason, the denial of a petition to compel arbitration, which ordinarily terminates further arbitration proceedings, is appealable.

     But not here.  The trial court’s order denying the petition to arbitrate did not put an end to arbitration.  If the trial court’s order were affirmed, the trial HOA would probably file a demand for arbitration under the limited warranty, whereas if the trial order were reverse, the HOA would probably seek an order compelling arbitration under its preferred section.  So because the trial court’s order lacked sufficient finality to be appealed, the Court of Appeal dismissed the appeal.

     What happens next?  Query whether there is room for more do-si-do in the trial court, because plaintiff failed to seek arbitration within 14 days. 

Arbitration/Homeowners/References/FAA: Fifth District Affirms Order Denying Motion To Compel Arbitration In Construction Defect Lawsuit

The Key:  Close Reading Of Provision Providing For Arbitration If Reference Became “Legally Unavailable.” 

      The short but interesting opinion in Freeman v. Froehlich Signature Homes, Inc., F073374 (5th Dist. 12/15/16) (Levy, Gomes, Kane) (unpublished), merits close reading, because it reads like a finely-worded exam question.

     In a construction defect lawsuit, the trial court considered plaintiffs/homeowners’ motion to compel a judicial reference with a developer against the backdrop of a CC&R requirement that disputes be resolved by judicial reference but, “if ‘for any reason the judicial reference procedures . . . are legally unavailable at the time a dispute would otherwise be referred to judicial reference, then such dispute shall be submitted to binding arbitration.’” 

     At first blush, a motion for judicial reference would seem appropriate.  Not so fast, said the trial court:  another case involving the same development project was pending, and a reference might negatively impact judicial economy.  So the trial court, in the exercise of judicial discretion, denied the motion for judicial reference – but without prejudice.

     Therefore, plaintiffs’ attorneys took the next logical step, and moved to compel arbitration.  After all, the court had denied their request for a judicial reference. However, the motion to compel arbitration was also denied.  Plaintiffs appealed.

     The Court of Appeal upheld the order denying the motion to compel arbitration, because the denial of a reference without prejudice did not make a reference legally unavailable.

     COMMENT:  Sometimes timing is everything.  This outcome does not foreclose plaintiffs from getting a reference or an arbitration.  The trial court ordered the cases consolidated, noting that, “motions for judicial reference, and when appropriate, motions [to] compel arbitration may be renoticed.”  So another round of law and motion can be anticipated.  Nothing prevents plaintiffs from moving again for a reference, and in the alternative, arbitration,

      This is a case in which the application of the Federal Arbitration Act makes a real difference, because if California law applies, the trial court could stay a reference or stay arbitration to avoid results inconsistent with a pending court case.  Here, the Court of Appeal concluded that the FAA applies – not because interstate commerce was involved, but because the dispute resolution provision expressly provided for application of the FAA.    In this case, the preemptive effect of the FAA sweeps away inconsistent California law that would otherwise give the trial judge more discretion to deny a reference or to deny arbitration.  Let’s see what happens after the inevitable “next round.”

Arbitration, Homeowners: Failure To Comply With B&P Section 7191 Requirements For Prominence and Formatting Makes Arbitration Provision For Work On Residence Unenforceable

Placement and Prominence Requirements Are Key To Implementing Statutory Disclosure And Knowing Waiver Objectives

     In Anna-Becky Redlich v. Reliance Management Group, Inc., Case No. A140313 (1/2 March 11, 2015) (Banke, Margulies, Dondero) (unpublished), the Court of Appeal agreed with the trial court that arbitration provisions between plaintiff homeowner, and defendants design firm and construction management firm, did not sufficiently comply with Business and Professions Code section 7191, which regulates arbitration provisions in a a contract for work on residential property with four or fewer units.  The Court identified various problems, such as failure to include a title “ARBITRATION OF DISPUTES”, a reference to the Code of Civil Procedure in the contract that should have been to the Business and Professions Code, lack of bold, colored, or capitalized text, and defective placement of certain provisions.  Analyzing the lack of statutory compliance under a “substantial compliance” standard, the Court of Appeal concluded that, given the disclosure and knowing waiver objectives of the statute, substantial compliance was lacking.

     COMMENT:  Several statutory schemes have prominence and formatting requirements for arbitration clauses.  Prominent examples relate to health care service plans, Health and Safety Code section 1363.1, certain real estate contracts, Code of Civil Procedure, section 1298, and contracts for work on small residential properties, Business and Professions Code section 7191.  Aim for strict compliance with the statute.  One person’s “technical defect” is another’s “failure of substantial compliance.”

Arbitration/Homeowners: California Supreme Court’s Pinnacle Museum Tower Association Case Disposes Of Enforceability of Arbitration Provision In CC&Rs In Verano Condominium Homeowners Association Case

Based On Holding of Pinnacle, Fourth District, Division 1 Reverses Order Of The Superior Court That Had Denied Developer’s Request To Arbitrate

     I posted on May 10, 2012 about Verano Condominium Homeowners Association v. La Cima Development, LLC, a 4^th District Division 1 case, in which the Court of Appeal held, based on an analysis of contractual privity, that an arbitration provision in recorded covenants, conditions and restrictions (CC&Rs) was not enforceable between the homeowners association and the developer, or between the developer and a class of owners on whose behalf the HOA sued.  On August 16, 2012, I posted about Pinnacle Museum Tower Assn. v. Pinnacle Market Development (UASA), LLC, 55 Cal.4th 223 (2012), in which the California Supreme Court held arbitration clauses in CC&Rs are enforceable against an HOA, notwithstanding the fact that the HOA did not come into existence until after the CC&ARs were recorded, and the HOA’s consent to arbitrate occurred by operation of law.  I asked:  “Will today's Supreme Court opinion in Pinnacle Museum Tower Association dispose of issues in Verano Condominium Homeowners Association?” 

     The answer to my rhetorical questions is:  Yes.  On January 25, 2013,the Court of Appeal held in Verano that the arbitration provisions in Verano “constitute a valid agreement to arbitrate within the scope of the FAA [Federal Arbitration Act],” thereby reversing the trial court’s order.  Verano Condominium Homeowners Association v. La Cima Development, LLC, Case No. D058217 (4th Dist. Div. 1 January 25, 2013) (unpublished) (Benke, Acting P.J., author).

Arbitration/Homeowners: Fourth District, Division 1 Reverses Trial Court’s Order And Holds Arbitration Clause In Recorded Declaration Of Covenants, Conditions And Restrictions Is Valid

Pinnacle Museum Tower Association Dictates Result

     In Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (2012), the California Supreme Court held that arbitration clauses in recorded CC&Rs, requiring that a homeowners association arbitrate construction claims against a developer, are enforceable.  See my August 16, 2012 post about Pinnacle.  (“Privity, Shmivity, Says The California Supreme Court – A Provision To Arbitrate Construction Disputes In Recorded CC&Rs Will Be Honored If Not Unreasonable”).

     In Villa Vicenza Homeowners Association v. Nobel Court Development, LLC, Case No. D054550 (4th Dist. Div. 1 January 17, 2013) (Benke, Acting P.J., author) (unpublished), homeowners brought a derivative action on behalf of a homeowners association against a developer, alleging the developer failed to provide a reserve fund sufficient to repair defects.  The developer filed a motion to compel arbitration that the trial court denied, believing that recording CC&Rs is not a valid means of obtaining an arbitration agreement.  The Court of Appeal affirmed the denial.  Then the developer filed a petition for review, which was granted, and after Pinnacle was decided, the Supreme Court transferred the case back to the Court of Appeal with directions to vacate and reconsider in light of Pinnacle.

     Pinnacle was dispositive, unless the arbitration clause in Pinnacle was unconscionable.  However, because the arbitrations provision under consideration in Vicenza Homeowners Association were “materially indistinguishable from the arbitration provisions considered in Pinnacle,” the arbitration provision was not unconscionable.

     The Court of Appeal vacated its earlier decision affirming the trial court’s order denying arbitration.  In other words, the parties will have to arbitrate.

     Drafting Tip:  The arbitration clause was covered by the Federal Arbitration Act because it involved interstate commerce.  The CC&Rs stated:  “Because many of the materials and products incorporated into the home are manufactured in other states, the development and conveyance of the Property evidences a transaction involving interstate commerce and the Federal Arbitration Act (9 U.S.C. section 1, et seq.) now in effect as it may be hereafter amended will govern the interpretation and enforcement of the arbitration provisions of this Declaration.”  A developer who wants the arbitration clause to be enforceable under the FAA should consider including such language.

Arbitration/Enforceability/Homeowners: California Supreme Court’s Decision In Pinnacle Requires Reversal In Another Case Of Order Denying Developer’s Motion To Compel Arbitration

     On August 16, 2012, we blogged about the California Supreme Court’s decision (actually, a majority, concurrences, and a dissent) in Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, 55 Cal.4th 223 (2012).  That case held that covenants, conditions and restrictions of a recorded declaration created by a developer, which contain an arbitration clause, will be honored and enforced to compel arbitration as long as they are not proven to be unreasonable.

      That Supreme Court holding compelled the Second District, Division 1, in Promenade at Playa Vista Homeowners Association v. Western Pacific Housing, Inc., Case No. BC225086 (2nd Dist. Div. 1 Dec. 6, 2012) (Mallano, J) (unpublished) to vacate its prior decision in the Promenade case affirming an order denying the developer’s motion to compel arbitration.  On remand, the trial court is to enter a new order granting the developer’s motion to compel arbitration.

Arbitration/Fees/: HOA’s Dismissal of Arbitration Against Management Company Results In Award of Attorney’s Fees Against HOA

HOA Was Not Spared Fees Because It Initiated Arbitration, And Fees Clause Was Broad Enough To Cover Situation

     Plaintiff homeowners association, Lakeside Club Villas, Inc., settled with developer defendants, and therefore voluntarily dismissed an arbitration against defendant property management company.  The management company brought a successful motion to obtain attorney fees.  The HOA appealed, arguing that, because it voluntarily dismissed the arbitration, the management company was not the prevailing party.  Lakeside Club Villas, Inc. v. LB Property Management, Inc., Case No. B236001 (2nd Dist. Div. 5 October 16, 2012) (Armstrong, J.) (unpublished).

     Under Civil Code section 1717, a voluntary dismissal may save a losing party from having to pay attorney’s fees on a contract claim.  But that didn’t work here, because the fees clause was “sufficiently broad to allow such fees on the noncontract claim, but are limited to those associated with the arbitration of the dispute.”

     The HOA’s contention depended “upon the premise that there was no arbitration.”  No go.  “A JAMS arbitration is commenced by filing the Demand for Arbitration, a copy of the agreement containing the arbitration provision, and the filing fee.”  And the HOA did that.

Arbitration/Enforceability/Homeowners: Privity, Shmivity, Says The California Supreme Court – A Provision To Arbitrate Construction Disputes In Recorded CC&Rs Will Be Honored If Not Unreasonable

 

Majority Opinion Draws Two Concurrences and One Dissent

     Arbitration is a matter of consent, right? Because there can be no meaningful consent between a developer that drafts covenants, conditions, and restrictions containing a provision requiring arbitration of construction disputes, and a homeowner's association (HOA) that doesn't yet exist, how can the HOA in such circumstances be bound by the arbitration clause? That was the view of the Court of Appeal in San Diego, 4^th District Division 1, which found, by a split vote, that the arbitration clause did not constitute an agreement sufficient to waive the HOA's constitutional right to a jury. But the California Supreme Court, with a five person majority, two concurrences, and one dissent, does not agree. Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, Case No. S186149 (Sup. Ct. August 16, 2012) (Baxter, J., author for the majority).

     Justice Baxter explains, "it is no surprise the courts have described recorded declarations as contracts." (emphasis added). The use of that little word "as" discloses a legal fiction, because while CC&Rs may act "as" contracts, they are not identical to contracts. In particular, they may be binding even where contractual privity is lacking, under the common law of equitable servitudes, and under the Davis-Stirling Act.

     And so the majority opinion concludes:

     "Even when strict privity of contract is lacking, the Davis-Stirling Act ensures that the covenants, conditions, and restrictions of a recorded declaration – which manifest the intent and expectations of the developer and those who take title to property in a community interest development – will be honored and enforced unless proven unreasonable. Here, the expectation of all concerned is that construction disputes involving the developer must be resolved by the expeditious and judicially favored method of binding arbitration."

     Justice Werdegar, concurring, points out that "the majority never clearly states whether the grounds for enforcement lie in contract or real property law." She agrees that contract law does not result in enforceability, because there is no meaningful consent between the developer and an HOA that is automatically subject to "whatever the developer has seen fit to insert in the declaration, without any opportunity to reject those terms." But she believes that the arbitration provision may be enforced as an equitable servitude -- even if not an equitable servitude at common law, then under the Davis-Sterling Act.

     Justice Lui joins the opinion of the Court with the proviso "whether or not the arbitration provision is contractual in the strict sense, it is appropriate in this case to use the substantive unconscionability inquiry from contract law to determine whether the arbitration clause is reasonable and hence lawful."

     Finally, Justice Kennard dissents, "because of the association's lack of consent to the arbitration provision." She would affirm the judgment of the Court of Appeal.

     COMMENT: We posted on May 10, 2012 about Verano Condominium Homeowners Association v. La Cima Development, LLC, another 4^th District Division 1 case, in which the Court of Appeal held, based on an analysis of contractual privity, that an arbitration provision in CC&Rs was not enforceable between the HOA and the developer, or between the developer and a class of owners on whose behalf the HOA sued. The Supreme Court granted a petition for review on July 25, 2012. Will today's Supreme Court opinion in Pinnacle Museum Tower Association dispose of issues in Verano Condominium Homeowners Association?

Arbitration/Enforceability/Homeowners: CC&R Arbitration Provision Does Not Constitute Agreement To Arbitrate Between HOA and Developer

 

But Arbitration Provision Between Developer and Direct, Original Purchasers, Suffices To Compel Arbitration of Those Purchasers' Claims

     Covenants, conditions and restrictions (CC&Rs) containing an arbitration provision often raise gnarly questions about enforceability. Is the provision enforceable, and if so, what group will be bound to arbitrate? Those issues were presented in the next case. Verano Condominium Homeowners Association v. La Cima Development, LLC, Case No. D058217 (4th Dist. Div. 1 May 8, 2012) (Benke, Acting P.J., author) (unpublished).

     Defendant and Appellant, La Cima, converted apartments to condominiums. As part of the condominium conversion, La Cima drafted and recorded CC&Rs that included an arbitration provision. The arbitration provision required individual condo owners and the homeowner's association (Verano) to resolve claims against La Cima through binding arbitration under the Federal Arbitration Act (FAA). La Cima transferred ownership of common areas to the homeowners' association (Verano). Also, La Cima required individual condo purchasers to sign purchase agreements containing similar arbitration clauses.

     Verano sued La Cima alleging defects to Verano's common areas, and also sued as a class representative for association members. La Cima moved to compel arbitration. The trial court denied the motion. La Cima appealed.

     The Court of Appeal analyzed three classes of claims.

     First, there are claims Verano raised on its own behalf against La Cima. Those were not subject to a valid agreement to arbitrate. Why? Essentially, because there was no binding contract between Verano and La Cima – property was transferred to La Cima, but no consideration was provided by Verano.  Under the Davis-Sterling Act, Verano had to take the common areas subject to the CC&Rs. 

     Second, Verano sued as a class representative for owners who did not directly purchase from La Cima. Here too, applying contract principles, there was no binding contract between La Cima and owners who did not purchase from La Cima. Also, there was no privity of estate, because La Cima no longer had any interest in the property. Again, the claims were not arbitrable.

     Third, there were original purchasers bound by an arbitration provision in their contracts with La Cima. Their claims were arbitrable. Also, the Court of Appeal had no trouble concluding that, because ""La Cima's development project was clearly intimately enmeshed with interstate commerce," the arbitration agreement would be covered by the FAA.

     Accordingly, the trial court's order was reversed and remanded with instructions to segregate the third class of claims – claims by the original purchasers – and grant La Cima's motion to compel arbitration of those claims only.