Aldea Dos Vientos v. Calatlantic Group, Inc.

It is reputed that condominium projects have three

phases—planning, building, and the lawsuit. Obviously, this

case is an example of the third phase. We are optimistic there

are numerous condominium projects that experience only the

first two phases.

A condominium association sued the developer alleging

construction defects. The association’s governing documents

require arbitration of such disputes and a vote of at least 51

percent of the association’s membership prior to beginning

arbitration. The association began arbitration without obtaining

a vote of its members. Later, the members overwhelmingly voted

to pursue the arbitration. The arbitrator dismissed the

arbitration for lack of a membership vote prior to its

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commencement. The trial court confirmed the award and entered

judgment for the developer. We reverse. We disagree with

Branches Neighborhood Corp. v. CalAtlantic Group, Inc. (2018)

26 Cal.App.5th 743 which holds otherwise.

FACTS

Aldea Dos Vientos is a condominium project in Thousand

Oaks. The project is a common interest development subject to

the Davis-Stirling Common Interest Development Act (Civ. Code,

§ 4000, et seq., hereafter Davis-Stirling Act).

The project is governed by the Aldea Dos Vientos

homeowners association (Association) and recorded covenants,

conditions, and restrictions (CC&R’s). CalAtlantic Group, Inc. is

the successor to the developer of the project (Developer).

The Association claims it discovered $5.6 million in

construction defects in the common areas and individual units.

Beginning in November 2012, the Association engaged in

discussions with the Developer about the defects. In November

2013, when the discussions were unproductive, the Association

brought suit against the Developer. The trial court stayed the

litigation on the parties’ stipulation to enter into mediation, and

if that failed, arbitration administered by JAMS.

Mediation failed to produce a settlement. Section 7.01A of

the CC&R’s requires that all disputes between the Developer and

the Association or its members, including construction defect

claims, be resolved by arbitration. On June 24, 2016, the

Association filed a demand for arbitration. The Developer filed

an answer in arbitration for the first time raising section 7.01B of

the CC&R’s (hereafter section 7.01B) as a defense. Section 7.01B

provides: “Required Vote to Make Claim. Prior to filing a claim

pursuant to the ADR Provisions, the Association must obtain the

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vote or written consent of Owners other than Declarant who

represent not less than fifty-one percent (51%) of the

Association’s voting power (excluding the voting power of

Declarant).”

The Association admitted that it had not obtained a vote

from its members prior to beginning arbitration. The arbitrator

stayed the arbitration to allow the Association to petition the

trial court to resolve the issue of arbitrability.

In the meantime, the Association obtained the approval of

over 99 percent of its members to continue the arbitration, with

only one member voting against continuing out of 116 votes.

The Association moved the trial court to rule that the

retroactive vote allowed arbitration to proceed. The court denied

the motion on the ground that arbitrability was a matter for the

arbitrator to decide.

The matter returned to the arbitrator. The arbitrator

heard oral argument on motions for summary judgment by the

Association and the Developer concerning interpretation of

section 7.01B. The Developer filed a motion to dismiss based on

the Association’s failure to comply with section 7.01B prior to

beginning arbitration. The Association filed a cross-motion on

the ground that the ratifying vote of the Association members

satisfied section 7.01B. The Association also filed a second

demand for arbitration. The arbitrator summarily dismissed the

original demand for arbitration.

The Developer moved the trial court to confirm the

arbitrator’s award. The court concluded that the dismissal of the

arbitration constituted a final determination of the rights of the

parties notwithstanding the second demand for arbitration. The

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court entered judgment in favor of the Developer and against the

Association.

DISCUSSION

I.

Arbitrator Exceeded His Power

The trial court shall vacate an arbitration award if “[t]he

arbitrators exceeded their powers and the award cannot be

corrected without affecting the merits of the decision upon the

controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4).)

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. (Richey v.

AutoNation, Inc. (2015) 60 Cal.4th 909, 916.) That is particularly

true of the rights and policies governing the conduct of the

arbitration itself. (Sargon Enterprises, Inc. v. Browne George

Ross LLP (2017) 15 Cal.App.5th 749, 765.)

Section 7.01B contravenes explicit legislative expressions of

public policy.

(a) Housing Policy

The Legislature stated that “housing is of vital statewide

importance to the health, safety, and welfare of the residents of

this state . . . .” (Health & Saf. Code, § 50001.) The Legislature

intended housing to be free of substantial construction defects.

(See Civ. Code, §§ 896 [listing construction defects for which the

developer is liable]; 897 [developer liable for defects not expressly

listed]; 941, subd (a) [10-year statute of limitations on actions for

construction defects].) Provisions such as section 7.01B

contravene statutory policy by giving the Developer the

unilateral power to bar actions for construction defects.

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(b) Policy Against Unreasonable Servitudes

The Davis-Stirling Act prohibits the enforcement of

unreasonable provisions in the CC&R’s. (Civ. Code, § 5975, subd.

(a) [“The covenants and restrictions in the declaration shall be

enforceable equitable servitudes, unless unreasonable”].) Here,

section 7.01B as interpreted by the arbitrator is not just

unreasonable, it is unconscionable. It gives the Developer veto

power over the Association’s claims in spite of the members’ vote

to proceed with the arbitration.

The Developer relies on Branches Neighborhood Corp. v.

CalAtlantic Group, Inc., supra, 26 Cal.App.5th 743 (Branches).

After the trial court affirmed the arbitrator’s award, the Fourth

District of the Court of Appeal, Division Three decided Branches.

The facts in Branches are similar to the facts here and involved

the same developer and arbitrator.

In Branches, a condominium development’s CC&R’s

contained a provision similar to section 7.01B, requiring the

condominium association to obtain a vote of at least 51 percent of

its members before beginning arbitration against the project’s

developer. The association began arbitration without seeking a

vote. When the developer sought to dismiss the arbitration, the

association obtained a ratifying vote from over 51 percent of its

members. Nevertheless, the arbitrator dismissed the arbitration

and the trial court entered judgment against the association. The

Court of Appeal affirmed. The court rejected the association’s

argument that the ratification vote was sufficient, pointing out

that the CC&R’s require the vote before arbitration. (Branches,

supra, 26 Cal.App.5th at p. 758.) The court also rejected the

association’s argument that the arbitrator exceeded his powers by

issuing an award that violates a party’s unwaivable statutory

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rights or that contravenes an explicit legislative expression of

public policy.

According to the interpretation of section 7.01B confirmed

by Branches, unless the Association has obtained approval by a

vote of at least 51 percent of its members prior to beginning

arbitration, it has forever forfeited its right to pursue its claims

in any forum in spite of an overwhelming ratifying vote. This

interpretation directly violates the public policy expressed in

Code of Civil Procedure section 1286.2, subdivision (a)(4). It

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.

Branches suggests provisions such as section 7.01B are for

the benefit of the association’s members. Branches states the

membership vote requirement “balance[s] the association’s need

to operate efficiently with the rights of its members to be

informed and participate in decisions that could impact the

association for years, if not decades, to come.” (Branches, supra,

26 Cal.App.5th at p. 758.) But the members voted to ratify the

Association’s decision to arbitrate. It is an odd benefit that

deprives the members of the right to proceed with an arbitration

they voted to undertake. The benefit suggested by Branches is

better realized by treating covenants such as section 7.01B as

between the association and its members only, and not a

covenant giving the developer standing to assert the clause as a

bar to the rights of the association.

The language of section 7.01B does not give the Developer

veto power over claims against it. Nor does section 7.01B inform

the Association or its members of the devastating effect the

failure to comply will have on its rights, or that the initial failure

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to comply, no matter how inadvertent, will be irremediable. We

decline to follow Branches.

As interpreted by Branches, section 7.01B violates explicit

legislative expressions of public policy.

II.

Senate Bill No. 326

The Legislature has also determined that provisions such

as section 7.01B are unconscionable. Senate Bill No. 326 (2019-

2020 Reg. Sess.) (Stats. 2019, ch. 207, § 2) was enacted and

signed by the Governor on August 30, 2019 and took effect on

January 1, 2020. (Cal. Const., art. IV, § 8, subd. (c)(1); Gov. Code,

§ 9600, subd. (a).) The bill adds Civil Code section 5986,

subdivision (b) as part of the Davis-Stirling Act.

Senate Bill No. 326 bars the use of provisions such as

section 7.01B as a defense for developers against claims of

condominium associations.1

1 Senate Bill No. 326 adds Civil Code section 5986,

subdivision (b) as follows: “The governing documents shall not

impose any preconditions or limitations on the board’s authority

to commence and pursue any claim, civil action, arbitration,

prelitigation process . . . or other legal proceeding against a

declarant, developer, or builder of a common interest

development. Any limitation or precondition, including, but not

limited to, requiring a membership vote as a prerequisite to, or

otherwise providing the declarant, developer, or builder with veto

authority over, the board’s commencement and pursuit of a claim,

civil action, arbitration, prelitigation process, or legal proceeding

against the declarant, developer, or builder, or any incidental

decision of the board, including, but not limited to, retaining legal

counsel or incurring costs or expenses, is unenforceable, null, and

void. The failure to comply with those limitations or

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The Developer, however, relies on Civil Code section 5986,

subdivision (d), also added by Senate Bill No. 326. That

subdivision provides: “This section applies to all governing

documents, whether recorded before or after the effective date of

this section, and applies retroactively to claims initiated before

the effective date of this section, except if those claims have been

resolved through an executed settlement, a final arbitration

decision, or a final judicial decision on the merits.” The

Developer argues the section is not retroactive because there has

been a “final arbitration decision.”

But the most reasonable construction of Civil Code section

5986, subdivision (d) is that the phrase “on the merits” following

“final judicial decision” also applies to “final arbitration decision.”

There is no reason why the Legislature would intend to require a

final judicial decision to be on the merits but not a final

arbitration decision to be on the merits. Here the arbitrator’s

decision was not on the merits and the judicial decision was not

final.

Also here, the arbitrator’s decision was not final. The

Association filed two demands for arbitration, one filed on June

24, 2016, before the membership vote, and the other filed on

October 31, 2017, after the membership vote. The arbitrator

found the first demand for arbitration void because it was made

prior to the vote required by section 7.01B. The arbitrator’s order

expressly states, “This finding does not directly impact the

viability of the Demand in Arbitration filed October 31, 2017.”

The arbitrator ordered that: “The Demand (Claim) in Arbitration

filed June 24, 2016 . . . is dismissed.” The arbitrator never ruled

preconditions, if only, shall not be asserted as a defense to any

claim or action described in this section.”

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on the October 31, 2017 demand. His decision did not end

arbitration.

In any event, Senate Bill No. 326 aside, the arbitrator’s

award violates other explicit legislative expressions of public

policy.

The judgment is reversed. Costs on appeal are awarded to

appellant.