Source: https://hoalaw.tinnellylaw.com/villa-vicenza-hoa-v-nobel-ct-d/
Timestamp: 2019-04-22 04:05:43+00:00

Document:
Although both federal and state law favor the enforcement of arbitration agreements, neither federal nor state law countenance imposition of arbitration where no agreement to waive judicial remedies exists. Admittedly, in other circumstances our cases and Civil Code section 1354 treat CC & R’s as equitable servitudes which bind homeowners and homeowners associations with respect to claims they may have against each other. This treatment of CC & R’s is not based on any determination the parties bound by them are in privity of contract with either their co-owners or a homeowners association. Rather, CC & R’s are made binding in disputes between homeowners or between homeowners and a homeowners association because of their shared and continuing interest in the equitable and efficient operation of common interest developments. Here, the recorded CC & R’s, standing alone, are not a contract between the developer and the homeowners association, which only came into existence after the CC & R’s were recorded. Thus here there has been no showing the association entered into a binding arbitration agreement. Accordingly, the trial court did not err in denying the developers’ motion to compel arbitration.
Nobel Court Development, LLC (Nobel), purchased the 418 apartments, common areas, and common facilities which make up the Villa Vicenza project in 2004 and converted the apartments to condominiums in 2005. In the course of making the property a condominium project, Nobel recorded CC & R’s under which the Villa Vicenza Homeowners Association (the Association) came into existence upon the sale of the first condominium. By deed Nobel also transferred ownership of the common areas and common facilities to the Association. No consideration was provided by the Association to Nobel and the Association did not execute any documents in favor of Nobel in connection with the deed transferring the common areas and common facilities to the Association. In pertinent part, the CC & R’s require that both condominium owners and the Association arbitrate any claims they have against the developer.
Here, we do not believe the CC & R’s Nobel recorded represent a binding agreement on the part of the Association to arbitrate its construction defect claims against Nobel. In reaching this conclusion we rely on our recent holding in Treo @ Kettner Homeowners Assn. v. Superior Court (2008) 166 Cal.App.4th 1055, 1066-1067 (Treo ), and the provisions of Civil Code section 1354. Although as we explain the holding in Treo is not directly applicable to the arbitration provisions of the CC & R’s, the principles it discusses are helpful in determining whether an agreement to arbitrate exists.
In Treo the developer of condominium project recorded CC & R’s which made all disputes between the developer and the homeowners association subject to a judicial reference under Code of Civil Procedure section 638. The homeowners association sued the developer for construction defects and the developer moved to have the matter determined by a referee under Code of Civil Procedure section 638. The trial court granted the developer’s motion and the homeowners association filed a petition for a writ of mandate. We issued the writ.
*3 Having found that under Grafton a jury waiver requires actual notice and meaningful reflection, in Treo we found the constructive notice provided by the CC & R’s did not meet those standards: “The difficulty here is the manner in which the ‘contract’ between [the developer] and [the homeowners association] waiving the right to trial by jury came about. As we have noted, an association, with its obligations and restrictions as defined in the CC & R’s, essentially springs into existence when there is a conveyance by the developer of a separate interest coupled with an interest in the common area or membership in the association.
“It is at least arguable that there is some meeting of the minds between the developer and the party to whom the first conveyance is made. The problem, however, is that later purchasers and their successors, who will make up almost all association members, effectively have no choice but to accept the CC & R’s prepared by the developer, including in this case the waiver of the right to trial by jury.
*4 As Nobel points out, where an arbitration agreement is covered by the FAA, the FAA preempts any conflicting state law. (Shepard v. Edward Mackay Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1097-1099.) Thus Nobel argues the jury waiver provisions in the California Constitution we relied on in Treo cannot be used to adversely impact its right to compel arbitration under the FAA.
We agree with Nobel that any purported agreement between it and the Association would be covered by the FAA and that where the FAA applies, the California Constitution cannot be used to treat arbitration agreements differently than other types of agreements. However, the FAA, like the CAA, only imposes arbitration on parties which have agreed to forego resort to judicial remedies. In this regard, while it is true in Treo we found that the CC & R’s do not meet the particular requirements of the California Constitution, our analysis in Treo of the manner in which the CC & R’s operate, as well as our further consideration of Civil Code section 1354, persuade us a developer may not obtain any contractual rights, including the right to arbitration, by the simple expedient of recording the CC & R’s. Neither the circumstances by which the CC & R’s are recorded nor their controlling impact on disputes between those with an ownership interest in or responsibility for the operation of a common interest development give rise to any sort of binding agreement between developers who have recorded the CC & R’s and those who might in the future be burdened by them.
Nobel notes that by their terms the CC & R’s state: “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. § 1, et seq.) now in effect and as it may be hereafter amended will govern the interpretation and enforcement of the arbitration provisions of this Declaration.” The facts set forth in the CC & R’s are hardly matters subject to serious dispute. Nobel’s condominium project was a substantial multi-family housing development composed of literally hundreds of dwelling units, the construction of which no doubt necessitated myriad contacts with and impacts on interstate commerce. Moreover, it can hardly be a matter of controversy interstate commerce was involved in financing the purchase of hundreds of individual condominiums from Nobel. Thus, the connection between the project and interstate commerce is manifest here and more than sufficient to support application of the FAA.
In this regard the United States Supreme Court’s opinion in Citizens Bank v. Alafabco, Inc. (2003) 539 U.S. 52, 55-58 [123 S .Ct.2037], is controlling. In Citizens Bank v. Alafabco, Inc., an Alabama borrower entered into a series of debt-restructuring agreements with an Alabama bank. Each of the restructuring agreements contained arbitration provisions. Because the borrower believed the bank had reneged on an agreement to provide the borrower with working capital, the borrower sued the bank, which then moved to compel arbitration.
Similarly, here it can hardly be disputed Congress has the power to regulate the sale and financing of a large residential development. The financing alone, implicates the use of federally regulated and chartered financial institutions with well-recognized impacts on interstate commerce, and thus supports application of the FAA under Citizens Bank v. Alfabaco, Inc. In this regard we note that under the Civil Code section 1351, subdivisions (a), (j) and (k), creation of the Association and its ownership of common areas and facilities was an integral part of the creation of the condominium project.
Application of the FAA to the transfer of property to the Association, prevents us from enforcing restrictions on the use of arbitration in construction defect cases which the Legislature enacted as Code of Civil Procedure section 1298 et seq. (See Shepard v. Edward Mackay Enterprises, Inc., supra, 148 Cal.App.4th at pp. 1097-1101.) “States may regulate contracts, including arbitration clauses, under general contract law principles and they may invalidate an arbitration clause ‘upon such grounds as exist at law or in equity for the revocation of any contract.’ [Citation.] What States may not do is decide that a contract is fair enough to enforce all its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state policy unlawful….” (Allied-Bruce Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265, 281 [115 S .Ct. 834].) The FAA also prevents us from relying on the jury waiver provisions of the California Constitution to invalidate an arbitration agreement. Those provisions of our Constitution would improperly discriminate against arbitration because they would not necessarily invalidate other portions of an agreement which, although lacking actual notice and meaningful reflection, do not purport to waive the right to a jury.
Our review of the CC & R’s Nobel recorded reveals they are consistent with Civil Code section 1354 and state an intent to benefit only the owners of separate units and provide a right of enforcement only to owners and the Association. Thus neither Civil Code section 1354 nor the terms of the Association’s CC & R’s express any intent to benefit Nobel in its capacity as developer of the project or provide it with any general right to enforce the CC & R’s, other than as the owner of unsold units.
*7 The rationale for limiting the enforcement of CC & R’s to owners and representative associations can be found in the reasons we were unwilling in Treo to find that CC & R’s may be used as a means of waiving the right to a jury. CC & R’s are generally, as here, adhesive and unilateral and those bound by their terms may only have constructive notice of those terms and no contractual relationship with the developer who drafted the CC & R’s. While, notwithstanding these considerable procedural shortcomings, CC & R’s may be a practical and necessary means of nonetheless governing the ongoing relationship between owners of common interest developments or adjoining property (see Citizens for Covenant Compliance v. Anderson, supra, 12 Cal.4th at pp. 360-369), no such practicality or necessity exists with respect to the rights or obligations of developers or other third parties.
In light of the foregoing, we do not believe that in providing in Civil Code section 1354 that CC & R’s be treated as equitable servitudes, the Legislature intended that CC & R’s would be used to provide continuing and irrevocable contractual benefits to entities such as Nobel, which have no continuing interest in a development or role as a representative of the owners of the development. Thus the trial court did not err in denying Nobel’s motion to compel arbitration.
WE CONCUR: NARES and McINTYRE, JJ.
The individual condominium buyers also brought claims on their own behalf and by way of a prior order, which is not the subject of this appeal, the trial court ordered those individual claims be arbitrated.
We express no opinion with respect to parties with whom a developer has a contractual relationship.
In B.C.E. we held that a developer, as the declarant which recorded CC & R’s, could reserve the power to enforce the CC & R’s, notwithstanding the fact the developer no longer had any interest in the development. However the CC & R’s we considered in B.C.E. were recorded in 1968 and concerned a subdivision of separate parcels. The B.C.E. CC & R’s were not subject to the current version of section 1354 or its statutory predecessor. (See Stats.1963, ch. 860.) Importantly, in finding that the developer could enforce the CC & R’s, we found the developer, which was attempting to enforce architectural restrictions, was acting not in its own interest, but as the only logical representative of all the property owners in the development. (B.C.E., supra, 215 Cal.App.4th at pp. 1149-1150.) Here, Nobel is acting solely in its own pecuniary interest and not as the representative of anyone with any existing interest in the development. In this case the enforcement role we endorsed in B.C.E. is being filled by the Association under the terms of section 1354.
We note that under sections 1355 through 1357 and the terms of the Association’s CC & R’s, the Association has the power to amend the CC & R’s. Because it appears from the record that Nobel controlled the Association until after these proceedings were initiated, we draw no inference from the Association’s failure to amend the CC & R’s.

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