Thursday, July 2, 2015
As highlighted in our most recent post, the Colorado Court of Appeals’ Vallagio decision upheld a declaration provision that prohibited the amendment of a mandatory arbitration clause without the consent of the developer/declarant. Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al., 2015COA65 (Colo. App. May 7, 2015). This case protects a developer/declarant’s ability to arbitrate construction defect claims with a well-crafted declaration that requires declarant consent in order to amend the mandatory arbitration provisions for construction defect actions.
However, the Vallagio ruling still hangs in the balance while the Colorado Supreme Court considers the condominium association’s petition for certiorari review, filed June 18, 2015. In its petition, the association argues that the declarant consent requirement violates public policy and four separate sections of the Colorado Common Interest Act (“CCIOA”).
For instance, the association argued in the courts below that a declarant consent requirement violates section 217 of CCIOA, which governs unit owners’ voting percentage requirements and provides that declarations may not require more than 67% affirmative vote for amendments. The Court of Appeals rejected this argument, reasoning that other provisions of section 217 contemplate consent requirements by parties other than unit owners, such as first mortgagees.
In its petition, the association now asserts that the Court of Appeals applied the mortgagee consent provision much too broadly because, while the interests of unit owners and their mortgage holders are aligned with regard to holding developers responsible for construction defects, the interests of declarant developers and unit owners are more likely to be adverse. More logically, CCIOA likely allows first mortgagees to approve or consent to certain amendments affecting their security interests because their interests with unit owners are likely to become adverse in certain circumstances as well. According to the Court of Appeals’ reasoning, because the mortgagee consent protection does not violate the voting percentage requirements of section 217, the declarant consent protection does not violate that section.
The association also argues in its petition that the Court of Appeal incorrectly read sections 38-33.3-302(2) (prohibiting restrictions imposed on the association’s enumerated powers which are unique to the declarant) and 38-33.3-303(5) (dealing with the period of declarant control and allowing declarant to require its approval before certain actions of the association become effective). To support its argument with respect to section 302(2), the association cites a Hawaii case where the court interpreted its own state statute. The Court of Appeal did not find this authority persuasive in part because the case did not involve a declarant consent requirement to amend a declaration provision. See Vallagio, 2015 WL 2342128 *6 (citing Association of Apartment Owners of Waikoloa Beach Villas v. Sunstone Waikoloa, LLC, 307 P.3d 132 (Haw. 2013)). The case was simply not relevant to the provision at issue.
To support its argument with respect to section 303(5), the association’s petition relies on a Nevada case where, again, the court interpreted its own state statute. See Vallagio at Inverness Residential Condominium Association, Inc.’s Petition for Writ of Certiorari, pp. 14-15 (citing Boulder Oaks Community Ass’n v. B&J Andrews Enters., LLC, 215 P.3d 27, 33-34 (Nev. 2010)). Once again, a declarant consent requirement to amend a declaration provision is not at issue in Boulder Oaks. Still, the association argues that the Court of Appeals should have broadly interpreted these two CCIOA sections, effectively prohibiting any declarant protections in the declaration that do not apply to other persons and that remain effective after declarant turnover to the association. If the Colorado Supreme Court grants the association’s petition, it will analyze whether these factually and legally distinguishable cases provide enough persuasive support to adopt the association’s sweeping interpretation of those sections.
In addition to these and other arguments, the association also warns of a slippery slope that will result if the declarant consent provision is upheld. The association predicts that developers will work declarant consent requirements into every community declaration on any issue, each lasting in perpetuity. Asserting similar statutory interpretation and slippery slope arguments, the Community Association Institute and Build Our Homes Right (“BOHR”) have submitted Amicus Curiae Briefs in support of the association’s petition for review. The briefs of both community association advocate groups include ominous warnings that if the declarant consent requirement remains valid, developers will run amok and begin inserting consent requirements in every declaration and essentially immunize all declarant developers from liability for defects. See BOHR Brief of Amicus Curiae, p. 14 (“The decision from the court below, . . . gives developers unfettered power to immunize themselves from liability by taking away every associations ability to remove self-serving provisions from its governing documents.”); CAI Brief of Amicus Curiae (arguing declarant consent provisions “could make it impossible for an association to remove declaration provisions limiting an association’s damages, adding additional delays to an association’s ability to pursue claims, or taking away an association’s ability to bring claims at all.”).
Contrary to the association advocates’ arguments, the Court of Appeals decision in Vallagio fell far short of giving developers the ability to prospectively immunize themselves from construction defect liability via a well-drafted declaration. Rather, it simply protects developers’ ability to arbitrate those claims. As the Court of Appeals noted, “[a]rbitration is favored in Colorado as a convenient and efficient alternative to resolving disputes by litigation.” In appropriate circumstances, plaintiff associations will still be able to rely on Colorado law that allows parties to circumvent arbitration provisions were enforcing the provision would prohibit a party from pursuing its claims. See, e.g., Rains v. Foundation Health Systems Life & Health, 23 P.3d 1249 (Colo. App. 2001). In other words, slippery-slope warnings are exaggerated and construction defect claims will still be asserted and adjudicated. We must wait to see whether the Colorado Supreme Court grants the association’s petition for certiorari to know if declarant consent requirements will encourage more adjudication through arbitration.
Wednesday, May 13, 2015
Vallagio v. Metropolitan Homes: The Colorado Court of Appeals' Decision Protecting a Declarant’s Right to Arbitration in Construction Defect Cases
On May 7th, the Colorado Court of Appeals issued its much anticipated ruling in Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al., 2015COA65 (Colo. App. May 7, 2015). By way of background, the Vallagio at Inverness Residential Condominiums were developed by Metro Inverness, LLC, which also served as the declarant for its homeowners association. Metropolitan Homes was Metro Inverness’ manager and the general contractor on the project. Greg Krause and Peter Kudla served as declarant-appointed members of the Association’s board during the period of declarant control.
When it set up the Association, Metro Inverness included within the Association’s declaration a mandatory arbitration provision specifically for construction defect claims. This provision stated that it “shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of the amendment.”
In 2010, Metro Inverness turned control of the Association’s board of directors over to the project’s unit owners and it sold the last unit to a non-declarant owner in 2012. The next year, the project’s unit owners voted to amend the declaration to remove, among other provisions, the mandatory binding arbitration provision for construction defect claims. In doing so, the unit owners did not obtain Metro Inverness’ consent to amend that section. Soon after the unit owners amended the declaration, the Association filed a construction defect lawsuit in district court, naming as defendants, Metro Inverness, Metropolitan Homes, Greg Krause, and Peter Kudla.
The defendants moved to compel arbitration, relying on the arbitration provision for construction defect claims and arguing that the purported amendment to remove it was invalid because the unit owners did not obtain Metro Inverness’ consent for the amendment. The Association, in response, argued that the unit owners validly amended the declaration to remove the arbitration provision and that the declarant consent requirement violated the Colorado Common Interest Act (“CCIOA”).
The district court denied the defendants’ motion to compel arbitration, concluding that Metro Inverness’ consent was not required to remove the arbitration provision because, inter alia, the declarant consent requirement violated CCIOA and was, therefore, void and unenforceable. Specifically, the district court held that the declarant consent provision violated C.R.S. § 38-33.3-302(2), which provides: “The declaration may not impose limitations on the power of the association to deal with the declarant that are more restrictive than the limitations imposed on the power of the association to deal with other persons.” The court also found that the declarant consent provision violated C.R.S. § 38-33.3-217(1)(a)(I), which states:
[T]he declaration . . . may be amended only by affirmative vote or agreement of unit owners to which more than fifty percent of the votes in the association are allocated or any larger percentage, not to exceed sixty-seven percent, that the declaration specifies. Any provision in the declaration that purports to specify a percentage larger than sixty-seven percent is hereby declared void as contrary to public policy, and until amended, such provision shall be deemed to specify a percentage of sixty-seven percent.
The defendants then filed the interlocutory appeal of the district court’s order, which resulted in this decision. In finding that the district court erred in this analysis, the Colorado Court of Appeals concluded that the provision requiring the declarant’s consent to amend the arbitration provision for construction defect claims did not violate CCIOA and was, therefore, enforceable.
With respect to C.R.S. § 38-33.3-302(2), the Court of Appeals held that the declarant consent provision does not violate that section because the Association has no power to amend the declaration itself. Under the terms of the declaration, the power to amend the declaration resides with the unit owners, not the Association, and, therefore, the declarant consent requirement does not impose any limitation on “the power of the association” under section 38-33.3-302(2).
With respect to C.R.S. § 38-33.3-217, the Court of Appeals held that the statute does not prohibit a declaration from requiring declarant consent for an amendment. In so holding, the Court of Appeals pointed out that CCIOA does not explicitly preclude a declaration from imposing additional requirements for amendments and that, to the contrary, other provisions of section 217 contemplate requirements of consent or approval by parties other than unit owners. See C.R.S. § 38-33.3-217(1)(b)(I) (setting forth notification procedures applicable “[i]f the declaration requires first mortgagees to approve or consent to amendments”). On this topic, the Court concluded “that section 38-33.3-217(1)(a)(I) merely governs requirements for unit owners’ voting percentages and does not prohibit a declaration from imposing an additional requirement of declarant consent for amendments.”
Dispensing with the argument that the declarant consent requirement contravenes CCIOA’s purpose, the Court of Appeals pointed out that:
CCIOA endorses the use of alternative dispute resolution and specifically allows declarations to mandate binding arbitration. See § 38-33.3-124(3), C.R.S. 2014 (“The declaration . . . may specify situations in which disputes shall be resolved by binding arbitration.”); § 38-33.3-124(1)(a)(II) (“The general assembly hereby specifically endorses and encourages associations, unit owners, managers, declarants, and all other parties to disputes arising under this article to agree to make use of all available public or private resources for alternative dispute resolution.”). Given this statutory language and the public policy in Colorado favoring arbitration, see City & Cnty. of Denver, 939 P.2d at 1353, 1362, we cannot say that the declarant consent requirement in this case “evade[s] the limitations or prohibitions” of CCIOA, § 38-33.3-104.
For these reasons and others, the Court of Appeals concluded that the declarant consent provision was enforceable and consistent with CCIOA. “Because the unit owners did not obtain Metro Inverness’ written consent, their attempt to remove the declaration’s arbitration provision was ineffective. Accordingly, we conclude that the declaration still contains a valid and enforceable arbitration agreement as set forth in [the declaration].”
As a builder, the moral of the story here is that you need not rely on the Colorado Legislature to protect your ability to arbitrate construction defect claims asserted against you by homeowners associations. All you need to do is to include within your declaration a valid and enforceable declarant consent provision requiring your consent to amend out of the declaration the arbitration requirement for construction defect claims.
Congratulations to Marisa Ala, Mary Ritchie, and the rest of our friends at Palumbo Bergstrom and to Amy Hansen, Richard Murray, and Ryan Warren at Polsinelli on this outstanding result. The Colorado construction community owes you a big debt of gratitude for helping to preserve a builder’s ability to enforce arbitration provisions in construction defect cases.
Tuesday, April 28, 2015
Senate Bill 177, the Colorado housing community’s effort to reinvigorate the construction of attainable multi-family housing and quell construction defect lawsuits, was killed by the House State, Veterans and Military Affairs Committee on Monday evening on a party-line vote. Although the bill received significant bipartisan support in the Senate, a broad coalition of municipalities, builders, contractors, and non-profit organizations was unable to convince a pre-determined “kill” committee of the merits and benefits of the bill.
We nevertheless expect an even stronger push for affordable housing and construction defect legislation in the next session. If you have any questions regarding legislation impacting construction law, or the litigation of construction defect claims in Colorado, you can reach Derek Lindenschmidt by e-mail at email@example.com or by telephone at (303) 987-9814.
Tuesday, March 31, 2015
Colorado SB 15-177 UPDATE: Senate Business, Labor, & Technology Committee Refers Construction Defect Reform Bill to Full Senate
On March 18th, following a lengthy hearing with testimony and questioning for and against Senate Bill 15-177, the Senate Business, Labor & Technology Committee voted 6 to 2 to refer the bill, with new amendments, to the full Senate.
While the main points of the bill remain strongly intact (check here for Senate Bill 177’s particulars), bill sponsors Senators Scheffel and Ulibarri offered four amendments, designed to bring additional compromise and clarity to the bill. The committee ultimately adopted these amendments, described below.
Amendment 16 removed a prior prohibition in the bill that would have prevented attorneys from assisting in the preparation of the notice required to be provided to all homeowners before the commencement of a construction defect claim. Amendment 19 complemented 16 by providing further clarification regarding the contents and specificities required in said notice, including a disclosure of projected attorneys’ fees, costs, duration, and financial impact of pursuing construction defect claims. Amendment 17 permitted homeowners to approve the pursuit of construction defect claims through written consent. Lastly, Amendment 18 provided clarification regarding the bill’s requirement that mediators and arbitrators be selected and approved through mutual agreement of the parties.
Senators opposing the bill sought to include several less clear amendments, including one which supported a homeowner’s purported “right” to a jury trial (a belief that actually runs contrary to Colorado’s and the United States’ Constitutions). Although none of the opponents’ amendments were adopted, significant hurdles still remain for SB 177 on the Senate floor and beyond. We will continue to monitor the progress and update you accordingly.
If you have any questions regarding construction law or the litigation of construction defect claims in Colorado, you can reach Derek J. Lindenschmidt by e-mail at firstname.lastname@example.org or by telephone at (303) 987-9814.
Thursday, March 19, 2015
FOR IMMEDIATE RELEASE
March 19, 2015
March 19, 2015
Contact: Sean Paige
Phone: (719) 337-0355
Phone: (719) 337-0355
Construction Defect Fixes Advance in the Senate
Lawmakers last night took the first bipartisan step toward addressing Colorado’s affordable housing and starter home crunch, when the Senate Business, Labor, and Technology Committee passed Senate Bill 177, the so-called construction defect reform law, by a 6 to 2 vote.
The bill aims to clear-away barriers and disincentives to affordable and multi-family home construction in Colorado, by providing pathways to dispute resolution that don’t necessarily end in court. It does not prevent or discourage legal action by individual homeowners who choose that course of action. An ever-present threat of lawsuits has been cited by homebuilders and local officials as a major contributor to Colorado’s affordable housing crunch.
“This bipartisan bill is the end result of extensive study and deliberation by stakeholders, and between members of both parties, who share a common interest in removing barriers to affordable and multi-family housing construction in Colorado,” said Senate Majority Leader Mark Scheffel (R-Douglas County) after the bill’s passage. “The hands-on involvement of Sen. Jessie Ulibarri and other Democrats shows that this represents a reasonable modification of Colorado’s counterproductive construction defect laws.”
“Colorado’s economy is dependent on a strong housing market that includes diverse and attainable options. Despite strong demand, communities across Colorado face a growing shortage of one of the most critical options – condos and town homes. This shortage is due in part to concerns about the inconsistencies of how disputes are resolved that involve homeowners and developers,” said Sen. Jessie Ulibarri (D-Westminster). “Senate Bill 177 ensures that construction issues within a condo or town home community are addressed quickly and fairly for individual homeowners, while at the same time respecting each member of the condo community.”
Currently, if a handful of unit owners in a condo, apartment, or other multi-family housing community notice construction defects, the entire Homeowners Association can take legal action against the builder, dragging other unit owners, who may not have a problem, into a costly or risky legal battle that leaves their property in a lengthy state of limbo. This bill, if it becomes law, will require associations to get majority approval before taking such actions. It also creates easier and speedier methods for dispute resolution, short of taking the matter to court.
“If we want to keep Colorado an attractive place to live and work, we can’t be pricing people of modest means out of the housing with laws that make building those starter homes harder to find,” added Senate President Bill Cadman. “This bipartisan bill, if we can get it passed, will help make the dream a home ownership a little easier for Coloradans to achieve.”
The bill next will be heard by the entire Senate. Passage means it will move to the House of Representatives for action.
SB-177 isn’t the only construction defect-related bill being weighed by lawmakers at the moment. Senate Bill 91, authored by Sen. Ray Scott of Grand Junction, passed the Senate State Affairs Committee on Monday, further bolstering prospects that construction defect reform could happen this session.
The bill would help reduce homebuilder uncertainty by shortening by two years the period of time in which owners of their homes can request a fix. That still gives homeowners a six-year window in which to detect and report a potential problem, but doesn’t leave builders in the prolonged period of uncertainly they face now.
“This bill still offers homeowners plenty of protection against construction defects, but helps reduce some of the prolonged uncertainty and risk that now discourages the construction of multi-unit projects,” said Scott. “It’s hard for companies to offer affordable housing when the state’s flawed construction defect laws just add to the delays, uncertainties and costly risks these builders already face.”
SB-91 now moves to the Senate as a whole for debate.
Tuesday, March 17, 2015
As previously reported, Senator Scott's SB 91, as originally introduced, would have reduced Colorado's statute of repose for construction defect actions from eight years to four years. Yesterday, the Senate State, Veterans & Military Affairs Committee heard Senate Bill 91 and, before passing the bill on a party line vote sending it back to the full Senate for consideration, made two substantive amendments. By one amendment, the Committee excluded any multi-family developments. The second amendment was to reduce the statute of repose from six years, currently on the books, to five years plus one more if the defect becomes manifest in the fifth year.
If passed in its current form, the bill would only apply to single family homes and, with respect thereto, would reduce the statute of repose for construction defect claims from six years, plus two more for defects which become manifest in years five or six, to five years, plus one more for defects which become manifest in the fifth year.
Friday, March 13, 2015
SB177 is scheduled to be heard in the Senate Business, Labor, & Technology Committee (Room 271) on Wednesday, March 18th, at 1:30 p.m.
Please take a moment to urge your State Legislators to SUPPORT SENATE BILL 177 and help fix the defect in Colorado’s construction law.
A big hurdle to building more entry-level housing is a defect in state law that exposes homebuilders and homeowners to a high risk of expensive, time-consuming litigation. It is referred to as the construction defects law. It has created a climate that puts the chill on new construction of affordable, multi-family housing, scaring off investment in the affordable-housing market.
Senate Bill 177, sponsored by Senators Scheffel & Ulibarri and Representatives DelGrosso & Singer, would begin to fix this problem and foster conditions that encourage builders to construct more affordable housing, provide increased homeownership opportunities for all Coloradans and stimulate our state's economy.