Colorado Court of Appeals to Rule on Arbitrability of an HOA's Construction Defect Claims

On October 24, 2013 the Colorado Court of Appeals granted a rare interlocutory appeal in a multi-family residential construction defect case.  The Court of Appeals accepted the case of Triple Crown at Observatory Village Association, Inc.  v. Village Homes of Colorado, Inc. (2013 WL 5761028) as an interlocutory appeal after the parties briefed and obtained rulings from the trial court that compelled the case to binding arbitration in lieu of a jury trial on all issues. The appellate decision of October 24, 2013 did not decide the merits of the case, but discussed the issues to be decided in the eventual merits decision.  The significance of the issues presented and the interlocutory nature of this appeal both make this case worth watching for further appellate proceedings.

The core issue in this appeal was the applicability of Colorado’s Uniform Arbitration Act (C.R.S. § 13-22-201, et seq.), based on recorded Declarations filed by the developer. The Declarations mandated that the HOA arbitrate any design/construction disputes with the developer.  Immediately prior to suit, the Association sought to amend the Declarations in order to avoid the arbitration process for these claims. The interlocutory appellate issues resulted from the trial court’s order compelling the arbitration over the objections of the Association.

The trial court’s decision was based on a reading of the Colorado Revised Non-Profit Corporation Act (“CRNPC,” at C.R.S. § 7-127-107), which was found applicable to the Association. The CRNPC which requires that any written vote (in lieu of an actual meeting vote) to revise the declarations governing a non-profit be accomplished by a 2/3 majority of the members of the association, and that all such written votes be gathered within a 60-day period after obtaining the first signature.

The trial court determined that the Association had only obtained 42% of the necessary signatures within the 60-day statutory period, and that it had obtained the balance of 67% of required signatures only two months after the statutory 60-day period.  As a result, the trial court found that the Declarations had not been properly amended to preclude arbitration, and it ordered the parties to binding arbitration.

The Association appealed the trial court ruling applying the CRNPA  to the Association, arguing that it conflicted with the provisions of the Colorado Common Interest Owners Act (“CCOIA,” at C.R.S. § 38-33.3-301, et seq.), which generally governs multi-family residential developments and their affiliated homeowners associations.  The Association asserted that CRNPA was not applicable to the Association for purposes of time-restricting the members’ process of amendment of the Declarations, because CCOIA did not impose any time constraints as part of its provisions for the members’ amendment or repeal of Declarations.

Finally, the Association also argued that CCOIA prohibited restrictions between the Association and the developer which were greater than limitations for the Association in dealing with other persons and entities. This was based on an argument that the Association was not required to arbitrate disputes between itself and others, unlike issues with the developer.

The final issue that was accepted for this interlocutory appeal was whether the Association’s punitive damage claims for alleged developer violations of the Colorado Consumer Protection Act (“CCPA”) were also subject to arbitration, as ordered by the trial court.  The Association argued that such claims were not subject to arbitration.

The focus of the present Court of Appeals decision dealt with the appropriateness of granting the interlocutory appeal, and whether the issues involved controlling and unresolved questions of Colorado law.  The decision to grant the interlocutory appeal was a 2-1 decision, with Judge Terry dissenting, because he felt that the circumstances of the case made the granting of the appeal impermissible under the Colorado Uniform Arbitration Act.  Judge Terry relied substantially on the deference given to trial judge orders compelling arbitration under the language of the arbitration statute, and the preference of appellate courts not to grant interlocutory appeals. 

While the granting of this interlocutory appeal is not predictive of the outcome that will follow on the merits of the issues, the issues are significant to construction professionals and the attorneys that represent them.  There has been a multi-year trend by developers to limit design and construction issues with homeowners’ associations to private arbitration, in lieu of jury trials.  Similar declarations have led to a greater number of developer-compelled arbitration proceedings for residential construction defect claims over the past several years. 

This is the first case in Colorado which clearly seeks to defeat these arbitration provisions as being in claimed conflict with the provisions of CCOIA, after the homeowners’ association seeks to repeal the declarations arbitration language. Similarly, it is the first case which seeks to carve out the Associations’ CCPA claims for a jury trial, separate from the disputes which are made subject to arbitration by the terms of a developer’s declarations.

On this latter issue, it is notable that CCPA claims are generally declined by insurers as covered claims, despite the requests of the insured and its coverage counsel for defense of these claims. Separate from the above-discussed matters of arbitration enforcement, it is a matter of concern to construction professionals that there may (in a future decision) be a potential separation of such claims from the negligence-based claims of construction defects. A separation of such claims would potentially leave the construction professional without available insurance coverage for both indemnity and defense on those CCPA claims.   

It will be months, or longer, before this case is decided on the merits. However, the outcome on the merits will be important to construction professionals, insurers who write construction liability policies, and to homeowners’ associations who seek to amend their declarations to avoid enforcement of binding arbitration proceedings.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com