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.
