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.