On June 5, 2017,
the Colorado Supreme Court announced the Vallagio at Inverness Residential
Con. Ass’n v. Metro. Homes, Inc., No. 15SC508, 2017 CO 69 (Colo. June 5,
2017) decision. In short, the Colorado Supreme Court upheld the validity of
declarant “consent-to-amend” provisions and expressly held that claims under
the Colorado Consumer Protection Act are arbitrable.
By way of
background, the Vallagio at Inverness Residential Condominiums were developed
by Metro Inverness, LLC, (“Declarant”) 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, the Declarant 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.”
The HOA purportedly amended the
declaration to remove the arbitration provision, without the Declarant’s
consent and filed a construction defect lawsuit in district court. 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 the Declarant’s 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 the Declarant’s
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 Declarant then brought an interlocutory appeal to the
Colorado Court of Appeals and a division of that court reversed the district
court’s denial of the motion to compel arbitration. Vallagio at Inverness
Residential Condo. Ass’n v. Metro. Homes, Inc., 2015 COA 65, ¶¶ 1, 72,
__P.3d__.
Thereafter, the petitioner, Vallagio at Inverness
Residential Condominium Association, Inc. (the “Association”), petitioned the
Colorado Supreme Court, which granted certiorari in order to answer two chief
questions: 1) did CCIOA permit a developer-declarant to retain a right of
consent to amendments to a provision of a common interest community’s
declaration mandating arbitration of construction defect claims, and; 2) were
claims brought under the Colorado Consumer Protection Act, §§ 6-1-101 to -1121, C.R.S. (2016) (“CCPA”) arbitrable. In
response to these questions, the Supreme Court concluded that CCIOA did not
void the declarant “consent-to-amend” provisions and that CCPA claims are
arbitrable.
Underlying its decision, the Supreme Court was unpersuaded
by the Association’s three principle arguments that the “consent-to-amend”
provision was violative of CCIOA. Specifically, the Association argued that the
“consent-to-amend” provision was void for the following reasons: 1) the
provision exceeded the 67% voting threshold established by C.R.S. §
38-33.3-217(1)(a)(I), for amending a declaration; 2) it was a device intended
to evade the foregoing 67% limitation and thus is proscribed by C.R.S. §
38-33.3-104, and; 3) in violation of C.R.S. § 38-33.3-302(2), it imposed
limitations on the power of the Association to deal with the Declarant that
were more restrictive than the limitations imposed on the power of the
Association to deal with other persons.
The Supreme Court ultimately made short work of the
arguments advanced by the Association. First, the Supreme Court agreed with the
Court of Appeals’ conclusion that nothing in CCIOA precluded a declaration
from imposing additional requirements (i.e.,
non-percentage based requirements) for amendments. The Supreme Court illustrated
this conclusion by evaluating other provisions of CCIOA that expressly
contemplated such additional requirements.
Second, the Supreme Court was similarly unpersuaded with the
Association’s second argument because it appeared to be premised on the
Association’s first argument, that CCIOA establishes an absolute 67% voting
limitation, and the Supreme Court concluded that the “consent-to-amend”
provision did not contravene any of CCIOA’s policies or purposes. The Supreme
Court supported the later conclusion by noting that CCIOA patently permits a
declaration to “specify situations in which disputes shall be resolved by
binding arbitration. . .” In this context, the Supreme Court concluded that it
was unable to find that the “consent-to-amend” provision evaded the limitations
of CCIOA.
In response to the Association’s third argument, with
respect to C.R.S. § 38-33.3-302(2), the Supreme Court recognized that the Association
had no power to amend the declaration. Rather, the Supreme Court concluded that
CCIOA provides that unit-owners, not the Association, have the power to amend
the declaration by a 67% vote. Therefore, the “consent-to-amend” provision did
not impose any limitation on “the power of the association” under C.R.S. §
38-33.3-302(2).
Lastly, turning to the Association’s argument that CCPA
claims were not arbitrable, the Supreme Court was not persuaded by the
Association’s proposition that the statutory right to file a civil action may
not be waived pre-dispute. In coming to this conclusion, the Supreme Court
noted that the CCPA contains no language expressly precluding a waiver of a
“court action” found in the statutes that Association sought to analogize. Nor
was the Supreme Court persuaded by the Association’s assertion that the
Colorado Construction Defect Action Reform Act (“CDARA”) precluded a waiver of
a plaintiff’s CCPA claims, given that CDARA expressly envisions the possibility
of an arbitration proceeding involving CCPA claims. See C.R.S. § 13-20-806(7)(a).
For these reasons and others, the Supreme Court concluded
that the “consent-to-amend” provision was enforceable and consistent with CCIOA
and that claims for violations of the CCPA may be properly arbitrated. In sum,
the Supreme Court’s decision is certainly a positive development for the
Colorado construction community as it preserves the builder’s ability to
enforce arbitration provisions in construction defect cases.
For additional information regarding Vallagio
v. Metropolitan Homes or about construction defect litigation in Colorado,
generally, you can reach Jean Meyer by telephone at (303) 987-9815 or by e-mail
at meyer@hhmrlaw.com.
