Monday, June 5, 2017

Vallagio v. Metropolitan Homes: Colorado Supreme Court Upholds Declarant Consent Provision to Amend Arbitration Out of Declarations

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.

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The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.