March 25, 2019

Colorado Court of Appeals: Homeowners’ Association’s Removal of Arbitration Provision Invalid Against Builders

The Colorado Court of Appeals issued its opinion in Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc. on Thursday, May 7, 2015.

Motion to Compel Arbitration—Construction Defect Action.

Plaintiff association (Vallagio) brought this action against defendants, alleging construction defects in the Vallagio residential development project (Project). The Project was organized as a common interest community under the Colorado Common Interest Ownership Act (CCIOA). Defendant Metro Inverness, LLC (Metro) was the Project’s developer and declarant. Defendant Metropolitan Homes, Inc. was Metro’s manager and the Project’s general contractor. Defendants Krause and Kudla were declarant-appointed members of Vallagio’s board before control of the Vallagio was transferred to unit owners.

The declaration contained a general provision allowing unit owners to amend the declaration by a 67% vote and a consenting vote of the declarant. The right of declarant consent expired after the last unit was sold to an owner other than declarant. There was a mandatory arbitration provision specifically for construction defect claims, which provided that it could never be amended without the written consent of declarant, without regard to whether declarant owned any portion of the Project at the time of the amendment.

In September 2013, after the declarant had turned over control of Vallagio and no longer owned any units, at least 67% of the unit owners voted to amend the declaration to remove the arbitration provision in its entirety. Metro’s consent was not obtained.

Vallagio then filed suit against defendants. Defendants moved to compel arbitration, relying on the original declaration provision, arguing that the amendment removing it was invalid because declarant had not consented. The district court denied the motion to compel arbitration, finding that the declaration had been effectively amended to remove the arbitration provision. This interlocutory appeal followed.

Defendants first argued that it was error to conclude that the declaration’s amendment provisions were ambiguous and to construe that ambiguity against declarant. The Court of Appeals agreed. Based on the plain language of the declaration, the Court held that amendments to the arbitration provision required Metro’s consent. Because that consent was not obtained, the motion to compel arbitration as to Metro should have been granted. The Court also agreed that it was error to conclude that the declarant consent requirement for amendments of the arbitration agreement violated CCIOA and was void and unenforceable.

The district court had found that CCIOA § 38-33.3-302(2) prohibited the consent requirement. This section prohibits restrictions on an association’s power that are “unique to the declarant.” Under this declaration, the unit owners have the power to amend the declaration, and under this section of CCIOA the declarant consent requirement does not impose any limitation on the “power of the association.”

The district court had also found that the declarant consent requirement violated CCIOA § 38-33.3-217 because it effectively required more than a 67% vote of unit owners to amend the declaration. The Court disagreed, finding nothing in that statutory provision prohibiting declarant consent for an amendment, but merely requirements for unit owners’ voting percentages. The Court also found that the consent requirement did not allow control of unit owners’ votes, because 67% of the unit owners had to vote favorably to amend the declaration and that requirement was not altered by the declarant consent provision. The Court also rejected Vallagio’s argument that the consent requirement violated CCIOA § 38-33.3-303(5) by allowing Metro Inverness to control Vallagio after the declarant control period expired. CCIOA provisions regarding declarant consent to an association’s actions were not relevant to the issue here presented.

Vallagio argued that even if Metro could enforce the arbitration provision, the other defendants lacked standing to do so because they were not parties to the declaration. The district court did not address this argument, so the Court remanded for resolution of these issues, in particular, whether the other defendants were third-party beneficiaries to the declaration’s arbitration provision.

Defendants argued that they could rely on the arbitration provisions in individual unit owners’ purchase agreements. Because this issue might arise on remand if the district court finds that the other defendants lack standing to enforce the declaration’s arbitration provision, the Court addressed it. The Court agreed with the ruling that Vallagio was not bound by those individual purchase agreements.

The Court rejected Vallagio’s claims that its Colorado Consumer Protection Act (CCPA) claims are non-arbitrable. The right to a civil action under CCPA § 6-1-113 was not made non-waivable under the statute.

The order was reversed in part and affirmed in part. The case was remanded for an order compelling arbitration of Vallagio’s claims against Metro, and for further proceedings to determine whether the claims against the other defendants must be arbitrated.

Summary and full case available here, courtesy of The Colorado Lawyer.

Print Friendly, PDF & Email

Speak Your Mind

*