Date: 02-08-2020

Case Style:

Case Number: B291731

Judge: Gilbert, P.J.

Court: California Court of Appeals Second Appellate District, Division Six on appeal from the Superior Court, County of Ventura

Plaintiff's Attorney: Robb Michael Strom, Judith E. Posner, Gerald M. Serlin and Kenneth E. Chyten

Defendant's Attorney: Brian Christophe Plante, Gregory Martin Golino and Nicole Elaine Bartz

Description: It is reputed that condominium projects have three
phases—planning, building, and the lawsuit. Obviously, this
case is an example of the third phase. We are optimistic there
are numerous condominium projects that experience only the
first two phases.
A condominium association sued the developer alleging
construction defects. The association’s governing documents
require arbitration of such disputes and a vote of at least 51
percent of the association’s membership prior to beginning
arbitration. The association began arbitration without obtaining
a vote of its members. Later, the members overwhelmingly voted
to pursue the arbitration. The arbitrator dismissed the
arbitration for lack of a membership vote prior to its
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commencement. The trial court confirmed the award and entered
judgment for the developer. We reverse. We disagree with
Branches Neighborhood Corp. v. CalAtlantic Group, Inc. (2018)
26 Cal.App.5th 743 which holds otherwise.
FACTS
Aldea Dos Vientos is a condominium project in Thousand
Oaks. The project is a common interest development subject to
the Davis-Stirling Common Interest Development Act (Civ. Code,
§ 4000, et seq., hereafter Davis-Stirling Act).
The project is governed by the Aldea Dos Vientos
homeowners association (Association) and recorded covenants,
conditions, and restrictions (CC&R’s). CalAtlantic Group, Inc. is
the successor to the developer of the project (Developer).
The Association claims it discovered $5.6 million in
construction defects in the common areas and individual units.
Beginning in November 2012, the Association engaged in
discussions with the Developer about the defects. In November
2013, when the discussions were unproductive, the Association
brought suit against the Developer. The trial court stayed the
litigation on the parties’ stipulation to enter into mediation, and
if that failed, arbitration administered by JAMS.
Mediation failed to produce a settlement. Section 7.01A of
the CC&R’s requires that all disputes between the Developer and
the Association or its members, including construction defect
claims, be resolved by arbitration. On June 24, 2016, the
Association filed a demand for arbitration. The Developer filed
an answer in arbitration for the first time raising section 7.01B of
the CC&R’s (hereafter section 7.01B) as a defense. Section 7.01B
provides: “Required Vote to Make Claim. Prior to filing a claim
pursuant to the ADR Provisions, the Association must obtain the
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vote or written consent of Owners other than Declarant who
represent not less than fifty-one percent (51%) of the
Association’s voting power (excluding the voting power of
Declarant).”
The Association admitted that it had not obtained a vote
from its members prior to beginning arbitration. The arbitrator
stayed the arbitration to allow the Association to petition the
trial court to resolve the issue of arbitrability.
In the meantime, the Association obtained the approval of
over 99 percent of its members to continue the arbitration, with
only one member voting against continuing out of 116 votes.
The Association moved the trial court to rule that the
retroactive vote allowed arbitration to proceed. The court denied
the motion on the ground that arbitrability was a matter for the
arbitrator to decide.
The matter returned to the arbitrator. The arbitrator
heard oral argument on motions for summary judgment by the
Association and the Developer concerning interpretation of
section 7.01B. The Developer filed a motion to dismiss based on
the Association’s failure to comply with section 7.01B prior to
beginning arbitration. The Association filed a cross-motion on
the ground that the ratifying vote of the Association members
satisfied section 7.01B. The Association also filed a second
demand for arbitration. The arbitrator summarily dismissed the
original demand for arbitration.
The Developer moved the trial court to confirm the
arbitrator’s award. The court concluded that the dismissal of the
arbitration constituted a final determination of the rights of the
parties notwithstanding the second demand for arbitration. The
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court entered judgment in favor of the Developer and against the
Association.
DISCUSSION
I.
Arbitrator Exceeded His Power
The trial court shall vacate an arbitration award if “[t]he
arbitrators exceeded their powers and the award cannot be
corrected without affecting the merits of the decision upon the
controversy submitted.” (Code Civ. Proc., § 1286.2, subd. (a)(4).)
Arbitrators exceed their power by issuing an award that violates
a party’s unwaivable statutory rights or that contravenes an
explicit legislative expression of public policy. (Richey v.
AutoNation, Inc. (2015) 60 Cal.4th 909, 916.) That is particularly
true of the rights and policies governing the conduct of the
arbitration itself. (Sargon Enterprises, Inc. v. Browne George
Ross LLP (2017) 15 Cal.App.5th 749, 765.)
Section 7.01B contravenes explicit legislative expressions of
public policy.
(a) Housing Policy
The Legislature stated that “housing is of vital statewide
importance to the health, safety, and welfare of the residents of
this state . . . .” (Health & Saf. Code, § 50001.) The Legislature
intended housing to be free of substantial construction defects.
(See Civ. Code, §§ 896 [listing construction defects for which the
developer is liable]; 897 [developer liable for defects not expressly
listed]; 941, subd (a) [10-year statute of limitations on actions for
construction defects].) Provisions such as section 7.01B
contravene statutory policy by giving the Developer the
unilateral power to bar actions for construction defects.
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(b) Policy Against Unreasonable Servitudes
The Davis-Stirling Act prohibits the enforcement of
unreasonable provisions in the CC&R’s. (Civ. Code, § 5975, subd.
(a) [“The covenants and restrictions in the declaration shall be
enforceable equitable servitudes, unless unreasonable”].) Here,
section 7.01B as interpreted by the arbitrator is not just
unreasonable, it is unconscionable. It gives the Developer veto
power over the Association’s claims in spite of the members’ vote
to proceed with the arbitration.
The Developer relies on Branches Neighborhood Corp. v.
CalAtlantic Group, Inc., supra, 26 Cal.App.5th 743 (Branches).
After the trial court affirmed the arbitrator’s award, the Fourth
District of the Court of Appeal, Division Three decided Branches.
The facts in Branches are similar to the facts here and involved
the same developer and arbitrator.
In Branches, a condominium development’s CC&R’s
contained a provision similar to section 7.01B, requiring the
condominium association to obtain a vote of at least 51 percent of
its members before beginning arbitration against the project’s
developer. The association began arbitration without seeking a
vote. When the developer sought to dismiss the arbitration, the
association obtained a ratifying vote from over 51 percent of its
members. Nevertheless, the arbitrator dismissed the arbitration
and the trial court entered judgment against the association. The
Court of Appeal affirmed. The court rejected the association’s
argument that the ratification vote was sufficient, pointing out
that the CC&R’s require the vote before arbitration. (Branches,
supra, 26 Cal.App.5th at p. 758.) The court also rejected the
association’s argument that the arbitrator exceeded his powers by
issuing an award that violates a party’s unwaivable statutory
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rights or that contravenes an explicit legislative expression of
public policy.
According to the interpretation of section 7.01B confirmed
by Branches, unless the Association has obtained approval by a
vote of at least 51 percent of its members prior to beginning
arbitration, it has forever forfeited its right to pursue its claims
in any forum in spite of an overwhelming ratifying vote. This
interpretation directly violates the public policy expressed in
Code of Civil Procedure section 1286.2, subdivision (a)(4). It
amounts to a trap for the unwary set by the Developer to bar
claims against it. The Developer is burdened with no similar
hurdle prior to seeking a determination of its rights.
Branches suggests provisions such as section 7.01B are for
the benefit of the association’s members. Branches states the
membership vote requirement “balance[s] the association’s need
to operate efficiently with the rights of its members to be
informed and participate in decisions that could impact the
association for years, if not decades, to come.” (Branches, supra,
26 Cal.App.5th at p. 758.) But the members voted to ratify the
Association’s decision to arbitrate. It is an odd benefit that
deprives the members of the right to proceed with an arbitration
they voted to undertake. The benefit suggested by Branches is
better realized by treating covenants such as section 7.01B as
between the association and its members only, and not a
covenant giving the developer standing to assert the clause as a
bar to the rights of the association.
The language of section 7.01B does not give the Developer
veto power over claims against it. Nor does section 7.01B inform
the Association or its members of the devastating effect the
failure to comply will have on its rights, or that the initial failure
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to comply, no matter how inadvertent, will be irremediable. We
decline to follow Branches.
As interpreted by Branches, section 7.01B violates explicit
legislative expressions of public policy.
II.
Senate Bill No. 326
The Legislature has also determined that provisions such
as section 7.01B are unconscionable. Senate Bill No. 326 (2019-
2020 Reg. Sess.) (Stats. 2019, ch. 207, § 2) was enacted and
signed by the Governor on August 30, 2019 and took effect on
January 1, 2020. (Cal. Const., art. IV, § 8, subd. (c)(1); Gov. Code,
§ 9600, subd. (a).) The bill adds Civil Code section 5986,
subdivision (b) as part of the Davis-Stirling Act.
Senate Bill No. 326 bars the use of provisions such as
section 7.01B as a defense for developers against claims of
condominium associations.1
1 Senate Bill No. 326 adds Civil Code section 5986,
subdivision (b) as follows: “The governing documents shall not
impose any preconditions or limitations on the board’s authority
to commence and pursue any claim, civil action, arbitration,
prelitigation process . . . or other legal proceeding against a
declarant, developer, or builder of a common interest
development. Any limitation or precondition, including, but not
limited to, requiring a membership vote as a prerequisite to, or
otherwise providing the declarant, developer, or builder with veto
authority over, the board’s commencement and pursuit of a claim,
civil action, arbitration, prelitigation process, or legal proceeding
against the declarant, developer, or builder, or any incidental
decision of the board, including, but not limited to, retaining legal
counsel or incurring costs or expenses, is unenforceable, null, and
void. The failure to comply with those limitations or
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The Developer, however, relies on Civil Code section 5986,
subdivision (d), also added by Senate Bill No. 326. That
subdivision provides: “This section applies to all governing
documents, whether recorded before or after the effective date of
this section, and applies retroactively to claims initiated before
the effective date of this section, except if those claims have been
resolved through an executed settlement, a final arbitration
decision, or a final judicial decision on the merits.” The
Developer argues the section is not retroactive because there has
been a “final arbitration decision.”
But the most reasonable construction of Civil Code section
5986, subdivision (d) is that the phrase “on the merits” following
“final judicial decision” also applies to “final arbitration decision.”
There is no reason why the Legislature would intend to require a
final judicial decision to be on the merits but not a final
arbitration decision to be on the merits. Here the arbitrator’s
decision was not on the merits and the judicial decision was not
final.
Also here, the arbitrator’s decision was not final. The
Association filed two demands for arbitration, one filed on June
24, 2016, before the membership vote, and the other filed on
October 31, 2017, after the membership vote. The arbitrator
found the first demand for arbitration void because it was made
prior to the vote required by section 7.01B. The arbitrator’s order
expressly states, “This finding does not directly impact the
viability of the Demand in Arbitration filed October 31, 2017.”
The arbitrator ordered that: “The Demand (Claim) in Arbitration
filed June 24, 2016 . . . is dismissed.” The arbitrator never ruled
preconditions, if only, shall not be asserted as a defense to any
claim or action described in this section.”
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on the October 31, 2017 demand. His decision did not end
arbitration.
In any event, Senate Bill No. 326 aside, the arbitrator’s
award violates other explicit legislative expressions of public
policy.

Outcome: The judgment is reversed. Costs on appeal are awarded to
appellant.

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Defendant's Experts:

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