PINNACLE
MUSEUM TOWER ASSOCIATION v. PINNACLE MARKET DEVELOPMENT (US), LLC









Filed 7/30/10



>CERTIFIED FOR PUBLICATION





COURT
OF APPEAL, FOURTH APPELLATE DISTRICT



DIVISION
ONE



STATE
OF CALIFORNIA






>

PINNACLE MUSEUM TOWER ASSOCIATION, Plaintiff and Respondent, v. PINNACLE MARKET DEVELOPMENT (US), LLC et al., Defendants and Appellants.

D055422 (Super. Ct. No. 37-2008-00096678-CU-CD-CTL)

APPEAL from
an order of the Superior Court
of San Diego
County, Ronald L. Styn, Judge.
Affirmed.

Wood,
Smith, Henning & Bermann LLP, Daniel A. Berman, Sheila E. Fix, R. Gregory
Amundson and Nicholas Gedo for Defendants and Appellants.

Feinberg
Grant Mayfield Kaneda & Litt LLP, Daniel H. Clifford, Joseph Kaneda,
Charles Fenton and Bruce Mayfield for Plaintiffs and Respondent.





A
homeowners association filed a construction defect action against the developer
of a condominium project on its own behalf and as a representative of its
members for damage to common areas, property owned by the association, and
property owned by individual members. We
conclude that an arbitration provision
in a declaration of covenants, conditions and restrictions (CC&R's)
recorded by the developer of the condominium project, which may not be changed
by the association without the written consent of the developer, did not
constitute an "agreement" sufficient to waive the constitutional right to jury trial for construction
defect claims brought by the homeowners association. Additionally, assuming the homeowners
association is bound by a jury waiver provision contained in purchase and sale
agreements signed by the individual condominium owners, we conclude that the
jury waiver provision in the purchase and sale agreements is not enforceable
because it is unconscionable.
Accordingly, we affirm the trial court's order denying the developer's
motion to compel arbitration.

FACTUAL AND
PROCEDURAL BACKGROUND

Pinnacle
Market Development (US) LLC, Pinnacle International (US) LLC, Pinnacle Market
Development (Canada) LTD, Michael De Cotiis, and Apriano Meola (collectively
Pinnacle) constructed and sold condominiums in a common interest development
project in downtown San Diego known as the Pinnacle Museum Tower Condominium
(Project). Pinnacle recorded CC&R's
forming the Pinnacle Museum Tower Association (Association), a California
nonprofit mutual benefit corporation, to manage and repair the Project's common
areas. Pinnacle pledged to convey
certain property, including easements and drainage facilities and utility
installations, to the Association before conveyance of the first condominium. Pinnacle also retained the right to convey
property to the Association at any time.
Pinnacle conveyed to each buyer of a condominium an undivided fractional
interest as tenant-in-common to the common areas. Under the CC&R's each condominium owner
must be a member of the Association, and pay an assessment to the Association
for its maintenance and repair of the common areas.

The second
page of the CC&R's states, in capital letters, that article 18 contains a
mandatory procedure for the resolution of construction defect disputes that
includes the waiver of the right to a jury.
Article 18 contains an arbitration provision reciting in capital letters
that Pinnacle, the condominium owners and the Association agree to resolve any
construction dispute through binding arbitration in accordance with the Federal
Arbitration Act (FAA, 9 U.S.C. § 1, et seq.) and the California Arbitration Act
(CAA, Code Civ. Proc., § 1280 et seq.).
Specifically, the arbitration provision states that by accepting a deed
for any portion of the Association property, the Association and each owner
agree to give up their right to a jury trial and have any construction dispute
decided by arbitration. The CC&R's
define a "[c]onstruction [d]ispute" as "any dispute between an
Owner or the Association and [Pinnacle] or between an Owner or the Association
and any employee, agent, partner, contractor, subcontractor or material
supplier of [Pinnacle] which dispute relates to the use or condition of the
Project or any improvements to the Project."

The
arbitration provision provides that its interpretation is governed by the FAA
because many of the materials incorporated into the Project were manufactured
in other states, and involved interstate commerce. The arbitration provision applies only to a
construction dispute in which Pinnacle has been named a party, and provides
that no amendment may be made to the arbitration provision without Pinnacle's
written consent.

In selling
the condominiums Pinnacle used a standard purchase and sale agreement that
recited on the first page that the buyer agrees to comply with the CC&R's
by accepting a grant deed to the condominium.
Page 8 of the document contained a section pertaining to dispute notification, resolution
procedures, and waivers. The section,
which required the initials of the buyer and seller, stated:

"Buyer and Seller agree that any certain disputes
shall be resolved according to the provisions set forth in Article XVIII of the
[CC&R's] and waive their respective rights to pursue any dispute in any
manner other than as provided in [the CC&R's]. [¶]
Buyer and Seller acknowledge that by agreeing to resolve all disputes as
provided in [the CC&R's], they are giving up their respective rights to
have such disputes tried before a jury.
[¶] WE HAVE READ AND UNDERSTOOD THE FOREGOING AND AGREE TO COMPLY WITH
ARTICLE XVIII OF THE [CC&R's] WITH RESPECT TO THE DISPUTE REFERENCED
THEREIN." (Capitalization and
bold type in original.)



After unsuccessfully mediating its
dispute with Pinnacle, the Association filed this action on its own behalf and
as a representative of its members for damages to common areas, property owned
by the Association, and property owned by individual Association members,
including: "subterranean parking garage,
drainage, exterior walls, windows, decks, interior walls and doors, roof and
electrical, plumbing, and mechanical components and systems." Pinnacle petitioned to compel arbitration
under the arbitration provision contained in the CC&R's, and the jury
waiver provision in the purchase and sale agreements. The trial court denied the motion on the
ground that while the arbitration provision in the CC&R's constituted an
agreement to arbitrate entered into by Pinnacle and the Association, it refused
to enforce the provision as unconscionable.
It also concluded that the Association was not a party to the purchase
and sale agreements; thus, Pinnacle could not rely on the jury waiver provision
in the purchase and sale agreements to compel arbitration. Pinnacle timely appealed.



DISCUSSION

I. General
Legal Principles

The FAA
applies to any written agreement to arbitrate a transaction involving
interstate commerce (Allied-Bruce
Terminix Cos. v. Dobson (1995) 513 U.S. 265, 281), and preempts state laws
applicable only to arbitration agreements
(Perry v. Thomas (1987) 482 U.S. 483,
492, fn. 9). However, even where the FAA
applies, it defers to state contract law principles to determine the
enforceability of arbitration clauses, recognizing as defenses "grounds
that exist at law or in equity for the revocation of any contract." (9 U.S.C. § 2; accord, Code Civ. Proc., §
1281; see generally Doctor's Associates,
Inc. v. Casarotto (1996) 517 U.S.
681, 686-687.) Accordingly, "the
FAA does not apply until the existence of an enforceable arbitration agreement
is established under state law principles involving formation, revocation and
enforcement of contracts generally."
(Banner Entertainment, Inc. v.
Superior Court (1998) 62 Cal.App.4th 348, 357 (Banner).)

Code of
Civil Procedure sections 1280 et seq. provide a procedure satisfying both state
and federal law for the summary determination of whether a valid agreement to
arbitrate exists. (Banner, supra, 62
Cal.App.4th at p. 356.) "Under this
procedure, the petitioner bears the burden of establishing the existence of a
valid agreement to arbitrate, and a party opposing the petition bears the
burden of proving by a preponderance of the evidence any fact necessary to its
defense." (Ibid.) On appeal from the
denial of a motion to compel arbitration, "we review the arbitration
agreement de novo to determine whether it is legally enforceable, applying
general principles of California
contract law. [Citations.]" (Kleveland
v. Chicago Title Ins. Co. (2006) 141 Cal.App.4th 761, 764.)

II. The
Arbitration Provision in the CC&R's

>Does Not Constitute an Agreement to
Arbitrate



The trial
court concluded that the CC&R's contained an arbitration agreement binding
Pinnacle and the Association. We
disagree.

As a
threshold matter, we note that under California
law the Legislature has addressed the form, content, and effect of
arbitration clauses contained in real property sales documentation. (Code of Civ. Proc., § 1298 et seq.; see
generally, Villa Milano Homeowners Assn.
v. Il Davorge (2000) 84 Cal.App.4th 819, 829-830 (Villa Milano).) California
law also prohibits the enforcement of a binding arbitration provision in a
purchase contract purporting to preclude a buyer from litigating a construction
defect action in court. (Code of Civ.
Proc., § 1298.7.) As the >Villa Milano court held, a developer
should not be permitted to accomplish through the CC&R's what it could not
accomplish through a purchase contract. (Villa
Milano, supra, 84 Cal.App.4th at
pp. 830-831.)

Pinnacle
argues, and we agree, that the Project involves interstate commerce because
some of the materials used in the Project were manufactured in other
states. Accordingly, the FAA applies and
we cannot rely on California law
to invalidate the arbitration clause contained in the CC&R's. (Allied-Bruce
Terminix Companies, Inc. v. Dobson, supra,
513 U.S. at p.
281 [A state "may not . . . decide that a contract is
fair enough to enforce all its basic terms (price, service, credit), but not
fair enough to enforce its arbitration clause.
The [FAA] makes any such state policy unlawful. . . ."];
see generally, Shepard v. Edward Mackay
Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1097-1101.) Nor can we rely on the jury waiver provision
of the California Constitution to invalidate the arbitration provision because
application of this provision would discriminate against arbitration while not
invalidating other portions of the CC&R's.
(Cal. Const., art. I, §
16.) Nonetheless, state law does govern
the question whether an agreement to arbitrate exists, and we examine this
question under general contract formation principles. (Doctor's
Associates, Inc. v. Casarotto, supra,
517 U.S. at pp. 686-687.)

"The
right to arbitration depends upon contract; a petition to compel arbitration is
simply a suit in equity seeking specific performance of that contract. [Citations.]" (Engineers & Architects Assn. v. Community Development Dept.
(1994) 30 Cal.App.4th 644, 653.)
Essential components of a contract include parties capable of
contracting and the consent of the parties to the contract. (Civ. Code, § 1550, subds. (1) & (2);
undesignated statutory references are to the Civil Code.) "The consent of the parties to a
contract must
be . . . [¶] . . . [¶] . . . [c]ommunicated
by each to the other." (§ 1565,
subd. (3).) Acceptance of an arbitration
agreement may be express or implied-in-fact.
(Craig v. Brown & Root, Inc.
(2000) 84 Cal.App.4th 416, 420.)

Here,
Pinnacle developed the Project as a common interest development subject to
numerous statutory requirements. (See
generally, § 1350 et seq.) Among other
things Pinnacle was required to record a declaration (§ 1352, subd. (a)),
including CC&R's

(§ 1353, subd. (a)(1)) which were intended to be
"enforceable equitable servitudes, unless unreasonable" (§ 1354,
subd. (a)). The declaration must provide
for an association to manage the development (§ 1353, subd. (a)(1); 1363, subd.
(a)), and each owner in a condominium project is a member of the association (§
1358, subd. (b)). A common interest
development is created with the recording of the declaration, and other
required documents, and there is a conveyance of a separate interest coupled
with an interest in the common area or membership in the association. (§ 1352.)
Thus, by statute, the Association "essentially [sprung] into
existence" when Pinnacle recorded the declaration and conveyed a separate
interest coupled with an interest in the common area or membership in the
Association. (Treo @ Kettner Homeowners Ass'n v. Superior Court (2008) 166
Cal.App.4th 1055, 1066 (Treo).)

As nonprofit mutual benefit
corporation, the Association has all the powers of a natural person, including
the right to enter into contracts (Corp. Code, § 7140, subd. (i)), and can only
act through its board of directors.
(Corp. Code, § 7210). Acting as
the creator of the Project and the Association, Pinnacle signed the
CC&R's. However, there is no
evidence that the Association agreed to the arbitration provision. Based on the application of fundamental
contract formation principles, we fail to see how the Association could have
agreed to waive its constitutional right to a jury trial because, for all
intents and purposes, Pinnacle was the only party to the "agreement,"
and there was no independent homeowners association when Pinnacle recorded the
CC&R's.

Pinnacle's
reliance on cases recognizing employee handbooks, including any arbitration
clause contained therein, as a binding unilateral contract does not advance its
position. Under general principles of
contract law the necessary "agreement" may be shown by an employee's
express acceptance or may be implied by the parties' conduct. (Craig
v. Brown & Root, Inc., supra,
84 Cal.App.4th at p. 420.) Here, there
is no express acceptance by the Association, or any conduct by the Association
from which the necessary agreement could be implied. (Compare, Asmus
v. Pacific Bell (2000) 23 Cal.4th 1, 11 [employee's continued employment
constituted implied acceptance of changed rules regarding job security]; >DiGiacinto v. Ameriko-Omserv Corp.
(1997) 59 Cal.App.4th 629, 635 [employee's continued employment constituted
implied acceptance of changed compensation rules].) Although the arbitration provision states
that by accepting a deed for any portion of the association property, the
Association agreed to give up its right to a jury trial and have any
construction dispute decided by arbitration, the Association had no choice but
to accept the property that Pinnacle deeded to it.

In any
event, the language of the arbitration provision in the CC&R's conveys a
mutuality of promises, stating: "It
is the desire and intention of [Pinnacle], Owners and
Association . . . to agree upon a mechanism and procedure
under which any controversy . . . will be resolved in a
prompt and expeditious manner" and that any controversy not resolved
through the provisions outline in section 1375 or mediation "shall"
be submitted to arbitration.
Accordingly, the arbitration provision is not a proposed unilateral
contract; rather, it purports to be a bilateral contract where the parties made
mutual promises concerning arbitration.
(Davis v. Jacoby (1934) 1
Cal.2d 370, 378.)

We also
reject Pinnacle's claim that the Association is bound by the arbitration
provision as a third party beneficiary.
A person who is not a party to a contract may nevertheless enforce it if
the contract was made expressly for his benefit. (§ 1559; accord, Motorsport Engineering, Inc. v. Maserati SPA (1st Cir. 2002) 316
F.3d 26, 29 ["If the signatories so intend, a third party can enforce the
contract against the signatory so obligated."].) Here, the Association is not seeking to
enforce the arbitration provision in the CC&R's. "The fact that a nonsignatory to a
contract may in some circumstances be viewed as a third party beneficiary or an
agent who is entitled to compel arbitration [citation] is legally irrelevant
where, as here [the Association] is not the one who wants to be bound by the
arbitration provision in a contract. . . .
[Citation.]" (Benasra v. Marciano (2001) 92 Cal.App.4th 987, 991, italics
deleted; accord, Comer v. Micor, Inc.
(9th Cir. 2006) 436 F.3d 1098, 1102 ["A third party beneficiary might in
certain circumstances have the power to sue under a contract; it certainly
cannot be to a contract it did not sign or otherwise assent to"], italics
deleted.)

Pinnacle
relies on Villa Milano to argue that California
courts have consistently construed CC&R's as contracts. (Villa
Milano, supra, 84 Cal.App.4th
819.) The Villa Milano court concluded that an arbitration clause contained
in the CC&R's of a condominium homeowners association was a sufficient
agreement to require that the association's construction defect claims against
the developer be submitted to arbitration.
(Id. at pp. 825-826, fn.
4.) In Treo, we declined to follow that aspect of the opinion. (Treo,
supra, 166 Cal.App.4th at pp.
1066-1067.) Here, we again decline to
follow that aspect of Villa Milano.

First, that
portion of the Villa Milano opinion
was poorly reasoned, with the court conceding that
". . . .the cited cases do not provide an analytical
framework for addressing the issue why the homeowners association, which makes
no purchase, is also bound contractually.
However, neither [party] raises the point, so we need not address it at
length. . . ." ( >Villa Milano, supra, 84 Cal.App.4th at p. 826, fn. 4.) Second, in finding the arbitration provision
in CC&R's a sufficient agreement to bind a homeowners association, the >Villa Milano court relied on a number of
cases where other courts treated the CC&R's as a contract between owners,
or between owners and a homeowners association.
(Barrett v. Dawson (1998) 61
Cal.App.4th 1048, 1054 [the right of an owner to enforce a restrictive covenant
limiting the use of neighboring property is clearly contractual]; >Franklin v. Marie Antoinette Condominium
Owners Assn. (1993) 19 Cal.App.4th 824, 828, 833-834 [describing CC&R's
as a contract between owners and association]; Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490,
512-513 [same].) Thus, as we stated in >Treo, "[w]e agree with >Villa Milano insofar as it holds that
CC&R's can reasonably be 'construed as a contract' and provide a means for
analyzing a controversy arising under the CC&R's when the issue involved is
the operation or governance of the association or the relationships between
owners and between owners and the association. . . ." (Treo,
supra, 166 Cal.App.4th at p.
1066.) Notably, other than >Villa Milano, we are aware of no California
cases treating CC&R's as a contract between anyone other than as between
owners, or between owners and a homeowners association.

In >Treo, we concluded that a provision in
CC&R's making all disputes between a developer and a homeowners association
subject to judicial reference under Code of Civil Procedure section 638 was not
a "written contract as the Legislature contemplated the term in the context
of [Code of Civil Procedure] section 638."
(Treo, supra, 166 Cal.App.4th at p. 1067.)
Code of Civil Procedure section 638 states that a referee may be
appointed if the court finds a reference agreement exists between the
parties. We concluded that under >Grafton Partners v. Superior Court
(2005) 36 Cal.4th 944 (Grafton), a
jury waiver required actual notice and meaningful reflection, but that a jury
waiver in CC&R's did not meet those requirements, noting that a homeowners
association "essentially springs into existence when there is a conveyance
by the developer of a separate interest coupled with an interest in the common
area or membership in the association."
(Treo at p. 1066.) We stated that: "Treating CC&R's as a contract such
that they are sufficient to waive the right to trial by jury does not comport
with the importance of the right waived.
CC&R's are notoriously lengthy, are adhesive in nature, are written
by developers perhaps years before many owners buy, and often, as here with
regard to the waiver of trial by jury, cannot be modified by the
association. Further, the document is
not signed by the parties." ( >Id. at p. 1067.)

To avoid a
similar result here, Pinnacle contends that the rule in Treo: (1) is distinguishable
because it involved judicial reference;
(2) cannot apply as it would violate the FAA; and (3) should be reconsidered
because it creates uncertainty. We
reject these arguments.

The general
principles discussed in Treo regarding
the need for free and voluntary consent before a party can be deprived of its
constitutional right to a jury trial are equally applicable to
arbitration. Additionally, >Treo essentially relied on general California
contract law principles to determine whether the requisite
"agreement" to waive the right to a jury existed. As discussed above, a determination that the
requisite "agreement" is lacking based on application of general
state contract law principles regarding the formation of contracts does not
violate the FAA. (Infra, Part I.) Finally, our
adherence to the principles articulated in Treo
does not create any uncertainty regarding the circumstances when CC&R's
will be characterized as contracts and when they will not be characterized as
contracts. As Treo clearly stated, "CC&R's can reasonably be 'construed
as a contract' and provide a means for analyzing a controversy arising under
the CC&R's when the issue involved is the operation or governance of the
association or the relationships between owners and between owners and the
association." (Treo, supra, 166
Cal.App.4th at p. 1066.)

We believe
it is critical to note that the Legislature has provided complex alternative
dispute resolution procedures that a common interest development association >must follow before it can file an action
against a builder of a common interest development. (§ 1375.)
The Legislature has also enacted statutes providing a simple and
efficient internal dispute resolution procedure to resolve disputes between an
association and its members. (§ 1363.810
et seq.; see Cal. Law
Revision Com. com., 8 West's Ann. Civ. Code (2007) foll. § 1363.810, p. 259.) If this internal procedure does not resolve a
dispute between an association and its members, additional statutes >require the association and its members
use an alternative dispute resolution procedure as a prerequisite to filing an
enforcement action in superior court.
(§§ 1369.510, 1369.520, subd. (a).)
Significantly, the Legislature stated that "[t]he form of alternative
dispute resolution chosen pursuant to this article may be binding or
nonbinding, with the voluntary consent of the parties." (§ 1369.510, subd. (a).) This statement comports with the general
principles we discussed in Treo, and
reiterated here, that the waiver of the right to a jury requires an actual
"agreement." ( >Treo, supra, 166 Cal.App.4th at p. 1066.)






TO BE CONTINUED AS PART II….





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