Narayan v. Ritz–Carlton Dev. Co.

• Decision Date: 03 June 2015
• Docket Number: No. SCWC–12–0000819.,SCWC–12–0000819.
• Citation: 135 Hawai'i 327,350 P.3d 995
• Parties: Krishna NARAYAN; Sherrie Narayan; Virendra Nath ; Nancy Makowski; Keith MacDonald as Co–Trustee for the DKM Trust Dated October 7, 2011; Simon Yoo; Sumiyo Sakaguchi; Susan Renton, as Trustee for the Renton Family Trust Dated 12/3/09; Stephen Xiang Pang; Faye Wu Liu; Massy Mehdipour as Trustee for Massy Mehdipour Trust Dated June 21, 2006; G. Nicholas Smith; Tristine Smith; Ritz 1303 Re, LLC, a Colorado Limited Liability Company; and Bradley Chaffee as Trustee of the Charles V. Chaffee BRC Stock Trust Dated 12/1/99 and the Clifford W. Chaffee BRC Stock Trust Dated 1/4/98, Petitioners/Plaintiffs–Appellees, v. The RITZ–CARLTON DEVELOPMENT COMPANY, INC.; The Ritz–Carlton Management Company, LLC ; John Albert ; Edgar Gum, Respondents/Defendants–Appellants, and Marriott International Inc.; Maui Land & Pineapple Co., Inc.; Exclusive Resorts, LLC; Kapalua Bay, LLC; Association of Apartment Owners of Kapalua Bay Condominium; Caroline Peters Belsom; Cathy Ross; Robert Parsons; Ryan Churchill; The Ritz–Carlton Hotel Company, L.L.C.; Marriott Vacations Worldwide, Corporation ; Marriott Ownership Resorts, Inc.; Marriott Two Flags, LP ; MH Kapalua Venture, LLC ; MLP KB Partner LLC; Kapalua Bay Holdings, LLC ; ER Kapalua Investors Fund, LLC; ER Kapalua Investors Fund Holdings, LLC; Exclusive Resorts Development Company, LLC; and Exclusive Resorts Club I Holdings, LLC, Respondents/Defendants.
• Court: Hawaii Supreme Court

135 Hawai'i 327

350 P.3d 995

Krishna NARAYAN; Sherrie Narayan; Virendra Nath ; Nancy Makowski; Keith MacDonald as Co–Trustee for the DKM Trust Dated October 7, 2011; Simon Yoo; Sumiyo Sakaguchi; Susan Renton, as Trustee for the Renton Family Trust Dated 12/3/09; Stephen Xiang Pang; Faye Wu Liu; Massy Mehdipour as Trustee for Massy Mehdipour Trust Dated June 21, 2006; G. Nicholas Smith; Tristine Smith; Ritz 1303 Re, LLC, a Colorado Limited Liability Company; and Bradley Chaffee as Trustee of the Charles V. Chaffee BRC Stock Trust Dated 12/1/99 and the Clifford W. Chaffee BRC Stock Trust Dated 1/4/98, Petitioners/Plaintiffs–Appellees,

v.The RITZ–CARLTON DEVELOPMENT COMPANY, INC.; The Ritz–Carlton Management Company, LLC ; John Albert ; Edgar Gum, Respondents/Defendants–Appellants,andMarriott International Inc.; Maui Land & Pineapple Co., Inc.; Exclusive Resorts, LLC; Kapalua Bay, LLC; Association of Apartment Owners of Kapalua Bay Condominium; Caroline Peters Belsom; Cathy Ross; Robert Parsons; Ryan Churchill; The Ritz–Carlton Hotel Company, L.L.C.; Marriott Vacations Worldwide, Corporation ; Marriott Ownership Resorts, Inc.; Marriott Two Flags, LP ; MH Kapalua Venture, LLC ; MLP KB Partner LLC; Kapalua Bay Holdings, LLC ; ER Kapalua Investors Fund, LLC; ER Kapalua Investors Fund Holdings, LLC; Exclusive Resorts Development Company, LLC; and Exclusive Resorts Club I Holdings, LLC, Respondents/Defendants.

No. SCWC–12–0000819.

Supreme Court of Hawai‘i.

June 3, 2015.

Terence J. O'Toole, Judith Ann Pavey, and Andrew J. Lautenbach, Honolulu, for petitioners.

Bert T. Kobayashi, Jr., Lex R. Smith, Joseph A. Stewart and Maria Y. Wang, Honolulu, for respondentsThe Ritz–Carlton Development Company, Inc., The Ritz–Carlton Management Company, LLC, John Albert and Edgar Gum and respondentsMarriott International, Inc., The Ritz–Carlton Hotel Company, LLC, Marriott Two Flags, LP, Marriott Ownership Resorts, Inc., MH Kapalua Venture, LLC, and Marriott Vacations Worldwide Corporation.

RECKTENWALD, C.J., NAKAYAMA, McKENNA and POLLACK, JJ., and Circuit Judge NAKASONE, in place of ACOBA, J., recused.

Opinion of the Court by NAKAYAMA, J.

In this appeal we address whether the plaintiffs, a group of individual condominium owners, can be compelled to arbitrate claims arising from financial problems at a Maui condominium project.We hold that because the condominium owners did not unambiguously assent to arbitration, the purported agreement to arbitrate is unenforceable.We also address the doctrine of unconscionability.

I.BACKGROUND

A.Factual History

This case arose from the financial breakdown of a Maui condominium development formerly known as the Ritz–Carlton Club & Residences at Kapalua Bay(the project).The project consists of 84 private ownership condominium units and was developed by DefendantKapalua Bay, LLC(the developer), a joint venture owned by DefendantsMarriott International, Inc.(Marriott), Exclusive Resorts, Inc., and Maui Land & Pineapple Co., Inc.Petitioners/Plaintiffs–AppelleesKrishna Narayan, et al. (collectively the Homeowners) purchased ten of the condominiums units from the developer.The developer owns 56 of the condominium units.The Homeowners, the developer, and other third-party owners comprise the Association of Apartment Owners of Kapalua Bay Condominium(AOAO).

Respondents/Defendants–Appellants the Ritz–Carlton Development Company, Inc.(RCDC) and the Ritz–Carlton Management Company, LLC(RCMC) were the original development and management companies for the project, and were then wholly-owned subsidiaries of Marriott.Respondents/Defendants–AppellantsJohn Albert(Albert) and Edgar Gum(Gum) served on the board of directors of the AOAO while allegedly being employed by either Marriott or Ritz–Carlton.

1.The Financial Breakdown of the Project

In April of 2012, the Homeowners learned that the developer and its affiliated entities had defaulted on loans encumbering the project.¹As a result, the developer could not pay several months of maintenance and operator fees to Marriott's management subsidiaries, and it defaulted on its corresponding AOAO assessments.Due to these problems, Marriott decided to abandon the project and to pull its valuable Ritz–Carlton branding.In the course of its departure, Marriott or one of its subsidiaries used its authority as managing agent to withdraw approximately $1,300,000.00 from the AOAO's operating fund, and threatened to withdraw the remaining $200,000.00 from the fund.AOAO board members, many of whom were employed by Marriott, Ritz–Carlton, and/or other interested entities, did not attempt to block Marriott from taking these actions.Instead, the AOAO board indicated that the multi-million dollar shortfall would have to be covered by the Homeowners.

2.Documents Governing the Project

Prior to the sale of individual condominium units, several documents relating to the governance of the project were recorded in the State of Hawai‘i Bureau of Conveyances pursuant to the requirements of Hawai‘i Revised Statutes (HRS) Chapter 514A.These documents included the Declaration of Condominium Property Regime of Kapalua Bay Condominium (condominium declaration) and the Association of Apartment Owners of Kapalua Bay Condominium Bylaws(AOAO bylaws).Additionally, the developer registered a Condominium Public Report (public report) with the Hawaii Real Estate Commission.These documents were incorporated by reference through purchase agreements that the Homeowners executed when they purchased their condominiums.

a. The Purchase Agreements

The Homeowners entered into purchase agreements with the developer soon after the documents governing the project were recorded.²The first page of the purchase agreements state:

ACKNOWLEDGMENT OF RECEIPT, OPPORTUNITY TO REVIEW, AND ACCEPTANCE OF PROJECT DOCUMENTS

THE FOLLOWING DOCUMENTS THAT ARE REFERRED TO IN THIS PURCHASE AGREEMENT FORM AN ESSENTIAL PART HEREOF.PURCHASER ACKNOWLEDGES THAT PURCHASER HAS RECEIVED COPIES OF EACH OF THE FOLLOWING DOCUMENTS AND THAT PURCHASER HAS HAD A FULL AND COMPLETE OPPORTUNITY TO READ, REVIEW AND EXAMINE EACH OF THE FOLLOWING DOCUMENTS.

....

2. the applicable state of Hawaii Condominium Public Report(s)

3. the Declaration of Condominium Property Regime of Kapalua Bay Condominium

4. the Bylaws of the Association of Apartment Owners of Kapalua Bay Condominium

The purchase agreements also contain a clause entitled "Purchaser's Approval and Acceptance of Project Documentation," which states:

Purchaser acknowledges ... having had a full opportunity to read and review and hereby approves and accepts the following documents ...: the Condominium Public Report(s) indicated in Section C.5, above, the Declaration, the Bylaws....It is understood and agreed that this sale is in all respects subject to said documents.

The Homeowners do not dispute that they received the condominium declaration, the public report, and the AOAO bylaws along with their purchase agreements.

The arbitration clause at issue in this case appears in the condominium declaration, which is referenced more than twenty times in the purchase agreements and in a variety of contexts.For example, the purchase agreements state: "Seller ... reserves the right to utilize unassigned or guest parking spaces described in the Declaration."The purchase agreements also state: "Purchaser agrees to purchase from Seller, in fee simple, the following property: a. The Apartment designated in Section A above and more fully described in the Declaration."Thus, on many occasions, the purchaser is put on notice that more specific information concerning particular rights and obligations is contained in the condominium declaration.

The purchase agreements contain two clauses related to dispute resolution:

47.Waiver of Jury Trial.Seller and Purchaser hereby expressly waive their respective rights to a jury trial on any claim or cause of action that is based upon or arising out of this Purchase Agreement....Venue for any cause of action brought by Purchaser hereunder shall be in the Second Circuit Court, State of Hawai‘i.

48.Attorneys['] Fees.If any legal or other proceeding, including arbitration, is brought ... because of an alleged dispute, breach, default or misrepresentation in connection with any provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees, court costs and all expenses even if not taxable as court costs, ... in addition to any other relief to which such party or parties may be entitled.

These clauses do not mention a binding agreement to arbitrate, nor do they direct the purchaser to the alternative dispute resolution clause in the condominium declaration.

b. The Condominium Declaration

The arbitration clause at issue in this case appears on pages 34 and 35 of the 36–page condominium declaration.It states:

XXXIII.ALTERNATIVE DISPUTE RESOLUTION.

In the event of the occurrence of any controversy or claim arising out of, or related to, this Declaration or to any alleged construction or design defects pertaining to the Common Elements or to the Improvements in the Project ("dispute"), ... the dispute shall be resolved by arbitration pursuant to this Article and the then-current rules and supervision of the American Arbitration Association.

The arbitration clause contains several other relevant provisions.First, it states: "The arbitration shall be held in Honolulu, Hawaii before a single arbitrator who is knowledgeable in the subject matter at issue."Second, it states: "The arbitrator shall not have the power to award punitive, exemplary, or consequential damages, or any damages excluded by, or in excess of, any damage limitations expressed in this Declaration."Third, it states:

The arbitrator may order the parties to exchange copies of nonrebuttable exhibits and copies of witness lists in advance of the arbitration hearing.However, the arbitrator shall have no other power to order discovery

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