Satomi Owners Ass'n v. Satomi, LLC

• Citation: 139 Wn. App. 175,159 P.3d 460
• Decision Date: 11 June 2007
• Docket Number: No. 56265-7-I.,56265-7-I.
• Court: Court of Appeals of Washington
• Parties: SATOMI OWNERS ASSOCIATION, a Washington nonprofit corporation, Respondent, v. SATOMI, LLC, a Washington limited liability company, Appellant.

159 P.3d 460

139 Wn. App. 175

SATOMI OWNERS ASSOCIATION, a Washington nonprofit corporation, Respondent, v. SATOMI, LLC, a Washington limited liability company, Appellant.

No. 56265-7-I.

Court of Appeals of Washington, Division 1.

June 11, 2007.

[159 P.3d 462]

Stellman Keehnel, Rogelio Omar Riojas, DLA Piper U.S. LLP, Anthony Todaro, Peterson Young Putra, Seattle, WA, Joel T. Salmi, Attorney at Law, Bellevue, WA, for Appellant.

Marlyn Kathryn Hawkins, Dean Eric Martin, Barker Martin PS, Seattle, WA, for Respondent.

Sharon Elizabeth Cates, Microsoft Corp, Redmond, WA, Thomas Fitzgerald Ahearne, Foster Pepper PLLC, Seattle, WA, Amicus Curiae on behalf of Master Builders Assoc. of King and Snohomish Counties.

Kit William Roth, DLA Piper Rudnick Gray Cary U.S. LLP Seattle, WA, Daniel Louis Dvorkin, Salmi & Gillaspy PLLC, Bellevue, WA, for Appellant and Amicus Curiae on behalf of Blakely Village, LLC.

Lori Kay McKown, David E. Chawes, Preg, O'Donnell & Gillett PLLC, Seattle, WA, Amicus Curiae on behalf of Leschi Corp.

ELLINGTON, J.

¶ 1 The chief question here is whether the Washington statute providing for judicial enforcement of statutory condominium warranties must yield to the federal arbitration statute, solely because some construction materials came from outside Washington state. We hold that under the circumstances here, the commerce clause does not reach so far, and the state statute controls.

BACKGROUND

¶ 2 Satomi, LLC (the Company) developed the Satomi Condominium, an 85-unit complex located in Bellevue. In 2005, the Satomi Owners Association (the Association) filed suit against the Company alleging numerous construction defects and other deficiencies throughout the complex, and claiming breach of contractual warranties, breach of implied and express warranties under the Washington Condominium Act, chapter 64.34 RCW (WCA), breach of the implied warranty of habitability, and violations of the Consumer Protection Act, chapter 19.86 RCW (CPA).

¶ 3 The Company denied the allegations and demanded arbitration based on the arbitration clause in the warranty addendum, which was an attachment to the original purchase and sale agreements. The Company asserted that most of the building materials used to construct the condominium were manufactured and shipped in interstate commerce, and the Association's claims were therefore subject to arbitration under the Federal Arbitration Act, 9 U.S.C.A. §§ 1-6(FAA).

¶ 4 The Association moved to quash the demand for arbitration, contending it is not bound by the agreement and that in any event, the agreement violates the judicial enforcement provision of the WCA, which is not preempted by the FAA because the contract does not involve interstate commerce.

¶ 5 The trial court quashed the demand for arbitration motion on three grounds:

(1) The Company did not prove that all of the individual owners agreed to arbitrate.

(2) Even if the individual owners agreed to arbitrate, the Association "is a legally separate corporate entity which is neither a `successor or transferee' to [the Association]. Thus, the arbitration clause is simply inapplicable."¹

(3) The FAA does not apply because Marina Cove Condominium Owners Ass'n v. Isabella Estates² held that condominium sales primarily impact Washington residents.

¶ 6 The Company appeals. Our review is de novo.³

DISCUSSION

¶ 7 The Company argues the court erred, and that all unit owners agreed to arbitrate their claims, the Association is bound to arbitrate these issues in the same manner as the unit owners, and the FAA applies and mandates arbitration. We agree with the first two arguments, but not the third.

I. Applicability of Arbitration Agreement to Association

¶ 8 The Association acknowledges that all original owners signed the warranty addendum, but contends that later purchasers are not bound by it. This argument has no merit. The purchase and sale agreement expressly required original unit owners to bind later purchasers to the terms of the addendum. All owners are therefore bound by the agreement to arbitrate.

¶ 9 The Association next contends the agreement has no application here because the Association is a separate legal entity.

¶ 10 The WCA requires condominiums to have a homeowners' association whose membership consists solely of the unit owners, all of whom must belong.⁴ Among other powers, a homeowners' association may "[i]nstitute, defend, or intervene in litigation or administrative proceedings in its own name on behalf of itself or two or more unit owners on matters affecting the condominium."⁵ An association may act on its own behalf when the proceedings occur "in connection with its own functions and activities."⁶ But if an association merely represents its owner/members, its standing is derivative, and it is subject to any defenses and limitations that may be asserted against them and is without a separate right to recover.⁷ In other words, "`[i]ts claim . . . is only as good as that of its constituent members.'"⁸

¶ 11 Such is the case here. The claims asserted belong to the individual unit owners. In addition to violations of the CPA, the Association alleges breaches of warranties under the WCA, the purchase contract, and the implied warranty of habitability, resulting in damage to property owned by its members.⁹ But the WCA's express and implied warranties run to the unit purchasers, not the Association,¹⁰ the implied warranty of habitability runs from the builder—vendor to the original purchaser,¹¹ the contract warranties do not run to the Association, and private rights of action under the CPA belong only to the individual allegedly deceived in a consumer transaction.¹² Given the nature of the claims here, the Association necessarily brought this action in a representative capacity, not on its own behalf as a separate juristic entity.

¶ 12 The Association stands in the shoes of the individual unit owners. The trial court erred when it concluded the arbitration clause does not apply to the Association. If the claims are subject to arbitration, the Association must arbitrate.

¶ 13 The remaining question is whether statutory warranty claims are subject to arbitration because the Federal Arbitration Act preempts state law.

II. Applicability of The Federal Arbitration Act

¶ 14 The Association contends that we decided this issue in Marina Cove, wherein we held that condominium purchase and sale agreements between Washington companies and Washington residents do not implicate the FAA.¹³ But as explained below, we must revisit this issue here.

¶ 15 Washington has a strong policy favoring arbitration of disputes,¹⁴ and any doubts about the scope of arbitrable issues are resolved in favor of arbitration "`whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.'"¹⁵

¶ 16 Congress also favors arbitration of disputes, and to that end enacted the Federal Arbitration Act. The FAA's basic purpose is to overcome courts' unwillingness to enforce arbitration agreements.¹⁶ Where it applies, the FAA preempts state law, prohibiting application of state statutes that invalidate arbitration agreements.¹⁷ The FAA provides as follows:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.[¹⁸] ¶ 17 The United States Supreme Court most recently considered the scope of the FAA in Citizens Bank v. Alafabco, Inc.,¹⁹ which involved debt restructuring arrangements between an Alabama bank and an Alabama construction company. In concluding the transactions were governed by the FAA, the Court described the phrase "involving commerce" as the "functional equivalent of the more familiar term `affecting commerce' —words of art that ordinarily signal the broadest permissible exercise of Congress' Commerce Clause power."²⁰

¶ 18 The Court emphasized that the Commerce Clause power "`may be exercised in individual cases without showing any specific effect upon interstate commerce' if in the aggregate the economic activity in question would represent `a general practice . . . subject to federal control.'"²¹ Only the general practice subject to federal control need have a substantial effect on interstate commerce.²²

¶ 19 The Citizens Bank debt restructuring agreements, although executed in Alabama by Alabama residents, easily met the "involving commerce" test for at least three reasons: (1) Alafabco used funds from loans that were the subject of the debt restructuring agreements to finance large projects throughout the southeastern United States; (2) the restructured debt was secured in part by Alafabco's inventory of goods assembled from out-of-state parts and raw materials; and (3) the general practice represented by the transactions at issue, commercial lending, has a broad impact on the national economy and is clearly within Congress' regulatory power.²³

¶ 20 Citizens Bank confirmed the broad reach of the FAA announced in 1995 in Allied-Bruce Terminix Cos. v. Dobson.²⁴ Allied-Bruce involved a homeowner's lawsuit against the companies with whom he contracted for termite protection. An Alabama statute disallowed predispute arbitration agreements. Allied-Bruce and Terminix operated in multiple states and "the termite-treating and house-repairing material used by Allied-Bruce in its (allegedly inadequate) efforts to carry out the terms of the [contract], came from outside Alabama."²⁵ The United States Supreme Court held that the transaction evidenced by the contract...