U.S. Home Corp. v. Michael Ballesteros Trust

• Decision Date: 12 April 2018
• Docket Number: No. 68810,68810
• Citation: 415 P.3d 32
• Parties: U.S. HOME CORPORATION, a Delaware Corporation, Appellant, v. The MICHAEL BALLESTEROS TRUST; Rodrigo Asanion, Individually; Federico Aguayo, Individually; Felipe Enriquez, Individually; Jimmy Foster, Jr., Individually; The Garcia Family Trust; Arnulfo Ortego-Gomez, Individually; Elvira Gomez-Ortega, Individually; John J. Olson, Individually; Irma A. Olson, Individually; Omar Ponce, Individually; Brandon Weaver, Individually; Jon Yates, Individually; and Mintesnot Woldetsadik, Individually, Respondents.
• Court: Nevada Supreme Court

415 P.3d 32

U.S. HOME CORPORATION, a Delaware Corporation, Appellant,

v.The MICHAEL BALLESTEROS TRUST; Rodrigo Asanion, Individually; Federico Aguayo, Individually; Felipe Enriquez, Individually; Jimmy Foster, Jr., Individually; The Garcia Family Trust; Arnulfo Ortego-Gomez, Individually; Elvira Gomez-Ortega, Individually; John J. Olson, Individually; Irma A. Olson, Individually; Omar Ponce, Individually; Brandon Weaver, Individually; Jon Yates, Individually; and Mintesnot Woldetsadik, Individually, Respondents.

No. 68810

Supreme Court of Nevada.

FILED April 12, 2018

Payne & Fears LLP and Gregory H. King, Sarah J. Odia, and Chad D. Olsen, Las Vegas, for Appellant.

Shinnick, Ryan & Ransavage P.C. and Duane E. Shinnick, Courtney K. Lee, Melissa Orr, and Bradley S. Rosenberg, Las Vegas, for Respondents.

Canepa Riedy Abele and Scott K. Canepa, Las Vegas, for Amicus Curiae Nevada Justice Association.

Wood, Smith, Henning & Berman, LLP, and Janice M. Michaels, T. Blake Gross, and Anthony S. Wong, Las Vegas, for Amicus Curiae Nevada Home Builders Association.

BEFORE THE COURT EN BANC.

OPINION

By the Court, PICKERING, J.:

This is an appeal from an order denying a motion to compel arbitration in a construction defect action. The Federal Arbitration Act (FAA) declares written arbitration agreements "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. In this appeal, we must determine whether the FAA governs the arbitration agreement contained in the common-interest community's Covenants, Conditions, and Restrictions (CC&Rs). Because the underlying transaction involved interstate commerce, we hold that it does and that, to the extent Nevada case law concerning procedural unconscionability singles out and disfavors arbitration of disputes over transactions involving interstate commerce, that case law is preempted by the FAA. We therefore reverse and remand for entry of an order directing the parties to arbitration.

I.

This construction defect action concerns 12 single-family homes located in a southern Nevada common-interest community. Appellant U.S. Home Corporation is the developer. The community is subject to CC&Rs that define U.S. Home as a "declarant." The CC&Rs include a section entitled "Arbitration," which states in relevant part:

Arbitration. Any dispute that may arise between: (a) the ... Owner of a Unit, and (b) the relevant Declarant, or any person or entity who was involved in the construction of any ... Unit, shall be resolved by submitting such dispute to arbitration before a mutually acceptable arbitrator who will render a decision binding on the parties which can be entered as a judgment in court pursuant to NRS 38.015, et seq.

Three of the respondents are original purchasers who contracted directly with U.S. Home to build and sell them homes. These respondents each signed a Purchase and Sales Agreement (PSA). The PSAs include an arbitration clause, in addition to that contained in the CC&Rs, in which the parties "specifically agree that this transaction involves interstate commerce and that any dispute ... shall first be submitted to mediation and, if not settled during mediation, shall thereafter be submitted to binding arbitration as provided by the Federal Arbitration Act ( 9 U.S.C. §§ 1 et seq. ) or, if inapplicable, by similar state statute, and not by or in a court of law." The remaining ten respondents are subsequent purchasers who took title subject to the CC&Rs but did not sign a PSA.

Between August 2013 and February 2015, U.S. Home received construction defect pre-litigation notices on behalf of all respondents (the Homeowners). U.S. Home responded with letters demanding arbitration. The Homeowners then filed, in the district court, an NRS Chapter 40 construction defect complaint against U.S. Home seeking damages for breach of contract, breach of implied warranties, and negligence. U.S. Home filed a motion to compel arbitration based on the arbitration clauses in the CC&Rs and PSAs. The district court denied the motion. It held that the underlying transaction did not involve interstate commerce so the FAA did not apply. Applying state law, the district court invalidated the arbitration agreements as unconscionable. This appeal followed.

II.

Before considering whether the FAA controls, there is a threshold question we must resolve: Does the arbitration clause in the CC&Rs bind the Homeowners?¹ The Homeowners maintain that U.S. Home cannot compel arbitration based on the CC&Rs because "CC&Rs are not ‘contracts,’ but covenants that run with the land." Citing Pinnacle Museum Tower Association v. Pinnacle Market Development, LLC , 55 Cal.4th 223, 145 Cal.Rptr.3d 514, 282 P.3d 1217 (2012), where the California Supreme Court held that an arbitration provision contained in recorded CC&Rs was enforceable against a non-signatory homeowners' association, U.S. Home argues that, by purchasing homes in a common-interest community, the Homeowners assented to the obligations the CC&Rs impose, including, in this case, the obligation to arbitrate their construction defect claims. To resolve these issues we must consider the nature and purpose of CC&Rs and whether arbitration agreements can properly be contained in CC&Rs.

NRS 116.2101 permits the creation of a common-interest community "by recording a declaration executed in the same manner as a deed and, in a cooperative, by conveying the real estate subject to that declaration to the association." A declaration must contain a number of required statements, NRS 116.2105(1), and "may contain any other matters the declarant considers appropriate." NRS 116.2105(2). "CC&Rs become a part of the title to [a homeowner's] property." NRS 116.41095(2). By law, a person who buys a home subject to CC&Rs must receive an information statement warning that "[b]y purchasing a property encumbered by CC&Rs, you are agreeing to limitations that could affect your lifestyle and freedom of choice" and that the CC&Rs "bind you and every future owner of the property whether or not you have read them or had them explained to you." Id. The statement must further advise the prospective homebuyer that "[t]he law generally provides for a 5-day period in which you have the right to cancel the purchase agreement." NRS 116.41095(1).

The Uniform Arbitration Act of 2000 (UAA), adopted in Nevada as NRS 38.206 -.248, does not require any particular formality to create an enforceable arbitration agreement. Rather, it states simply: "An agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable and irrevocable except upon a ground that exists at law or in equity for the revocation of a contract." UAA § 6(a), 7 U.L.A. 25 (part 1A) (West 2009), codified in substantially similar form at NRS 38.219(1). Though arbitration agreements often appear in conventional two-party contracts, they can also arise from other written records where signatures are not required. See Tallman v. Eighth Judicial Dist. Court , 131 Nev. ––––, ––––, 359 P.3d 113, 119 (2015) ( "While NRS 38.219(1) requires that the arbitration agreement be ‘contained in a record’ it does not require that the written record of the agreement to arbitrate be signed."). Indeed, the UAA provides an example of a valid unsigned arbitration agreement—"arbitration provisions contained in the bylaws of corporate or other associations"—and notes that "[c]ourts that have addressed whether arbitration provisions contained in [an organization's] bylaws ... are enforceable under the UAA have unanimously held that they are." UAA § 6(a), 7 U.L.A. 25 part 1A & cmts.

The same principle—that arbitration agreements can exist in a document not labeled "contract"—has been applied to arbitration clauses in CC&Rs. Thus, in Pinnacle , the California Supreme Court compelled arbitration of a dispute between a developer and a homeowners' association based on an arbitration clause in the CC&Rs. 145 Cal.Rptr.3d 514, 282 P.3d at 1221. In doing so, the court emphasized the contractual nature of terms contained in a recorded declaration of CC&Rs. Id. , 145 Cal.Rptr.3d 514, 282 P.3d at 1225-26. By purchasing a unit within the common-interest community, the homebuyer manifests acceptance of the CC&Rs. Id. "Having a single set of recorded covenants and restrictions that applies to an entire common interest development protects the intent, expectations, and wishes of those buying into the development and the community as a whole by ensuring that promises concerning the character and operation of the development are kept." Id ., 145 Cal.Rptr.3d 514, 282 P.3d at 1225. It thus comes as "no surprise that courts have described recorded declarations as contracts" and enforced them as such, as between developer/declarants and homeowners. Id. , 145 Cal.Rptr.3d 514, 282 P.3d at 1227 (collecting cases).

The proposition that CC&Rs create contractual obligations, in addition to imposing equitable servitudes, is widely accepted. See Restatement (Third) of the Law of Prop.: Servitudes, ch. 4 intro. note (Am. Law Inst. 2000) ("One of the basic principles underlying the Restatement is that the function of the law is to ascertain and give effect to the likely intentions and legitimate expectations of the parties who create servitudes, as it does with respect to other contractual arrangements .") (emphasis added). By accepting the deed or other possessory interest in a unit, the homeowner manifests his or her assent to the CC&Rs.² Thus, even apart from the arbitration setting, numerous cases, including at least one from Nevada, recognize the contractual nature of the obligations imposed by a common-interest community's CC&Rs, which cover such diverse subjects as indemnification, restrictions on resale or use, and dispute resolution. See Sandy Valley Assocs. v. Sky Ranch Estates Owners Ass'n , 117 Nev. 948, 954, 35 P.3d 964,...