Villa Milano Homeowners Ass'n v. Il Davorge

• Decision Date: 06 November 2000
• Docket Number: No. G023526.,G023526.
• Citation: 102 Cal.Rptr.2d 1,84 Cal.App.4th 819
• Parties: VILLA MILANO HOMEOWNERS ASSOCIATION, Plaintiff and Respondent, v. IL DAVORGE, Defendant and Appellant.
• Court: California Court of Appeals Court of Appeals

102 Cal.Rptr.2d 1

84 Cal.App.4th 819

VILLA MILANO HOMEOWNERS ASSOCIATION, Plaintiff and Respondent, v. IL DAVORGE, Defendant and Appellant.

No. G023526.

Court of Appeal, Fourth District, Division 3.

November 6, 2000.

As Modified on Denial of Rehearing November 27, 2000.

Review Denied February 21, 2001.

Cooksey, Howard, Martin & Toolen, Thomas F. Zimmerman, Costa Mesa, and Wilson E. Yurek for Defendant and Appellant.

Duke, Gerstel, Shearer, and Dawn R. Brennan, San Diego, for Plaintiff and Respondent.

OPINION

SILLS, P.J.

In this case of first impression, we decide whether a developer can use a declaration of covenants, conditions and restrictions (CC & R's) containing a binding arbitration clause as a device to preclude homeowners, and the homeowners association of which they are members, from pursuing an action for construction or design defect damages in a court of law. When homeowners purchase property subject to CC & R's, they agree to be bound by those CC & R's, including any arbitration clause contained therein. But that agreement, like any other, will not be enforced if it is unconscionable. Code of Civil Procedure section 1298.7 provides home buyers the right to bring a judicial action for construction or design defect damages even when the purchase agreement contains a binding arbitration clause. Public policy will not permit a developer, who is unable to use a purchase agreement to block a home buyer's access to a judicial forum, to cut off that access by circuitous means—the CC & R's.

I FACTS

II Davorge, a California limited partnership, was the developer of the Villa Milano condominium complex located in Huntington Beach. In order to create a "condominium project" governed by the Davis Stirling Common Interest Development Act (Civ.Code, § 1350 et seq.), it recorded CC & R's governing the use and maintenance of the property within the complex (Civ. Code, §§ 1351-1353). As the sole owner of the property at the time of recordation, II Davorge was the only party to sign the CC & R's. More than two years after the CC & R's were recorded, and before any units were sold, II Davorge lost the project through foreclosure by its construction lender. The units were sold thereafter.

The CC & R's provided for the creation of the Villa Milano Homeowners Association (Association), a nonprofit corporation. Every owner of a condominium unit is a member of the Association, as required by the CC & R's. The Association is governed by applicable statutes, its articles of incorporation, its bylaws, and most notably, the CC & R's. (2 Hanna & Van Atta, Cal. Common Interest Developments: Law and Practice (1999) § 18:40, p. 46 (hereafter Hanna & Van Atta).) The CC & R's, by their terms, are imposed as equitable servitudes against the property and bind all owners of interests in the property, both the individual unit owners and the Association as the holder of an easement interest in the common area.

Eventually, the homeowners and the Association discovered that both the individual units and the common area suffered from what they believed to be various construction and design defects. Hence, the Association filed a complaint against II Davorge seeking compensation for damages to the project. While the Association filed the suit in its own name, pursuant to Code of Civil Procedure section 383,¹ it sought recovery for damages suffered by the individual unit owners as to their separate interests in the project. In this way, it represented the interests of the individual homeowners.

II Davorge filed a petition to compel arbitration (Code Civ.Proc., § 1281.2), based on an arbitration clause contained in the CC & R's. That clause provides that any dispute between II Davorge on the one hand, and either a unit owner or the Association on the other hand, will be submitted to binding arbitration.² Controversies concerning the construction or design of the project are specifically identified as being subject to arbitration. The trial court denied the petition, likening the arbitration clause to an adhesion contract and calling it "un-American."³ II Davorge appealed. (Code Civ.Proc., § 1294, subd. (a).) We affirm.

II CONTRACT LAW

A. Agreement to Arbitrate

In its petition to compel arbitration, II Davorge contended that a written agreement to arbitrate, between II Davorge and the Association, was memorialized in the CC & R's. A written agreement to arbitrate is fundamental, because Code of Civil Procedure section 1281.2 permits a court to order the parties to arbitrate a matter only if it determines that an agreement to arbitrate exists. (Banner Entertainment, Inc. v. Superior Court (1998) 62 Cal.App.4th 348, 356, 72 Cal.Rptr.2d 598; Berman v. Renart Sportswear Corp. (1963) 222 Cal.App.2d 385, 388-389, 35 Cal.Rptr. 218.) Indeed, when the trial court reviews a petition to compel arbitration, the threshold question is whether there is an agreement to arbitrate. (Cheng-Canindin v Renaissance Hotel Associates (1996) 50 Cal.App.4th 676, 683, 57 Cal.Rptr.2d 867.)

The Association claims there is no agreement to arbitrate, relying on Badie v. Bank of America (1998) 67 Cal.App.4th 779, 79 Cal.Rptr.2d 273. In Badie, a bank attempted to unilaterally impose an arbitration provision on its customers by sending them bill stuffers notifying them of a change in terms. The bank asserted it had the right to add the arbitration provision to the customer agreements because it had retained the right to unilaterally change the terms of those agreements. The court struck down the arbitration clause, having determined that the original customer agreements did not contemplate the addition of any new terms of that nature. (Id. at p. 803, 79 Cal.Rptr.2d 273.)

However, Badie is distinguishable for a couple of reasons. First, by use of the bill stuffers, the bank in Badie sought to change the terms to which the customers had already agreed. But here, there is no change in terms. Rather, the arbitration clause has been a part of the CC & R's since the date of recordation. Second, Badie did not have to do with condominium units and recorded CC & R's at all. As to those, a separate body of law applies.

Individual condominium unit owners "are deemed to intend and agree to be bound by" the written and recorded CC & R's, inasmuch as they have constructive notice of the CC & R's when they purchase their homes. (Citizens for Covenant Compliance v. Anderson (1995) 12 Cal.4th 345, 349, 47 Cal.Rptr.2d 898, 906 P.2d 1314.) CC & R's have thus been construed as contracts in various circumstances. (See, e.g., Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 512-513, 229 Cal.Rptr. 456, 723 P.2d 573 [CC & R's as contract between homeowner and homeowners association with respect to installation of common area lighting]; Barrett v. Dawson (1998) 61 Cal.App.4th 1048, 1054, 71 Cal.Rptr.2d 899 [CC & R's as contract between neighboring property owners prohibiting use of residential property for business activities]; and Franklin v. Marie Antoinette Condominium Owners Assn. (1993) 19 Cal.App.4th 824, 828 833-834, 23 Cal.Rptr.2d 744 [CC & R's as contract between homeowner and homeowners association with respect to homeowners association's obligation to maintain and repair common area plumbing].)⁴ The arbitration clause, as a provision of the Villa Milano CC & R's, is therefore a part of the contract between the parties. This, then, answers the threshold question: There is an agreement to arbitrate.

B. Enforceability

This is only the beginning of our inquiry, however. The trial court concluded the CC & R's were an adhesion contract and the arbitration provision was unenforceable because it was unconscionable. Faced with that determination, II Davorge argues the CC & R's very simply are not a contract at all, so contract law concerning enforceability is irrelevant.⁵ More specifically, II Davorge contends CC & R's are equitable servitudes and the court should have applied real property law instead of contract law. As we stated in Barrett v. Dawson, supra, 61 Cal.App.4th at p. 1054, 71 Cal.Rptr.2d 899, "We need not get bogged down in the metaphysics of where property ends and contract rights begin to know that, [in some contexts], the right . . . to enforce a restrictive covenant [in CC & R's] is clearly contractual." This is one of those contexts. The right to enforce the covenant to arbitrate must necessarily be contractual in this case. Unless a valid agreement to arbitrate exists, as determined under contract law, the petition to compel arbitration must be denied. (Banner Entertainment, Inc. v. Superior Court, supra, 62 Cal.App.4th at pp. 356-357, 72 Cal.Rptr.2d 598; Cheng-Canindin v. Renaissance Hotel Associates, supra, 50 Cal. App.4th at p. 683, 57 Cal.Rptr.2d 867.)

Clearly then, the enforceability of the contractual arbitration clause must be addressed. The only argument II Davorge makes relating to this point is that even if the CC & R's did constitute a contract, they could not be characterized as an adhesion contract, because the homeowners could have purchased property elsewhere in a condominium development whose governing CC & R's did not contain an arbitration clause. However, II Davorge provides no citation of authority in support of the proposition that a contract can never be adhesive if the weaker party could have rejected the agreement and gone elsewhere.

In Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 711, 131 Cal. Rptr. 882, 552 P.2d 1178, our Supreme Court stated: "In the characteristic adhesion contract case, the stronger party drafts the contract, and the weaker has no opportunity . . . to negotiate concerning its terms. [Citations.]" It added: "In many cases of adhesion contracts, the weaker party lacks not only the opportunity to bargain but also any realistic opportunity to look elsewhere for a more favorable contract; he must either adhere to the standardized agreement or forego the needed service. [Citation.]" (...