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Pinnacle Museum Tower Association v. Pinnacle Market Development

July 30, 2010


APPEAL from an order of the Superior Court of San Diego County, Ronald L. Styn, Judge. Affirmed. (Super. Ct. No. 37-2008-00096678-CU-CD-CTL).

The opinion of the court was delivered by: McINTYRE, J.


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.


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.


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, ...

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