Pinnacle Museum Tower Ass'n v. Pinnacle Mkt. Dev. (US), LLC

55 Cal.4th 223

282 P.3d 1217

145 Cal.Rptr.3d 514

12 Cal. Daily Op. Serv. 9387

2012 Daily Journal D.A.R. 11,381

PINNACLE MUSEUM TOWER ASSOCIATION, Plaintiff and Respondent,

v.PINNACLE MARKET DEVELOPMENT (US), LLC, et al., Defendants and Appellants.

No. S186149.

Supreme Court of California

Aug. 16, 2012.

Wood, Smith, Henning & Berman, Los Angeles, Daniel A. Berman, Sheila E. Fix, R. Gregory Amundson, Nicholas M. Gedo; Hecht Solberg Robinson Goldberg & Bagley, San Diego, Jerold H. Goldberg, Richard A. Schulman, Gregory S. Markow and Amanda A. Allen for Defendants and Appellants.

Luce, Forward, Hamilton & Scripps, Kathleen F. Carpenter, San Francisco, for California Building Industry Association as Amicus Curiae on behalf of Defendants and Appellants.

Feinberg Grant Mayfield Kaneda & Litt, Fenton Grant Mayfield Kaneda & Litt, Daniel H. Clifford, Joseph Kaneda, Charles Fenton and Bruce Mayfield for Plaintiff and Respondent.

Berding & Weil, Alamo, Matt J. Malone, Tyler P. Berding; Epsten Grinnell & Howell, San Diego, Anne L. Rauch, Jon Epstein, Douglas Grinnell; Niddrie Fish & Addams and David A. Niddrie, San Diego, for Executive Council of Homeowners and Consumer Attorneys of California as Amici Curiae on behalf of Plaintiff and Respondent.

BAXTER, J.

An owners association filed the instant construction defect action against a condominium developer, seeking recovery for damage to its property and damage to the separate interests of the condominium owners who compose its membership. In response, the developer filed a motion to compel arbitration, based on a clause in the recorded declaration of covenants, conditions, and restrictions providing that the association and the individual owners agree to resolve any construction dispute with the developer through binding arbitration in accordance with the Federal Arbitration Act (FAA; 9 U.S.C. § 1 et seq.).

We granted review to determine whether the arbitration clause is binding on the association, and if so, whether it must be invalidated as unconscionable. As we shall explain, even though the association did not exist as an entity independent of the developer when the declaration was drafted and recorded, it is settled under the statutory and decisional law pertaining to common interest developments that the covenants and terms in the recorded declaration reflect written promises and agreements that are subject to enforcement against the association. We conclude that the arbitration clause binds the association and is not unconscionable.

Factual and Procedural Background

Pinnacle Market Development (US), LLC, and others (collectively Pinnacle) developed a mixed use residential and commercial common interest community in San Diego known as the Pinnacle Museum Tower Condominium (the Project). Pursuant to the Davis–Stirling Common Interest Development Act (Civ.Code, § 1350 et seq.; the Davis–Stirling Act or the Act), Pinnacle, as the owner and developer of the Project property, drafted and recorded a “Declaration of Restrictions” to govern its use and operation (the Project CC & R's). The Project CC & R's contains a number of easements, restrictions and covenants, which it describes as “enforceable equitable servitudes” and “bindingon all parties having any right, title or interest” in the property, and their heirs, successors and assigns. The Project CC & R's also provided for the creation of a nonprofit mutual benefit corporation called the Pinnacle Museum Tower Association (the Association) to serve as the owners association responsible for managing and maintaining the Project property.

In selling the Project units, Pinnacle conveyed to each buyer an airspace condominium in fee and a proportionate undivided interest in the common area as a tenant in common. All other real property (including the property in the tower module, the parking structure, and other appurtenances) was deeded directly to the Association in fee.¹ Pursuant to the Project CC & R's, each condominium owner is a member of the Association with certain voting rights, and each agrees to pay assessments for all purposes described in the declaration, including the Association's maintenance and improvement of the Association's property and the common areas.

As relevant here, article XVIII of the Project CC & R's (article XVIII) recites that, by accepting a deed for any portion of the Project property, the Association and each condominium owner agree to waive their right to a jury trial and to have any construction dispute resolved exclusively through binding arbitration in accordance with the FAA and the California Arbitration Act (CAA; Code Civ. Proc., § 1280 et seq.).² Article XVIII specifies that it applies only to a construction dispute in which Pinnacle has been named as a party, and provides that no amendment may be made to its terms without Pinnacle's written consent.

The individual owners bought condominium units in the Project pursuant to a standard purchase agreement. The agreement anticipated creation of the Association and explicitly provided: “By acceptance of the Grant Deed to the Condominium, Buyer shall be deemed to have accepted and agreed to comply” with the recorded Project CC & R's. Section 8 of the purchase agreement stated that, by agreeing to resolve all disputes as provided in article XVIII, the parties give up their respective rights to have such disputes tried before a jury. Section 8 also required the parties to initial a provision reciting their agreement “TO COMPLY WITH ARTICLE XVIII OF THE DECLARATION WITH RESPECT TO THE DISPUTE REFERENCED THEREIN.” ³

The Association filed the instant action against Pinnacle, alleging that construction defects caused damage to the Project. As the sole plaintiff, the Association seeks recovery not only for damage to its own property, but also for damage to the interests held by its individual members. The Association claims standing to represent the owners' interests pursuant to Civil Code section 1368.3, which grants an owners association the requisite standing to sue a developer in its own name for damage to the common areas and damage to the separate interests the association is obligated to maintain or repair. (See Windham at Carmel Mountain Ranch Assn. v. Superior Court (2003) 109 Cal.App.4th 1162, 1172, 1174–1175, 135 Cal.Rptr.2d 834 [addressing predecessor to Civ.Code § 1368.3]; see also Civ.Code, § 945.)

Pinnacle filed a motion to compel arbitration, contending the FAA mandates enforcement of article XVIII's arbitration provisions. The trial court determined that the FAA is applicable and that article XVIII embodies an agreement to arbitrate between Pinnacle and the Association. Nonetheless, the court invalidated the agreement upon finding it marked by slight substantive unconscionability and a high degree of procedural unconscionability.

The Court of Appeal affirmed. Although finding unanimously that the FAA is applicable, the court concluded, by a split vote, that the arbitration clause in the Project CC & R's does not constitute an agreement sufficient to waive the Association's constitutional right to jury trial for construction defect claims. The majority additionally held that, even assuming the Association is bound by the jury waivers in the purchase agreements signed by the individual condominium owners, the waivers are unconscionable and unenforceable.

We granted Pinnacle's petition for review.

Discussion

Article XVIII of the Project CC & R's provides that Pinnacle and, by accepting a deed to any portion of the Project property, the Association and each individual condominium owner agree to submit any construction dispute to binding arbitration in accordance with the FAA (and the CAA to the extent it is consistent with the FAA). (See ante, fn. 2.) To determine whether article XVIII is binding upon and enforceable against the Association, we consider the rules governing compelled arbitration of claims, the principles relating to the contractual nature of the covenants and restrictions in a declaration recorded pursuant to the Davis–Stirling Act, and the doctrine of unconscionability.

A. Arbitration under the FAA

Consistent with the express terms of article XVIII, both the trial court and the Court of Appeal determined that the FAA applies in this case because materials and products incorporated into the Project were manufactured in other states. (9 U.S.C. § 2; see Allied–Bruce Terminix Cos. v. Dobson (1995) 513 U.S. 265, 281–282, 115 S.Ct. 834, 130 L.Ed.2d 753( Allied–Bruce ).) Although the Association currently disputes the FAA's applicability, we accept the determination of the lower courts because the issue was not preserved for review.

Section 2 of the FAA provides in relevant part: “A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be 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.) This statute stands as “a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” ( Moses H. Cone Hospital v. Mercury Constr. Corp. (1983) 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765( Moses H. Cone ).) ⁴

To ensure that arbitration agreements are enforced according to their terms, “the FAA pre-empts state laws which ‘require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration.’ ” ( Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488( Volt ); e.g., Perry v. Thomas (1987) 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426 [FAA preempts Cal. Labor Code provision allowing maintenance of wage collection actions despite private agreement to arbitrate]; Southland Corp. v. Keating (1984) 465 U.S. 1, 104...