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Parys v. 9th Street Market Lofts, LLC

California Court of Appeals, Second District, First Division
Mar 25, 2010
No. B213954 (Cal. Ct. App. Mar. 25, 2010)

Opinion

NOT TO BE PUBLISHED

APPEAL from an order of the Superior Court No. BC394461 of Los Angeles County. Jerome K. Fields, Judge. Reversed.

Retired Judge of the Los Angeles Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

Goodkin & Lynch, R. Jane Lynch and Jacqueline G. Antonio for Defendant and Appellant.

Van Parys Law Firm and Nicholas H. Van Parys for Plaintiffs and Respondents.


CHANEY, J.

Defendant 9th Street Market Lofts, LLC (“defendant”) appeals the trial court’s order denying defendant’s motion to compel arbitration. Because we conclude the arbitration agreement at issue is not substantively unconscionable, we reverse.

Background

Defendant is the developer of the 9th Street Market Lofts project, a mixed-use real estate development in downtown Los Angeles.

1. Purchase Agreement

In February 2007, while the 9th Street Market Lofts project was under construction, plaintiff Rosa Cornejo signed a Purchase Agreement and Escrow Instructions (“purchase agreement”) for the purchase of a condominium in the 9th Street Market Lofts.

By signing and initialing Addendum B to the purchase agreement, Ms. Cornejo acknowledged receipt and review of, among other documents, the “Amended and Fully Restated Declaration of Covenants, Conditions and Restrictions and Reservation of Easements for Market Lofts, and, if applicable, any recorded amendment or supplement thereto.”

Ms. Cornejo also signed and initialed Addendum F to the purchase agreement, which is entitled “Right to Repair Law, Fit and Finish Warranty and Indemnity” and describes California’s Right to Repair Law. Section 1(d) of Addendum F states that “[a]ny dispute which is not resolved under the Right to Repair Law Procedures shall be resolved by arbitration under section 12.4.3 of the Declaration.” Similarly, section 2(h) of that addendum, entitled “Dispute Resolution,” provides that “[a]ny dispute arising out of or related to this Fit and Finish Warranty shall be subject to the Right to Repair Law Procedures. Any dispute which is not resolved under those Right to Repair Law Procedures shall be resolved by arbitration under section 12.4.3 of the Declaration.”

2. CC&Rs

In May 2007, a Declaration of Covenants, Conditions, Restrictions and Reservation of Easements for Market Lofts (“CC&Rs”) was executed and recorded with respect to the 9th Street Market Lofts project. Ms. Cornejo is not a signatory to the CC&Rs.

Although in the purchase agreement Ms. Cornejo acknowledged receipt of a document entitled “Amended and Fully Restated Declaration of Covenants, Conditions and Restrictions and Reservation of Easements for Market Lofts,” that document is not in the record. For purposes of this opinion, we assume without deciding that the “Declaration of Covenants, Conditions, Restrictions and Reservation of Easements for Market Lofts” attached as Exhibit B to defendant’s motion to compel arbitration (which we refer to as the CC&Rs) is substantially similar to the document Ms. Cornejo acknowledged receiving.

The cover page of the CC&Rs includes a notification regarding arbitration. It states: “NOTE: IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT, CERTAIN DISPUTES ARISING UNDER THIS DECLARATION, INCLUDING DISPUTES CONCERNING THE CONSTRUCTION OF THE COMMUNITY, SHALL BE SUBMITTED TO ARBITRATION UNDER SECTION 12.4. ARBITRATION INCLUDES A WAIVER OF THE RIGHT TO TRIAL BY JURY. YOU MUST READ THE ARBITRATION PROVISION CAREFULLY AND SHOULD CONSULT LEGAL COUNSEL WITH ANY QUESTIONS.”

Article 12 of the CC&Rs is entitled “Enforcement and Dispute Resolution.” Section 12.4.3 of that article provides in full: “Arbitration. EXCEPT AS SET FORTH ABOVE, ALL DISPUTES INCLUDING RIGHT TO REPAIR LAW CLAIMS THAT ARE NOT RESOLVED UNDER THE CHAPTER 4 PROCEDURES, SHALL BE ARBITRATED – WHICH ARBITRATION SHALL BE MANDATORY AND BINDING – PURSUANT TO THE FEDERAL ARBITRATION ACT AND SUBJECT TO THE FOLLOWING PROCEDURES.” We discuss additional arbitration provisions in more detail below.

3. Grant Deed

In August 2007, the grant deed transferring the condominium to Ms. Cornejo was recorded. As grantee, Ms. Cornejo signed the last page of the deed, which bears the title “Grantee Acceptance and Agreement” and provides In relevant part that Ms. Cornejo, “by acceptance and recordation of this Grant Deed,... accepts and agrees to be bound by all provisions of the [CC&Rs]... including... the dispute resolution procedures and waiver of jury trial in Section 12.4 of the [CC&Rs]..., which provisions are acknowledged to be reasonable and incorporated in this Grant Deed by reference.”

4. Plaintiffs’ Complaint and Defendant’s Motion to Compel Arbitration

Soon after Ms. Cornejo moved into the condominium with her husband and two young children (collectively, “plaintiffs”), a strong sewage smell began to permeate the condo. The condominium became uninhabitable and plaintiffs began to feel sick and unusually fatigued. After unsuccessful attempts to remediate or ease the problem, plaintiffs sued defendant and others. As against defendant, plaintiffs alleged (1) breach of contract, (2) negligence, (3) breach of implied warranty, (4) negligent misrepresentation, (5) intentional misrepresentation, (6) concealment, (7) violation of transfer disclosure duties, (8) rescission, (9) trespass, and (10) nuisance.

Citing the purchase agreement and CC&Rs, defendant moved the trial court to compel arbitration of the parties’ dispute. At the hearing on the motion, defendant also mentioned that the arbitration provisions were “reiterated” in the grant deed. The trial court denied defendant’s motion to compel arbitration, concluding the arbitration provisions in the CC&Rs were unenforceable under Villa Milano Homeowners Association v. Il Davorge (2000) 84 Cal.App.4th 819 (Villa Milano). Although defendant filed written evidentiary objections to plaintiffs’ evidence in opposition to the motion to compel arbitration and, at the hearing, requested a ruling on those objections, the trial court refused to rule on the objections, stating “it wasn’t necessary.”

Defendant appealed.

Discussion

1. Standard of Review

On appeal from the denial of a motion to compel arbitration, we apply general principles of contract law and review the arbitration agreement de novo to determine whether it is legally enforceable. Whether an arbitration agreement is unconscionable is also a question of law subject to de novo review, although factual issues may bear on that determination. (Thompson v. Toll Dublin, LLC (2008) 165 Cal.App.4th 1360, 1369 (Thompson).)

2. Agreement to Arbitrate

The threshold question is whether there is an agreement to arbitrate. (Villa Milano, supra,84 Cal.App.4th at p. 824.) Here, defendant argues the arbitration provisions in the CC&Rs—which defendant claims are incorporated into both the purchase agreement and grant deed—constitute the parties’ agreement to arbitrate. There appears to be a conflict in the law, however, with respect to whether arbitration provisions in CC&Rs may constitute an agreement to arbitrate. (Compare Villa Milano, supra, 84 Cal.App.4th at pp. 825-826 [arbitration provisions in CC&Rs constitute an agreement to arbitrate] with Treo @ Kettner Homeowners Association v. Superior Court (2008) 166 Cal.App.4th 1055, 1066-1067 [CC&Rs cannot waive constitutional right to jury trial].) We need not resolve this conflict, however, because, here, the arbitration agreement is not only in the CC&Rs. As noted above, it is also referenced and included in the purchase agreement signed by Ms. Cornejo and defendant.

3. Unconscionability

Thus, assuming an arbitration agreement exists, we must determine whether it is enforceable.

California and federal law favor arbitration as a means of resolving disputes. (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97, 115 (Armendariz).) However, to be enforceable, an arbitration agreement “must also satisfy traditional contract standards of conscionability.” (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1280.) The guidelines for unconscionability analysis are well established. To invalidate an arbitration agreement, both procedural and substantive unconscionability are required. (Armendariz, supra, 24 Cal.4th at p. 114.) Procedural unconscionability focuses on oppression or surprise and the manner in which the agreement was negotiated. (Ibid.) Substantive unconscionability focuses on the terms of the agreement and the presence of overly harsh or one-sided results. (Ibid.) These two aspects of unconscionability need not be present in the same degree. “[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid. See also Thompson, supra, 165 Cal.App.4th at pp. 1371-1372 [applying Armendariz unconscionability analysis in condominium owners’ lawsuit against condominium developer and real estate agents].)

a. Contract of Adhesion

Our unconscionability analysis “begins with an inquiry into whether the contract is one of adhesion. [Citation.] ‘The term [contract of adhesion] signifies a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ [Citation.] If the contract is adhesive, the court must then determine whether ‘other factors are present which, under established legal rules—legislative or judicial—operate to render it [unenforceable].’ [Citation.]” (Armendariz, supra, 24 Cal.4th at p. 113.) “‘Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or “adhering” party will not be enforced against him. [Citation.] The second—a principle of equity applicable to all contracts generally—is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or “unconscionable.”’ [Citation.] Subsequent cases have referred to both the ‘reasonable expectations’ and the ‘oppressive’ limitations as being aspects of unconscionability. [Citation.]” (Ibid.)

In circumstances similar to those presented here, courts have held arbitration provisions to be part of a contract of adhesion. “‘The reality of the transaction was that plaintiffs had to accept the arbitration provisions if they wanted to buy a house. The arbitration provisions were part of a preprinted form contract, presented on a take-it-or-leave-it basis.’ (Bruni v. Didion (2008) 160 Cal.App.4th 1272, 1293, 73 Cal.Rptr.3d 395 (Bruni); accord, Pardee Construction Co. v. Superior Court (2002) 100 Cal.App.4th 1081, 1087, 123 Cal.Rptr.2d 288 (Pardee).)” (Thompson, supra, 165 Cal.App.4th at p. 1372.)

Although defendant states plaintiffs “had ample time and could have attempted to negotiate[e] an amendment to the CC&Rs, and specifically the arbitration clause,” we are not persuaded. Other than defendant’s unsupported statement, there is no indication Ms. Cornejo could have successfully negotiated anything in the CC&Rs, let alone the arbitration provision. In fact, the opposite appears true.

It is evident all Market Lofts condominium owners are required to accept, and are subject to, the CC&Rs, including their arbitration provisions. As expressly stated in the CC&Rs preamble, the covenants, conditions, restrictions and easements in the CC&Rs run with and burden the Market Lofts development (which includes 267 units) and anyone acquiring an interest in the development. Within the arbitration provisions themselves, using all capital letters, the CC&Rs state that “[a]cknowledgment of the [arbitration provisions] is a condition to conveyance of title to any portion of the Community to such participant.” (Italics added, all capitals eliminated.) Further, in support of defendant’s motion to compel arbitration, counsel for defendant stated all Market Lofts “home buyers are subject to mandatory binding arbitration.” And, in order to amend the CC&Rs, individual owners, such as Ms. Cornejo, must follow a prescribed procedure involving a notice period and adoption by a certain percentage of owners. Finally, in a declaration filed in support of plaintiffs’ opposition to the motion to compel arbitration, Ms. Cornejo said the CC&Rs were presented on a take-it-or-leave-it basis with no meaningful opportunity to negotiate.

Defendant filed evidentiary objections to Ms. Cornejo’s declaration as well as to the declaration submitted by plaintiffs’ counsel. Although defendant asked the trial court to rule on the objections, the trial court refused, saying “it wasn’t necessary.” Defendant’s objections are preserved on appeal and we consider them as necessary. (See City of Long Beach v. Farmers & Merchants Bank of Long Beach (2000) 81 Cal.App.4th 780, 784-785 [written evidentiary objections preserved for appeal when counsel twice asked trial court for a ruling].)

Defendant offers no plausible explanation how or why, during purchase negotiations, Ms. Cornejo could have successfully negotiated amendments to the CC&Rs and the arbitration provisions on her own. In the circumstances of this case, we conclude the arbitration provisions constitute a contract of adhesion.

b. Procedural Unconscionability

The same facts that reveal a contract of adhesion also demonstrate procedural unconscionability. As noted, procedural unconscionability focuses on oppression or surprise and the manner in which the agreement was negotiated. Although we conclude there was no “surprise” here (as the arbitration provisions are clearly presented, are not hidden in fine print, and are previewed and acknowledged in the purchase agreement), we nonetheless conclude the provisions are procedurally unconscionable because of their “oppressive” nature. Oppression “‘arises from an inequality of bargaining power of the parties to the contract and an absence of real negotiation or a meaningful choice on the part of the weaker party.’” (Pardee, supra, 100 Cal.App.4th at p. 1089; accord, Thompson, supra, 165 Cal.App.4th at p. 1372; Villa Milano, supra, 84 Cal.App.4th at pp. 828-829.)

Accordingly, in light of the oppression due to unequal bargaining power in the contract of adhesion, the arbitration agreement is procedurally unconscionable.

c. Substantive Unconscionability

Substantive unconscionability focuses on the terms of the agreement and the presence of overly harsh or one-sided results. As explained below, although we conclude that paragraph 12.4.3(c) of the CC&Rs is unfairly one-sided and creates a serious ambiguity in the arbitration agreement, that paragraph does not cause the agreement to be substantively unconscionable.

Paragraph 12.4.3(c) of the CC&Rs provides that the arbitration provisions inure to the benefit of and are enforceable by defendant and related people or entities. In full, that paragraph provides: “Benefited Parties. The arbitration provisions in this Section 12.4.3 shall inure to the benefit of, and be enforceable by [defendant or any officer, director, partner, shareholder, member, employee, representative of defendant] and each of their contractors, subcontractors, agents, vendors, suppliers, design professionals, insurers and any other person whom the applicable Claimant [here, plaintiff] may contend is responsible for any alleged loss, liability or damages incurred by the Claimant as a result of the circumstances relating to [the dispute].” There is no mention that the arbitration provisions are also for the benefit of or enforceable by a purchaser or homeowner such as Ms. Cornejo.

Standing alone, this provision is unfairly one-sided as it specifically indicates the arbitration provisions inure to the benefit of defendant, but offers no similar provision as to plaintiffs. And, when read in conjunction with other provisions of the arbitration agreement, it creates an ambiguity as to whether an owner such as Ms. Cornejo (as opposed to defendant or any of the other listed “benefited parties”) may enforce the arbitration agreement.

When possible, however, we must interpret a contract so as to make it enforceable (see Civ. Code, §§ 1641, 1643, 1652) and, in light of the strong public policy in favor of arbitration, we “‘“indulge every intendment to give effect to such proceedings”’” (Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 9.) Thus, although paragraph 12.4.3(c) quoted above is one-sided and creates an ambiguity as to an owner’s ability to enforce the arbitration agreement, we decline to read the ambiguity against defendant as the drafter of the agreement. (Cf. Civ. Code, § 1654 [When other canons of construction do not dispel an ambiguity, “the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.”].) When the arbitration agreement is read as a whole, it is sufficiently clear that an owner may also enforce the agreement.

Here, although paragraph 12.4.3(c) is unfairly one-sided, in paragraph 12.4.5 of the CC&Rs, defendant waives its right to a trial by jury and acknowledges its agreement to resolve disputes as provided in section 12.4 of the CC&Rs (which includes the arbitration provisions). In relevant part, that paragraph provides: “Agreement to Dispute Resolution; Waiver of Jury Trial.... [Defendant], Association and each Owner shall use the procedures established in this section 12.4 to resolve all Disputes and waive their rights to resolve Disputes in any other manner. [DEFENDANT], THE ASSOCIATION, AND EACH OWNER ACKNOWLEDGE THAT BY AGREEING TO RESOLVE ALL DISPUTES AS PROVIDED IN THIS SECTION 12.4, THEY ARE WAIVING AND CONVENANTING NOT TO ASSERT THEIR CONSTITUTIONAL RIGHT TO TRIAL BY JURY OF ANY DISPUTES, INCLUDING, BUT NOT LIMITED TO, DISPUTES RELATING TO DESIGN AND CONSTRUCTION DEFECTS, MISREPRESENTATION, OR THE FAILURE OF ANY DECLARANT PARTY TO DISCLOSE MATERIAL FACTS. The foregoing waiver of jury trial shall be binding upon the successors and assigns of [Defendant], the Association and each Owner of all or any portion of the Community and upon all persons and entities asserting rights or claims or otherwise acting on behalf of any such Participant or their successors and assigns.”

We conclude as a matter of law that the arbitration agreement inures to the benefit of owners such as Ms. Cornejo and, therefore, despite the unfairly one-sided paragraph 12.4.3(c), the agreement is not substantively unconscionable.

d. Villa Milano and FAA preemption

Finally, we do not agree with the trial court that Villa Milano, supra, 84 Cal.App.4th 819 is “directly on point.” In particular, Villa Milano’s substantive unconscionability analysis is inapplicable here. The Villa Milano court held the subject arbitration agreement substantively unconscionable because it attempted to avoid Code of Civil Procedure section 1298.7, which provides that an arbitration provision in an agreement to convey real property cannot limit the right to have construction defect claims tried by a jury. (Id. at pp. 830-831, 833.)

But, Villa Milano did not address whether the Federal Arbitration Act (“FAA”) (9 U.S.C. § 2) preempts section 1298.7. Subsequent cases have addressed the issue, however, and have concluded that, when the agreements or transactions at issue involve interstate commerce, the FAA preempts section 1298.7. (Shepard v. Edward MacKay Enterprises, Inc. (2007) 148 Cal.App.4th 1092, 1100-1101 (Shepard); Basura v. U.S. Home Corp. (2002) 98 Cal.App.4th 1205, 1208, 1211-1215 (Basura).)

This case is similar to both Shepard and Basura, where the proponents of arbitration submitted evidence detailing how the transactions at issue (both of which were construction projects) involved interstate commerce. (Shepard, supra, 148 Cal.App.4th at p. 1101 [use of out-of-state building materials]; Basura, supra, 98 Cal.App.4th at p. 1214 [use of out-of-state design professionals and building materials, and use of interstate mail and telephone to communicate with out-of-state professionals].) Likewise, defendant here submitted a declaration supporting its position that the 9th Street Market Lofts project involved interstate commerce. In particular, defendant’s project manager during construction of the residential loft project stated that the condominium units were constructed in large part with materials imported from other states and countries. He also stated that defendant contracted with out-of-state design professionals, contractors and subcontractors, with whom defendant communicated by interstate mail and telephone. Thus, because the transaction at issue here involved interstate commerce, the FAA preempts Code of Civil Procedure section 1298.7 and Villa Milano is not directly on point.

The project manager’s declaration references a residential lofts project located at 810 South Flower Street. But, this is not plaintiffs’ address or the location of the 9th Street Market Lofts condominiums at issue here, which are located at 645 West 9th Street. However, plaintiffs do not dispute or object to this declaration and defendant represents the declaration is applicable to the 9th Street Market Lofts location. We assume the project manager’s declaration is relevant to the condominium and development project at issue here.

Disposition

The order is reversed.

We concur: MALLANO, P. J.ROTHSCHILD, J.

As to Ms. Cornejo’s statement that the CC&Rs were presented on a take-it-or-leave-it basis with no meaningful opportunity to negotiate, defendant claimed the statement (a) was hearsay, (b) lacked foundation, (c) was vague, (d) was irrelevant, and (e) was argumentative. Defendant also asserted that Ms. Cornejo not only lacked specialized knowledge, skill, experience and training to form that “expert opinion” but also lacked personal knowledge. We conclude these objections lack merit and, accordingly, we overrule them.


Summaries of

Parys v. 9th Street Market Lofts, LLC

California Court of Appeals, Second District, First Division
Mar 25, 2010
No. B213954 (Cal. Ct. App. Mar. 25, 2010)
Case details for

Parys v. 9th Street Market Lofts, LLC

Case Details

Full title:MICHAEL VAN PARYS et al., Plaintiffs and Respondents, v. 9TH STREET MARKET…

Court:California Court of Appeals, Second District, First Division

Date published: Mar 25, 2010

Citations

No. B213954 (Cal. Ct. App. Mar. 25, 2010)