Verano Condo Homeowners v. La Cima Dev.

Filed 5/8/12 Verano Condo Homeowners the Assn. CA4/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
VERANO CONDOMINIUM
HOMEOWNERS THE ASSOCIATION,
Plaintiff and Respondent,
v.
LA CIMA DEVELOPMENT, LLC,
Defendant and Appellant.
D058217
(Super. Ct. No. 37-2010-00090423-
CU-CD-CTL)
APPEAL from an order of the Superior Court of San Diego County, Luis R.
Vargas, Judge. Reversed and remanded.
In this case a condominium developer seeks to compel arbitration of construction
defect claims brought against it by a homeowners association on behalf of the association
itself and its members. The developer relies on arbitration provisions in a declaration of
covenants, conditions and restrictions (CC&R's) the developer recorded prior to
establishment of the association and on separate purchase agreements which also

-- 1 of 17 --

2
contained arbitration provisions. We conclude the CC&R's do not constitute an
agreement to arbitrate. However, the purchase agreements between the developer and
direct, original purchasers which include arbitration provisions are arbitration agreements
sufficient to compel arbitration. They bind both the purchasers and the homeowners
association when the association acts as a representative of the purchasers.
In light of the recent Supreme Court decision in AT&T Mobility LLC v.
Concepcion (2011) 563 U.S. ___ [131 S.Ct. 1740], we decline to hold the arbitration
clauses unenforceable due to unconscionability.
Accordingly, while we agree with the trial court that no agreement to arbitrate
exists between the developer and the homeowners association, nor between the developer
and any owner who did not buy a condominium directly from the developer, we reverse
and remand the matter to the trial court for further proceedings consistent with our
conclusion that claims asserted on behalf of original purchasers are subject to arbitration.
FACTUAL AND PROCEDURAL BACKGROUND
Defendant La Cima Development, LLC (La Cima), purchased a 77-building, 521-
unit apartment complex in December 2004 and converted the apartments to
condominiums, and named the complex Verano. In the course of conversion, La Cima
drafted and recorded CC&R's under which plaintiff Verano Condominium Homeowners
Association (the Association), a California mutual benefit corporation, came into
existence upon the sale of the first condominium. La Cima also transferred ownership of
the development's common areas and recreational facilities to the Association to hold in

-- 2 of 17 --

3
its own right. No consideration was provided by the Association to La Cima, and the
Association did not execute any documents in favor of La Cima in connection with the
transfer of common areas and facilities. the Association's members include all owners of
Verano condominiums.
In pertinent part, the CC&R's contain arbitration clauses which require both
individual condominium owners and the Association to resolve any claims they have
against La Cima through binding arbitration in accordance with the Federal Arbitration
Act (FAA, 9 U.S.C. § 1 et. seq.) and California Arbitration Act (CAA, Code Civ. Proc.,
§ 1280 et. seq.). Specifically, the arbitration clauses state that by accepting a deed to any
portion of the property, the Association and any owner agree to waive their rights to jury
trial and have any dispute settled by binding arbitration.
In addition to the CC&R's, La Cima required individual condominium purchasers
to sign purchase agreements containing similar arbitration clauses. The agreements
stated that all disputes with La Cima would be resolved through arbitration, and that
owners waived their right to jury trial with respect to any claim they might have against
La Cima.
Following their purchase of units, several owners became aware of construction
defects both in their own units and in common areas. Under enforcement rights provided
by the CC&R's and by statute, the Association sued La Cima as real party in interest with
respect to defects to Verano's common areas. the Association also sued La Cima as a

-- 3 of 17 --

4
class representative on behalf of its member owners for defects which caused damage to
individual units.
La Cima moved in superior court to compel arbitration of all the claims asserted
by the Association. The trial court denied the motion, finding no agreement to arbitrate
between La Cima and the Association existed under the terms of the CC&R's, that the
FAA did not apply as La Cima had failed to meet its burden to show development and
sale of Verano impacted interstate commerce, and that, in any event, the arbitration
agreements in both the CC&R's and purchase agreements were unenforceable due to
unconscionability.
La Cima now appeals the trial court's order.
DISCUSSION
I
As the trial court did not consider any disputed extrinsic evidence or resolve any
disputed factual issues, we review its order denying La Cima's motion to compel
arbitration de novo. (Guiliano v. Inland Empire Personnel, Inc. (2007) 149
Cal.App.4th 1276, 1284.)
II
The FAA constitutes a federal statutory scheme for the arbitration of disputes that
arise under maritime transactions or involve interstate commerce. (See 9 U.S.C. §§ 1-
16.) The FAA, properly invoked in an arbitration agreement, preempts any conflicting
state law. (Perry v. Thomas (1987) 482 U.S. 483, 492, fn. 9 [170 S.Ct. 2520]; Shepard v.

-- 4 of 17 --

5
Edward Mackay Enterprises Inc. (2007) 148 Cal.App.4th 1092, 1097-1099.) However,
the threshold issue of whether a party has entered into an agreement to arbitrate is a
question of state law. (See First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938,
942; Marsch v. Williams (1994) 23 Cal.App.4th 250, 254-255.) 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.)
A. La Cima and the Association
As a threshold matter, we conclude the CC&R's are insufficient to form an
agreement to arbitrate between La Cima and the Association. Generally, contracts
require a mutuality of consent between capable parties. (See Civ. Code, § 1550, subds.
(1), (2).)
No evidence exists to show the Association consented to the terms of the CC&R's,
either explicitly or implicitly. As a nonprofit mutual benefit corporation required by
statute and created solely for a common interest development (Civ. Code § 1353, subd.
(a)(1); § 1363, subd. (a)), the Association had no ability to reject the provisions of the
CC&R's, nor could it decline to come into existence. Instead, the Association was given
title to property in its own right and responsibility for the common areas when La Cima
recorded the CC&R's and conveyed the first separate interest in a residential unit coupled
with the Association membership. The Association took this responsibility subject to the

-- 5 of 17 --

6
CC&R's, which were similarly mandated by statute. (Civ. Code § 1353, subd. (a)(1).)
The Association did not consent to terms it had no actual power to refuse.
Moreover, the statute requiring CC&R's for common interest development
projects, such as Verano, plainly establishes the CC&R's as equitable servitudes
enforceable between the Association and member owners, or between individual owners
themselves. No language contained in the statute suggests CC&R's were intended by the
Legislature to create a continuing contractual relationship between a developer and
homeowner's the Association.
Civil Code section 1354 expressly provides: "(a) The covenants and restrictions in
the declaration shall be enforceable equitable servitudes, unless unreasonable, and shall
inure to the benefit of and bind all owners of separate interests in the development.
Unless the declaration states otherwise, these servitudes may be enforced by any owner
of a separate interest or by the Association, or by both.
"(b) A governing document other than the declaration may be enforced by the
Association against an owner of a separate interest or by an owner of a separate interest
against the Association."
The CC&R's La Cima recorded state an intent to benefit individual Verano
condominium owners as equitable servitudes consistent with Civil Code section 1354 and
provide rights of enforcement only to owners and the Association. Thus, neither La
Cima's CC&R's nor section 1354 expresses any intent to benefit La Cima in its capacity
as developer of the project, nor grants it enforcement rights over the CC&R's except in its

-- 6 of 17 --

7
role as owner of unsold units. It follows La Cima's CC&R's, as equitable servitudes, are
only valid to protect owners from one another and permit enforcement of its terms by the
Association. La Cima relinquished its interests in the land by selling its property and
may not assert any rights under the CC&R's following the transfer of its ownership
interest.
Limiting enforcement of CC&R's to owners and the Associations which act on
behalf of owners is entirely consistent with the cases which have used contract principles
to interpret and enforce CC&R's. (See e.g. Citizens for Covenant Compliance v.
Anderson (1995) 12 Cal.4th 345, 349 [CC&R's need not be referenced nor repeated in
each succeeding deed to be enforceable by other owners]; Frances T. v. Village Green
Owners Assn. (1986) 42 Cal.3d 490, 512–513 [CC&R's as contract between homeowner
and homeowners the Association with respect to installation of common area lighting];
Barrett v. Dawson (1998) 61 Cal.App.4th 1048, 1054 [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.) Each of those cases involved disputes either between
homeowners or between homeowners and a homeowners the Association. As we noted
in B.C.E. Development, Inc. v. Smith (1989) 215 Cal.App.3d 1142, 1149 (B.C.E.):
"Recent times have seen increased development of multi-residential units which are
interrelated. Condominium construction introduced the concept of common space
dividers, both vertical and horizontal. Open as well as communal space reserved for the

-- 7 of 17 --

8
common use of tract residents became a typical benefit of developments, both in the form
of condominiums and separated dwelling unit tracts. Private internal roads and gated
entrances gave rise to the necessity of guards and maintenance personnel for the service
of all residents of the development. Regulation of the rights, inter se, of the residents
could be achieved, and assured, only by the adoption of highly detailed and specific
regulations, imposed on initial buyers and successors in interest alike by the use of
recorded mutual agreements. . . . [¶] . . . Typically, the interest in enforcing restrictions
will be common to most, if not all, members of the community. Requiring individual
landowners to shoulder the burden of enforcement litigation would be unreasonable. The
administration of the common areas in the development is typically allocated to a
homeowners the Association, or to some other entity constituted to represent all of the
owners. Often at the inception of the development the enforcement entity is created and
controlled by the developer of the project. It is highly reasonable in these circumstances
that the representative the Association or other central agency undertake, on behalf of all
homeowners, such litigation as may be required to enforce the CC&R'."1
1 In B.C.E. we held that a developer, as the declarant which recorded CC&R's, could
reserve the power to enforce the CC&R's, notwithstanding the fact the developer no
longer had any interest in the development. However, the CC&R's we considered in
B.C.E. were recorded in 1968 and concerned a subdivision of separate parcels. The
B.C.E. CC&R's were not subject to the current version of Civil Code section 1354 or its
statutory predecessor. (See Stats. 1963, ch. 860.) Importantly, in finding that the
developer could enforce the CC&R's, we found the developer, which was attempting to
enforce architectural restrictions, was acting not in its own interest, but as the only logical
representative of all the property owners in the development. (B.C.E., supra, 215

-- 8 of 17 --

9
In this regard, our holding in Kelly v. Tri–Cities Broadcasting, Inc. (1983) 147
Cal.App.3d 666, 678–679 (Kelly), is instructive. In Kelly we held a rental arbitration
provision in a lease only bound an assignee of the initial lessee while the assignee was a
tenant. We found the agreement to arbitrate in the lease was a covenant which ran with
the land because it concerned rent and therefore was a covenant which " ' "touches and
concerns" the land.' " (Id. at p. 679.) However, we further noted the inherent limitation
on the enforceability of covenants running with the land: "This rule is based upon privity
of estate, not privity of contract. When the privity of estate no longer exists, those
covenants running with the land, based upon that privity, are no longer enforceable. Thus
the covenant to arbitrate is binding upon a nonassuming assignee only as to matters
arising during the term or period that the assignee was bound by privity of estate. No
authorities predict an agreement to arbitrate could be stretched to require arbitration of a
claim for rent due after the premises had been abandoned, after the privity of the estate
has been broken." (Ibid.; see also Melchor Investment Co. v. Rolm Systems (1992) 3
Cal.App.4th 587, 592–593.)
The use of CC&R's as a means of providing contractual rights to parties with no
interest in or responsibility for a common interest development is also problematic from
the standpoint of determining what, if any, consideration would support such third party
Cal.App.3d at pp. 1149–1150.) Here, La Cima is acting solely in its own pecuniary
interest and not as the representative of anyone with any existing interest in the
development. In this case the enforcement role we endorsed in B.C.E. is being filled by
The Association under the terms of Civil Code section 1354.

-- 9 of 17 --

10
agreements. By their terms the CC&R's bind all successors, even those with whom a
third party such as La Cima has never had any contractual relationship and to whom La
Cima has not provided any consideration.
In light of the foregoing, we do not believe that in providing in Civil Code section
1354 that CC&R's be treated as equitable servitudes the Legislature intended that
CC&R's would be used to provide continuing and irrevocable contractual benefits to
entities such as La Cima, which have no continuing interest in a development or role as a
representative of the owners of the development.
B. La Cima and Successors in Interest
For the foregoing reasons, we find no agreement in the CC&R's between La Cima
and owners who did not purchase units directly from La Cima. These subsequent
purchasers never contracted with La Cima for their units, but instead entered into
purchase agreements with former owners. The consequence of this chain of title is that
no meeting of the minds between La Cima and these later purchasers and their successors
occurred. (See Treo @ Kettner Homeowners Assn. v. Superior Court (2008) 166
Cal.App.4th 1055, 1066-1067.)
C. La Cima and Original Purchasers
Unlike the Association and subsequent purchasers, owners who bought units
directly from La Cima executed purchase agreements with the developer that are binding,
valid contracts. Those purchase agreements contained arbitration clauses separate from
those found within the CC&R's, and the owners had the power to directly negotiate with

-- 10 of 17 --

11
La Cima over its terms. While the CC&R's do not create valid contractual rights in favor
of La Cima, the separate purchase contracts contain an agreement to arbitrate that is valid
and enforceable under state law.
III
We agree with La Cima that any valid agreement between it and a direct
purchaser, would be covered by the FAA. An agreement to arbitrate is covered by the
FAA when the underlying transaction "in fact . . . involved interstate commerce."
(Allied-Bruce Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265, 277-278 [115
S.Ct. 834].) Here, La Cima's development project was clearly intimately enmeshed with
interstate commerce. Verano was a large housing development with hundreds of units
sold by a Delaware company. The construction and conversion of those units into
saleable condominiums was performed by contractors headquartered across the United
States. Moreover, the financing necessary for both construction and individual purchases
of the condominium units undoubtedly occurred through federally regulated and
chartered financial institutions with long-recognized substantial effects on interstate
commerce. In the aggregate, the economic activity manifest in the La Cima development
project concerned raw materials, business goods, and retail and commercial finance
instruments from all corners of the nation, representing a "general practice" clearly
entwined with "interstate commerce in a substantial way." (Citizens Bank v. Alafabco,
Inc. (2003) 539 U.S. 52, 56-57 [123 S.Ct. 2037].)

-- 11 of 17 --

12
We also agree with La Cima that an agreement to arbitrate under the FAA would
preclude the application of conflicting state law, including limitations on the use of
arbitration in construction defect cases. (Shepard v. Edward Mackay Enterprises Inc.,
supra, 148 Cal.App.4th 1092, 1097-1101.) Specifically, states are forbidden from
treating arbitration provisions differently than the remainders of the contracts in which
they appear. "What States may not do is 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 Act makes any such state policy unlawful, for that kind of policy would
place arbitration clauses on an unequal 'footing,' directly contrary to the Act's language
and Congress' intent." (Allied-Bruce Terminix Companies, Inc. v. Dobson, supra, 513
U.S. at p. 281.) Even a state constitutional standard, such as the jury waiver provision
requirements of the California Constitution, cannot be used to circumvent the FAA in the
face of an otherwise valid arbitration agreement.
Thus, the FAA applies to the purchase agreements between La Cima and direct,
original purchasers.
IV
We turn now to the issue of unconscionability. The "saving clause" of the FAA
statute, 9 U.S.C. section 2, permits "agreements to arbitrate to be invalidated by
'generally applicable contract defenses, such as fraud, duress, or unconscionability,' but
not by defenses that apply only to arbitration or that derive their meaning from the fact
that an agreement to arbitrate is at issue." (AT&T Mobility LLC v. Concepcion, supra,

-- 12 of 17 --

13
563 U.S. ___ [131 S. Ct. at p. 1746], quoting Doctor's Associates, Inc. v. Casarotto
(1996) 517 U.S. 681, 687 [116 S. Ct. 1652]; 9 U.S.C § 2.)
Our courts have frequently invalidated arbitration agreements for
unconscionability, relying on the statutory power to refuse to enforce any contract found
"to have been unconscionable at the time it was made." (Civ. Code, § 1670.5, subd. (a).)
The doctrine of unconscionability requires both procedural and substantive elements.
The former focuses "on ' "oppression" ' or ' "surprise" ' due to unequal bargaining power,
the latter on ' "overly harsh" ' or ' "one-sided" ' results." (Armendariz v. Foundation
Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114.)
Our Supreme Court applied this framework to class-action waivers in Discover
Bank v. Superior Court (2005) 36 Cal.4th 148 (Discover Bank), holding "[s]uch one-
sided, exculpatory contracts in a contract of adhesion, at least to the extent they operate to
insulate a party from liability that otherwise would be imposed under California law, are
generally unconscionable" and should not be enforced. (Discover Bank, supra, 36 Cal. at
p. 161.)
However, the United States Supreme Court recently overruled Discover Bank.
The court stated that while "§ 2's saving clause preserves generally applicable contract
defenses, nothing in it suggests an intent to preserve state-law rules that stand as an
obstacle to the accomplishment of the FAA's objectives." (Concepcion, supra, 131 S. Ct.
at p. 1748.) In doing so, the court severely limited the application of such state law rules,
including unconscionability, as defenses to enforcement of arbitration agreements.

-- 13 of 17 --

14
Concepcion recognizes not only that established state law prohibiting arbitration of some
claims is "displaced by the FAA," but that "a doctrine normally thought to be generally
applicable, such as . . . unconscionability . . . applied in a fashion that disfavors
arbitration," is similarly subject to preemption. (Concepcion, supra, 131 S. Ct. at p.
1747.)
Although Concepcion's holding is limited to the class-action waivers covered by
the Discover Bank rule, the reasoning in Concepcion clearly applies to other impediments
to arbitration. The opinion sets forth several examples other than class-action waivers
under which a court may attempt to dispose of arbitration agreements on
unconscionability grounds: failure to comport with federal evidence guidelines, or
discovery rules, or disallowance of an ultimate disposition by a jury. (Concepcion,
supra, 131 S.Ct. at p. 1747.) It concludes that all are insufficient to avoid application of
the FAA, and expressly forestalls any rationale which limits its holding to class-action
waivers: "And, the reasoning would continue, because such a rule applies the general
principle of unconscionability or public-policy disapproval of exculpatory agreements, it
is applicable to 'any' contract and thus preserved by § 2 of the FAA. In practice, of

-- 14 of 17 --

15
course, the rule would have a disproportionate impact on arbitration agreements. . . ."
(Ibid.)2
Concepcion similarly disapproves reliance on adhesion as grounds to strike
arbitration clauses for unconscionability, pointing out "the times in which consumer
contracts were anything other than adhesive are long past." (Concepcion, supra, 131 S.
Ct. at p. 1750, fn. omitted; Carbajal v. H&R Block Tax Servs., Inc. (7th Cir. 2004) 372
F.3d 903, 906.)
In the case at bar, the trial court denied La Cima's motion to compel arbitration in
part based its conclusion the arbitration clause was unconscionable. Specifically, the trial
court looked to the adhesive nature of both the CC&R's and the individual purchase
contracts signed by Verano owners, as well as the waiver of jury rights inherent in both.
Under Concepcion, these circumstances will not support a finding of unconscionability
because they plainly create a disproportionate burden on arbitration clauses in consumer
agreements.
Thus, on this record the arbitration agreements set forth in the purchase
agreements are not subject to an unconscionability defense.
2 In Sanchez v. Valencia Holding Co., LLC (2011) 201 Cal.App.4th 74 (Sanchez)
the Second District interpreted Concepcion narrowly, holding it "inapplicable where, as
here, we are not addressing the enforceability of a class action waiver or a judicially
imposed procedure that is inconsistent with the arbitration provision and the purposes of
the Federal Arbitration Act." (Id. at p. 89.) The Supreme Court granted review in
Sanchez on March 21, 2012.

-- 15 of 17 --

16
V
Our analysis leaves us with three classes of claims:
Claims the Association raises on its own behalf for defects to common areas
deeded to it by La Cima, which are not subject to any valid agreement to arbitrate.
Claims the Association raises in its role as class representative for owners who did
not purchase units directly from La Cima with respect to defects in those individual units,
which are similarly not subject to a valid arbitration agreement.
Claims the Association raises in its role as class representative for owners who
purchased units directly from La Cima with respect to defects in those individual units.
The assignment of rights the Association took on behalf of original owners subjects it to
the terms of the purchase contracts. Our law is well settled on the matter. "An assignee
stands in the shoes of the assignor, acquiring all of its rights and liabilities."
(Professional Collection Consultants v. Hanada (1997) 53 Cal.App.4th 1016, 1018-1019;
Royal Bank Export Finance Co. v. Bestways Distributing Co. (1991) 229 Cal.App.3d
764, 768; F.D.I.C. v. Bledsoe (5th Cir. 1993) 989 F.2d 805, 810; see also U.S. v.
Thornburg (9th Cir. 1996) 82 F.3d 886, 891; Remington Investments, Inc. v. Kadenacy
(C.D.Cal. 1996) 930 F. Supp. 446, 451; 1 Witkin, Summary of Cal. Law (9th ed. 1987)
Contracts, § 948, p. 844.) Because the purchase contracts contained a valid agreement to
arbitrate any in-unit defect claims original owners might raise, the Association must
submit claims made on behalf of direct purchasers to arbitration. Accordingly, the trial

-- 16 of 17 --

17
court must segregate those claims from the remainder, and grant La Cima's motion to
compel arbitration of those claims only.
DISPOSITION
The order is reversed and remanded with instructions to conduct proceedings
consistent with the views we have expressed.
BENKE, Acting P. J.
WE CONCUR:
McDONALD, J.
AARON, J.

-- 17 of 17 --