Smart Corner Owners Association v. CJUF Smart Corner, LLC et al. - D076775 - 05/20/2021

 

In Smart Corner Owners Association v. CJUF Smart Corner, LLC, an HOA sued a developer for construction defects.  The developer argued that the case should be dismissed because the HOA did not get approval by more than 50% of the owners before filing suit, as required by the HOA’s governing documents.  (Notably, it is the developer that initially drafts those governing documents.)

The developer’s argument should be obviously wrong because there is no reason why the developer should escape liability based upon the timing of the HOA’s vote.  (Perhaps an HOA member could object to paying for the litigation that was not properly approved, but not the developer.)  In general, authorization for the conduct of an agent can be ratified after-the-fact and there is no reason to prohibit ratification here.

But in Branches Neighborhood Corp. v. CalAtlantic Group, Inc. (2018) 26 Cal.App.5th 743, 749, the developer drafted the governing documents to require a pre-filing vote and arbitration.  A pre-filing vote was not taken (but a post-filing vote was), and the arbitrator dismissed the HOA’s suit.  Under California law, arbitrators can get things very wrong and there is generally no ability to appeal—the scope of judicial review of arbitration awards is extremely narrow. 

There “narrow exceptions” including where “the arbitrator exceeded his powers.”  Branches held the arbitrator did not.

To fix the error of (the arbitrator or court) in Branches, the Legislature passed Civil Code section 5986, effective January 2020, which declared any “pre-filing” vote requirement void and its effect to be retroactive to all active cases before “final judicial decision on the merits.”

In February 2020, Aldea Dos Vientos v. CalAtlantic Group, Inc. (2020) 44 Cal.App.5th 1073, 1079, disagreed with Branches finding the pre-filing vote requirement to be unenforceable and its application in excess of an arbitrator’s powers, and then also found Civil Code section 5986 applied.

In Smart Corner Owners Association v. CJUF Smart Corner, LLC, the trial court had followed the arbitrator’s ruling of Branches and entered judgment for the developer.  The HOA appealed and the developer argued that “final judicial decision” had already been entered.  The court of appeal held that “final judicial decision” means the final after any appeals after examining the text, legislative history, and structure of section.  The court also goes on to agree with Aldea that pre-filing vote requirements were unenforceable as violating California’s public policy.  

After one bad arbitration decision, it has taken Legislative action and multiple appellate court decisions to clean up the mess.  Arbitration was supposed to result in judicial economy.