Association of Apartment Owners of the Waikoloa Beach Villas Ex Rel. Board of Directors v. Sunstone Waikoloa, LLC ( 2013 )

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Electronically Filed
Supreme Court
SCWC-11-0000998
28-JUN-2013
09:58 AM
IN THE SUPREME COURT OF THE STATE OF HAWAI#I
---o0o---
ASSOCIATION OF APARTMENT OWNERS OF THE WAIKOLOA BEACH VILLAS,
by its Board of Directors,
Petitioner/Applicant-Appellee,
vs.
SUNSTONE WAIKOLOA, LLC,
Respondent/Respondent-Appellant.
SCWC-11-0000998
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-11-0000998; S.P. NO. 11-1-007K)
June 28, 2013
RECKTENWALD, C.J., NAKAYAMA, ACOBA, MCKENNA, AND POLLACK, JJ.
OPINION OF THE COURT BY ACOBA, J.
We hold that Section R.4(c) of the Declaration of
Condominium Property Regime for the Waikoloa Beach Villas
(Declaration) violates Hawai#i Revised Statutes (HRS) § 514B-
105(a)1 because it imposes limitations on Petitioner/Applicant-
1
HRS § 514B-105 provides in relevant part as follows:
§ 514-105 Association; limitations on powers
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Appellee Association of Apartment Owners of the Waikoloa Beach
Villas, (Petitioner or the Association) in arbitration or
litigation with Respondent/Defendant-Appellant Sunstone Waikoloa,
LLC (Respondent) more restrictive than those imposed on other
persons. For the reasons stated herein, we vacate in part and
affirm in part the March 4, 2013 judgment of the Intermediate
Court of Appeals (ICA) filed pursuant to its January 29, 2013
Published Opinion.
I.
A.
The Waikoloa Beach Villas condominium project (Villas)
was apparently developed by Respondent in 2004. On November 12,
2004 Respondent executed the Declaration of Condominium Property
Regime for Villas (the Declaration). Section R.4(c) of the
Declaration is relevant to this case and imposes numerous
requirements that Petitioner must meet before initiating
arbitration or litigation proceedings against Respondent.
Generally, Section R authorizes Petitioner to defend itself in
any litigious proceeding, and to “institute, prosecute,
maintain/or intervene in any” “Proceeding” “subject to full
compliance with” conditions set forth in two categories of
proceedings denominated as “operational proceedings” and
(a) The declaration and bylaws may not impose limitations on the
power of the association to deal with the developer which are more
restrictive than the limitations imposed on the power of the
association to deal with other persons.
(Emphasis added.)
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“development controversies.”
R. Claims and Litigation
[Petitioner] . . . shall have the power and the duty to reasonably
defend [itself] in any pending or potential lawsuit, arbitration,
mediation, or governmental proceeding, and [Petitioner] shall have
the power, but not the duty, to reasonably institute, prosecute,
maintain and/or intervene in any lawsuit or administrative
proceeding (collectively referred to as a Proceeding) provided,
however, that each and any exercise of such power(s) shall be
subject to full compliance with the following provisions:
The first category, “Operational Proceedings,” as
defined by Section R.1, covers seven specific types of
controversies, including (1) enforcement of the Declaration,
Bylaws, and Project Rules, (2) the imposition of assessments, (3)
challenges to taxation, (4) protection against threats to the
health and safety of all Owners, (5) proceedings based on a
contract or purchase order entered into in the ordinary course of
[Petitioner’s] business, (6) counterclaims in Proceedings
initiated against Petitioner, and (7) matters involving less than
$10,000.00.
1. Operational Proceedings.
Any [p]roceeding brought by Petitioner (i) to enforce the
provisions of the Project Documents (including, without
limitation, the foreclosure of liens), or (ii) for the imposition
and/or collection of assessments pursuant to the Project
Documents, or (iii) involving challenges to real property or ad
velorum taxation, or (iv) to protect against any matter which
imminently and substantially threatens the health, safety, and
welfare of all of the Owners, or (v) against a supplier, vendor,
contractor, or provider of services, pursuant to a contract or
purchase order with the Association and in the ordinary course of
the Association’s business, or (vi) by way of counterclaim in a
Proceeding instituted against the Association, or (vii) for money
damages wherein the total amount in controversy for all matters
arising in connection with the action is not likely to exceed Ten
Thousand Dollars ($10,000.00) in the aggregate; shall be referred
to herein as an “Operational Proceeding.” Subject to the
provisions of Sections R.3 and R.4 below relating to a
“Development Controversy” or “Development Controversies” (as
defined below), the Board from time to time may cause an
Operational Proceeding to be commenced and prosecuted.
(Emphases added.) Section R.2 mandates that all proceedings
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undertaken by Petitioner except operational proceedings require
approval by 75% of the owners of Villas.
2. Association Approval.
Except with respect to an Operational Proceeding, and subject to
the provisions of Sections R.3 and R.4 below relating to a
Development Controversy or Development Controversies, no
[p]roceeding shall be commenced or prosecuted by the Board or
[Petitioner] unless approved by the affirmative vote of not less
than seventy-five percent (75%) of the Owners at a meeting of the
Association called for such purpose.
(Emphases added.)
The second category of proceedings, “Development
Controversies,” as defined by Section R.3, involves “any
Proceeding . . . against [Respondent].”
3. Development Controversies.
Any [p]roceeding involving [Petitioner] and/or the Board against
[Respondent] . . . arising from or otherwise relating to the
Governing Documents, any express or implied warranty, any
construction defects, issues involving the adequacy of reserves,
or any other matter, of whatever nature, involving the Project
(excepting, however, an Operational Proceeding brought against
Declarant solely in its capacity as an Apartment Owner) shall be
referred to herein as a “Development Controversy” or as
“Development Controversies.”
(Emphases added.)
Section R.4 requires that development controversies
must proceed through negotiation, Section R.4(a); mediation,
Section R.4(b); and finally arbitration or litigation, Section
R.4(c).
4. Proceedures for Development Controversies.
To protect [Petitioner] and the Owners from being subjected to
potentially costly or prolonged Development Controversies without
full disclosure, analysis, and consent, and to protect
[Petitioner] and individual Board members from charges of
negligence, breach of fiduciary duty, conflict of interest, or
acting in excess of their authority or in a manner not in the best
interests of [Petitioner] and the Owners, and to help ensure
voluntary and well-informed consent and clear and express
authorization by the Owners, strict compliance with the following
provisions of this Section R.4 shall be mandatory with regard to
any and all Development Controversies commenced, instituted,
and/or maintained by [Petitioner]:
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(a) Negotiation
(i) . . . [Petitioner] shall give written notice to [Respondent]
describing the nature of all claims against [Respondent] (the
Dispute) and a description of what [Petitioner] believes shall be
done to resolve the dispute. [Petitioner shall also propose a date
and time for a conference . . . . If, as a result of the
conference, the Dispute or certain issues in the Dispute have been
resolved and the issues, if any, that remain unresolved and will
require Mediation (as defined below).
(ii) In the case of any Dispute with respect to a deficiency in .
. . construction . . . “Negotiation” shall mean, to the extent
applicable, the procedure set forth in the Hawai#i Contractor
Repair Act . . . .
(b) In the event that the parties have completed the Negotiation
as required by subsection R.4(a) above but have failed to resolve
the entire Dispute, then, if either of the parties wishes to
pursue the Dispute further, the unresolved aspects of the Dispute
shall be resolved, if possible, by mediation conducted with the
assistance of a single mediator in accordance with the Arbitration
Rules, Procedures, and Protocols of Dispute Prevent and
Resolution, Inc. then in effect. . . . Any Mediation shall be
conducted in the City and County of Honolulu, and shall be
governed by the laws of the State of Hawaii. . .
...
(Emphases added.) Section R.4(c)(1) through (3) mandates
conditions imposed on Petitioner in connection with the
initiation of arbitration or litigation against Respondent.
(c) In the event that [] Mediation, as required by subsection
R.4(b) above, fails to reasonably resolve the Development
Controversy, [Petitioner] shall not be authorized to commence,
institute or maintain any arbitration or litigation of such
Development Controversy until and unless the Board has fully
complied with the following procedures:
(1) [Petitioner] shall first investigate the legal merit,
feasibility, and expense of prosecuting the Development
Controversy by obtaining a written opinion of a licensed Hawaii
attorney regularly residing in Hawaii, with a Martindale–Hubbell
rating of ‘bv’ or better,2 expressly stating that such attorney
has reviewed the underlying facts and data in sufficient,
verifiable detail to render the opinion, and expressly opining
that [Petitioner] has a substantial likelihood of prevailing on
the merits with regard to the Development Controversy without
substantial likelihood of incurring any material liability with
respect to any counterclaim which may be asserted against the
[Petitioner].
(2) Said attorney opinion letter shall also contain the attorney's
best good faith estimate of the amount of legal costs, . . . which
are reasonably expected to be incurred for prosecution to
completion (including appeal) of the Development Controversy.
(3) Upon receipt and review of the Attorney Letter, if two-thirds
2
Martindale-Hubbell rates lawyers through a process of peer review.
According to Martindale-Hubbell a “bv” rating “is the maximum rating a lawyer
can receive who has been admitted to the bar from [sic] 5-9 years.”
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(2/3) or more of the Board affirmatively votes to proceed with the
institution or prosecution of, and/or intervention in, the
Development Controversy . . . [Petitioner] shall call for a vote
of the Owners, whereupon: . . . if seventy-five percent (75%) or
more of the Owners vote in favor of pursuing such Development
Controversy and in favor of levying a Special Litigation
Assessment on the apartment owners in the amounts and for the
duration set forth in the Special Assessment Report and/or of
entering into the loans proposed to fund necessary borrowings,
then the Board shall be authorized to proceed to institute,
prosecute, and/or intervene in the Development Controversy. In
such event, [Petitioner] shall engage the attorney who gave the
opinion and quote set forth in the Attorney Letter, which
engagement shall be expressly subject to the Attorney Letter. . .
.
(Emphases added.)
R.5 requires that disputes between Petitioner’s members
and Respondent be subject to “final and binding arbitration.”
5. Warranty.
The Association and each Owner acknowledge that each initial
purchaser of an Apartment has entered into a separate Deposit
Receipt, Reservation, and Sales Agreement (“Purchase Agreement”)
with [Respondent], which provides for mandatory arbitration of
claims and disputes between the Owner of such Apartment and
[Respondent], all pursuant to [Respondent’s] Home Builder’s
Limited Warranty . . . . [Petitioner] and each Owner covenant and
agree to abide by said warranty program. In accordance with
[Respondent’s] Home Builder’s Limited Warranty,3 and the agreement
of [Petitioner] and each Owner to abide by said warranty program,
[Petitioner] and each Owner covenant and agree that any and all
claims and/or disputes of any kind relating to the common elements
of the Project or to the Apartments . . . shall be submitted by
[Petitioner] and/or each Owner, as applicable, to final and
binding arbitration pursuant to and in accordance with the
provisions of the arbitration agreement contained in
[Respondent’s] Home Builder’s Limited Warranty, which arbitration
agreement is incorporated herein as though fully set forth.
(Emphases added.)
R.6 restricts the source of funding for proceedings
other than “Operational Proceedings.”
6. Funding of Proceedings
In no event shall any Association reserve fund or working capital
fund be used as the source of funds to institute, prosecution,
maintain and/or intervene in any [p]roceeding other than an
3
By mandating arbitration “[i]n accordance with [Respondent’s] Home
Builder’s Limited Warranty,” Section R.5 of the Declaration incorporates by
reference the arbitration provision in the Home Builder’s Limited Warranty
discussed infra.
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Operational Proceeding . . . .
(Emphasis added). The Declaration also provides that “[i]f any
provision of this Declaration shall be declared invalid, all
other provisions of the Declaration shall continue in full force
and effect as if the invalid provision had not been included.”
As referenced in the Declaration, the Home Builder’s
Limited Warranty provided a “binding arbitration procedure” for
disputes between either owners or Petitioner and Respondent:
VIII. Binding Arbitration Procedure
Any disputes between You4 and Us, 5 or parties acting on Our
behalf, including PWC . . . will be resolved by binding
arbitration. Binding arbitration shall be the sole remedy
for resolving any and all disputes between You and Us . . .
. . .
The arbitration shall be conducted by Construction
Arbitration Services, Inc., or such other reputable
arbitration service that PWC6 shall select, at its sole
discretion, at the time the request for arbitration is
submitted. The rules and procedures of the designated
arbitration organization, that are in effect at the time the
request for arbitration is submitted, will be followed 7. . .
. . .
The process for You to initiate arbitration is described
below
Step 1[:] You complete a Binding Arbitration Request Form
and mail it to PWC along with the appropriate arbitration
filing fee . . . .
Step 2[:] PWC will arrange the arbitration proceeding. . . .
(Emphases added).
4
The Home Builder’s Limited Warranty defined “you” as “the
Homeowner and the Homeowner’s Association.”
5
The Home Builder’s Limited Warranty defined “us” as “the builder,”
i.e., Respondent.
6
The Home Builder’s Limited Warranty defined “PWC” as “Professional
Warranty Service Corporation which administers the warranty program in which
[Respondent] participate[s].”
7
The Warranty provides that PWC shall select the arbitration
service “at its sole discretion.” However, the Warranty also provides that
the rules and procedures of the designated arbitration organization shall
apply. Because Petitioner has not challenged this provision, it is assumed
Petitioner has no objection to this “procedure.”
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B.
Between 2007 and 2009, Petitioner commissioned
inspection reports of the Villas, which documented several
purported construction defects. On October 7, 2009, Petitioner
contacted Respondent to resolve issues regarding the defects.
Negotiations between the parties continued until March 30, 2011,
when Petitioner filed a Motion to Compel Mediation and
Arbitration in the court. Petitioner argued that it had
fulfilled all of the requirements of Section R.4(a) of the
Declaration. On the other hand, Petitioner claimed that
Respondent had failed to comply with the Hawai#i Construction
Repair Act as required by Section R.4(a)(i) of the Declaration,
apparently because Respondent did not respond to Petitioner’s
claims within 30 days. (Citing HRS § 672E-4.) Therefore,
Petitioner asked the court to “submit the present dispute to
mediation and arbitration.”
Petitioner did not claim that it had fulfilled the
requirements of sections R.2, R.4(c) or R.5 of the Declaration.
Instead, Petitioner argued that “Section R is in violation of
[HRS §] 514B-105(a), and may not be enforced.” Petitioner also
argued that “Declaration Section R is Unconscionable.”
Respondent filed an opposition memorandum, arguing that
Petitioner could not request arbitration because it had failed to
comply with the requirements of the Declaration. It maintained,
inter alia, that Section R of the Declaration did not violate HRS
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§ 514B-105(a) and was not unconscionable. Petitioner filed a
reply memorandum, arguing, inter alia, that “the requirements
outlined in the Home Builder’s Limited Warranty also violate [HRS
§] 514B-105(a) as it creates greater restrictions in
[Petitioner’s] dealing with [Respondent] compared to any other
person.”
On July 19, 2011, the court issued an Order granting
Petitioner’s Motion to Compel Mediation and Arbitration “for the
reasons set forth in Applicant’s Motion[] and Reply Memoranda
[sic].”
II.
Respondent appealed to the ICA. The ICA reversed the
court’s order granting Petitioner’s Motion to Compel Mediation
and Arbitration. Association of Apartment Owners of Waikoloa
Beach Villas v. Sunstone Waikoloa, LLC, 129 Hawai#i 117, 123, 295
P.3d 987, 993 (App. 2013). As to HRS § 514B-105(a), the ICA held
that “Section R.2 . . . and Section R.6 . . . do not apply only
to proceedings against the developer; rather, the provisions
apply to any proceeding other than an ‘operational proceeding.’”
Id. at 121, 295 P.3d at 991. The ICA stated that Section R.2 and
Section R.6 did not violate HRS § 514B-105(a) because they
“limit[ed] [Petitioner’s] power to institute major proceedings
against any party and do not favor [Respondent].” Id. The ICA
apparently did not address Sections R.4 or R.5 of the
Declaration.
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The ICA also held that Section R of the Declaration and
the Home Builder’s Limited Warranty were not unconscionable. Id.
According to the ICA, the element of “procedural
unconscionability” was lacking because “the [Condominium Property
Act (CPA)8] requires developers [to] draft and record a
declaration before offering any units for sale to the public.”
Id. at 122, 295 P.3d at 992 (citing Pinnacle Museum Tower Ass’n
v. Pinnacle Market Development (US), LLC, 282 P.3d 1217, 1231-33
(Cal. 2012)). Additionally, the ICA determined, inter alia, that
the “the arbitration provisions are not so unreasonable or
unfairly one-sided as to be substantively unconscionable.” Id.
at 123, 295 P.3d at 993.
The requirement in Section R.4 to retain a bv rated
attorney was not “unduly burdensome” because Petitioner was able
to “engage and retain a [bv] rated attorney since the beginning
of this dispute.” Id. According to the ICA, the opinion letter
“only needs to provide an estimate of an association’s likelihood
of success and the legal costs and fees, which would help unit
owners decide whether to incur the burdens of a proceeding.” Id.
On these bases, the ICA held that Section R of the Declaration
and the Home Builder’s Limited Warranty were “enforceable against
[Petitioner].” Id.
The ICA did not address whether or not Petitioner had
failed to comply with the requirements of the Declaration and
8
The CPA is located in HRS Chapter 514A.
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Home Builder’s Limited Warranty for instituting an arbitration
proceeding or filing suit. Instead, after deciding that the
provisions at issue were enforceable against Petitioner, the ICA
vacated the court’s Order and remanded the case for further
proceedings. Id.
III.
In its Application, Petitioner questions whether, inter
alia, the ICA committed a grave error in holding “HRS § 514B-
105(a) inapplicable on the basis that the Declaration makes a
distinction between ‘minor’ and ‘major’ proceedings and therefore
the provisions of Section R of the Declaration do not favor the
developer Sunstone alone[.]”9 Respondent filed a Response on
April 11, 2013.
IV.
A.
Regarding this question, Petitioner argues that (1)
contrary to the ICA’s decision, Sections R.2 and R.6 do not draw
“a reasonable distinction between major and minor proceedings”
because that distinction is not found in HRS § 514B-105, (2)
“[o]ther than ‘Operational Proceedings’ and ‘Development
Controversies,’ there are not other ‘proceedings’ specifically
described, discussed, or expressly provided for under the
9
Petitioner also asks whether grave error was committed by the ICA
2) “when it allowed Developers to control the practice of Law in Hawaii”; 3)
when it found that Section R.4(c) of the Declaration [is] . . .
unconscionable;” and 4) when it “erroneously relied upon new California case
law that actually favors the [Petitioner’s] position.” Inasmuch as our answer
to the first question is dispositive, we do not decide these other inquiries.
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Declaration,” and (3) contrary to the ICA’s ruling, “Sections
R.2, R.4, and R.6 are limitations on the power of [Petitioner] to
deal with [Respondent]” because “[Petitioner] would not have to
go through all of the steps detailed in Section R.2, R.4, and R.6
in order to assert its rights or protect its interests against
persons or entities other than [Respondent].”10
In its Response, Respondent contends (1) that Sections
R.2 and R.6 of the Declaration are not invalidated by HRS § 514B-
105(a), because those provisions “apply to any proceeding other
than an ‘operational proceeding,’” (2) “the Declaration does not
limit the consent and funding requirements in Sections R.2 and
R.6 to actions against [Respondent],” (3) because “matters
involving alleged construction defects and other development
issues are inherently likely to be the most complex, costly, and
protracted matters that [Petitioner] will ever litigate or
arbitrate,” it is reasonable to “specif[y] additional steps [in
Section R.4] that a Board must take in obtaining the unit owners’
informed consent,” and (4) none of the provisions of Section R
violate HRS § 514B-105(a) because the restrictions in the
10
Before the ICA, Petitioner also argued that “the requirements of
the Home Builder’s Limited Warranty [incorporated in the Declaration in
Section R.5] violated HRS § 514B-105(a) as it creates greater restrictions in
the Association’s dealing with the developer compared to any other person.”
The ICA’s opinion did not explicitly address whether the Home Builder’s
Limited Warranty violated HRS § 514B-105(a). However, the ICA implicitly held
that the Home Builder’s Limited Warranty was valid under HRS § 514B-105(a)
when it concluded that “the arbitration provisions [i.e., the Declaration and
the Warranty] are . . . enforceable against [Petitioner].” Sunstone Waikoloa,
129 Hawai#i at 123, 295 P.3d at 993. Petitioner did not argue before this
court that Section R.5 or the Home Builder’s Limited Warranty violates HRS §
514B-105(a). Therefore, this argument is waived. See Hawai#i Rules of
Appellate Procedure Rule 40.1(d)(1).
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Declaration only apply to Association’s board, and not to
Association itself.
V.
A.
To reiterate, pursuant to HRS § 514B-105(a), “[t]he
declaration and bylaws may not impose limitations on the power of
the association to deal with the developer which are more
restrictive than the limitations imposed on the power of the
association to deal with other persons.” Petitioner’s assertion
that this language is unambiguous is incorrect inasmuch as the
phrase “other persons” requires further interpretation. It is
not clear from the text of HRS § 514B-105(a) whether a limitation
which restricts the power of the developer in addition to some,
but not all, “other persons” is prohibited by the statute. In
this respect, the statute’s text is ambiguous. Hawai#i Providers
Network, Inc. v. AIG Hawai#i Ins. Co., 105 Hawai#i 362, 369, 98
P.3d 233, 240 (2004) (“When there is doubt, doubleness of
meaning, or indistinctiveness or uncertainty of expression used
in a statute an ambiguity exists.”) (internal quotation marks and
citations omitted).
HRS § 514B-105(a) was enacted by 2004 Haw. Sess. Laws
Act 164. In Part 1 of Act 164, the legislature stated that
“[t]his Act is the result of the [real estate commission’s] three
year effort to recodify Hawai#i’s condominium law,” and that the
“commission’s ‘Final Report to the Legislature’ . . . should be
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used as an aid in understanding and interpreting this Act.” 2004
Haw. Sess. Laws Act 164. In the Final Report to the Legislature,
the commission’s only comment on Section 5-5(a), the section that
would become HRS § 514B-105(a), was that the “[Uniform Common
Interest Ownership Act (UCOIA)] § 3-102(b) is the source of
subsection (a).” Following an amendment to UCIOA § 3-102(b) in
2008, the Commentary to the UCIOA declared that “the amended text
preserves the basic rule in the earlier Act that prevents the
declarant11 from imposing unique limits on the association’s
power to deal with the declarant,” (emphasis added) i.e., limits
that applied only to the declarant. Thus, the drafters of the
UCIOA understood § 3-102(b)’s reference to prohibit only
limitations on the power of the Association that applied
“uniquely” to litigation between the Association and the
declarant.
VI.
On their faces, Sections R.2 and R.6 do not appear to
violate HRS § 514B-105(a). Sections R.2 and R.6 draw only a
distinction between “Operational Proceedings” and other
proceedings. Section R.2 states that “except with respect to an
Operation Proceeding, and subject to the provisions below
relating to a Development Controversy or Development
Controversies, no Proceeding shall be commenced or prosecuted by
11
Declarant is defined as “one who has made a statement” or “one who
has signed a declaration.” Black’s Law Dictionary at 467 (9th ed. 2009)
(emphasis added). In the instant case, Respondent executed the Deposit,
Receipt, Offer and Acceptance, and is therefore the declarant.
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[Petitioner] unless approved by an affirmative vote of not less
than 75% of owners.” In other words, although Section R.4,
controlling Development Controversies, may provide additional
restrictions, the plain language of Section R.2 states that all
Proceedings other than “Operational Proceedings” require approval
of 75% of owners. Similarly, Section R.6 governs “any Proceeding
(including, but not limited to any Development Controversy),
other than an Operational Proceeding.” (Emphasis added). Thus,
Sections R.2 and R.6 control all proceedings other than
Operational Proceedings.
Given the types of Proceedings categorized as
“Operational Proceedings” by the Declaration, it cannot be said
that Sections R.2 and R.6 apply “uniquely” to proceedings between
Petitioner and Respondent. As pointed out by Respondent before
the ICA, “Proceedings” that are not “Operational Proceedings” and
thus are controlled by Sections R.2 and R.6 include, inter alia,
“an action for damages in excess of $10,000.00 against an
adjacent landowner,” “an action against a board member for
malfeasance,” and “an action against a government entity over
land use matters.” Therefore, it is apparent that Sections R.2
and R.6 apply to actions that may be initiated against persons
“other than” Respondent.12 Moreover, as an action against
12
The ICA used the terms of “major” and “minor” proceedings in
reasoning that Sections R.2 and R.6 applied to other persons in addition to
Respondent. See Sunstone Waikoloa, 129 Hawai#i at 121, 295 P.3d at 991
(stating that Sections R.2 and R.6 “do not apply only to proceedings brought
against the developer; rather, the provisions apply to any proceeding other
than an ‘operational proceeding.’ . . . Thus, the Declaration draws a
reasonable distinction between minor and major proceedings.”). However, as
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Respondent may be an action for damages wherein the total amount
in controversy is not more than $10,000.00, it also may be
possible for Petitioner to initiate litigation against Respondent
that is an Operational Proceeding, and therefore not subject to
the requirements of Sections R.2 and R.6. In sum, Sections R.2
and R.6 apply to actions against “other persons,” in addition to
Respondent. Consequently, it cannot be said that Sections R.2
and R.6 apply “uniquely” to Respondent only. Hence, the ICA was
right in holding that Sections R.2 and R.6 did not violate HRS §
514B-105(a).13
VII.
A.
However, Declaration Section R.4(c)14 clearly does
Respondent argued, Sections R.2 and R.6 apply to other persons irrespective of
whether the subject matter was “major” or “minor.”
13
In its Reply, Petitioner also challenged Sections R.2 and R.6 of
the Declaration as unconscionable. However, in the questions presented in its
Application, Petitioner asked only if the ICA erred when it held Section
R.4(c) was unconscionable. Pursuant to HRAP Rule 40.1 (d)(1), “[t]he
application for a writ of certiorari shall contain . . . a short and concise
statement of the questions presented for decision,” and “[q]uestions not
presented according to this paragraph will be disregarded.” Petitioners’
arguments regarding the unconscionability of Sections R.2 and R.6 of the
Declaration are unrelated to any of the questions presented. Hence, under
Rule 40.1(d)(1) Petitioner’s arguments are disregarded.
14
Petitioner states that “Section R.4” of the Declaration violates
HRS § 514B-105(a). However, before the court and the ICA, Petitioner
apparently conceded that Sections R.4(a) and R.4(b) of the Declaration were
valid inasmuch as Petitioner argued that it had fulfilled the requirements of
Sections R.4(a), and therefore was entitled to “mediation and arbitration
pursuant to the Declaration,” apparently under Sections R.4(a) and R.4(b),
which provide for the mediation of disputes.
Thus, Petitioner apparently does not dispute the applicability of
Sections R.4(a) and R.4(b). Hence, those sections are not discussed further.
Cf. Roxas v. Marcos, 89 Hawaii 91, 124, 969 P.2d 1209, 1242 (1998) (explaining
that the doctrine of judicial estoppel prevents a party from “maintain[ing]
inconsistent positions” or “tak[ing] a position in regard to a matter which is
directly contrary to, or inconsistent with, one previously assumed by
him[.]”).
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violate HRS § 514B-105(a). Section R.4(c) requires that in
“Development Controversies,” Petitioner must, inter alia, hire an
attorney with a Martindale-Hubble rating of “bv” or higher,
obtain an opinion letter indicating that Petitioner has a
substantial likelihood of success on the merits, and impose a
“special litigation assessment” to fund arbitration or
litigation. As discussed supra, “Development Controversies” are
defined as “any Proceeding . . . against [Respondent].” Thus, by
limiting Section R.4(c) to “Development Controversies,”
Respondent ensured that Section R.4(c) applies solely to
proceedings against itself. In other words, Section R.4(c)
represents a restriction limiting the power of Petitioner to act
in proceedings against Respondent. Section R.4(c) applies only
to actions against Respondent and not to actions against any
“other person.” HRS § 514B-105(a). Thus, Section R.4(c)
violates HRS § 514B-105(a). By failing to address the validity
of Section R.4(c), the ICA gravely erred.
B.
Moreover, the disproportionate imposition of burdens on
Petitioner in Section R.4(c) of the Declaration is precisely the
type of abuse meant to be prevented by HRS § 514B-105(a). The
obvious purpose of prohibiting the party drafting the Declaration
(the developer) from imposing restrictions on the Association
that apply only to arbitration or litigation with the developer
is that such terms are likely to grant the developer an unfair
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advantage. Nearly all of the provisions of Section R.4(c) do in
fact grant the developer an unfair advantage in “arbitration or
litigation.”
First, Sections R.4(c)(1) and (c)(3) of the Declaration
require Petitioner to obtain an opinion letter from an attorney
with a “bv” rating or higher, and, subsequently, to hire that
attorney. The effect of Sections R.4(c)(1) and c(3) is to
require Petitioner, but not Respondent, to hire an attorney with
a “bv” rating or better. Thus, this requirement diminishes the
pool of attorneys available to Petitioner, but not Respondent.
Second, Section R.4(c)(1) of the Declaration requires
the opinion letter to state that Petitioner not have a
substantial likelihood of incurring any material liability with
respect to any counterclaim. As Petitioner points out,
hypothetically, this provision could preclude Petitioner from
filing a suit for 10 million dollars if there existed a
meritorious counterclaim for $50,000, even though the net value
of the suit to Petitioner would be $9,950,000. This provision
operates to preclude meritorious suits if a viable counterclaim
by Respondent exists, and thereby serves to limit Respondent’s
liability in actions brought by Petitioner.
Third, Section R.4(c)(3) of the Declaration requires
Petitioner to distribute to each apartment owner a copy of the
opinion letter written by Petitioner’s attorney. Petitioner
maintains that because Respondent owns apartments in the Villas,
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Respondent will inevitably have access to documents that should
be protected by attorney client privilege and the work-product
privilege.15 This court has explained that “[t]he attorney-client
privilege is codified in the Hawai#i Rules of Evidence (HRE) Rule
503, which provides that a client ‘has a privilege to refuse to
disclose and to prevent any other person from disclosing
confidential communications made for the purpose of facilitating
the rendition of professional legal services to the client.’”
Save Sunset Beach Coalition v. City and County of Honolulu, 102
Hawai#i 465, 484, 78 P.3d 1, 20 (2003) (quoting HRE Rule 503(b)).
The purpose of the opinion letter is to inform Petitioner of its
likelihood of success in arbitration or litigation. This aids
Petitioner in deciding whether or not it should pursue
arbitration or litigation. The letter thus “facilitat[es] the
rendition of professional legal services” to Petitioner.
Accordingly, the letter would be covered by HRE Rule 503.
The work-product privilege “has its foundation in
[Hawai#i Rules of Civil Procedure] (HRCP) Rule 26,” and protects
materials “‘prepared in anticipation of litigation or for
trial.’” Id. (quoting HRCP Rule 26). It is apparent that the
opinion letter is “prepared in anticipation of litigation”
because under the terms of the declaration the opinion letter is
a prerequisite for litigation. Thus, the opinion letter is
covered by the work-product privilege. Cf. United States v.
15
At a hearing, Respondent conceded that it owned several apartments
in the Waikoloa Beach Villas.
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Adlman, 134 F.3d 1194, 1200 (2d. Cir 1998) (stating that a
memorandum, inter alia, “estimating the likelihood of success in
litigation” would be covered by work-product privilege).
The information contained in the opinion letter could
be extremely valuable to Respondent. For example, knowing
Petitioner’s attorney’s opinion of Petitioner’s likelihood of
success and projected litigation costs could provide Respondent
with a significant advantage in any potential settlement
negotiations or arbitration proceedings. Consequently, in
requiring Petitioner to disclose the opinion letter to all
apartment owners, Section R.4(c)(3) compels Petitioner to reveal
what may be adverse information to Respondent.16
Section R.4(c) of the Declaration, that applies only to
actions that Petitioner brings against Respondent, serves to
limit Respondent’s liability, and burdens Petitioner’s ability to
protect its own interests. These terms are thus voided by HRS §
514B-105(a).
C.
Finally, Respondent’s argument that Section R.4(c) of
the Declaration is valid because it applies only to actions
initiated by the Board, and not the Association, is incorrect.
HRS § 514B-106(a) provides that “except as provided in the
16
We do not address whether there are any other statutory provisions
or legal principles that might require disclosure of privileged information to
apartment owners. Rather, we simply hold that, by imposing such a requirement
on Petitioner here with regard to Development Controversies, Section R.4(c)(3)
violates HRS § 514B-105(a).
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declaration, the bylaws, subsection (b),[17] or other provisions
of this chapter, the board may act in all instances on behalf of
the association.” In other words, the Association may act
through its Board unless the declaration or bylaws provides
otherwise. As discussed supra, however, Section R.4(c) restricts
the board from action on behalf of the Association by, inter
alia, prohibiting it from initiating arbitration or litigation
unless it receives an opinion letter from an attorney with a
rating of “bv” or higher, requiring that Petitioner have a
substantial likelihood of success on the merits, and that it
distribute that opinion letter to all apartment owners. Hence,
Section R.4(c) of the Declaration hinders the Association in
acting through its Board in proceedings against Respondent.
Section R.4(c) of the Declaration, therefore, imposes limitations
on the Association that apply solely in actions against
Respondent. Consequently, Section R.4(c) violates HRS § 514B-
105(a).
VIII.
Therefore, to the extent that the ICA held that Section
17
HRS § 514B-106(b) provides as follows:
(b) The board may not act on behalf of the association to
amend the declaration or bylaws (sections 514B-32(a)(11) and
514B-108(b)(7)), to remove the condominium from the
provisions of this chapter (section 514B-47), or to elect
members of the board or determine the qualifications, powers
and duties, or terms of office of board members (subsection
(e)); provided that nothing in this subsection shall be
construed to prohibit board members from voting proxies
(section 514B-123) to elect members of the board; and
provided further that the board may fill vacancies in its
membership to serve until the next annual or special
association meeting.
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R.4(c) was “enforceable against [Petitioner],” Sunstone Waikoloa,
129 Hawaii at 123, 295 P.3d at 993, the ICA gravely erred. As
noted, the Declaration provides that its provisions are
severable, and thus the invalidity of any provision would not
affect other provisions which “shall continue in full force and
effect as if the invalid provision had not been included.”
Although Section R.4(c) is invalid, the other provisions,
including Sections R.2 and R.6, have not been shown to violate
HRS § 514B-105(a). For the same reason, Section R.5, of the
Declaration which incorporates the Home Builder’s Limited
Warranty is not invalid.18 Therefore, these provisions are
enforceable against Petitioner.
Before the court, Petitioner did not establish that it
had obtained the approval of 75% of the homeowners in the
Waikoloa Beach Villas before filing its motion to compel
mediation and arbitration, as required by Section R.2 of the
Declaration. Nor did Petitioner maintain that it had followed
the arbitration requirements in the Home Builder’s Limited
Warranty. Instead, Petitioner argued before the court that
Section R.2 and R.619 of the Declaration and the Home Builder’s
Limited Warranty were invalid. The court apparently relied on
18
As discussed supra, Petitioner did not argue before this court
that Section R.5 of the Declaration, which incorporates by reference the Home
Builder’s Limited Warranty, violated HRS § 514B-105(a).
19
Section R.6 prevents Petitioner from funding Proceedings other
than Operational Proceedings through Petitioner’s general fund. However,
there is no evidence in the record regarding the source of funding in the
instant case.
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these arguments in granting Petitioner’s Motion to Compel
Arbitration. The court erred in this respect.
IX.
Based on the foregoing, the March 4, 2013 judgment of
the ICA filed pursuant to its January 29, 2013 published opinion
is vacated in part and affirmed in part for the reasons stated
herein, and the case remanded to the court for further
proceedings consistent with this opinion.
Terrance M. Revere, /s/ Mark E. Recktenwald
Malia Nickison-Beazley,
and Christopher A. Santos, /s/ Paula A. Nakayama
for petitioner
/s/ Simeon R. Acoba, Jr.
Michael L. Freed,
Brad S. Petrus, /s/ Sabrina S. McKenna
and David R. Harada-Stone,
for respondent /s/ Richard W. Pollack
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