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Association of Apartment Owners of Villas v. Sunstone Waikoloa, LLC

Supreme Court of Hawaii

June 28, 2013

ASSOCIATION OF APARTMENT OWNERS OF THE WAIKOLOA BEACH VILLAS, by its Board of Directors, Petitioner/Applicant-Appellee,
SUNSTONE WAIKOLOA, LLC, Respondent/Respondent-Appellant.


Terrance M. Revere, Malia Nickison-Beazley, and Christopher A. Santos, for petitioner.

Michael L. Freed, Brad S. Petrus, and David R. Harada-Stone, for respondent.




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-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.



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 "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]roceedinq 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 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]roceedinq 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]roceedinq 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]:
(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 ...

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