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Narayan v. Ritz-Carlton Development Co.

Supreme Court of Hawaii

July 14, 2017

KRISHNA NARAYAN; SHERRIE NARAYAN; VIRENDRA NATH; NANCY MAKOWSKI; KEITH MACDONALD AS CO-TRUSTEE FOR THE DKM TRUST; SIMON YOO; SUMIYO SAKAGUCHI; SUSAN RENTON, AS TRUSTEE FOR THE RENTON FAMILY TRUST; STEPHEN XIANG PANG; FAYE WU LIU; MASSY MEHDIPOUR AS TRUSTEE FOR MASSY MEHDIPOUR TRUST; G. NICHOLAS SMITH; TRISTINE SMITH; RITZ 1303 RE, LLC, a Colorado Limited Liability Company; and BRADLEY CHAFFEE AS TRUSTEE OF THE CHARLES V. CHAFFEE BRC STOCK TRUST AND THE CLIFFORD W. CHAFFEE BRC STOCK TRUST, Petitioners/Plaintiffs-Appellees,
v.
THE RITZ-CARLTON DEVELOPMENT COMPANY, INC.; THE RITZ-CARLTON MANAGEMENT COMPANY, LLC; JOHN ALBERT; EDGAR GUM, Respondents/Defendants-Appellants, and MARRIOTT INTERNATIONAL INC.; MAUI LAND & PINEAPPLE CO., INC.; EXCLUSIVE RESORTS, LLC; KAPALUA BAY, LLC; ASSOCIATION OF APARTMENT OWNERS OF KAPALUA BAY CONDOMINIUM; CAROLINE PETERS BELSOM; CATHY ROSS; ROBERT PARSONS; RYAN CHURCHILL; THE RITZ-CARLTON HOTEL COMPANY, L.L.C.; MARRIOTT VACATIONS WORDWIDE, CORPORATION; MARRIOTT OWNERSHIP RESORTS, INC.; MARRIOTT TWO FLAGS, LP; MH KAPALUA VENTURE, LLC; MLP KB PARTNER LLC; KAPALUA BAY HOLDINGS, LLC; ER KAPALUA INVESTORS FUND, LLC; ER KAPALUA INVESTORS FUND HOLDINGS, LLC; EXCLUSIVE RESORTS DEVELOPMENT COMPANY, LLC; and EXCLUSIVE RESORTS CLUB I HOLDINGS, LLC, Respondents/Defendants.

         ON REMAND FROM THE UNITED STATES SUPREME COURT (CAAP-12-0000819; CIV. NO. 12-1-058 6(3))

          Terence J. O'Toole, Judith Ann Pavey, and Andrew J. Lautenbach for petitioners

          Bert T. Kobayashi, Jr., Lex R. Smith, Joseph A. Stewart, Maria Y. Wang, and Aaron R. Mun for respondents The Ritz-Carlton Development Company, Inc., The Ritz- Carlton Management Company, LLC, John Albert and Edgar Gum and respondents Marriott International, Inc., The Ritz-Carlton Hotel Company, LLC, Marriott Two Flags, LP, Marriott Ownership Resorts, Inc., MH Kapalua Venture, LLC, and Marriott Vacations Worldwide Corporation

          RECKTENWALD, C.J., NAKAYAMA, McKENNA, AND POLLACK, JJ., AND CIRCUIT JUDGE NAKASONE, IN PLACE OF ACOBA, J., RECUSED [1]

          OPINION

          NAKAYAMA, J.

         I. INTRODUCTION

         In Narayan v. Ritz-Carlton Development Co., 135 Hawai'i 327, 350 P.3d 995 (2015) (Narayan I), this court held that the Plaintiffs, a group of individual condominium owners, could not be compelled to arbitrate claims arising from the financial breakdown of a Maui condominium project. In reaching this conclusion, this court determined that the arbitration clause was unenforceable because the Plaintiffs did not unambiguously assent to arbitration and because the terms of arbitration were unconscionable.

         On January 11, 2016, the Supreme Court of the United States (Supreme Court) vacated and remanded Narayan I to this court for further consideration in light of its recent decision in DIRECTV, Inc. v. Imburgia, 136 S.Ct. 463 (2015) . In Imburgia, the Supreme Court determined that state law must place arbitration agreements "on equal footing with all other contracts." Id. at 471 (quoting Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443 (2006)).

         Again recognizing this principle, we affirm our decision in Narayan I, concluding that, under long-standing Hawai'i contract law, the arbitration clause is unconscionable. As such, we vacate the Intermediate Court of Appeals' (ICA) October 28, 2013 judgment on appeal, affirm the Circuit Court of the Second Circuit's (circuit court) August 28, 2012 order denying the Defendants' motion to compel arbitration, and remand the case to the circuit court for further proceedings consistent with this opinion.

         II. BACKGROUND

         A. Factual History

         The following facts[2] are summarized from this court's earlier opinion in Narayan I.

         Petitioners/Plaintiffs-Appellees Krishna Narayan et al. (collectively, the Homeowners) purchased ten condominium units from Kapalua Bay, LLC, a joint venture owned by Marriot International, Inc., Exclusive Resorts, Inc., and Maui Land & Pineapple Co., Inc. (collectively, the Defendants). These units were part of a Maui condominium development formerly known as the Ritz-Carlton Club & Residences at Kapalua Bay (the project).[3]

         The Homeowners entered into purchase agreements with the Defendants when they purchased their condominiums. The purchase agreements contain two clauses relating to dispute resolution: a jury waiver clause and an attorneys' fee clause. While these clauses do not mention a binding agreement to arbitrate, the purchase agreement references another document, the Declaration of Condominium Property Regime of Kapalua Bay Condominium (declaration), which includes an arbitration clause. The Defendants recorded the declaration and the Association of Apartment Owners of Kapalua Bay Condominium Bylaws (AOAO bylaws) in the State of Hawai'i Bureau of Conveyances prior to the sale of the individual condominium units to the Homeowners. Additionally, the Defendants registered the Condominium Public Report (public report) with the Hawai'i Real Estate Commission. All of these documents are incorporated by reference through the purchase agreement.

         The arbitration clause is found towards the end of the thirty-six page condominium declaration and provides, in its entirety:

XXXIII. ALTERNATIVE DISPUTE RESOLUTION.
In the event of the occurrence of any controversy or claim arising out of, or related to, this Declaration or to any alleged construction or design defects pertaining to the Common Elements or to the Improvements in the Project ("dispute"), if the dispute cannot be resolved by negotiation, the parties to the dispute agree to submit the dispute to mediation by a mediator mutually selected by the parties. If the parties are unable to agree upon a mediator, then the mediator shall be appointed by the American Arbitration Association. In any event, the mediation shall take place within thirty (30) days of the date that a party gives the other party written notice of its desire to mediate the dispute. If the dispute is not resolved through mediation, the dispute shall be resolved by arbitration pursuant to this Article and the then-current rules and supervision of the American Arbitration Association. The duties to mediate and arbitrate hereunder shall extend to any officer, employee, shareholder, principal, partner, agent trustee-in-bankruptcy, affiliate, subsidiary, third-party beneficiary, or guarantor of all parties making or defending any claim which would otherwise be subject to this Article.
The arbitration shall be held in Honolulu, Hawaii before a single arbitrator who is knowledgeable in the subject matter at issue. The arbitrator's decision and award shall be final and binding and may be entered in any court having jurisdiction thereof. The arbitrator shall not have the power to award punitive, exemplary, or consequential damages, or any damages excluded by, or in excess of, any damage limitations expressed in this Declaration or any other agreement between the parties. In order to prevent irreparable harm, the arbitrator may grant temporary or permanent injunctive or other equitable relief for the protection of property rights.
Issues of arbitrability shall be determined in accordance with the federal substantive and procedural laws relating to arbitration; all other aspects of the dispute shall be interpreted in accordance with, and the arbitrator shall apply and be bound to follow, the substantive laws of the State of Hawaii. Each party shall bear its own attorneys' fees associated with negotiation, mediation, and arbitration, and other costs and expenses shall be borne as provided by the rules of the American Arbitration Association.
If court proceedings to stay litigation or compel arbitration are necessary, the party who unsuccessfully opposed such proceedings shall pay all associated costs, expenses, and attorneys' fees which are reasonably incurred by the other party.
The arbitrator may order the parties to exchange copies of nonrebuttable exhibits and copies of witness lists in advance of the arbitration hearing. However, the arbitrator shall have no other power to order discovery or depositions unless and then only to the extent that all parties otherwise agree in writing.
Neither a party, witness, or the arbitrator may disclose the facts of the underlying dispute or the contents or results of any negotiations, mediation, or arbitration hereunder without prior written consent of all parties, unless and then only to the extent required to enforce or challenge the negotiated agreement or the arbitration award, as required by law, or as necessary for financial and tax reports and audits.
No party may bring a claim or action, regardless of form, arising out of or related to this Declaration or to any construction or design defects claims pertaining to the Common Elements or to the Improvements of the Project, including any claim of fraud, misrepresentation, or fraudulent inducement, more than one year after the cause of action accrues, unless the injured party cannot reasonably discover the basic facts supporting the claim within one year.
Notwithstanding anything to the contrary in this Article, in the event of alleged violation of a party's property or equitable rights, including, but not limited to, unauthorized disclosure of confidential information, that party may seek temporary injunctive relief from any court of competent jurisdiction pending appointment of an arbitrator. The party requesting such relief shall simultaneously file a demand for mediation and arbitration of the dispute, and shall request the American Arbitration Association to proceed under its rules for expedited procedures. In no event shall any such court-ordered temporary injunctive relief continue for more than thirty (30) days.
If any part of this Article is held to be unenforceable, it shall be severed and shall not affect either the duties to mediate and arbitrate hereunder or any other part of this Article.

(Emphases added.) Significantly, the underlined portions above indicate that the arbitration clause includes a limit on damages, a limit on discovery, and a confidentiality provision.

         In April of 2012, the Homeowners learned that the Defendants had defaulted on loans encumbering the project and that, as a result, the Defendants could not pay maintenance and operator fees to Marriott's management subsidiaries. The Defendants eventually defaulted on the AOAO assessments, abandoned the project, and revoked the Ritz-Carlton branding. Marriott or one of its subsidiaries withdrew approximately $1, 300, 000.00 from the AOAO operating fund and threatened to withdraw the remaining $200, 000.00 from the fund. The AOAO board members, many of whom were employed by Marriott, Ritz-Carlton, and/or other interested entities, did not attempt to block Marriott from taking these actions but instead indicated that the multi-million dollar shortfall would have to be covered by the Homeowners.

         B. Procedural History

         On June 7, 2012, the Homeowners filed suit in the circuit court[4] asserting claims for breach of fiduciary duty, access to books and records, and injunctive/declaratory relief. The circuit court denied the Defendants' motion to compel arbitration, which the Defendants appealed. The ICA concluded that the parties had entered into a valid agreement to arbitrate, that the dispute fell within the scope of that agreement, and that the agreement was not procedurally unconscionable. Thus, the ICA held that the Defendants could compel the Homeowners to arbitration.

         On June 3, 2015, this court issued an opinion in Narayan I, vacating the ICA's judgment on appeal, affirming the circuit court's order denying the Defendants' motion to compel arbitration, and remanding the case to the circuit court for further proceedings consistent with the opinion. 135 Hawai'i at 339-40, 350 P.3d at 1007-08. This court held that the Homeowners could not be compelled to arbitrate for two reasons. First, this court determined that "the arbitration provision contained in the condominium declaration is unenforceable because the terms of the various condominium documents are ambiguous with respect to the Homeowners' intent to arbitrate." Id. at 335, 350 P.3d at 1003. Second, this court determined that portions of the arbitration clause were unconscionable. Id. at 336-39, 350 P.3d at 1004-07.

         This court subsequently issued summary disposition orders in line with its opinion for two related cases, Nath v. Ritz-Carlton Hotel Co., No. SCAP-13-2732 (Haw. June 30, 2015)(SDO), and Narayan v. Marriott International, Inc., No. SCAP-13-3607 (Haw. June 30, 2015)(SDO), (collectively, the Narayan cases).

         The Defendants filed petitions for writ of certiorari for the Narayan cases and, on January 11, 2016, the Supreme Court entered orders granting the petitions and vacating and remanding the Narayan cases: "The judgment is vacated, and the case is remanded to the Supreme Court of Hawaii for further consideration in light of DIRECTV, Inc. v. Imburgia, [136 S.Ct. 463] (2015)."

         On remand, both parties filed supplemental briefs addressing the impact of Imburgia on the Narayan cases.

         C. The Imb ...


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