Compelled Arbitration of Dispute between Homeowners Associations Upheld

In Ibis Lakes Homeowners Ass'n, Inc. v. Ibis Isle Homeowners Ass'n, Inc., 4D12-1273 (Fla. 4th DCA, Dec. 12, 2012), Ibis Lakes Homeowners Association, Inc. (“Plaintiff”) sought review of a non-final order of the trial court granting Ibis Isle Homeowners Association, Inc.’s (“Defendant”) motion to compel arbitration.

The Plaintiff and the Defendant, adjoining homeowner's associations located within a residential community, shared a common entrance way, and the Defendant’s residents were to use a common roadway located on the Plaintiff's property to reach their residences. Because of this, the Plaintiff and the Defendant entered into a Shared Common Expense Agreement (“Agreement”). Under the Agreement, the Plaintiff was responsible for the maintenance and repair of the common areas following certain budgetary procedures. The Agreement also assigned specific percentages of expenses to be shared, such as irrigation electric, annual flowers and general liability insurance. The Agreement contained three arbitration clauses: Paragraph 9, Paragraph 10 and Paragraph 20. Paragraph 9 provided for binding arbitration in the event that the Defendant failed to pay its share of the expenses. Paragraph 10 provided for binding arbitration in the event that the Plaintiff failed to perform its maintenance obligations. Paragraph 20 provided for binding arbitration of any dispute arising out of the Agreement. Pursuant to the Agreement, the Defendant sought arbitration to obtain a refund of $7,122.68 for insurance overcharges made by the Plaintiff. The Plaintiff filed a complaint to enjoin arbitration alleging that this dispute was not one covered by the arbitration clauses. The Defendant motioned to abate and compel arbitration. Thereafter, the Defendant requested production of all of the quarterly shared expense statements or invoices prepared by the Plaintiff with regard to the insurance policies. The Plaintiff objected to this request. The trial court sustained the Plaintiff’s objection and stayed the request to produce pending the ruling on the motion to abate and compel arbitration, which was granted. The Fourth District Court of Appeal affirmed the order finding that an arbitrable issue existed and the Defendant had not waived arbitration.

In its reasoning, the Fourth District Court of Appeal discussed the standard for ruling on a motion to compel arbitration, focusing on the second and third elements: Florida courts have recognized that “there are three elements for courts to consider in ruling on a motion to compel arbitration of a given dispute: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.” Id.

With regards to the second element, “where an arbitration agreement exists between the parties, arbitration is required only of those controversies or disputes which the parties have agreed to submit to arbitration.” Id. The Plaintiff invoked the doctrine of ejusdem generis to avoid the application of Paragraph 20. Under this doctrine, “when a general phrase follows a list of specifics, the general phrase will be interpreted to include only items of the same type as those listed.” Id. However, the doctrine only applies to enforce specifically defined contract provisions that conflict with general provisions that would otherwise control. Therefore, Paragraph 20 would control where it did not conflict with Paragraph 9 and Paragraph 10. Such was the case at hand.

With regards to the third element, in determining whether a party waived its right to arbitrate, it must be determined whether, under the totality of the circumstances, the defaulting party has acted inconsistently with the arbitration right. “A party claiming waiver of arbitration must demonstrate: 1) knowledge of an existing right to arbitrate and 2) active participation in litigation or other acts inconsistent with the right.” Id. It has been held that “propounding discovery directed to the merits of pending litigation before moving to compel arbitration results in a waiver of the right to arbitration.” Id. However, the request for production was “nipped in the bud” by the trial court's stay, so the Defendant's “waiver” conduct was not extensive. Furthermore, the Defendant first filed for arbitration then later to move to compel arbitration. Therefore, arbitration was “pending” when the limited discovery request was made.

With the rising popularity of alternative dispute resolution, more contractual agreements are including mandatory arbitration clauses. In response, courts have put arbitration clauses under the microscope, making the drafting and review of arbitration clauses and the contracts that contain them even more significant. A good example of the of where the court has given an arbitration clause a thorough review is Perdido Key Island Resort Dev., L.L.P. v. Regions Bank, 37 Fla. L. Weekly D147 (Fla. 1st DCA 2012).

In this case, Perdido Key Island Resort Development, L.L.P. and a Louisiana company (collectively referred to as the “Borrowers”) executed a promissory note in favor of Regions Bank (the “Lender”). The promissory note contained the following arbitration clause:

It is hereby agreed that all disputes, claims and controversies between Borrowers and Lender with regard to this Note and all other obligations of Borrower[s] with respect to the indebtedness represented by said Note shall be resolved through binding arbitration under the Rules of the American Arbitration Association in effect at the time said dispute, claim or controversy arises. The foreclosure upon any collateral securing this Note shall not constitute a waiver of this provision.

Along with the promissory note, the Borrowers executed a mortgage deed. The mortgage deed did not contain an arbitration clause but did incorporate all terms of the promissory note. David J. Cattar and Joseph Holyfield (collectively referred to as the “Guarantors”) executed personal guarantees for all obligations to the Lender under the promissory note. The guarantees did not contain arbitration clauses nor did they incorporate the terms of the promissory note, and they were signed by the Guarantors in their individual capacities.

The Borrowers defaulted on their loan, and the Lender brought an action against the Borrowers and the Guarantors asserting claims for breach of a promissory note, foreclosure of a mortgage, and to enforce the guarantees upon default. The trial court entered an order compelling arbitration of the claim for breach of the promissory note, but denied arbitration on the remaining claims because the mortgage and guarantees did not contain arbitration clauses. It was also denied because claims arising under these instruments were separate from the Lender’s claim under the note, therefore the promissory note’s arbitration clause did not apply to the mortgage and guarantees. The Borrowers and the Guarantors appealed. The denial of arbitration for the mortgage foreclosure claim was reversed because the mortgage explicitly incorporated all of the terms of the promissory note. However, the denial of arbitration was affirmed for the personal guarantees claims because the personal guarantees did not have arbitration clauses and the arbitration clause in the promissory note was drafted narrowly, only allowing for arbitration of claims between the Lender and the Borrowers, not the Guarantors.

If you are a commercial or residential real estate lender or are an individual or business seeking a real estate loan, please contact the real estate attorneys at Schecter Law today at (954) 779-7009 to best protect your interests.