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September 8, 2016
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Unique Solution Leads to Successful Outcome for Water Customers of a Colorado Community

In 2014, Cascade, CO water customers were serviced by a metropolitan district controlled by a lawyer/developer who was the sole resident of the district and who handpicked the members of the district’s board of directors. District infrastructure was badly in need of repair and had a water loss rate estimated to be up to 45 percent. Moreover, customers discovered the district manager had embezzled more than $800,000 from the district. The embezzlement left the district owing Colorado Springs Utilities (“CSU”), the entity that sold treated water to the district, more than $500,000 for past water purchases. Finally, the developer, his lender and the district were suing CSU to terminate the agreement under which the district purchased water from CSU so that they could sell the underlying water rights. The potential sale of the water rights threatened customers’ ability to get affordable water service. 

Matter Specifics

Eight of the customers ultimately sought help from Polsinelli to insure they would continue to receive water service if the developer and his lender were successful in their lawsuit against CSU. Despite the customers’ difficult legal position, the Polsinelli team convinced the developer, the lender, the district and CSU to allow the customers to intervene in the lawsuit between the developer, the district and CSU so the customers could participate in settlement negotiations between the parties.

After two days of mediation, the customers secured their right to purchase water from CSU for the next 100 years.  As a result, the customers control the district, and will receive water through an improved system and ultimately will be customers of CSU rather than the district. In addition, 
• The developer and his lender agreed to turn over control of the district to the customers by holding an election to expand the boundaries of the district from one property to include all 350 customers of the district. 
• The district agreed to appoint one of the interveners to the board of directors pending the inclusion election. 
• The district also agreed to investigate potential sources of recovery for the embezzled funds, which had not previously been considered by the district. 
• Finally, the district agreed to raise money through a bond offering to pay off the debt to CSU and make improvements and repairs to the district infrastructure with the goal of transferring ownership of the infrastructure to CSU after the repairs are complete.

Oct 26, 2015
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Positive Effects on Colorado Housing and Construction Market
Success Highlights 

Through its amicus brief on behalf of some of the most influential business entities and organizations in the region, Polsinelli successfully presented prevailing arguments in favor of an interpretation of CCIOA that will have profound positive effects on the housing and construction markets in Colorado.

Case Background

Construction defect litigation has severely restricted new condominium development in Colorado.  During the 2015 Colorado legislative session, Senate Bill 177 was introduced to reform Colorado’s construction defect laws.  The bill sought to address a common problem concerning arbitration provisions in community declarations. Developer-declarants - those who build the condo community and establish the HOA - routinely include in the declaration a provision requiring binding arbitration of construction defect disputes. The Colorado Common Interest Ownership Act (“CCIOA”), the statute that governs the formation of condominiums in Colorado, expressly encourages arbitration of such disputes and Colorado law has long favored arbitration as an alternative to civil actions in court. Just as routinely, homeowners, once in control of their HOA, would vote to amend their declarations to remove that arbitration requirement in an effort to bring their case before a jury.  This amendment occurs despite an express provision in many declarations requiring declarant consent before the amendment is made.  That consent is rarely, if ever, sought by the homeowners prior to the amendment.  Following the amendment, the homeowners then proceed to court with their construction defect claims. Senate Bill 177 was meant to address these issues and make the declarant-consent provisions enforceable. However, the bill died in a House committee.

Meanwhile, the case of Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al. was pending in the Colorado Court of Appeals.  In Vallagio, a condominium homeowners association brought a lawsuit against the developer/declarant alleging construction defects. The declaration included a mandatory arbitration provision specifically for construction defect claims. That section stated that its provisions "shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of the amendment." After the declarant turned over control of the project to the association, the unit owners voted to amend the declaration to remove the entire mandatory arbitration provision, without ever obtaining the declarant's consent. Soon after the declaration was amended, the association filed a lawsuit in district court. The district court denied the declarant's motion to compel arbitration, ruling the declarant consent requirement violated CCIOA and was void and unenforceable. An appeal followed.

The Court of Appeals reversed on the CCIOA issues. Notably, the appellate court held the declarant's consent was required to amend the arbitration provision under the terms of the original declaration, and the consent requirement was not void and unenforceable under CCIOA. The appellate court further held that requiring declarant consent for amendments does not limit any "power" of a homeowners' association and that CCIOA does not prohibit a declaration from imposing the requirement of declarant consent for amendments. The court concluded: "Because the unit owners did not obtain Metro Inverness' written consent, their attempt to remove the declaration's arbitration provision was ineffective."

The court went on to acknowledge that there may be intended third-party beneficiaries to the arbitration requirement within declarations – i.e., construction and design professionals – so long as they are specifically intended within the declarations.

Polsinelli’s Role 

In the case of Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes, Inc., et al., Polsinelli drafted and filed an amicus curiae brief, a "friend of the court" brief, on behalf of a coalition of developers, chambers of commerce, trade organizations, and business organizations, presenting arguments that declarations requiring declarant consent prior to the removal of an arbitration provision by homeowners are valid and enforceable under CCIOA. The published appellate decision addressed a major problem in Colorado's construction defect laws that Senate Bill 177 was designed to correct – if the declaration includes a requirement that an arbitration clause cannot be removed without the declarant's consent, that declaration means what it says, and that requirement is enforceable.  In its published decision, the Colorado Court of Appeals’ opinion echoed the arguments presented in Polsinelli's amicus brief with respect to each of the CCIOA issues.

Polsinelli is proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements. Polsinelli PC. Polsinelli LLP in California