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Termination and Arbitration (Cornerstone 417 v. Cornerstone Cd’m, Assn.)

Michael Gelfand 7/25/2020

This morning the Fifth District Court of Appeal addressed mandatory arbitration jurisdiction for a contest of a plan of termination, and the pitfalls of not watching the calendar, in Cornerstone 417 LLC v. Cornerstone Condominium Association, Inc. Case No. 5D19-1621 (Fla 5 DCA, July 24, 2020). Beyond the holdings, there are many considerations, addressed at the end.

BACKGROUND

Unit owner Oreo acquired 91% of the Cornerstone Commercial Condominium’s units which allowed Oreo to elect the Condominium Association’s board of directors that approved a plan to terminate the Condominium. The termination plan provided for the Association to determine the fair market value of the unit owner Cornerstone 417 unit which would be paid to that unit owner. The Condominium was terminated, and the unit owner received compensation as provided in the plan.

ARBITRATION

Unit owner Cornerstone 417 petitioned for mandatory nonbinding arbitration before the Department of Business and Professional Regulation. The DBPR dismissed the petition as being “untimely and procedurally flawed.”

TRIAL COURT

The unit owner sued the Condominium Association and Oreo asserting claims for:

  • Unjust enrichment.
  • Breach of fiduciary duty for undervaluing the unit.
  • Declaratory judgment as to the unit’s value.

The Association and Oreo moved to dismiss for failing to petition for mandatory nonbinding arbitration pursuant to Section 718.1255 Fla. Stat. (2019) within 90 days of the plan’s recording. The motion was granted, the trial court dismissing the complaint.

The first issue on appeal was whether claims for damages for unjust enrichment and breach of fiduciary duty, and the related declaratory judgment claim, were outside of arbitration’s jurisdiction. The appellate court referred to the “plain language” of Section 718.117(16) Fla. Stat. (2019), which requires:

[a] unit owner or lienor may contest a plan of termination by initiating a petition for mandatory nonbinding arbitration pursuant to s. 718.1255, Florida Statutes, within ninety days after the date the plan is recorded.

Despite the language being “plain” the statute “must be read in conjunction” with the arbitration statute which provides that a “dispute” is “any disagreement between two or more parties that involves a plan of termination.” Section 718.1255(1)(c), (4)(a) Fla. Stat.

The analysis for jurisdiction is not “how the plaintiff frames the claim,” but the “gravamen” or actual relief sought. The complaint challenged the value of the unit. Valuation was a dispute regarding the “fairness and reasonableness of the apportionment of the proceeds” which falls within the parameters of 718.117(16) Fla. Stat. (2019). Thus, the claims were within the jurisdiction of arbitration. To allow the claims to proceed directly to court would render the mandatory nonbinding arbitration requirement “meaningless.” Furthermore, the court noted that the unit owner recognized the jurisdiction of arbitration by filing its petition, though doing so untimely!

Regarding whether arbitration had jurisdiction to grant relief composed of damages, the statute “specifically provides”:

[i]f the arbitrator determines that the apportionment of sales proceeds is not fair and reasonable, the arbitrator may void the plan or may modify the plan to apportion the proceeds in a fair and reasonable manner pursuant to this section based upon the proceedings and order the modified plan of termination to be implemented.

(Emphasis added by court). Thus, had the challenging unit owner participated in mandatory nonbinding arbitration and been successful in its claim that the proceeds were not fair and reasonable, then the arbitrator would have been able to grant the exact relief sought, more compensation. Accordingly, arbitration had authority to grant the relief sought.

Now, because the Termination Plan was uncontested and carried out, Cornerstone seeks “damages,” rather than a greater apportionment of proceeds, but it is nevertheless seeking the money it claims that it was owed as compensation for its unit.

Thus, if the dispute was brought to arbitration, then in arbitration compensation could have been adjusted. Proceeding in court and seeking damages is the same as challenging apportionment.

KIBITZING

The appellate court firmly directs unit owners to contest valuation in arbitration as an issue of the apportionment of proceeds. It may be that the unit owner’s fatal flaw was in the timing of filing its arbitration petition, apparently more than ninety days after the recording of a plan of termination. It is unclear what “procedural flaws” would have caused a petition to be dismissed; however we know of that many are tripped up on the notice and opportunity to cure requirement.

Query I: If an owner contests the overall valuation, rather than the apportionment of proceeds, and sought greater money, would that be more than a dispute over apportionment? Consider the difference between seeking a larger slice of the pie verses seeking a larger pie and from the larger pie the same proportional slice!

Query II: Are Division arbitrators trained sufficiently to evaluate damage claims considering that the lack of ability to evaluate was the basis for restricting jurisdiction?

Outside of the termination realm this decision may encourage greater consideration as to whether an issue actually seeks the type of non-monetary relief that traditionally has been within an arbitrator’s authority, as opposed to merely being labeled as a claim for damages which arbitrators have generally rejected, including the issue of breach of fiduciary duty.

The concept of breach of fiduciary duty is also of interest. The appellate court does not address whether the Condominium Association or Oreo as the 91% owner had a fiduciary duty to the unit owner. We have seen recently courts reaffirming that a condominium association does not have a fiduciary duty to the unit owners, at least pursuant to the Condominium Act whose text refers to directors owning a fiduciary duty in Section 718.111(1)(a). Presumably, that was not an issue raised by the parties below and not a basis for the trial court’s ruling; thus, there was no requirement for the appellate court to address that issue.

The decision’s terminology is of interest. The court writes in large part of “jurisdiction” of arbitration or arbitrators, and the switches to “authority”. The decision also seems to treat arbitrators and arbitration interchangeably.

Almost last on my list is the caption, the Condominium Association was sued “As Termination Trustee.” Again, not an issue apparently raised by the parties or the court, but should a 1.221 class action have been required, particularly if one unit owner’s piece of the pie was larger, then other owners’ slices would be smaller; however, a termination trustee does holds property and owes duties, Section 718.117(13) and (14). and thus may be a proper party.

Finally, consider whether the Condominium Association set a world record for shortest time from adopting a termination plan to trial! Why ask? The 2019 statute is cited which would not have been in effect until July 1, 2019. Yes, the termination statute has not changed since 2017, but would not the parties and the courts cited to the law in effect at the time of plan adoption, if not an earlier statute citation? This of course helps avoids the seeming boogeyman of most termination disputes, whether application of the current termination statute is an unconstitutional retroactive impairment of contract.

Michael J. Gelfand

Past Chair

Real Property, Probate and Trust Law Section

of The Florida Bar

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Note: This article is not legal advice. Statements and comments made are not those of The Florida Bar or the RPPTL Section

© 2020 Michael J. Gelfand



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