Arbitration or trial? Judges in condo-hotel cases split

By Liz Benston

Friday, May 15, 2009 | 2 a.m.

Federal and state judges have issued conflicting decisions in lawsuits filed by condo-hotel investors against the developers of Signature at MGM Grand, complicating the 3-year-old case that has become a cautionary tale for condo-hotel buyers and developers.

At issue is whether the developer insinuated that ownership of the units would bring big profits. But first judges must resolve whether the dispute — which has morphed into nine lawsuits involving more than 300 condo purchasers — will be resolved by an arbitrator or in a jury trial.

In 2002 MGM Mirage partnered with Turnberry Associates, a major developer of condominium towers, to build one of Las Vegas’ first condo-hotel developments. Owners of more than 150 units in the development’s three condo-hotel towers say they bought the units because sales agents told them they could net a profit, after mortgage payments, management fees and other expenses, because their units could be rented at rates starting at $300 a night. Selling condos as investments, unless units are registered as securities, is against the law.

The units — which sold for more than $600,000 in 2006 and 2007 and now sell for less than $300,000 — rent for $60 to $200 a night.

Unable to generate enough cash to cover their mortgages and other expenses, investors want a jury trial to expose what they believe was an illegal scheme to sell the condo-hotel units as money-making investments.

Developers, who have sought to enforce arbitration, as called for in the condo-hotel purchase contract, deny marketing the condos as investments and blame the low rental rates on the bad economy. Buyers say the low rates took effect before the downturn and reflect poor marketing and a conflict of interest on the part of Signature manager MGM Mirage. The company rents the rooms it owns on the Strip more aggressively, they say.

The dispute has played out differently in two of the Signature lawsuits.

A Clark County District Court judge sided with MGM/Turnberry in the original suit, filed in August 2007, ordering that the case be resolved in arbitration. Condo owners appealed to the Nevada Supreme Court, which affirmed the lower court’s ruling last month, effectively killing owners’ chances for a jury trial in state court.

The second of the nine lawsuits, filed in February 2008 as a class action on behalf of all Signature owners, took a different path. MGM/Turnberry moved the suit from state to federal court last year — a decision executives now likely regret after a federal judge in March declared the arbitration clause unenforceable.

In a 20-page decision, U.S. District Court Magistrate Judge Peggy Leen said the contract was one-sided in favor of the sellers, leaving the door open to a jury trial for Signature owners.

The arbitration clause, contained in the “miscellaneous” section of the condo purchase contract, was downplayed and “insufficient to put a purchaser on notice that he or she is waiving important rights under Nevada law,” according to the decision. The contract also allows the seller to escape punitive damages allowed by state law, which are intended to deter fraudulent conduct, the ruling continues.

The Nevada Supreme Court on April 22 came to the opposite conclusion, stating in an eight-page decision that the arbitration clause was conspicuous enough to be noticed and understood by buyers — especially self-described real estate investors of speculative rental properties.

Legal experts say the Signature cases — the first of multiple lawsuits filed by condo-hotel owners in Las Vegas seeking to recoup investment losses — could have both positive and negative implications for buyers. Las Vegas real estate attorney Tara Young said these decisions will lead other condo buyers attempting to escape arbitration to pursue lawsuits in federal court rather than state court.

The Signature buyers object to other provisions of the arbitration clause. It requires the losing party to pay the arbitration expenses, including attorneys fees, for the prevailing party. The clause also states that the parties may depose only two individuals as well as their opponent’s expert witness to make their case.

That’s insufficient for a complicated fraud case, say buyers, who have submitted as evidence notes documenting sales agents’ investment claims and the agents’ refusal to allow more flexibility in the contract.

“We want the opportunity to prove our case without having our hands tied behind our backs,” said Rory Agnello, the lead plaintiff in the original lawsuit and the owner of two Signature units. “Why is MGM fighting us so hard on this? Because they don’t want to have this information to come out at trial.”

Steve Morris, the attorney representing the Signature development, said owners may present evidence before an arbitrator, which is a fair, efficient and less costly means of resolving disputes.

“If the plaintiffs are serious about wanting to resolve their claims, I’d assume they’d want to proceed in arbitration,” he said. “But they are going to try any and every theory they can think of to get their money back.”

Though juries may be more sympathetic to individuals than to “faceless corporations” such as MGM Mirage, arbitrators are neutral legal experts agreed upon by both parties, Morris said.

But buyers don’t expect to get a fair shake that way, Agnello said. “The arbitration clause is so stacked against us that we don’t stand a snowball’s chance in hell,” he said.

While the burden of proof under state law lies with sellers to demonstrate they are not selling unregistered securities, the arbitration clause states that both parties bear the burden of proving their claims — essentially shifting the burden of proof onto buyers, Agnello said.

Condo owners have declared victory in the federal case, but Signature developers have appealed Judge Leen’s decision to U.S. District Court Judge Roger Hunt.

A trial in federal court isn’t a foregone conclusion, Morris said. The Nevada Supreme Court has the final word on questions of state law, which is at issue in this dispute, he said.

Judge Leen’s decision, he said, might have been different had the Nevada Supreme Court issued its order beforehand.

Even if the company can’t force arbitration, it will fight the owners’ request for class-action status as well as the underlying claims.

“They weren’t tricked into signing this agreement ... they read each page and initialed it by hand,” Morris said. “This is ... buyer’s remorse.”

Most buyers, even sophisticated investors, didn’t realize they were waiving their right to sue, Agnello said. Now they are braced for a long fight.

“Had (sales agents) not lied to us, we wouldn’t be here,” he said. “Win lose or draw, we want our day in court.”