Thursday, February 2, 2017
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Court of Appeal Tosses Part of Judgment in Loan Dispute
Panel Says Ban on Contractual Waivers Takes Precedence Over Choice-of-Law Clause
By KENNETH OFGANG, Staff Writer
California public policy precludes enforcement of predispute contractual waivers of jury trial, even when the contract contains an otherwise valid choice-of-law clause in which the parties have agreed to be governed by the laws of a state that enforces such waivers, the First District Court of Appeal has ruled.
Div. Four Tuesday partially reversed a San Francisco Superior Court judgment, reinstating damages claims by several entities controlled by New York real estate investor Richard D. Cohen against Carmel Partners, Inc. and others. The claims arise from a 2010 foreclosure sale at which a Carmel affiliate acquired ownership of the 320-unit Rincon Towers apartment complex, now Carmel Rincon Luxury Apartments.
The Cohen entities had purchased the property in 2007 for $143 million, financed in part by borrowing $110 million from the commercial real estate lending arm of Bear Stearns. The terms required payment in full within two years, except that the borrowers were given the right to a one-year extension if they met certain conditions.
2008 Collapse
Bear Stearns collapsed during the 2008 financial crisis, and most of its assets were acquired by JPMorgan Chase.
The Rincon loan, however, was one of a number that Chase did not want, and that were acquired by Maiden Lane Trust. Maiden Lane was set up by the Federal Reserve Bank of New York as part of its facilitation of the Chase acquisition of Bear Stearns.
The Cohen entities made no payments on the Rincon loan. They notified Maiden Lane in 2009 that they intended to exercise their right to an extension, but Maiden Lane insisted that the conditions for doing so had not been met.
Negotiations Fruitless
Subsequent negotiations between the parties were fruitless, and Maiden Lane put the loan up for auction. Carmel Partners affiliate CP III Rincon Towers, Inc. acquired the loan and eventually purchased the property at foreclosure with a $73 million credit bid.
The Cohen entities filed suit against CP III, Carmel Partners, Maiden Lane, and others, and recorded a lis pendens. They sought damages for breach of contract, fraud, slander of title, and trade secret misappropriation, along with setting aside of the foreclosure, restitution under the Unfair Competition Law, and an accounting.
They demanded a jury trial on the legal causes of action, but Superior Court Judge Marla Miller granted the defendants’ motion strike the demand. She ruled that New York law, which the parties said in the loan agreement was to govern in the event of any dispute, generally enforces such waivers, even though California law does not.
Rejecting the argument that California public policy should prevail over the choice-of-law clause, the judge noted that all of the parties to the loan agreement were based in New York, and that the only California parties to the litigation—the Carmel entities—were opposed to a jury trial.
”New York’s interest in protecting the bargained for expectations of sophisticated commercial entities to contracts negotiated, signed, and performed in New York outweighs California’s limited interest in a jury trial simply because the property is located here,” the judge wrote.
After lengthy and contentious discovery, Miller ruled for the defendants on all causes of action.
Justice’s Opinion
Justice Jon Streeter, writing for the Court of Appeal, said Miller misapplied Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, which requires a balancing of states’ interests to resolve conflict-of-laws issues.
“In our view, the relevant ‘interest’ of California for purposes of the Nedlloyd analysis is not solely an interest in whether this dispute is resolved by a jury trial,” he wrote. “Instead, California has an interest in enforcing its policy that only the Legislature can determine the permissible methods for waiving the right to jury trial when parties submit their civil disputes to a court in this state for resolution.”
Streeter noted that the California Constitution refers to civil jury trial as “an inviolate right,” which may only be waived “as prescribed by statute.” And he cited Grafton Partners v. Superior Court (2005) 36 Cal.4th 944, which held that predispute contractual waivers of jury trial are unenforceable under Code of Civil Procedure §631.
Under that statute, a jury waiver must be made in open court, or in a writing filed with the court, or be inferred from failure to request a jury or to appear for trial, or to pay jury fees. While most U.S. jurisdictions have found contractual waivers to be enforceable, only the Legislature can adopt that rule in California, the Grafton court said.
Streeter wrote:
“We recognize, as did the trial court, that New York has an interest in protecting the expectations of parties who enter contracts in New York....But when those parties come to a California courtroom, this state has a considerable interest in how the proceeding is conducted. Like every other California litigant, each party to this case is entitled to rely upon California’s commitment to protection of fundamental rights within the civil justice system as a whole. Taking a step back from this particular case, as we must in evaluating the relevant policy interests, the constitutionally protected and legislatively declared policy we perceive here may be viewed as but one expression of the priority we place upon access to civil justice on the same terms for everyone, with no exceptions for the sophisticated or the wealthy. At stake here is a fundamental right for all litigants...not just a right for consumers or those needing protection from contractual overreaching….”
In the unpublished portions of the opinion, the court upheld all of Miller’s challenged rulings on discovery issues and on the equitable causes of action.
The case is EV Realty LLC v. CP III Rincon Towers, Inc., 17 S.O.S. 501.
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