Orange County is a hotbed for development and real estate. Lenders work hand-in-hand with real estate professional to make these deals happen. When using out-of-state financing, contractual jury waivers are commonplace. Under such terms, the parties essentially agree that any dispute will not be tried to a jury, but instead, the court (i.e. “bench” trial). However, a recent decision from the California Court of Appeal may have far reaching implications regarding the enforceability of jury waiver provisions in California courts.
In Rincon EV Realty LLC v. CP III Rincon Towers, Inc. (2017) 8 Cal.App.4th 1, the First Appellate District, Division Four, reviewed a dispute surrounding a large commercial loan. In June 2007, plaintiffs Rincon purchased a commercial property in San Francisco for approximately $143 million. Plaintiffs financed the purchase with $110 million in financing. Ultimately, the subsequent purchaser of the loan, defendant CP III, foreclosed, and Plaintiffs filed suit.
When Plaintiffs asserted a jury demand in their fourth amended complaint, Defendant filed a motion to strike citing the express waiver set forth in the underlying loan documents. Notably, the jury waiver set forth in all-capital letters, with bold font, “BORROWER AND LENDER HEREBY AGREE NOT TO ELECT A TRIAL BY JURY…” The trial court granted the motion to strike and applied the controlling case of Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal. 4th 459. That court concluded that when read in conjunction with the New York choice-of-law provision, the jury waiver was enforceable. Ultimately, the case was tried and a judgment was entered in favor of Defendants on all claims.
On Appeal, the First District Court of Appeal reversed the judgment. The Court went through the Nedlloyd test to determine whether to apply the choice-of-law provision. In doing so, the Court examined whether: (1) the chosen state has a substantial relationship to the parties or their transaction; (2) the chosen state’s law is contrary to a fundamental policy of California; and (3) California has a materially greater interest than the chose state in the determination of the particular issue. In finding that all three tests were met, the Court declined to enforce the choice of law as contrary to California’s right to jury is “fundamental,” “inviolate,” and “sacred in its character.” Rincon, supra, 8 Cal.App.4th at 12, 15-16. Interestingly, the Court noted that no “sophisticated parties exemption” existed even where, as there, each party was a large and complex business entity who had freely negotiated the contract at issue. Rincon, supra, 8 Cal.App.4th at 14-15.
Take away: California has a strong public policy favoring trial by jury. Since 2005, contractual pre-dispute jury trial waivers have been invalid under California law. Grafton Partners, L.P. v. Superior Court (2005) 36 Cal.4th 944. Rincon only further emboldened California’s policy favoring jury trials. Now, it appears California courts may not uphold pre-litigation jury waivers even where foreign choice-of-law provisions would otherwise permit. Any business with an existing out-of-state loan agreement would be smart to closely review this issue to ascertain their rights and safeguard against the large costs associated with trying a case to verdict before a judge, only to repeat the exercise before a jury.
Darrell is an associate at Weintraub Tobin, specializing in complex business litigation disputes. He also provides outside general counsel services to clients across the manufacturing, construction, and real estate industries.