Rincon Will Shift Commercial Litigation Away From Calif.

By Jerrold Bregman and Racey Cohn

Law360, New York (May 18, 2017, 2:07 PM EDT)

A recent California appellate court decision — rejecting the parties’ jury trial wavier under New York law — underscores the importance of including a venue selection clause for eligible transactions (those involving $1 million or more) as well as contractual backup provisions, such as a judicial reference provision, to protect against the vagaries and risks accompanying jury trials.

California Courts Will Not Enforce Jury Trial Waiver

In Rincon EV Realty LLC v. CP III Rincon Towers Inc., (2017) 8 Cal.App.5th 1, the California appellate court declined to enforce the parties’ jury trial waiver despite that the waiver was enforceable under New York law and the parties’ contract included a New York choice of law provision. The subject contract, involving a $110 million loan to purchase a $143 million apartment building in California, was entered into in New York by sophisticated parties each of whom was located in New York.

The legal battle began when the $110 million loan went into default. The California trial court allowed the lenders to strike the borrowers’ jury demand, and ruled in favor of the lenders on legal and equitable causes of action.

The appellate court reversed the judgment on the borrowers’ legal claims, and declared the jury waiver to be invalid in California. In so ruling, the court declined to enforce the New York choice of law provision, which waived the right to a jury trial, citing Grafton Partners vs. Superior Court, 36 Cal. 4th 944 (2005), the California Supreme Court decision holding that predispute jury waivers are not enforceable in California.

The appellate court upheld the trial court’s ruling in favor of the lenders on the equitable causes of action. Equitable claims do not invoke the right to a jury trial under the Seventh Amendment to the U.S. Constitution, which preserves the right to a jury trial for certain suits at common law, such as breach of contract claims, but not equitable claims.[3]

New York Courts Enforce Choice of Law, Choice of Venue, and Jury Trial Waivers

Had the parties in Rincon specified in their contract that New York courts would adjudicate any dispute, and litigated in New York as so agreed, then the jury trial wavier would have been enforced. In addition to avoiding a jury trial on the contract claims, the parties would have gained the benefit of New York’s well developed body of sophisticated commercial law, which reduces risks associated with litigation.

Thus, Rincon reinforces the inclination of many sophisticated parties who are unwilling to subject the resolution of their complex disputes to juries, to select New York law and venue for resolving commercial disputes of any significance. It also underscores the importance of including a venue selection clause in addition to a choice of law clause, where venue other than California is desired, including to obtain the benefit of laws that would be enforceable under the law of the desired venue. [4]

New York welcomes all parties to resolve disputes within its courts, regardless of their ties — or lack of any ties — to New York. New York law explicitly allows parties to choose New York law and utilize its judicial apparatus where the underling transaction involves at least $1 million. See New York General Obligations Law § 51402 (New York venue clause, providing access to New York courts, enforceable for matters involving transactions of at least $1 million) and New York General Obligations Law § 51401( 1) (choice of New York law enforceable for matters involving transactions involving at least $250,000). New York courts do not engage in choice of law or conflict of laws analysis when the parties designate in their contracts that New York substantive law is to apply and they agree to submit to the jurisdiction of New York as the venue for litigation. See IRBBrasil Resseguros v. Inepar Investments, 20 N.Y.3d 310, 982 N.E.2d 609 (N.Y. 2012) (not necessary for court to engage in conflicts of laws or choice of law analyses where the parties have selected New York law and venue).

The New York Legislature, in making clear that New York courts are open and available to resolve complex financial disputes regardless of where the parties or property are located, and regardless of their ties to New York, has thereby advanced its objective of ensuring that New York remains the world’s leading financial center.

For smaller transactions, parties may still include New York law and venue provisions, but such provisions will not be enforced under the foregoing statutes. Instead, they will be enforced, if at all, under New York’s choice of law provisions, which consider the parties’ connections to New York and other factors beyond the scope of this article.

Backup Plan to Avoid Jury Trial in California

Even where the transactions at issue do not involve at least $1 million, or the parties are not otherwise sufficiently connected to New York to invoke its laws and venue, parties may choose to include contractual provisions to insulate any dispute from a California jury trial. In this regard, consideration should be given, for example, to including a judicial reference provision in the contract.

Judicial reference procedure, permitted and embodied in California Code of Civil Procedure 638, allows parties to voluntarily provide in their contracts for, or to agree after the fact to, the appointment of a referee to “hear and determine” any action or proceeding. The referee will apply California law, including its rules of evidence, and issue a binding decision that is subject to appeal on the same basis as a court’s judicial ruling.[5]

Advantages to the judicial reference procedure compared to a jury trial include the ability to obtain a relatively quick resolution, by a referee whom the parties may select and thereby insure a level of expertise that is rarely present with jury trials, though the referee procedure is private and does require the parties to fund the referee’s fees and administrative costs. Nevertheless, of primary significance, the judicial reference procedure avoids the risks and uncertainties associated with jury trials.

The judicial reference procedure may also be considered preferable to arbitration, including for the fact that the referee is obliged to follow applicable law, inclusive of the rules of evidence as well as discovery procedure. This allows the parties to have more certainty as to the substance and mechanics of discovery and trial relative to an arbitration.

Conclusion

As a result of the Rincon ruling, it is more likely that sophisticated parties will be discouraged from participating in the California court system in favor of jurisdictions that will enforce their contractual provisions, including jury trial waivers. Thus, California courts will likely see fewer significant commercial litigation cases, rather than more, as a result of the Rincon decision. This result is likely to favor states such as New York, where contractual predispute jury waivers are enforced.

Jerrold L. Bregman is a partner and Racey Cohn is of counsel with Brutzkus Gubner Rozansky Seror Weber LLP in Los Angeles.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The Seventh Amendment provides as follows: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any Court of the United States, than according to the rules of the common law.”

[2] An example of a choice of law and choice of venue provision, for illustrative purposes only, is as follows:

This Contract shall be governed by and construed in accordance with the substantive and procedural laws of the State of New York without regard to principles of conflicts of laws. In the event of any dispute under or arising out of this Contract, then the United States District Court for the Southern District of New York (the “NY Court”), shall have the exclusive venue and jurisdiction over the subject matter and each of the Parties to interpret and enforce this Contract. Each of the Parties so agrees and waives all arguments against the venue being in the NY Court, including, without limitation, any forum non conveniens argument or similar argument that New York is not a convenient forum.

[3] An example of a judicial reference provision, for illustrative purposes only, is as follows:

The parties prefer that any dispute between or among them be resolved in litigation subject to a jury trial waiver as set forth in this agreement. If, and only if, a predispute jury trial waiver of the type provided for herein is unenforceable in litigation to resolve any dispute, claim, cause of action or controversy under the this Contract (each, a “Claim”) in the venue where the Claim is being brought pursuant to the terms of this Contact, then, upon the written request of any party, such Claim, including any and all questions of law or fact relating thereto, shall be determined exclusively by a judicial reference proceeding. Except as otherwise provided in herein, venue for any such reference proceeding shall be in the state or federal court in the County or District where venue is