In California litigation, parties to a loan agreement cannot use choice of law provisions to circumvent the right to a jury trial.
Rincon EV Realty LLC v. CP III Rincon Towers, Inc., 2017 WL 429267 (Cal. Ct. App. 2017).
In June 2007, Rincon EV Realty LLC, Rincon ET Realty LLC, and Rincon Residential Towers LLC (“Rincon”) purchased Rincon Towers, a San Francisco apartment complex (the “Property”). To finance this transaction, Rincon borrowed $110 million (the “Loan”) from Bear Stearns Commercial Mortgage, Inc. (“Bear Stearns”). Rincon and Bear Stearns entered into a loan agreement (“Loan Agreement”), specifying that the Loan was due two years later, in June 2009. The Loan Agreement included a jury trial waiver, under which Rincon and Bear Stearns agreed not to elect a trial by jury. The Loan Agreement also included a choice of law provision, under which the parties agreed that the Loan Agreement was to be governed by, and was to be construed in accordance with, the laws of the State of New York. Both the choice of law provision and the jury trial waiver were set forth in all-capital letters, with bold font.
After the collapse of Bear Stearns in 2008, Maiden Lane Commercial Mortgage-Backed Securities Trust 2008-1 (the “Trust”) acquired the Loan. Rincon did not repay the Loan by the June 2009 maturity date. The Trust subsequently transferred the Loan to CP III Rincon Towers, Inc. (“CP III”). In June 2010, CP III initiated non-judicial foreclosure proceedings by recording a notice of default. CP III later acquired the Property at a foreclosure sale.
Rincon sued CP III in California. CP III argued for the enforcement of the jury trial waiver in the Loan Agreement. New York, along with most U.S. jurisdictions, allow for predispute contractual waivers of the right to a jury trial. California does not. If the jury trial waiver were to be construed in accordance with the laws of New York, as stipulated in the choice of law provision of the Loan Agreement, the jury trial waiver would be enforceable. However, if the jury trial waiver were to be construed in accordance with California law, it would not be enforceable.
The trial court enforced the choice of law provision of the Loan Agreement, applied New York law, and denied Rincon a jury trial. The appellate court reversed the trial court’s judgment.
The appellate court applied the three-prong test for analyzing choice-of-law enforceability as set forth in Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459 (1992), in order to determine the applicability of California law to the issue of jury trial waivers. In Nedlloyd, the California Supreme Court explained that to determine the enforceability of a choice of law provision, a court must evaluate (1) whether the chosen state has a substantial relationship to the parties and their transaction, (2) whether the chosen state’s law is contrary to a fundamental policy of California, and (3) whether California has a materially greater interest than the chosen state in the determination of the particular issue. If the chosen state’s law is contrary to a fundamental policy of California, and if California has a materially greater interest than the chosen state, such choice of law provision shall not be enforced.
The appellate court acknowledged that CP III had met the first prong of the Nedlloyd test. The Loan Agreement was negotiated in New York, the Loan was made and accepted in New York, and the proceeds of the Loan were disbursed in New York.
Turning to the second prong of the Nedlloyd test, the appellate court determined that on the matter of the jury trial waiver, the application of New York law was contrary to California’s fundamental policy. The appellate court explained that the right to a jury trial is guaranteed in the California Constitution, and that this right was “fundamental,” “inviolate,” and “sacred in its character.” Neither the courts, nor the parties to predispute agreements, can waive this right.
The appellate court noted that the right to a jury trial is enshrined in Article I, section 16 of the California Constitution. Under the California Constitution, only the legislature can determine if parties to a dispute can waive the right to a jury trial. Statutory methods for waiving jury trials in California are limited. California Code of Civil Procedure section 631(f) enumerates only six methods by which the right to jury trial may be forfeited or waived. These methods include failure to appear in trial, failure to demand jury trial within a required time frame after the case is set for trial, and failure to pay required fees. The appellate court held that California’s limited, statutorily prescribed methods for waiving a jury trial reflect a fundamental public policy in favor of jury trials. New York’s acceptance of jury trial waivers contradicts this public policy.
In analyzing the third prong of the Nedlloyd test, the appellate court determined that in this case, California has a materially greater interest than New York in the enforcement of the jury trial waiver provision. The appellate court acknowledged that the Loan Agreement was negotiated, signed, and performed in New York. However, the relevant interest for purposes of the Nedlloyd analysis is not solely an interest in whether this dispute was to be resolved by a jury trial; rather, 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 California court.
The appellate court recognized that all of the parties involved in this dispute were highly sophisticated commercial entities, and that New York had an interest in protecting the bargained-for expectations of such entities. However, because the policy at stake in this case forms part of a procedural scheme intended to create a balanced adversarial system and a fair system of public administration of justice, the appellate court concluded that California, as the forum for adjudication of the dispute, had the paramount interest.
The appellate court found that its Nedlloyd analysis is applicable only when the venue for the dispute is in California. California’s constitutional and statutory provisions only protect litigants in California courts. The appellate court noted that had the venue been changed to New York, which no party attempted to do, “the jury trial rights the parties enjoy in our courts would not travel with them.”