Onions Etc., Inc. et al v. Z & S Fresh, Inc. et al

Filing 935

Order Denying Defendant Fresno Madera Land Bank's Motion To Strike Jury Demand (ECF No. 913), signed by Magistrate Judge Michael J. Seng on 1/23/2016. (Yu, L)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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1:09-cv-00906-AWI-MJS
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ONIONS ETC., INC., et al.,

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ORDER DENYING DEFENDANT FRESNO
Plaintiffs, MADERA LAND BANK’S MOTION TO
STRIKE JURY DEMAND

v.

(ECF No. 913)

Z & S FRESH, INC., et al.,

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Defendants.

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AND ALL RELATED ACTIONS

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I.

PROCEDURAL HISTORY

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Litigation in this case arose out of the financial collapse of Defendant Z&S Fresh,

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Inc., doing business as Z&S Distributing Company, Inc., a California corporation (“Z&S”).

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(Compl., ECF No. 1.) Multiple claims and counter-claims were filed against and amongst

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the various Defendants and related parties by a number of creditors. Among these, the

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Fresno Madera Federal Land Bank Association, FCLA ("Land Bank") sued Aron and

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Carrie Margosian for breaching their guaranty of a $4.8 million restructured loan made to

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ZM Fresh Special T's, Inc, formerly known as ZMC Fresh, Inc (both “ZM”). ZM had been
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formed by Aron Margosian and Martin Zaninovich, the principal of Z&S. The Margosians

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counter-claimed, alleging, as relevant here, that the Land Bank fraudulently

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misrepresented that the guaranty would not expose the Margosians to personal liability

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for ZM's indebtedness.

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The District Court Judge referred the claims between Land Bank and the

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Margosians to the undersigned for all purposes based upon the parties’ consent to

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Magistrate Judge jurisdiction. (ECF No. 826.) These claims are set for trial on May 31,

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2016. (ECF No. 906.) The Margosians have demanded a trial by jury. (ECF No. 675.)

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Before the Court is the Land Bank’s motion to strike the Margosians’ jury demand

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on the grounds that (1) the Margosians’ remaining claims are equitable in nature and

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seek equitable relief and, as such, no right to jury trial attaches, and (2) the Margosians

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contractually waived their right to a jury trial. (Motion (“Mot.”), ECF No. 913.) The

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Margosians respond that their claims are in fact legal and not equitable, and that the

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contractual jury trial waiver is invalid under California law. (Opposition (Oppn.) ECF No.

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921.)

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II.

CONCTRACTUAL WAIVER

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“Under California law, pre-dispute jury trial waivers are invalid unless expressly

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authorized by statute. Federal law, on the other hand, permits such waivers as long as

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each party waived its rights knowingly and voluntarily.” In re Cnty. Of Orange v. U.S.

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Dist. Ct., 784 F.3d 520, 523 (9th Cir. 2015) (citations omitted). Thus, the validity of the

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jury trial waiver in the instant case hinges, in part, on whether state or federal law

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applies.

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Under Erie Railroad Company v. Tompkins, 304 U.S. 64, 58 (1938), a federal

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court sitting in diversity applies state substantive law and federal procedural law.

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Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 419 (1996). This principle applies

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equally where, as here, the court hears state law claims based on supplemental

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jurisdiction. Mangold v. Cal. Pub. Utils. Comm'n, 67 F.3d 1470, 1478 (9th Cir. 1995).

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“The law governing jury trial waivers in federal court is federal procedural law.” In
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re Cnty. of Orange, 784 F.3d at 531. Nevertheless, the Ninth Circuit recently held that

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“federal courts sitting in diversity must apply the relevant state law to evaluate the validity

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of a pre-dispute jury trial waiver when that law is more protective than federal law.” Id. at

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531-32. Because California law is more protective of the right to jury trial than the federal

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standard, “district courts sitting in diversity must apply California's rule on pre-dispute

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jury trial waivers to contracts governed by California law.” Id. at 532.

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Here, there is no dispute that the guaranty at issue contains provisions waiving

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the parties’ rights to a jury trial with respect to any action or proceeding relating to the

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guaranty or loan documents. (Mot. at 4; Oppn. at 2.) However, it also is undisputed that

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the guaranty contains a choice-of-law provision stating that its terms are to be governed

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by California law. (Oppn. at 2; see Reply, ECF No. 924 at 5.) Under California law, the

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pre-dispute jury trial waiver here is invalid and does not provide a basis for striking the

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Margosians’ jury demand.

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The Court acknowledges the Land Bank’s argument that In re County of Orange,

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decided only eight months ago, should be given only prospective application. However,

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the Ninth Circuit applied its holding in In re County of Orange retroactively to a contract

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entered into in 2008. There is no basis for concluding that the holding is to be applied

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only prospectively.
Accordingly, the contractual jury trial waiver is invalid. The Land Bank’s motion to

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strike the Margosians’ jury demand on the basis of this waiver will be denied.

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III.

NATURE OF CLAIMS AND DEFENSES

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A.

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The Seventh Amendment to the United States Constitution, which became

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effective as part of the Bill of Rights in 1791, provides that: “In suits at common law,

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where the value in controversy shall exceed twenty dollars, the right of trial by jury shall

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be preserved, and no fact tried by a jury shall be otherwise re-examined in any Court of

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the United States, than according to the rules of the common law.”

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Legal Standard

Determining whether a jury trial right exists for a particular action is a two-step
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process. The first step involves an historical inquiry: if an issue would have been heard

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at common law in 1791, it is now triable of right to a jury. However, if the issue

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historically would have been tried in the courts of equity or otherwise without a jury, no

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right to a jury trial attaches. Wooddell v. Int'l Bhd. of Elec. Workers, Local 71, 502 U.S.

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93, 97 (1991) (quotation omitted). The second step requires determining whether the

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remedy sought “is legal or equitable in nature.” Id. (quotation omitted).

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“[D]etermining as a historical matter whether a particular contract action would

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have been tried to a jury at English common law in 1791 is at best ‘difficult, and even at

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times impossible.’” Burlington N. R.R. Co. v. Nebraska Pub. Power Dist., 931 F. Supp.

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1470, 1481 (D. Neb. 1996) (quoting 5 Arthur L. Corbin, Corbin on Contracts, § 1103, at

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557 (1964)). However, certain categories of contract actions generally were or were not

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tried to a jury: (1) a breach of contract action claiming damages was tried to a jury, 9

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Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2316, at 125-

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26 (1995) (citing Ross v. Bernhard, 396 U.S. 531, 542 (1970)); (2) an action claiming

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that a contract should be reformed was tried to the judge, id. at 130 (citing Great Atl. Ins.

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Co. v. Liberty Mut. Ins. Co., 773 F.2d 976, 978 (8th Cir.1985)); and (3) an action claiming

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a right to specific performance of a contract was tried to a judge, id. § 2309, at 85 (citing

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Turner v. Burlington N. R.R. Co., 771 F.2d 341, 343 (8th Cir. 1985)).

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A claim of fraud “is not distinctively either a legal issue or one of an equitable

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nature,” id. § 2311, and thus the right to a jury turns on the remedy sought and the

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context in which the claim of fraud arises.

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B.

The Claims at Issue

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In this action, the Land Bank has brought a claim for damages against the

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Margosians for breach of the guaranty. The Bank seeks to recover: the total amount due

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under the Restructure Loan; fees, costs, and interest as provided for under the

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Restructure Loan; attorney’s fees; Trustee’s fees; and, costs of suit. (ECF No. 432.)

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The Margosians’ answer raises various defenses. (ECF No. 675.) However, at the

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hearing on the instant motion, the Margosians’ counsel explained that they primarily
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intend to defend on the ground that the Land Bank’s fraudulent misrepresentations

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prevented the formation of a valid contract, and thus there could be no breach.

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The Margosians also brought against the Land Bank a counter-claim for

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“Damages for Fraud and Deceit – Intentional Misrepresentation of Facts.” (ECF No. 675

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at 17.) At the hearing, the Margosians’ counsel clarified that the fraud underlying both

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their affirmative defense and their counter-claim is the same: that Land Bank

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representatives misrepresented the guaranty to be a name change and misrepresented

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that the guaranty would not expose the Margosians to personal liability.

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C.

Parties’ Arguments

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The Land Bank argues that the Margosians have no right to a jury trial. According

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to the Land Bank, no factual issues remain with regard to its claim for breach of the

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guaranty, other than those raised by the Margosians’ defenses and counter-claim.

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Because the defenses and counter-claim essentially are equitable in nature, the

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Margosians have no right to a jury trial. (Mot. at 3.)

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More specifically, the Land Bank argues that the Margosians seek to avoid liability

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on the guaranty “based upon alleged fraudulent misrepresentations that they were not

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signing a Guaranty but a name change (the Guaranty should be rescinded based upon

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fraud) or that the Guaranty, despite its terms, would not cover their personal assets (the

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Guaranty should be reformed based upon fraud).” (Id.) Similarly, the Bank argues that

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the Margosians’ affirmative claim of fraudulent misrepresentation merely “seek[s] to

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avoid liability under the 2008 Guaranty based upon the premise that the Margosians are

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entitled to rescind the contract (they didn’t know they were signing a guaranty, but

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thought it was a name change) or reform the contract to conform it to what they claim

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was represented (they were told it was a guaranty, but that wouldn’t extend to their

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personal assets).” (Id. at 6.) Because rescission and reformation are equitable remedies,

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no right to a jury trial attaches. (Id.)

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The Margosians disagree with this characterization of their claim and defenses as

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equitable. They argue that, under California law, they have the option to seek to “undo
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the transaction in its entirety” or to seek damages. (Oppn. at 7-8). Here, the Margosians

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expressly seek damages, a legal remedy. (Id.).

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In response, the Land Bank acknowledges that the Margosians may elect either

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to avoid liability under the guaranty or to sue for damages, but argues that they may not

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do both. (Reply at 2-3.) Thus, if the Margosians choose to affirm the contract and sue for

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damages, the Court should enter judgment on the Land Bank’s claim. (Id. at 3.)

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D.

Discussion

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The Land Bank’s claim for breach of the guaranty is a classic action at law. See

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Dairy Queen, Inc. v. Wood, 369 U.S. 469, 477 (1962) (“As an action on a debt allegedly

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due under a contract, it would be difficult to conceive of an action of a more traditionally

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legal character.”); Wyler Summit P'ship v. Turner Broad. Sys., Inc., 235 F.3d 1184, 1194

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(9th Cir.2000) (“In most instances, a claim seeking money damages for breach of

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contract is an action at law.”). The remedy sought by the Land Bank, i.e. damages, is a

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legal remedy. Accordingly, a right to trial by jury attaches to this claim.

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Similarly, the Margosians’ counter-claim for fraud seeks money damages, and

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therefore is a legal claim. See Curriden v. Middleton, 232 U.S. 633 (1914). A right to trial

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by jury also attaches to this claim.

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All that remains, then, is the Margosians’ affirmative defense to the Land Bank’s

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claim for breach of the guaranty. The Margosians have essentially argued that the

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nature of their defense is irrelevant because it is brought against a legal claim with an

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attendant jury trial right. This is not an entirely accurate characterization of the law. In the

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Ninth Circuit, “[a] litigant is not entitled to have a jury resolve a disputed affirmative

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defense if the defense is equitable in nature.” Granite State Ins. Co. v. Smart Modular

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Techs., Inc., 76 F.3d 1023, 1027 (9th Cir.1996). Accordingly, the Court must examine

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the nature of the Margosians’ defense.

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As an initial matter, the Court notes a significant lack of clarity regarding the

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Margosians’ affirmative defense. However, at the hearing on this matter, the Margosians’

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counsel explained that they intend to defend on the ground that no valid contract was
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formed. Specifically, the Margosians contend that they did not assent to material terms

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of the contract because those terms were fraudulently misrepresented by Land Bank

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representatives. Because there is no valid contract, there can be no breach. The Court

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agrees with the Margosians that this defense is distinguishable from the cases cited by

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the Land Bank (ECF No. 913) in which a defending party specifically brings a counter-

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claim for the equitable remedies of rescission or reformation.

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The Court also concludes that the defense is distinguishable from other

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affirmative defenses that, due to their equitable nature, have been found not to invoke a

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right to a jury trial. See, e.g., Granite State Ins. Co., 76 F.3d at 1027 (no right to a jury on

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defense of equitable estoppel); Danjaq LLC v. Sony Corp., 263 F.3d 942, 962 (9th Cir.

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2001) (no right to a jury on the equitable defense of laches). Significantly, neither the

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affirmative defense nor the counter-claim seeks equitable relief. Rather, the Margosians

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are defending on the ground that the Land Bank cannot prove all of the elements

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necessary to succeed on their cause of action. Thus, they are raising a legal defense.

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Cf. Brown v. San Diego State Univ. Found., No. 3:13-CV-2294-GPC-NLS, 2015 WL

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4545857, at *4 (S.D. Cal. July 28, 2015) (finding defense of settlement and release to be

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a legal defense).

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Finally, the Court rejects the Land Bank’s argument that the Margosians have

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elected, or are required to elect, between rescission and damages at this juncture. It is

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true that California law requires a person claiming to be defrauded by false

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representations to elect between two inconsistent remedies: rescission of the contract, or

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affirmance and a suit for damages. Hjorth v. Bernstein, 44 Cal. App. 2d 561, 564 (1941).

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“But the mere attempt to obtain one remedy, or even the commencement of an action

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seeking one remedy, is not a binding election.” 5 Witkin, Summary 10th Torts § 829, p.

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1201 (2005); see also Hjorth, 44 Cal. App. 2d at 565-66. No binding election occurs until

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a contract has effectually been affirmed or disaffirmed. Thus, a party is permitted to seek

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these alternative, inconsistent, remedies in a single action. 5 Summary 10th Torts § 829,

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p. 1201; Hjorth, 44 Cal. App. 2d at 565. Put simply, “[t]here is nothing inconsistent in [a
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party] asking for rescission first and damages if he cannot have it.” Hjorth, 44 Cal. App.

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2d at 565. Although the Margosians eventually may be required to make an election,

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they need not do so now.

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IV.

CONCLUSION AND ORDER

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Based on the foregoing, the Court concludes the Margosians have a right to a trial

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by jury on the claims asserted herein. Accordingly, the Land Bank’s motion to strike the

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jury demand is HEREBY DENIED.

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IT IS SO ORDERED.
Dated:

January 23, 2016

/s/

Michael J. Seng

UNITED STATES MAGISTRATE JUDGE

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