Opinion
01 Civ. 5207.
December 13, 2007
Attorneys for Plaintiff, DICKSTEIN SHAPIRO LLP, New York, NY, By: Joseph F. Fields, Esq., Keith A. Markel, Esq.
Attorneys for Defendants, LAW OFFICES OF SUSAN G. KELLMAN, Brooklyn, NY, By: Susan G. Kellman, Esq.
STAHL ZELMANOVITZ, New York, NY, By: Joseph Zelmanovitz, Esq.
OPINION
The plaintiff, American Equities Group, Inc. ("AEG" or the "Plaintiff"), has moved in limine to strike the jury demand of defendants Ahava Dairy Products Corp. ("Ahava"), Lewis County Dairy Corp. ("Lewis Dairy"), Ahava Food Products Corporation ("AFC"), Ahava Products Corporation ("APC"), and Moise Banayan ("Banayan") (collectively the "Defendants"), as well as their defense of usury. For the reasons set forth below, the motion to strike the jury demand is granted and the motion to strike the defense of usury is denied.
Prior Proceedings
On June 11, 2001, the Defendants filed a motion to withdraw the reference of a proceeding in the bankruptcy of AEG asserting contractual rights against the Defendants in the amount of over $12 million.
On September 27, 2001, the motion to withdraw the reference was granted, and a motion by the Defendants to transfer the action to the U.S. District Court for the District of New Jersey was denied. American Equities Group, Inc. v. Ahava Dairy Products Corp., No. 01 Civ. 5207 (RWS), 2001 WL 1143188 (S.D.N.Y. Sept. 27, 2001) (the "September 27 Opinion").
On October 15, 2001, AEG filed an Amended Complaint alleging rights under an agreement between the parties, the Master Purchase Sale Agreement entered into on November 6, 1996 (the "Agreement").
Discovery proceeded, and motions for summary judgment were denied. See American Equities Group, Inc. v. Ahava Dairy Products Corp., 01 Civ. 5207 (RWS), 2004 WL 870260 (S.D.N.Y. Apr. 23, 2004) ("the April 23 Opinion"). Settlement discussions were held and the action was set down for trial on January 14, 2008. The instant motions were heard on November 14, 2007.
The Facts
AEG, a financial services company, entered into the Agreement with Ahava in November 1996. Lewis Dairy and Banayan each executed a guaranty of payment for all of Ahava's contractual obligations under the Agreement. The Agreement provided that AEG would purchase the account receivables of Ahava and advance Ahava, pursuant to a formula set forth in the Agreement.
The Agreement included the following provisions:
"AEG, as the absolute owner of the Receivables, shall have the sole and exclusive power and authority to collect each Receivable through legal action or otherwise. . . ." (¶ 1(a)).
"As to any individual receivable, if Seller (Ahava) fails to deliver the required confirmations or AEG determines in its reasonable discretion that the customer has poor credit, AEG has the right to declare the Receivable to be a Client Risk Receivable (`Client Risk') and not advance any moneys on that Receivable." (¶ 1(b)).
"AEG has the right to declare any individual Receivable to be a `Client Risk Receivable'" and "not advance any moneys on that Receivable. . . . AEG will not charge Seller for Client Risk Receivables." (¶ 1(b)).
"[T]he term `Initial Receivable Value' shall mean the purchase price of the Factor Risk. At the time Receivables are purchased, AEG shall charge Seller a 2.00% Discount Fee and a Service Fee as hereinafter provided. . . . Each week and or prior to the establishment of the Receivable Pool, Seller shall notify, in writing, AEG of the Initial Receivable Value it requests which shall not be more than 75.00% and not less than 55.00% of the Factor Risk. In the event the Seller shall fail to notify AEG, the Initial Receivable Value shall be 75.00%." (¶ 1(d)).
The "Service Fee" ranged from 1.50% (if the Initial Receivable Value was at 75%) to .80% (if the Initial Receivable Value was 55%). (¶ 2(d)).
A "Penalty Fee equal to 0.50%" was charged on the face value of Receivables uncollected for 90 days. (¶ 1(d)).
The "Book Account" was defined as "the account to which all monies owing to Seller by AEG shall be credited and all monies owing by Seller to AEG will be charged. All monies owing by either party will be entered into the Book Account on the day they become due." (¶ 1(d)).
"Each Overdraft shall bear interest on the outstanding principal amount thereof for each day it is outstanding until paid in full at the rate of eighteen percent (18.00%) per annum compounded annually. Interest shall be charged to the Book Account daily." (¶ 1(d)).
"Factor Risk" is defined as "[t]he Receivables upon which AEG advances money." (¶ 1(b)).
The Agreement also stated:
JURISDICTION. The Parties consent to the nonexclusive jurisdiction and venue of the state or federal courts located in New Jersey. Service of process on either party in connection with any dispute shall be binding on said party if sent to the Seller by Registered or Certified Mail at the address specified below. The Seller waives any right the Seller may have to a jury trial. (¶ 10)
The interpretation of and performance under the Agreement are contested by the parties.
The Court has previously determined that the law of New York will be applied. See April 23 Opinion, 2004 WL 870260, at *8-9.
The Right to a Jury Has Been Waived
It is plainly well-settled that "parties to a contract may, by prior written agreement entered into knowingly and voluntarily, waive the right to a jury trial." Morgan Guar. Trust Co. v. Crane, 36 F. Supp. 2d 602, 603 (S.D.N.Y. 1999) (citing Herman Miller v. Thom Rock Realty Co., 46 F.3d 183, 189 (2d Cir. 1995)). "[J]ury trial waivers are common in loan agreements and loan guarantees, and these are regularly enforced." National Westminster Bank, U.S.A. v. Ross, 130 B.R. 656, 667-8 (S.D.N.Y. 1991), aff'd sub nom., Yaeger v. National Westminster, 962 F.2d 1 (2d Cir. 1992)). See also Great Earth Int'l Franchising Corp. v. Milks Dev., 311 F. Supp. 2d 419, 437 (S.D.N.Y. 2004) (noting that the court in Morgan Guar. Trust Co., 36 F. Supp. 2d at 667-68, stated that it "[could not] find a single reported New York decision in which a court refused to enforce a jury trial waiver provision in a bank loan agreement or guarantee").
The factors considered in determining whether a contractual waiver of a jury trial was knowingly and voluntarily entered into include: "1) the negotiability of contract terms and negotiations between the parties concerning the waiver provision; 2) the conspicuousness of the waiver provision in the contract; 3) the relative bargaining power of the parties; and 4) the business acumen of the party opposing the waiver." Bear Stearns Funding, Inc. v. Interface Group-Nevada, Inc., No. 03 Civ. 8259 (CSH), 2007 U.S. Dist. LEXIS 82557, at *7 (citing Morgan, 36 F. Supp. 2d at 604).
Here, Ahava's attorney reviewed and issued an opinion letter on the Agreement. See, e.g., Nat'l Westminster Bank, 130 B.R. at 667 (finding an enforceable waiver in a guarantee where the party objecting to waiver "was represented by counsel in connection with the loan transaction at issue and, with the assistance of counsel, reviewed and revised various of the Loan Agreements including the Guarantee," and noting that the party's counsel had prepared a draft opinion letter about the guarantee). Courts have found a knowing and voluntary waiver even absent representation by counsel. See, e.g., Orix Credit Alliance, Inc. v. Better Built Corp., No. 89 Civ. 7333 (JFK), 1990 WL 96992, at *2 (S.D.N.Y. 1990) ("Although the presence of counsel at contract negotiations is recommended, the absence of counsel by itself does not destroy the validity of agreements signed or create an unequal bargaining position.").
With regard to the "conspicuousness" of a waiver, courts have looked at the placement of the waiver within the contract, as well as the font size and style of the waiver. Here, the waiver is in the "JURISDICTION" paragraph of the Agreement, and in the same font and size as all other provisions. The jury waiver language was sufficiently conspicuous. See Nat'l Westminster Bank, 130 B.R. at 667 (noting that enforceable waiver provision was, "like the balance of the Guaranty, printed in small but entirely legible text."); James Talcott, Inc. v. Wilson Hosiery Co., 299 N.Y.S.2d 460, 461 (N.Y.App.Div. 1969) (enforcing a jury waiver provision in factoring agreement and guaranty and noting that "[t]he provisions for jury waiver are set forth in the same size of the printed type as every other provision of the documents. No claim has been made that the provision is illegible nor is it printed in such small print as to be unnoticeable or unreadable." See also Bank of China, 2002 WL 1072235, at *3 ("[T]he waiver provisions in both contracts are entirely conspicuous, as they are easily found and are equal in appearance to all other contract provisions.").
With regard to the business acumen of the parties, both AEG and Ahava are corporations, and "neither should be a stranger to contract negotiations." Orix, 1900 WL 96992 at *2. Defendants have claimed that Ahava's business acumen was "non-existent" and that "[i]f Ahava were as competent as AEG makes it out to be, Ahava would not be involved in all of these lawsuits. Def. Opp. at 7-8. However, Ahava has entered into lending agreements with other institutions. In fact, at the start of its relationship with AEG, Ahava borrowed money from AEG to pay off a prior factor. Release dated November 6, 1996, Fields Reply Aff. Ex. 3.
AFC received a $7.1 million loan from New York City's Economic Development Corporation. April 23 Opinion, 2004 WL 870260, at * 4.
Defendant Banayan is the president of Defendant AFC and Defendant Lewis County Dairy. "Extensive past business experience on behalf of the party contesting a jury waiver is an indication that this party knowingly and intentionally consent to the waiver." Morgan Guar. Trust Co., 36 F. Supp.2d at 604 (listing the qualifications of the parties opposing the jury waiver as evidence that they knowingly agreed to the waiver). See also Oei v. Citibank, N.A., 957 F. Supp. 492, 523 (S.D.N.Y. 1997) (enforcing a jury waiver in a bank application agreement where the borrower "was an experienced businessman"); Nat'l Westminster Bank, 130 B.R. at 667 (discussing defendant's business experience in finding that his jury waiver was knowing and intentional).
Defendants Ahava and Banyan have experience entering into a variety of business transactions. See, e.g., M I Equip. Fin. Co. v. Lewis County Dairy, et al., No. 06 Civ. 54, 2007 WL 128879 (N.D.N.Y. Jan. 11, 2007) (granting summary judgment in favor of plaintiff leasing corporation and against defendants Lewis County Dairy, AFC and Banayan based upon the defendants' breach of a financing agreement); Ahava Dairy Products Corp. v. Trident Leasing Corp., 768 N.Y.S.2d 229 (N.Y.App.Div. 2003) (finding that Ahava's complaint failed to state a cause of action under the terms of an equipment lease); Aris Food Transit, Inc. v. Ahava Food Corp., 836 N.Y.S.2d 491 (N.Y.Sup. 2007) (noting that "Ahava purchases food products for distribution," "manufactures and distributes its own food products, and "operates a public storage business and a truck parking business at [its] Brooklyn facility"); Lewis County Dairy Corp., 21 OSHC (BNA) 1937 (Aug. 14, 2006) (affirming a finding of multiple violations of the Occupational Safety and Health Act at the facility of Lewis Dairy, noting that "Lewis and Ahava of California . . ., another company located in the same facility, [have] the same owner, Moise Banayan," and detailing the complexities of maintaining facilities in compliance with federal standards).
The Defendants' have asserted that the Agreement "was never followed," was "non-existent" or "expired". As the Court has previously concluded, "[o]ther than the actual wording of the relevant contracts, virtually every aspect of the relationship between the parties is disputed." April 23 Opinion, 2004 WL 870260, at *4. However, Defendants relied upon the Agreement both to assert defenses in this action and in their effort to transfer this case to New Jersey. If Ahava had wanted to terminate the Agreement, Ahava could have undertaken to effectuate the termination provision in the Agreement. It was only after AEG sent Ahava notice of their breach on December 20, 2000, pursuant to the termination provision, that the Agreement was terminated.
The Defendants have contended that the guaranties do not constitute a waiver in the absence of express language to that effect in the guaranties. There are authorities providing that in New York, "[t]he right to a jury trial may . . . be waived in an instrument other than that representing the agreement upon which the action is founded." Bank of China v. NBM L.L.C., No. 01 Civ. 0815 (DC), 2002 WL 1072235, at *3 (S.D.N.Y. May 28, 2002) (citingBarclay's Bank of N.Y., N.A. v. Heady Elec. Co., Inc., 571 N.Y.S.2d 650, 653 (N.Y.App.Div. 1991) (internal quotation marks omitted); see also Franklin Nat'l Bank of Long Island v. Capobianco, 266 N.Y.S.2d 961, 961 (N.Y.App.Div. 1966). However, "it must be determined that such waiver was intended by the parties." Cohn v. Adler, 526 N.Y.S.2d 843, 844 (N.Y.App.Div. 1988). Here, there is sufficient evidence of such intent.
In Bank of China, the court found that a jury waiver provision in a loan agreement applied to separately-executed loan guaranties that did not contain jury waiver provisions. Id. at *3-4. In determining the parties' intent with regard to the waiver, the court noted that the loan agreement referred to the contemporaneous execution of the loan guaranties, and that "the guaranties were executed on the same date as the Credit Agreement, and appear to refer to the Credit Agreement, as they each bear the heading `Personal Unconditional Continuing Guaranty.'" Id. at *4. Here, the Agreement refers to "the Guarantor of this Agreement" (¶ 7(f)), as well as "the Guaranty of Lewis County Dairy Corp., as more particularly described on Schedule B" (¶ 5(b)). As the Court has already noted, "Lewis County Dairy and Banayan executed an absolute and unconditional guaranty of payment for all of Ahava's contractual obligations under the Agreement" on the same date that the Agreement was signed. April 23 Opinion, 2004 WL 870260, at *2. The Agreement states that "[t]he Seller waives any right the Seller may have to a jury trial," and the guaranties provide that the guarantors "absolutely and unconditionally guarantee the performance and payment by Seller of any and all obligations and indebtedness arising under said Agreement, without limitation as to time or amount." The "corporate guaranty" signed by Lewis County Dairy Corp. further states that "guarantor has agreed to guaranty the performance of each and every covenant and condition contained in said Agreement." The jury waiver will be held valid as to the guarantors.
With regard to the claims against AFC and AFC's counterclaims, jury trial waivers in a contract are to be construed broadly to encompass both contract claims and related tort claims where the "causes of action would not exist were it not for the relationship between [the parties]," In Re Actrade Fin. Tech., No. 02 Civ. 16212, 2007 WL 1791687 (Bankr. S.D.N.Y. June 20, 2007), as well as "counterclaims whether or not arising from" the contract at issue. National Westminster Bank, 130 B.R. at 668. For example, the National Westminster Bank Court enforced and construed a provision in a loan guarantee that waived "the right in any litigation with the Bank . . . to trial by jury" to encompass the guarantor's counterclaim for fraud against the lender. Id. at 667-68. See also In re Actrade Fin. Tech., Ltd., No. 02-16212, 2007 WL 1791687 (Bankr. S.D.N.Y. June 20, 2007). The waiver in the Agreement will be similarly construed to apply to all claims in this action. AFC is not entitled to a jury trial on its counterclaim, if it is established, as AEG contends, that AFC is Ahava's alter ego. Cf. Mobius Management Systems, Inc. v. Technologic Software Concepts, No. 02 Civ. 2820 (RWS), 2002 WL 31106409, at *2 (S.D.N.Y. Sept. 20, 2002) (noting that the Second Circuit recognized, in American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 133 (2d Cir. 1997), that a non-signatory party may be bound by an arbitration agreement signed by its alter ego).
The jury trial waiver contained in the Agreement will be enforced against Ahava and the guarantors, including AFC, if the facts establish that AFC is Ahava's alter ego.
The Usury Defense is a Triable Issue
Loans which bear an annual interest rate in excess of 25% violate New York's criminal usury statute. N.Y. Penal Law § 190.40 (Consol. 2007). Both parties have contended that the facts as proven will establish whether or not usury was committed by AEG. The trial will presumably establish the annual rate of interest charged.
As this Court discussed in the April 23 Opinion, 2004 WL 870260, at *16-17, in Venture Mortgage Fund, 282 F.3d 185 (2d Cir. 2002), the Second Circuit held that an annual interest rate exceeding 25% violated the plain language of the criminal usury statute, id. at 186, but noted that the issue of remedy for a loan in violation of New York's criminal usury statute, but not in violation of the civil usury statute, "identifies an unsettled question of New York law that [the court] need not decide because it was never raised by the parties to this appeal." Id. at 187.
Pursuant to N.Y. Gen. Oblig. Law § 5-501(6)(a), New York's civil usury statute applies only to loans of less than $250,000. Loans of greater than $250,000 but less than $2.5 million, however, are not subject to New York's civil usury laws, but are subject to New York's criminal usury laws. See id. at 189-91. None of New York's usury laws prohibits, voids, or regulates transactions over $2.5 million. Venture Mortgage Fund, 282 F.3d at 189.
The court noted that New York's voiding provision, N.Y. Gen. Oblig. Law § 5-511, applies to violations of the civil usury statute, but says nothing about a loan that violates the criminal usury statute. Id. at 190 n. 4. The court then observed that there is "no specific statutory authority for voiding a loan that violates the criminal usury statute." Id. at 190. Indeed, albeit in dictum, the Court stated:
Nothing we see in the criminal usury statute provides for voiding, and it is unclear whether the Legislature intended that criminally usurious loans of $250,000 or greater be voided. On the one hand, it may be expected (as the parties to this appeal evidently assume) that one who commits criminal usury should not be preferred (and be able to collect) over the usurer who charges a rate of interest that is not criminal. On the other hand, the larger the loan transaction, the less likely it is that the borrower needs or deserves financial protection; moreover, the greater the amount of forfeiture, the more unsettling it becomes to financial arrangements. As the New York courts have recognized, the consequences to a lender of voiding a usurious loan transaction are harsh: "the borrower is relieved of all further payment-not only interest but also outstanding principal, and any mortgage securing payment are cancelled. In effect, the borrower can simply keep the borrowed funds and walk away from the agreement."Id. at 189 (citations omitted). The court offered two possible remedies: (a) a court can sustain the obligation to pay the principal and cancel the interest obligation; or (2) a court can order the defendant to pay a revised, non-usurious interest. See id. at 189, n. 3.
According to the court in Venture Mortgage Fund, 282 F.3d at 190, "§ 5-511 voids a loan that violates the civil usury statute (§ 5-501) but says nothing about a loan that violates the criminal usury statute. The criminal usury statute, by its terms, does not expressly void a loan that exceeds its maximum rate."
This question of remedy needs resolution only in the event that usury is established and the facts, including the total amount of AEG's loans, establish appropriate circumstances.
The adequacy of the usury defense depends upon the facts and will be determined at trial.
Conclusion
The motion of AEG to strike the jury demand is granted and its motion to strike the usury defense is denied.
It is so ordered.