Opinion
Civil Action No. 05-12338-GAO.
June 19, 2006
MEMORANDUM AND ORDER
This action was brought by Neuro-Rehab Associates, Inc. and Neuro-Rehab Associates (a partnership) (referred to herein singularly as "Neuro-Rehab") to obtain rescission of an approximately $20 million dollar loan it entered into in 1999 with the predecessor-in-interest to defendant AMRESCO Commercial Finance, L.L.C. ("AMRESCO"). According to the complaint, Neuro-Rehab entered into a loan transaction with AMRESCO on December 28, 1999, to borrow a principal sum of $20 million. Along with a Promissory Note in the face amount of $22,222,222.22, it executed several other instruments to provide collateral for the loan, including a "Pledge and Security Agreement" (the Security Agreement) and a "Mortgage, Assignment of Leases and Rents and Security Agreement" (the Mortgage).
Neuro-Rehab (which does business as Northeast Rehabilitation Health Network) operates various rehabilitation facilities in Massachusetts and New Hampshire, including 21 outpatient rehabilitation clinics, an 87-bed rehabilitation hospital in Salem, New Hampshire, and a 15-bed inpatient rehabilitation facility at another hospital in Nashua, New Hampshire. The facilities are said to provide comprehensive rehabilitation services to over 20,000 patients from throughout New England on an annual basis, many of whom are disabled children. Many of the patients also have significant cognitive and/or physical impairments.
The predecessor entity that originally made the loan was called AMRESCO Commercial Finance, Inc. AMRESCO also is currently servicing this loan. The complaint also names as a defendant First Union Trust Company, N.A., as Owner Trustee of the ACLC Business Loan Receivables Trust 1999-2. Neuro-Rehab's loan was originally assigned to this trust, see below. The entity at issue (the Owner Trustee of the Trust containing Neuro-Rehab's loan) is apparently now called Delaware Trust Company, N.A., a successor to Wachovia Trust Company, N.A., which itself was a successor to the defendant named in this suit, First Union Trust Company, N.A. For ease of reference, throughout the complaint I will refer to the defendant parties as either "AMRESCO" or "defendants."
At the core of the original complaint by Neuro-Rehab are allegations that AMRESCO made misrepresentations and failed to disclose material facts regarding the alleged risks involved in and operation of the Neuro-Rehab loan. In addition to seeking rescission of the loan transaction, Neuro-Rehab seeks damages on claims that AMRESCO breached an implied covenant of good faith and fair dealing and committed unfair and deceptive acts in violation of Mass. Gen. Laws ch. 93A, §§ 2 and 11 ("Chapter 93A").
These are the counts that were alleged in the initial complaint. The plaintiffs sought leave to amend the complaint based on additional conduct that occurred after the filing of the lawsuit, conduct which forms the basis of their request for a preliminary injunction and will be described in more detail below. That motion to amend was granted. According to their motion to amend and the amended complaint, the plaintiffs claim that these subsequent actions by AMRESCO are wrongful because they breached the contract, violated the implied covenant of good faith and fair dealing, constituted tortious interference with Neuro-Rehab's advantageous business and contractual relations, and constituted unfair and deceptive practices under Chapter 93A.
This case was initially filed in the Massachusetts Superior Court and removed to this court by the defendants on the basis of diversity jurisdiction. A flurry of motions followed, including, notably, the plaintiffs' Emergency Motion for Preliminary Injunction (Dk. # 14). The defendants have filed a Motion to Strike the Plaintiffs' Jury Demand (Dk. # 12) and a Motion for Partial Judgment on the Pleadings (Dk. # 20). Finally, the plaintiffs filed a Motion for Protective Order, requesting that a subpoena to a third party be quashed (Dk. # 40). This Memorandum and Order addresses all of these pending motions.
Although this motion was filed on an "emergency" basis, the urgency underlying the motion has been alleviated by a stipulation entered into by the parties (Dk. # 18) wherein the defendants have agreed to refrain from taking any further action with respect to accelerating the amounts due under the December 28, 1999 Promissory Note or pursuing any collection remedies against the collateral for that Note until there has been a ruling on the preliminary injunction motion. The plaintiffs have similarly agreed that they will not take any action to impair or dispose of any of the loan collateral (except as permitted under the loan documents) until such a ruling has been made.
Motion for Preliminary Injunction
In its motion for a preliminary injunction, Neuro-Rehab seeks an order enjoining AMRESCO from accelerating any amounts due under the 1999 Promissory Note and from pursuing any collection remedies against the collateral for the Note, including, without limitation, taking any action to foreclose on the mortgages that Neuro-Rehab granted to AMRESCO. The motion was precipitated by AMRESCO's issuance of a notice of default to Neuro-Rehab on January 27, 2006, and of a subsequent notice of acceleration on February 13, 2006. AMRESCO claims that these actions are proper under the loan documents because Neuro-Rehab committed certain defaults and did not cure them within the time period allowed for by the parties' agreements. Neuro-Rehab claims that the acceleration is wrongful under multiple legal theories.
Factual Background
Pursuant to the loan documents, Neuro-Rehab granted AMRESCO a leasehold mortgage in seventeen satellite facilities in which it was a tenant and a first-secured position on all furniture, fixtures, equipment, inventory at and receivables generated by those satellite facilities. Neuro-Rehab has remained current on all monthly payments since the loan's inception.
After Neuro-Rehab commenced this lawsuit, AMRESCO undertook to verify that Neuro-Rehab's collateral remained secure, and as a result, became aware that Neuro-Rehab had failed to file a June 2005 compliance certificate (as required by the Security Agreement) and had failed re-execute some leasehold mortgages, a step necessary to ensure proper recording. On December 1, 2005, AMRESCO sent a default letter requesting that Neuro-Rehab re-execute the leasehold mortgages and submit the June 2005 compliance certificate. In response, on December 13, 2005, Neuro-Rehab sent a letter enclosing the re-executed leasehold mortgages and the missing June 2005 compliance certificate. In conversations prior to and in the December 13, 2005 response, Neuro-Rehab's general counsel also notified AMRESCO that Neuro-Rehab had terminated its leases at two satellite facilities which had previously been subjects of leasehold mortgages, located in Haverhill and North Billerica. Neuro-Rehab had not previously notified AMRESCO nor sought AMRESCO's consent for these two lease terminations. In response to AMRESCO's further inquiries regarding this issue, Neuro-Rehab sent a letter on January 10, 2006, providing information on the history and termination of the leases at the two locations, indicating that Neuro-Rehab had vacated both premises as of August 2003.
Based upon this information, AMRESCO sent the default letter at issue here on January 27, 2006. That letter described the purported defaults and offered a fifteen day period to "cure" the default, in accordance with the terms of the Security Agreement. AMRESCO further stated that in the absence of a "cure" within that time period, it intended to declare an event of default under the loan documents, accelerate all amounts owed thereunder to be immediately due and payable, and proceed to exercise its rights and remedies.
AMRESCO's position — both in the January 27, 2006 default letter and in response to the present motion — is that Neuro-Rehab defaulted under the loan documents by permitting termination of the Haverhill and North Billerica satellite facility leases without providing prior notice to AMRESCO or seeking its consent and by submitting three compliance certificates between August 2003 and late 2005 that failed to disclose the terminations.
Neuro-Rehab responded to the default letter formally by a letter dated February 7, 2006. In that letter, it explained that the leases had been terminated in the ordinary course of business. As to the Haverhill location, the lease was actually a sublease and was terminated when the doctor-tenant Neuro-Rehab was leasing from had his lease terminated. Neuro-Rehab says it eventually "replaced" that location with a new one in Newburyport in 2005. As to the North Billerica location, Neuro-Rehab deemed the site too small for its business needs and moved the satellite location across the street into a new building in April 2003, despite the fact it could have renewed the lease at the original location. Neuro-Rehab claims that any failure to notify AMRESCO of these changes was purely inadvertent. In the February 7, 2006 letter it offered to "cure" the defaults by providing "substitute collateral" in any form. Specifically, it offered (1) leasehold mortgages for the two new sites that replaced the terminated locations, (2) any additional collateral, including leasehold mortgages, at six new satellite facilities that had been opened since the inception of the loan, and (3) a first mortgage on Neuro-Rehab's new administrative office building, built at a construction cost of about $2.6 million. Neuro-Rehab also provided additional information purporting to show that it was a "stronger borrower" than when the loan had originally closed and reminded AMRESCO it had never missed a loan payment. Neuro-Rehab asserted that it believed this response adequately "cured" any existing defaults because those defaults were merely technical in nature and, to the extent notice and AMRESCO's consent was required for these lease terminations, Neuro-Rehab now sought consent. Neuro-Rehab "assumed" that AMRESCO would consent because such consent could not, under the loan documents, be unreasonably withheld.
Article VII of the Security Agreement addresses various "Events of Default." The relevant event of default provision here is Section 7(b), which provides that an "event of default" occurs when Neuro-Rehab (1) (a) defaults, fails to perform or observe, or breaches any of the covenants and conditions of or agreements in the loan documents or (b) "make[s] a material inaccuracy in or omission from, any representation or warranty under or in, this Security Agreement, the Promissory Note, any other Loan Document . . . any financial or other statement delivered to [AMRESCO]" and (2) "such default, failure, breach, inaccuracy or omission [continues] unremedied for . . . fifteen (15) days following the date that notice of such default, failure, breach, inaccuracy or omission is given to [Neuro-Rehab] by [AMRESCO]." If both of these conditions are met and an "event of default" is properly declared, AMRESCO has a series of remedies available to it under Article VIII of the Security Agreement, including the ability under Section 8.2 to accelerate the amount due under the Promissory Note (including any "Make Whole Premium" due upon prepayment per the terms of the agreement) and any other obligations, making them immediately due and payable.
AMRESCO sent an acceleration notice to Neuro-Rehab on February 13, 2006, stating that Neuro-Rehab had failed to cure the violations of the loan documents within the fifteen-day time period and, accordingly, an "event of default" had occurred. In light of this "event of default," AMRESCO stated that it was exercising its right to accelerate under Section 8.2 of the Security Agreement and would take all necessary action to recover $20,898,702.39, the full amount said to be immediately due and payable (including, in approximate terms, the outstanding principal balance of $14.8 million, a $3.7 million "make whole premium," a $2.2 million "credit enhancement amount" and $187,000 in late fees and interest). Two days later, Neuro-Rehab moved for a preliminary injunction to prevent the acceleration. Likelihood of Success on the Merits
In assessing whether to grant Neuro-Rehab's request for a preliminary injunction, I must weigh (1) Neuro-Rehab's likelihood of success on the merits, (2) the potential for irreparable harm to Neuro-Rehab if the injunction is denied, (3) the balance of the relevant impositions — here, the hardship to AMRESCO if it is enjoined contrasted with the hardship to Neuro-Rehab if the injunction is denied, and (4) the effect (if any) of the preliminary injunction ruling on the public interest. See Bl(a)ck Tea Soc'y v. City of Boston, 378 F.3d 8, 11 (1st Cir. 2004).
The first, and most critical, factor in the balance is an assessment of Neuro-Rehab's likelihood of success on the merits.See Wine and Spirits Retailers v. State of Rhode Island, 418 F.3d 36, 37 (1st Cir. 2005). In the context of the preliminary injunction sought here, this requires an assessment of the likelihood that Neuro-Rehab will succeed in showing that AMRESCO's purported acceleration of the Note was wrongful. Neuro-Rehab contends that it is likely to succeed in proving that AMRESCO's actions in (1) relying on minor, technical defaults that caused no actual impairment of its security and (2) refusing to permit any "remedy" by Neuro-Rehab within the period allowed under Section 7(b) of the Security Agreement, constitute a breach of the parties' contract or, at the least, a breach of an implied covenant of good faith and fair dealing. AMRESCO's response is that Neuro-Rehab has no likelihood of success because Neuro-Rehab does not contest that the defaults actually occurred and cannot be "cured" by any means, including Neuro-Rehab's offer of "substitute" and "additional" collateral, because the defaults deprived AMRESCO of its rights to prior notice of termination of the leaseholds and the corollary right to grant or deny consent to such termination. It seems to be AMRESCO's position that the loss of its rights to prior notice and consent cannot — consistent with the linear elapse of time — ever be rectified. Upon review of the parties' arguments and the evidence submitted in relation to the motion, I conclude that Neuro-Rehab has a reasonable likelihood of success in proving those claims against AMRESCO that are based upon AMRESCO's conduct leading up to the challenged acceleration.
Under Idaho law, there is an implied covenant of good faith and fair dealing in all contracts. See Idaho First Nat'l Bank v. Bliss Valley Foods, Inc., 824 P.2d 841, 862-63 (Idaho 1991). This covenant implied at law applies to proscribe any action by either side that violates, nullifies, or significantly impairs the benefits of the contract. Id. However, Idaho courts have consistently held — often in response to attempts by plaintiffs to use the implied covenant to impose additional duties on the other contracting party that are not written in the agreement — that a violation of the implied covenant of good faith and fair dealing will not be found where to do so would contradict express provisions of the agreement. See id.; see also Idaho First Nat'l Bank v. David Steed and Assocs., Inc., 825 P.2d 79, 82-83 (Idaho 1992); Wooden v. First Sec. Bank of Idaho, 822 P.2d 995, 998 (Idaho 1991). Here, Neuro-Rehab has a reasonable likelihood of showing that AMRESCO has violated the covenant by invoking the default and acceleration provisions of the agreement in reliance on defaults which do not appear to have caused any substantial harm to its security interests and thus may be immaterial as a matter of law, while at the same time refusing to permit any attempted remedy despite contract provisions requiring that a defaulting party be given an opportunity to cure.
The loan documents contain a choice of law clause, discussed in more detail below, which states that the loan documents shall be "construed, applied, enforced and governed under the laws of the state of Idaho without giving effect to the principles of conflicts of law."
Various courts have held that while acceleration clauses are common and are often enforced according to their terms, equity may bar acceleration and subsequent foreclosure in certain circumstances because of the harsh nature of such actions. Specifically, acceleration and foreclosure have been barred as inequitable in circumstances where the default relied upon to accelerate was technical or minor and resulted in no prejudice or impairment to the lender's security interest or where the acceleration was not being exercised as a means to protect the lender's security interest but instead was motivated by inequitable considerations, such as the lender's desire to take advantage of a technical default to coerce full payment. See Beale v. Mars Larsen Ranch Corp., 586 P.2d 1378, 1382 (Idaho 1978); see also Brown v. Avemco Investment Corp., 603 F.2d 1367, 1376 (9th Cir. 1979); Tunnel Publ'g Co. v. Straus Communications, Inc., 565 N.Y.S.2d 572, 574-75 (N.Y.App.Div. 1991); Continental Fed. Sav. Loan Ass'n v. Fetter, 564 P.2d 1013, 1017-19 (Okla. 1977); Vaughan v. Crown Plumbing Sewer Serv., Inc., 523 S.W.2d 72, 75-76 (Tex.Civ.App. 1975);Baltimore Life Ins. Co. v. Harn, 486 P.2d 190, 193 (Ariz.Ct.App. 1971). In contrast, courts have rejected a similar argument and held acceleration and/or foreclosure not to be inequitable where, among other things, the impairment to the security of the lender caused by the defaults was real and substantial. See Parrott v. Wallace, 900 P.2d 214, 220 (Idaho Ct.App. 1995) (failure of borrower to pay taxes and water assessments — as required by mortgage — for two years on sole mortgaged property supporting $93,000 promissory note); see also Union Labor Life Ins. Co. v. Ten Gallon Hat Assocs., 787 F. Supp. 465, 468-69 (E.D. Pa. 1992) (acceleration proper where borrower twice defaulted on payment and acceleration did not occur until after period to cure by payment was allowed); Benjamin Franklin Fed. Sav. Loan Ass'n v. Parker, 741 P.2d 512, 513 (Or.Ct.App. 1987) (acceleration was proper under clause allowing for default to be declared upon sale of the only property securing the obligation where clause required prior consent, which was not obtained, for any sale of the property);Key Int'l Mfg. v. Stillman, 480 N.Y.S.2d 528, 531 (N.Y.App. Div. 1984) (acceleration clause enforceable where borrower defaulted by failing to timely obtain renewal letters of credit which served as the security for the loan). As the Idaho Supreme Court has explained, the determination of this equitable matter is highly dependent on the facts and circumstances of each case.See Parrott, 900 P.2d at 220.
At this preliminary stage, it appears that Neuro-Rehab has a reasonable likelihood of success on this equitable theory. The most salient factor is that there is no indication that the cited defaults caused harm or prejudice to AMRESCO's security. Even if AMRESCO had received prior notice it might not have been able to withhold consent for the lease terminations, because under the agreements such consent could not be "unreasonably withheld." Only two of seventeen facilities' leases pledged as security were at issue. Moreover, it appears that Neuro-Rehab's total collateral value, even at loan inception, exceeded the amount borrowed. Additionally, Neuro-Rehab offered AMRESCO substantially more in substitute collateral than was lost by the lease terminations. It is also relevant in assessing the extent of AMRESCO's "insecurity" that Neuro-Rehab has always performed and continues to perform on the principal obligation of the loan arrangement, making timely payments. In light of these circumstances, it is possible to say that Neuro-Rehab has a reasonable likelihood of prevailing on its claim that the acceleration violated AMRESCO's implied covenant of good faith and fair dealing.
Other Preliminary Injunction Factors
Despite AMRESCO's argument that any harm to Neuro-Rehab would only be monetary damages, there is a potential for irreparable harm if the injunction is not issued. It is true that if Neuro-Rehab paid the full accelerated amount without foreclosure of any collateral the principal impact would only be monetary. However, the substantial magnitude of that monetary harm would have its own harmful consequences that would be difficult to remedy adequately afterwards. Even if the only "differential" between the accelerated amount and the amount that Neuro-Rehab would presumably be prepared to pay if it should succeed in its rescission action would be the "make whole premium" required by the documents, that would nevertheless amount to an additional $3.6 million, an amount equal to more than 70% of Neuro-Rehab's annual net income. In the absence of an injunction, Neuro-Rehab would be left with the choice of either (1) paying the full "accelerated" amount which, as described above, it has a reasonable likelihood of success in proving is wrongful or (2) facing foreclosure on the subject collateral, which would undoubtedly have irreparable, non-monetary harm to Neuro-Rehab's business. AMRESCO's position seems to be that Neuro-Rehab should pay the amount due as a result of the acceleration — effectively vitiating the rescission action — and then litigate to recover any amounts that might have been unnecessarily paid. In other words, Neuro-Rehab should effectively be required (by the absence of injunctive relief) to pay to AMRESCO a substantial amount of money that AMRESCO may not be entitled to, thus to be deprived of the use of that money during the pendency of this suit, a suit Neuro-Rehab has a reasonable likelihood of winning at least in part. That deprivation can certainly be called needless, and even if a monetary value can be placed on it, the very bearing of such a burden is not repaired simply by a later award of damages restoring what was wrongly disgorged.
Furthermore, the balance of the relevant impositions clearly favors Neuro-Rehab because AMRESCO has not shown that the harm to it from an injunction will outweigh the potential harm to Neuro-Rehab. In fact, it has not made any showing as to how it will be harmed at all by forestalling further acceleration and related collection action until a determination on the merits, especially where Neuro-Rehab has met and continues to meet its current payment obligations.
One salutary purpose of a preliminary injunction is to preserve the status quo pending full adjudication on the merits where the status quo does not work any irreparable loss to either side.See CMM Cable Rep., Inc. v. Ocean Coast Props., Inc., 48 F.3d 618, 620 (1st Cir. 1995). In light of Neuro-Rehab's reasonable likelihood of success on the merits, this purpose is well served by granting this preliminary injunction.
Preliminary Injunction
For all the foregoing reasons, Neuro-Rehab's Motion for Preliminary Injunction is GRANTED. In the absence of a further Order from this court, AMRESCO is enjoined during the pendency of this litigation from taking any further action to (1) accelerate any amounts due under the December 28, 1999 Promissory Note from Neuro-Rehab or (2) pursue any collection remedies against the collateral for the Promissory Note to collect any accelerated amounts, including, without limitation, taking any action to foreclose on any mortgage granted by Neuro-Rehab.
Motion to Strike Jury Demand
Neuro-Rehab has requested, in both its original and amended complaints, a trial by jury on all claims so triable. In its motion to strike the jury demand, AMRESCO seeks to enforce a jury waiver appearing in all three loan documents executed in December 1999. The waiver clause, typographically set in capital letters, states, in relevant part, that Neuro-Rehab and AMRESCO agree to "IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY AND ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THE PROMISSORY NOTE."
In the Security Agreement and Mortgage, the language was substantially similar.
In a diversity case such as this, the enforcement of a contractual jury waiver is a question of federal, not state, law.See Medical Air Tech. Corp. v. Marwan Inv., Inc., 303 F.3d 11, 18 (1st Cir. 2002). Although the First Circuit has noted that there is a "presumption against denying a jury trial based on waiver, and waivers must be strictly construed," a contractual jury waiver will be enforced if (1) it was entered into knowingly and voluntarily and (2) the plain language of the jury waiver in the contract unambiguously covers the claims asserted. Id. at 18-19. AMRESCO argues that both conditions are satisfied here and thus the jury demand should be stricken. I agree.
Deciding whether a jury waiver was knowing and voluntary is a "fact based inquiry" which generally requires an analysis of the "'totality of the circumstances' including factors such as the waiving party's education and business experience, the respective roles of the parties in determining the terms of the waiver, the clarity of the agreement, the amount of time the waiving party had to consider the waiver, whether the waiving party was represented by counsel, and the consideration offered for the waiver." See Medical Air Tech., 303 F.3d at 19 n. 4. The totality of the circumstances here supports the conclusion that the jury waiver was knowing and voluntary in the required sense. Neuro-Rehab was a sophisticated party engaging in a complex commercial transaction. At the time of the transaction, Neuro-Rehab operated a rehabilitation hospital and approximately seventeen outpatient facilities; it had previously engaged in complex business transactions. The principals of Neuro-Rehab, including the individual who signed the loan documents on behalf of Neuro-Rehab, were all educated and experienced professionals who reviewed the transaction prior to approving it. Neuro-Rehab was represented by legal counsel throughout the loan application, negotiation, and execution stages. Moreover, Neuro-Rehab retained separate attorneys to review the loan transaction, including the loan documents containing the jury waiver provisions. The process of loan origination took a number of months, from the loan application in June 1999 through the execution of the final loan documents in December 1999. Lastly, the jury waiver provisions are set forth in a separate paragraph in all capital letters and are clear and unambiguous, in two of the documents bearing the underlined heading "WAIVER OF TRIAL BY JURY." For additional emphasis, the loan documents further stated, in capital letters, that Neuro-Rehab "HEREBY MAKES AND ACKNOWLEDGES THAT IT MAKES ALL OF THE WAIVERS, AGREEMENTS AND CONSENTS ("WAIVERS") SET FORTH IN [the loan documents] KNOWINGLY, INTENTIONALLY, VOLUNTARILY, WITHOUT DURESS, AND ONLY AFTER EXTENSIVE CONSIDERATION OF THE RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEY." These circumstances lead me to conclude that Neuro-Rehab knowingly and voluntarily waived its right to a jury trial.
There is some dispute among the circuit courts over which party bears the burden of proof on the issue of whether a jury waiver was knowing and voluntary, and the First Circuit has expressly reserved deciding this issue. See Medical Air Tech., 303 F.3d at 18 n. 3. Nevertheless, assuming that AMRESCO bears the burden of proof because it is the party seeking to enforce the jury waiver, it has met its burden.
Neuro-Rehab argues that its agreement to the jury waiver should not be deemed knowing and voluntary because the entire loan transaction was induced by fraud. Although the First Circuit has yet to address this precise issue, I am persuaded by the analysis in Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837-38 (10th Cir. 1988). In Telum, the Tenth Circuit analogized the enforceability of contractual jury waivers to the established body of law regarding the enforceability of arbitration clauses and held that a general claim of fraud in the inducement as to the entire agreement — as opposed to fraud in inducement of the jury waiver itself — was not sufficient to vitiate a knowing and voluntary waiver of the jury right. Id. The analogy is not a perfect one, but that does not mean it is not instructive. A showing of fraud may justify releasing a party from the obligations the fraud had induced the party to undertake. Thus, fraud touching upon the business terms of an agreement justifies releasing the misled party from the business obligations it agreed to. There is no necessary reason why collateral, non-business terms that are untouched by the deception must also be upset. Arbitration clauses are a good example of such collateral terms. So are choice of law provisions, forum selection clauses, and the like. There is no reason not include jury waivers in this category. Unless the fraud specifically induced the waiver, there is no need to set it aside. In other words, unless a party's specific agreement to waive a jury trial (or to arbitrate, etc.) was obtained by fraud, there is no reason to regard that agreement as anything other than an expression of the free and intentional choice of each party.
I also conclude that the plain language of the jury waiver unambiguously covers the claims asserted in this action. As an initial matter, there can be no right to a jury trial for Neuro-Rehab's claims for rescission or under Chapter 93A, a point which Neuro-Rehab does not dispute. As to the claim for breach of the implied covenant of good faith and fair dealing, all of the conduct alleged to have amounted to the breach clearly falls within the jury waiver's plain language because the claim focuses on what AMRESCO allegedly did or did not do as required under the contract. The claims added by the amended complaint center around the alleged wrongful acceleration of the Note by AMRESCO, purportedly pursuant to its contract rights, thus clearly falling within the jury waiver provision's broad language. Neuro-Rehab's proposed construction of the jury waiver provision to exclude its claim for misrepresentation is too narrow in light of the plain language of the broad and unambiguous jury waiver, covering all claims "arising in connection with, out of or otherwise relating to" the loan documents at issue. The misrepresentation claim here is based on the same allegations that underpin the claim for rescission, and the harm said to have been caused by the misrepresentations was that Neuro-Rehab was induced to execute the loan documents themselves and thus take on the obligations contained therein. Neuro-Rehab stretches too far to say that these claims do not, at the least, "otherwise relat[e] to" the loan documents.
Claims for rescission are in the nature of a suit in equity and thus are tried to the court. See 9 Charles Alan Wright Arthur R. Miller, Federal Practice and Procedure § 2311.
It is established that there is no right to a jury trial under Chapter 93A. See Continental Ins. Co. v. Bahnan, 216 F.3d 150, 153 (1st Cir. 2000) (citing Nei v. Burley, 446 N.E.2d 674, 677 (Mass. 1983)).
Therefore, having found that Neuro-Rehab knowingly and voluntarily executed the jury waiver provision and that its plain language unambiguously covers the claims made in this action, AMRESCO's Motion to Strike Plaintiffs' Jury Demand (Dk. # 12) is GRANTED. The jury demand shall be stricken. See Medical Air Tech., 303 F.3d at 18-19.
Motion for Partial Judgment on the Pleadings
AMRESCO has moved for a partial judgment on the pleadings dismissing Neuro-Rehab's claims for negligent misrepresentation and for violations of Chapter 93A. It argues that the parties agreed to resolve disputes by reference to Idaho law, and that Idaho law does not countenance either theory of relief. Neuro-Rehab counters by arguing that these claims, which it characterizes as only alleging wrongs of misrepresentation occurring prior to the formation of the contract, are not within the scope of the parties' choice of law clause.
The choice of law clause that appears in all three of the loan documents, written in prominent typeface to stand out from the rest of the text, provides that "[the document in which the provision was included] AND ALL LOAN DOCUMENTS ARE ENTERED INTO IN THE STATE OF IDAHO" and that the parties agreed that "THE VALIDITY, ENFORCEABILITY, CONSTRUCTION AND INTERPRETATION OF THIS [document in which the provision was included] SHALL [or "WILL"] BE CONSTRUED, APPLIED, ENFORCED AND GOVERNED UNDER AND BY THE LAWS OF THE STATE OF IDAHO WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW."
In the case of the Security Agreement and the Mortgage, the following language was inserted here: "AND OF ALL TRANSACTIONS AND DOCUMENTS UNDER OR RELATING TO [the document in which the provision was included]."
Jurisdiction in this case is grounded in diversity of citizenship and thus the choice of law principles of the forum State, Massachusetts, apply. See Cochran v. Quest Software, Inc., 328 F.3d 1, 6 (1st Cir. 2003). Under Massachusetts law, parties are free in forming their contractual relationship to choose what law will govern their relationship, and courts will uphold that contractual choice as long as the result would not be contrary to the public policy of Massachusetts and the State whose law is chosen has some substantial relation to the contract. See Dykes v. Dupuy, Inc., 140 F.3d 31, 39 (1st Cir. 1998); see also Clarendon Nat'l Ins. Co. v. Arbella Mut. Ins. Co., 803 N.E.2d 750, 752 (Mass.App.Ct. 2004) (explaining that the Massachusetts courts' "functional approach" to choice of law questions is "explicitly guided by the Restatement (Second) of Conflict of Laws (1971)"); Restatement (Second) of Conflict of Laws § 187(2) (1971) (the law of the State chosen by the parties in their choice of law clause will be applied unless (a) the chosen State "has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice," or (b) application of the chosen State's law "would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue [whose law would be the one to apply in the absence of an effective choice of law by the parties]"). Here, there has been no argument made and there is no apparent reason to find that application of Idaho law here would contravene any public policy. Furthermore, there is little doubt — and Neuro-Rehab does not dispute — that Idaho has a substantial relation to the contract because that is where AMRESCO is headquartered, where it has performed its end of the contractual obligations (including servicing of the loan), and where Neuro-Rehab has sent all its payments since loan inception.
The dispute here focuses on whether the choice of law clause covers claims concerning misrepresentations which allegedly were made prior to the execution of the loan documents and induced Neuro-Rehab to execute the agreements. AMRESCO argues that the language of the choice of law clause, applicable by its terms to issues of "enforceability" of the loan documents, clearly covers these fraudulent inducement claims. Neuro-Rehab contends that the "enforceability" term should be read only to apply to the actual "enforceability" of particular terms and conditions of the loan documents. It further argues that its claims, which it characterizes as directed at "conduct affecting the validity of the formation of a contract itself," are the types of claims that federal and state courts applying Massachusetts choice of law principles have found fall outside choice of law provisions similar to the one here.
I conclude that as a matter of contractual interpretation the choice of law provision should be read as covering Neuro-Rehab's claims based upon alleged misrepresentations it relied upon in the negotiations leading up to execution of the loan documents. The choice of law clause states that Idaho law will apply to cover issues of both "enforceability" and "validity" of the loan documents. The misrepresentation claims are substantively akin to the claim for rescission of the contractual agreements, a claim which clearly questions the "validity" and "enforceability" of the agreements. Any harm Neuro-Rehab suffered as a result of the alleged misrepresentations results from its having been induced to enter into and continue in the contractual relationship, and that harm can be avoided not only by excusing Neuro-Rehab from its promised performance but also by compensating it for any resulting monetary losses as well. Thus, the "validity" and "enforceability" of the purportedly fraudulently induced contract obligations are clearly in question.
Neuro-Rehab cites cases holding that particular contractual choice of law clauses did not apply to alleged misrepresentations occurring in the contract formation process. See Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607, 611 (1st Cir. 1993); Computer Sales Int'l, Inc. v. Lycos, Inc., No. Civ. A. 05-10017-RWZ, 2005 WL 3307507, at *2-3 (Dec. 6, 2005 D. Mass. 2005); Kitner v. CTW Transport., Inc., 762 N.E.2d 867, 871-72 (Mass.App.Ct. 2002). However, the cases cited are inapposite because of differences between the wording of the choice of law clauses at issue in those cases and the choice of law clause here. In the two cases that deserve precedential respect, Northeast Data and Kitner, the courts were faced with choice of law provisions that they found were narrow and limited. In the Kitner case, the court found the provision at issue, which stated that "North Dakota [law] shall govern the identity, construction, enforcement, and interpretation of this Agreement" was "expressly self-limiting" and did not indicate that the chosen law would also cover tortious conduct or unfair acts inducing a breach of contract. See Kitner, 762 N.E.2d at 871-72. In Northeast Data, the choice of law provision only chose California law to govern and construe the "Agreement and the rights and obligations of the parties." 986 F.2d at 609. The First Circuit found that a claim of fraud in the inducement of the contract did not fall within the coverage of that clause because it concerned the validity of contract formation and therefore could not "be categorized as one involving the rights or obligations arising under the contract." Id. at 611. Here, the contractual language is not as limiting, choosing Idaho law to cover questions of "enforceability" and "validity" of the agreement, terms not included in Northeast Data and Kitner. The choice of law provision at issue in the Computer Sales case also did not include the term "enforceability." See 2005 WL 3307507, at *2. The choice of law clause in that case did, however, contain the term "validity," a term also contained in the clause here. See id. It does not appear that theComputer Sales court expressly passed on the significance of the word "validity." See id. at *2-3. However, to the extent that the Computer Sales decision did so and is inconsistent with my decision here, I respectfully decline to follow it.
Because Idaho law applies to Neuro-Rehab's claims for negligent misrepresentation and violations of Chapter 93A, dismissal of those claims as a matter of law is appropriate. Under Idaho law, claims for negligent misrepresentation are strictly limited to circumstances not applicable here. Duffin v. Idaho Crop Improvement Ass'n, 895 P.2d 1195, 1203 (Idaho 1995) ("except in the narrow confines of a professional relationship involving an accountant, the tort of negligent misrepresentation is not recognized in Idaho"). Since the type of negligent misrepresentation claim made here is not recognized under Idaho law, the claim for negligent misrepresentation must be dismissed. Additionally, the claims of violations of Chapter 93A, a Massachusetts statutory provision, are not claims arising under Idaho law and accordingly cannot be maintained. See ePresence, Inc. v. Evolve Software, Inc., 190 F. Supp.2d 159, 164-65 (D. Mass. 2002).
Accordingly, AMRESCO's Motion for Partial Judgment on the Pleadings (Dk. # 20) is GRANTED. All claims brought by Neuro-Rehab on the basis of Mass. Gen. Laws ch. 93A and on the theory of negligent misrepresentation are DISMISSED.
Motion for Protective Order and to Quash Third Party Subpoena
Upon review of the subpoena issued to third party Northmark Bank and the parties' positions presented in their papers, I conclude that the motion ought to be GRANTED IN PART and DENIED IN PART. The motion is granted and the subpoena is quashed with respect to Request # 3 listed in Schedule A of the subpoena because the information sought does not appear to be sufficiently relevant to the claims or defenses presented. See Fed.R.Civ.P. 26(b)(1); 26(c). However, it appears that the Northmark Bank has made initial indications that it has no documents responsive to Requests # 1 and # 2 listed in Schedule A of the subpoena. Assuming that is the case, the subpoena will not be quashed with respect to those two requests to allow Northmark Bank to respond formally in such a manner. If it does, no further action will be required with respect to these requests. However, if it indicates that it has such materials, I will upon proper motion revisit whether the requests are properly the subject of discovery. Accordingly, the motion for a protective order as to Requests # 1 and # 2 is denied on these terms.
It is SO ORDERED.