Court Holds Guarantor's Signature Release Authorization Constitutes Waiver of Right to Jury Trial

The United States District Court for the Southern District of New York recently held that a guarantor may knowingly and voluntarily waive his constitutional right to a jury trial contractually, even if he has not personally reviewed or negotiated the provision, if he has specifically given his lawyer authorization to release his signature. Also, the Court held that a claim by a guarantor of fraud in the inducement as to a contract generally does not apply to a jury trial waiver in the contract absent a specific allegation of fraud as to that provision. Lehman Brothers Holdings, Inc. v. Bethany Holdings Group, LLC, 2011 WL 3427013 (S.D.N.Y. Aug. 5, 2011).

Bethany Holdings Group, LLC ("Bethany") was an owner and operator of apartment complexes across the country. The Terry and Rose Knutson 2000 Family Trust (the "Knutson Trust") and Terry Knutson ("Knutson," together with the Knutson Trust, the “Knutson defendants”) were independent investors who invested in a series of five real estate transactions that Bethany organized. In these transactions the Knutson defendants provided equity funding, which Bethany leveraged with loan financing, largely from Lehman Brothers Holdings, Inc. ("Lehman") to complete the acquisitions.

In the third of the five transactions, Lehman provided Bethany with more than $200 million for the purchase of apartment properties in Arizona (the "Transaction"). Knutson, acting individually and as co-trustee of the Knutson Trust, executed five guaranties (the "Guaranties") in connection with Lehman's loans to Bethany, each of which contained a jury waiver. As was typical in the transactions between the parties, Lehman's counsel circulated signature pages to Bethany's counsel, who would coordinate obtaining Knutson's signatures on behalf of the Knutson defendants, oftentimes with Knutson's counsel holding signature pages in escrow until the deal was finalized.

By the beginning of 2009, Bethany had defaulted on the loans related to the Transaction. On May 4, 2010, Lehman notified the Knutson defendants of the defaults and demanded payment of the Guaranties, which was never made. Lehman then filed suit against Bethany and the Knutson defendants.

The Knutson defendants' main defense to the substantive allegations in the lawsuit was that they were fraudulently induced into executing the Guaranties. However, the Knutson defendants also alleged that the jury waivers contained in the Guaranties were invalid because the signature pages were signed by Knutson and delivered to his attorney prior to the closing on the Transaction. Therefore, Knutson never had the opportunity to personally review the content of the Guaranties and the Knutson defendants could not be said to have knowingly and voluntarily agreed to the jury trial waiver therein.

The Court disagreed with the Knutson defendants and found that the jury trial waivers contained in the Guaranties were made knowingly and voluntarily, and thus were valid. First, the Court found that allegations of fraudulent inducement to a contract in general do not pertain specifically to jury waiver provisions. Therefore, although the Knutson defendants had claimed that they were fraudulently induced to enter into the Transaction, they had not specifically alleged that they were fraudulently induced to waive a jury trial.

Second, the Court held that a lawyer may generally bind his client if he is given the authority to do so, and waiver of a right to jury trial is no exception. The Knutson defendants' lawyer had been given the authority to release the Knutson defendants' signature pages by Knutson, and had been given the opportunity to review the Guaranties prior to releasing Knutson's signature pages. The fact that Knutson personally did not review the Guaranties was irrelevant.

Finally, the Court found that the jury trial waiver had been made knowingly and voluntarily, using the four-part test found in Morgan Guar. Trust Co. of New York v. Crane, which states that for a court to determine that a party has contractually waived the right to a jury trial it must look to four factors:

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.
4. The business acumen of the party opposing the waiver.

In this case, the Court found that the jury waivers were knowing and voluntary as: (1) although the jury waiver provisions were not actually negotiated, they were subject to negotiation; (2) although the jury waiver provisions were not specially designated (all-capital letters, bolded, etc…) they were shown in plain terms in the first sentence of the paragraph they were contained in and were not "buried in fine print or masked by jargon"; (3) the investment in the transaction was optional and the fact that Lehman was a major financial institution alone did not provide Lehman with sufficiently unequal bargaining power; and (4) Knutson had sufficient business acumen, having successfully participated in negotiations for the sale of his national frozen baked goods company for $175 million in 2006.

The holding in the Bethany case serves as a reminder that although a trial by jury is a right contained in the United States Constitution, it may (and oftentimes is) knowingly and voluntarily waived in a contract. While usually not a priority in contract negotiations, it deserves the attention of all parties involved. Furthermore, parties providing an attorney with the authority to review a contract and release signature pages on their behalf should be vigilant, as the fact that they have not personally reviewed a jury waiver provision will not void a waiver of the same.