• Jury Trial Waivers in Complex Swap Transactions May Not Always Be Effective
  • November 28, 2011
  • Law Firm: Lerch Early Brewer Chartered - Bethesda Office
  • A North Dakota Court recently denied a defendant’s motion to strike a plaintiff’s jury trial demand, despite the fact that the plaintiff waived this right in the swap agreement, because the waiver was not made knowingly and voluntarily.

    In 2007, a loan officer at Wells Fargo Bank, NA was contacted by Robert Nelson concerning construction financing. The financing was for a new building owned by one of Nelson’s companies, County 20 Storage & Transfer Inc. (“County 20”). Nelson had a long history of borrowing from Wells Fargo, a history that dated back almost two decades and encompassed millions of dollars. The bank offered Nelson two different financing options. The first option was a conventional promissory note secured by a mortgage against the warehouse building with interest at 6.4%. The second option, which would allow Nelson to obtain a fixed interest rate at 6.1%, was offered pursuant to a swap agreement. This required Nelson to enter into an International Swap Dealers Association (“ISDA”) Master Agreement.

    A swap agreement is an exchange of one cash flow for another. In this instance, Nelson would pay the bank a “fixed rate multiplied by the notional amount of the interest rate swap transaction.” The “notional amount” was a fictional amount that equaled the amount in the linked promissory note, $2.45 million. Wells Fargo would pay Nelson a variable rate of interest multiplied by the same notional amount. With this arrangement, each time a payment was made the party that owed more interest paid the difference to the other party.

    Nelson chose the swap option, and on behalf of County 20, entered into both a promissory note and ISDA Master Agreement. After Wells Fargo advanced the loan proceeds, Nelson approached Wells Fargo and asked it to substitute the collateral and another one of his companies—Precision Equipment Manufacturing of North America, Inc.—as borrower. Wells Fargo made the switch, and a new promissory note and ISDA were executed with Nelson signing as co-borrower.

    At this point, the parties’ accounts of the facts diverge. In December 2008, Nelson contacted a new loan officer at Wells Fargo and claimed he told the bank officer that he wanted to re-transfer the promissory note from Precision to County 20. Nelson stated that the bank agreed. Nelson also contended that the bank officer told him that the loan documents could not be completed before the end of the year, so on the last day of December, Nelson obtained an unsecured bridge loan from another bank and paid off the outstanding balance on Precision’s note. Wells Fargo stated that even though Nelson paid off the note, the swap agreement still required monthly payments. In January, the borrower indicated he was advised that new lending requirements enacted at Wells Fargo precluded the bank from entering into a new note with County 20 at the same rate of interest. Nelson stated he offered to pay the higher rate, but Wells Fargo failed to prepare the loan documents. Wells Fargo maintained that no promise was made, no definite terms were discussed and it believed Nelson would obtain financing elsewhere.

    Ultimately, Nelson ceased making payments under the swap agreement and filed suit against Wells Fargo, alleging six causes of action and demanding a jury trial. Wells Fargo filed a motion to strike the demand for a jury trial.

    Wells Fargo argued that Nelson, on behalf of himself and Precision, knowingly and voluntarily waived the right to a jury trial by signing the ISDA Master Agreement and Schedule. The Schedule contained the following provision: “(G) WAIVER OF JURY TRIAL. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY TRIAL OR LITIGATION ARISING OUT OF OR IN CONNECTION WITH ANY TRANSACTION OR THIS AGREEMENT.” Nelson contended that he did not know he was waiving his right to a jury trial.

    The Court found that the burden of proving that the waiver was knowing and voluntary was on the party seeking to enforce it. Looking at several factors, the Court denied Wells Fargo’s motion to strike the jury demand. Some of the factors the Court considered were the fact that Nelson was not represented by an attorney, that Wells Fargo never informed Nelson of the jury waiver provision, and that the loan officer admitted “that he was challenged to understand the terms and conditions of the ISDA agreement.”

    The Court noted that “even if Nelson was aware of the jury waiver provision, it is unlikely that he was aware of the legal consequences of such a waiver.” In further explaining its ruling it stated that “the jury waiver provision is, in essence, a ‘take-it-or-leave-it’ adhesion provision of the contract inserted into a 27-page complex financing agreement with no discussion as to the consequences¿.This was a complex derivative financing agreement that neither the Wells Fargo loan officers directly involved with the transaction understood nor did the customer (Nelson) have a clear understanding of. To suggest that there was a knowing and voluntary waiver of a jury trial is not supported by the evidence in the record.”

    This case is cited as County 20 Storage & Transfer Inc., et al. v. Wells Fargo Bank, NA, 2011 WL 826349 (D.N.D. 03/03/11).