Assert an equitable defense or a counterclaim? “Waiving” your jury Goodbye! | Farrell Fritz, PC

Most practitioners in New York are aware that some causes of action can be tried by a jury, while other claims can only be tried in court. For example, causes of action for damages, such as tort claims, contract claims, and some legal claims, can be tried by a jury, while equitable claims, such as motions to vacate or reform of a contract, can be judged by the court.

But what if a litigant defending a damages claim asserts an equitable defense or counterclaim? CPLR § 4101 specifically addresses this situation, providing that “equitable defenses and equitable counterclaims shall be adjudicated by the court”. Therefore, where a plaintiff brings a lawsuit adjudicable by jury and the defendant brings equitable defenses or counterclaims arising out of the same transaction, the defendant waives his right to a jury trial, even on the main legal action.

A defendant’s waiver of his right to a jury trial was recently addressed by the Commercial Division of Albany County (Platkin, J.) in Real Estate Webmasters, Inc. v Rodeo Realty, Inc. (2022 NY Slip Op 50037(U) [Sup Ct, Albany County, Jan. 24, 2022]). In this case, Plaintiff Real Estate Webmasters, Inc. (“REW”) brought an action against Defendant Rodeo Realty, Inc. (“Rodeo”), seeking damages for Rodeo’s alleged anticipated breach of a agreement (“Service Agreement”), pursuant to which REW was to develop a custom website for Rodeo. After the matter was joined, REW moved for partial summary judgment on liability for its sole claim against Rodeo for anticipatory repudiation, and moved to dismiss Rodeo’s affirmative defenses and counterclaims (the “SJ Motion”).

The Court dismissed most of Rodeo’s affirmative defenses and counterclaims, but found justifiable issues of fact as to Rodeo’s counterclaim for fraudulent inducement and its affirmative defense alleging voidance and/or restitution based on of REW’s alleged fraud. Following the discovery, REW filed a question note requesting a non-jury trial. Rodeo responded by responding to a request from the jury. REW proposed to strike the claim.

Judge Richard M. Platkin from Albany County Commercial Division quashed Rodeo’s jury request, finding that Rodeo was not entitled to a jury trial under CPLR § 4101 because its remaining affirmative defense and counterclaim alleging fraudulent inducement were equitable in nature.

The Court first explained that a defendant waives his right to a jury trial when he asserts a fair counterclaim arising from the same set of facts as plaintiff’s main claim – even if plaintiff’s main claim is of a legal nature. The Court then noted that whether a fraudulent inducement counterclaim is “fair” or “legal” depends on whether the defrauded party terminated the contract by prompt termination (giving thereby giving rise to an equitable claim or defence), or confirmed the contract and then pursued legal action. legal claim for damages resulting from fraud.

Based on the position taken by Rodeo in opposition to the SJ petition, the Court found that Rodeo “unequivocally chose to disaffirm the service agreement after allegedly learning of the falsity of certain pre-contractual representations made by REW.” Specifically, the Court noted that:

  • Rodeo manager says service agreement “was canceled” after learning of REW’s allegedly false statements;
  • Rodeo’s manager said he personally “terminated Rodeo’s relationship with [REW]because of its “false representations” and “lies”;
  • Rodeo did not deny REW’s allegation that it repudiated the service agreement. Instead, Rodeo argued that the repudiation was “not unreasonable” because it possessed “a valid defense of avoidance based on fraud”; and
  • Rodeo’s attorney asserted that Rodeo “rightly canceled the service agreement based on fraudulent misrepresentation.”

Having elected to disaffirm the service agreement and defend against REW’s early repudiation claim on the basis of the equitable defense of termination, the Court found that Rodeo’s counterclaim for fraudulent inducement was fair and not legal, and Rodeo therefore waived its right to a jury trial.

Critically, the Court held that Rodeo’s fraudulent inducement counterclaim was fair even though Rodeo specifically sought damages in the counterclaim and in its claim for relief. According to the Court, “the only damages identified in Rodeo’s counterclaim are the sum of $21,160, which represents the initial payment made by Rodeo to REW under the service agreement.” These alleged damages, in the Court’s view, were “restitutive in nature” and “incidental to the equitable remedy for annulment” sought by Rodeo as part of its remaining affirmative defence. As the Court explained,

[F]After its binding election to disaffirm the agreement, Rodeo is limited to pursuing incidental or collateral damages to its equitable defense of termination, including the recovery of funds necessary to unwind the transaction and restore the parties to status quo. This is a request of a fair nature.

The Court therefore found that Rodeo had waived its right to a jury trial by filing a fair defense and counterclaim arising out of the same transaction as REW’s anticipated repudiation claim.

Take away food :

There are three main takeaways from the Court’s decision in Real estate webmasters:

  • First of allequitable defenses and counterclaims (such as termination or reform of the contract, or restitution) may be adjudicated in court alone – even if the applicant’s request is of a legal nature;
  • Second, a party that terminates a contract by requesting prompt termination (as opposed to confirming the contract and subsequently seeking damages) asserts a fair – not legal – claim; and
  • Thirdan express claim for damages will not turn an otherwise equitable counterclaim into a legal claim, particularly where, as in Real estate webmastersthe only damages alleged were “restitutive” or incidental to equitable reparation.

Lawyers and their clients do not always determine at the outset of litigation whether the case should be tried by a jury or by a judge. Indeed, it is often a decision made as the case progresses, discovery is obtained and the credibility of the witness is assessed. However, litigants should be particularly mindful of the remedy sought in their pleadings (i.e., whether it is an equitable or legal remedy) and the strategic positions taken throughout the trial. (including in movement practice), as these factors could later determine their right to a jury trial.

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