K.M.C. Co., Inc. v. Irving Trust Co.

• Decision Date: 04 March 1985
• Docket Number: No. 83-5563,83-5563
• Citation: 757 F.2d 752
• Parties: , 1 Fed.R.Serv.3d 1095 K.M.C. CO., INC., Plaintiff-Appellee, v. IRVING TRUST COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 752

757 F.2d 752

92 A.L.R.Fed. 661, 1 Fed.R.Serv.3d 1095

K.M.C. CO., INC., Plaintiff-Appellee, v. IRVING TRUST COMPANY, Defendant-Appellant.

No. 83-5563.

United States Court of Appeals,

Sixth Circuit.

Argued Oct. 11, 1984.

Decided March 4, 1985.

Jack B. Draper, Arnett, Draper & Hagood, Knoxville, Tenn., Peter H. Kaminer (argued), John F. Pritchard, Winthrop, Stimson, Putman & Roberts, New York City, for defendant-appellant.

William D. Vines, III (argued), Butler, Vines, Babb & Threadgill, James C. Wright, Knoxville, Tenn., for plaintiff-appellee.

Harold Krent (argued), Justice Dept., Washington, D.C., for intervenor.

Before KENNEDY and KRUPANSKY, Circuit Judges, and DeMASCIO, District Judge. ^*

CORNELIA G. KENNEDY, Circuit Judge.

Irving Trust Company (Irving) appeals from a judgment entered against it in this diversity action for breach of a financing agreement. K.M.C. is a Tennessee corporation headquartered in Knoxville and engaged in the wholesale and retail grocery business. In 1979, Irving and K.M.C. entered into a financing agreement, whereby Irving held a security interest in all of K.M.C.'s accounts receivable and inventory and provided K.M.C. a line of credit to a maximum of $3.0 million, increased one year later to $3.5 million at a lower rate of interest, subject to a formula based on a percentage of the value of the inventory plus eligible receivables. On March 1, 1982, Irving refused to advance $800,000 requested by K.M.C. This amount would have increased the loan balance to just under the $3.5 million limit. K.M.C. contends that Irving's refusal without prior notice to advance the requested funds breached a duty of good faith performance implied in the agreement and ultimately resulted in the collapse of the company as a viable business entity. Irving's defense is that on March 1, 1982, K.M.C. was already collapsing, and that Irving's decision not to advance funds was made in good faith and in the reasonable exercise of its discretion under the agreement.

Trial was conducted by a Magistrate on consent of the parties pursuant to 28 U.S.C. Sec. 636(c). Although the financing agreement contained a jury trial waiver clause, the Magistrate ordered a jury trial over defendant's objection. He based his decision upon the statement of plaintiff's president Leonard Butler, that Butler was told by a representative of Irving prior to signing the agreement that absent fraud, which was not present in the instant case, the waiver provision would not be enforced. The jury found Irving liable for breach of contract and fixed damages at $7,500,000 plus pre-judgment interest. Defendant's motions to dismiss and for a directed verdict and post-trial motions for judgment n.o.v., a new trial or a remittitur were denied.

Irving has raised several issues on appeal. First, it suggests that 28 U.S.C. Sec. 636(c) permitting a Magistrate to conduct civil trials with the consent of the parties is unconstitutional. Second, it contends that the Magistrate erred in denying Irving's motion to strike plaintiff's demand for a jury trial. Third, it argues that it did not in fact breach the financing agreement with K.M.C., and that the jury's verdict is not supportable in law and is contrary to the weight of the evidence. Finally, it asserts that the Magistrate erred in admitting incompetent expert testimony on the question of damages.

I. Constitutionality of Sec. 636(c) of the Magistrates Act

The essence of appellant's constitutional argument is that the Magistrates Act improperly confers the judicial power of the United States as exercised under Article III of the Constitution on an Article I court, and that since Article III is concerned with subject matter jurisdiction, this infirmity cannot be corrected by the consent of the parties. The only opinion to so hold, Pacemaker Diagnostic Clinic of Am., Inc. v. Instromedix, Inc., 712 F.2d 1305 (9th Cir.1983), has been vacated by the Ninth Circuit, see 725 F.2d 537 (9th Cir.1984) (en banc). In all, challenges to the constitutionality of Sec. 636(c) thus far have been rejected by eight circuits. ¹ We agree with the carefully reasoned opinions in these cases upholding the validity of the Act, and acknowledge the authority of the Magistrate to try the issues here involved with the consent of the parties.

II. Jury Trial

The final sentence of p 11 of the financing agreement between Irving and K.M.C. states that each party to the agreement "waives all right to a trial by jury in any action or proceeding relating to transactions under this Agreement." Irving contends that since the financing agreement between the parties was an integrated and unambiguous contract, the parol evidence rule should bar consideration of testimony purporting to vary or contradict express terms of the contract.

It is clear that the parties to a contract may by prior written agreement waive the right to jury trial. See Smith-Johnson Motor Corp. v. Hoffman Motors Corp., 411 F.Supp. 670, 675-77 (E.D.Va.1976); c.f. D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 184-85, 92 S.Ct. 775, 781-82, 31 L.Ed.2d 124 (1972) (due process rights to notice and hearing prior to a civil judgment are subject to waiver). However, the Magistrate correctly observed that the question of right to jury trial is governed by federal and not state law. See Simler v. Conner, 372 U.S. 221, 83 S.Ct. 609, 9 L.Ed.2d 691 (1963); Shu-Tao Lin v. McDonnell Douglas Corp., 742 F.2d 45, 49 n. 5 (2d Cir.1984). He reasoned that the constitutional right to jury trial may only be waived if done knowingly, voluntarily and intentionally, and that whether this standard was met in a given case is a constitutional question separate and distinct from the operation of rules of substantive contract law like the parol evidence rule. Cf. Overmyer, 405 U.S. at 183, 185-86, 92 S.Ct. at 781, 782 ("[m]ore than mere contract law ... is involved" in determining whether waiver was effective under applicable standard); Sambo's Restaurants, Inc. v. City of Ann Arbor, 663 F.2d 686, 690 (6th Cir.1981) (quoting Brookhart v. Janis, 384 U.S. 1, 4, 86 S.Ct. 1245, 1246, 16 L.Ed.2d 314 (1966)) (contractual waiver of first amendment rights).

Initially, we consider Irving's argument, raised for the first time on appeal, ² that it was incorrect for the Magistrate to apply the knowing and voluntary standard in the instant case. Irving is correct in stating that in Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972), the Supreme Court, in applying the knowing and voluntary standard to a waiver of due process rights in a conditional sales agreement, cautioned that it was "not holding that [the] standards [governing waiver of constitutional rights in a criminal proceeding] must necessarily apply." 407 U.S. at 94, 92 S.Ct. at 2001 (emphasis added). ³ Irving then goes on to state that "in Schneckloth v. Bustamonte, 412 U.S. 218, 237 [93 S.Ct. 2041, 2052-53, 36 L.Ed.2d 854] (1973), the Court stated that the application of the requirement of a knowing and intelligent waiver was limited 'to those rights which the Constitution guarantees to a criminal defendant in order to preserve a fair trial.' " The Court in Schneckloth, however, did not purport to address the waiver standard applicable in criminal vis-a-vis civil cases. Rather, it was distinguishing expressly between waiver of rights necessary to preserve a fair trial, such as the rights to counsel, confrontation, speedy trial, and jury trial, and other rights, such as freedom from unreasonable search and seizure.

Those cases in which the validity of a contractual waiver of jury trial has been in issue have overwhelmingly applied the knowing and voluntary standard. See, e.g., National Equipment Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir.1977); N. Feldman & Son, Ltd. v. Checker Motors Corp., 572 F.Supp. 310, 313 (S.D.N.Y.1983); Dreiling v. Peugeot Motors of Am., Inc., 539 F.Supp. 402, 403 (D.Colo.1982); Sanchez v. Sirmons, 121 Misc.2d 249, 467 N.Y.S.2d 757, 760 (1983). We are of the opinion that the Magistrate was correct in applying the knowing and voluntary standard in this instance. ⁴

In any event, whether the appropriate standard is that K.M.C.'s waiver must have been knowing and voluntarily, or merely "clear," Fuentes, 407 U.S. at 95, 92 S.Ct. at 2002, we conclude that if in fact it was represented to K.M.C.'s president Butler before the signing of the financing agreement that the jury waiver provision would not be enforced under circumstances such as those in the instant case, neither standard is met. It necessarily follows from this conclusion that the parol evidence rule may not bar proof that such a representation was made. ⁵

Irving observes that in none of the cases addressing contractual waiver of jury trial and other constitutional rights were alleged oral representations the basis for a finding that the waiver was invalid, but rather that only objective circumstances were considered. Compare Fuentes, 407 U.S. at 95, 92 S.Ct. at 2001 (waiver not bargained over, unequal bargaining power, contract of adhesion); National Equipment Rental, 565 F.2d at 258 (unequal bargaining power, clause buried inconspicuously in contract) and Dreiling, 539 F.Supp. at 403 (unequal bargaining power, waiver not bargained over) with Overmyer, 405 U.S. at 186-87, 92 S.Ct. at 782-83 (sophisticated parties, equal bargaining power, consideration exchanged for waiver); Feldman, 572 F.Supp. at 313 (provision clearly visible, agreement bargained over); United States v. Mountain Village Co., 424 F.Supp. 822, 825 (D.Mass.1976) (sophisticated parties, consideration exchanged for waiver) and Global Industries, Inc. v. Harris, 376 F.Supp. 1379, 1382 (N.D.Ga.1974) (equal bargaining power, contract prepared by party seeking to avoid waiver). It complains that if Butler's statement is admitted, it is being forced to shoulder the impossible burden of proving or rebutting the subjective understanding of the party seeking to...