Telum, Inc. v. E.F. Hutton Credit Corp., s. 86-1375

• Decision Date: 14 October 1988
• Docket Number: 86-1496,Nos. 86-1375,s. 86-1375
• Citation: 859 F.2d 835
• Parties: 26 Fed. R. Evid. Serv. 1463 TELUM, INC., a Nebraska Corporation, Earl K. Cook and Carl R. King, Plaintiffs- Appellees and Cross-Appellants, v. E.F. HUTTON CREDIT CORPORATION, a corporation, Defendant-Appellant and Cross- Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 835

859 F.2d 835

26 Fed. R. Evid. Serv. 1463

TELUM, INC., a Nebraska Corporation, Earl K. Cook and Carl

R. King, Plaintiffs- Appellees and Cross-Appellants, v. E.F. HUTTON CREDIT CORPORATION, a corporation,

Defendant-Appellant and Cross- Appellee.

Nos. 86-1375, 86-1496.

United States Court of Appeals, Tenth Circuit.

Oct. 14, 1988.

Rehearing Denied Nov. 25, 1988.

Rex E. Madsen (Reed L. Martineau, Michael R. Carlston and Stephen J. Hill, with him on the brief), Snow, Christensen & Martineau, Salt Lake City, Utah, for plaintiffs-appellees.

Francis M. Wikstrom (T. Patrick Casey, with him on the brief), Parsons, Behle & Latimer, Salt Lake City, Utah, for defendant-appellant.

Before MOORE and BALDOCK, Circuit Judges, and BOHANON, District Judge ^*.

BALDOCK, Circuit Judge.

This is an appeal from a final judgment in favor of plaintiff-appellee Telum, Inc. (Telum) and from an order denying the motion by defendant-appellant E.F. Hutton Credit Corp. (Hutton) for a new trial or a judgment notwithstanding the verdict. Telum brought an action to rescind both the lease of an oil drilling rig and the personal guaranties of Telum's owners, Carl King and Earl Cook, with Hutton on the grounds of fraud, breach of contract, failure of consideration, negligent misrepresentation, mutual mistake, unilateral mistake and constructive fraud. Telum also sought special damages on the fraud claim. Hutton counterclaimed to enforce the lease and guaranties.

I.

The parties to this dispute entered an agreement whereby Hutton would purchase from J.P. Exploration, Inc., represented by Robert Pinder, an oil rig which would then be leased to Telum. Telum would then take the appropriate investment tax credit and sublease the rig back to J.P. Exploration. The parties signed the relevant agreements in July 1980, and Telum and J.P. Exploration began making their respective lease and sublease payments.

These payments continued for approximately two years until J.P. Exploration was sold to a third party who discontinued the sublease payments. Telum then sought to repossess the rig and, in the meantime, signed an extension agreement with Hutton which deferred Telum's monthly lease payments for a period of three months. Thereafter, in January 1983, Telum claims it discovered for the first time that the rig was not complete as described in a schedule attached to the lease at the time of the July 1980, closing. Thereupon, Telum sued to rescind the lease and recover restitution consisting of lease payments made and special damages for expenses incurred in retrieving the rig after the sale of J.P. Exploration.

At trial, Telum sought rescission, contending that Ray Welling, an employee of Hutton, made a number of misrepresentations which wrongfully induced Telum to enter the lease. Hutton counterclaimed to enforce the lease, arguing that Telum's reliance upon Welling was unreasonable. Hutton also claimed that Telum knew of the discrepancies between the lease equipment schedule and the actual rig at the time the extension agreement was signed, thereby waiving any claim for fraudulent inducement. Hutton further asserted that the facts showed the existence of a joint venture between Telum and Pinder. According to Hutton, if there were a joint venture, Pinder's knowledge that the rig was incomplete could be attributed to Telum.

The issues were tried before a jury which answered special interrogatories, finding that (1) Hutton had not proved by a preponderance of the evidence that Telum, Cook and King, at the time that Telum signed the extension agreement, knew about the fraud, and that (2) Telum, Cook and King proved with clear and convincing evidence that they were induced by Hutton's misrepresentations of material fact to enter the lease agreement. Based upon the jury verdict, the trial court entered judgment rescinding the lease and the personal guaranties and dismissed Hutton's counterclaim. The court also denied Hutton's motion for a new trial or judgment notwithstanding the verdict.

Hutton appeals on four grounds. First, it claims that Telum did not prove by clear and convincing evidence that its reliance on Hutton was justifiable and reasonable. Second, Hutton maintains that the undisputed evidence at trial was that Telum expressly waived its claim for fraudulent inducement by signing the extension agreement with knowledge that the rig was incomplete. Third, Hutton alleges that the district court erred by not allowing the jury to determine whether Telum and Pinder had formed a joint venture. Finally, Hutton argues that the trial court erred in failing to enforce a jury waiver provision of the contract.

On cross-appeal, Telum urges that the trial court erred by denying its request for special damages. Second, Telum alleges error in the court's failure to present its alternative theories to the jury, including negligent misrepresentation, failure of consideration, mutual mistake and unilateral mistake. Finally, Telum claims that the trial court wrongly excluded evidence purporting to show that Welling had embezzled $40,000 from Hutton in connection with the Telum lease. Because of its dispositive effect, we will deal first with the jury-waiver issue. We reverse and remand.

II.

After Hutton counterclaimed, Telum demanded a jury trial. Hutton opposed this demand, relying on p 16(b) of the master lease agreement between the parties which provided in part that the "[l]essee waives all right to trial by jury in any litigation arising herefrom or in relation hereto." Exhibit 1. The trial court granted Telum's request for a jury trial, rec. vol. IV at 26, and denied Hutton's motion to reconsider that ruling, rec. vol. XII at 9. In answers to special interrogatories, the jury found that Telum, without knowledge of the relevant facts, was induced to enter the lease agreement as a result of Hutton's material misrepresentations. Upon the jury's finding of fact, the trial court entered judgment in favor of Telum, dismissing Hutton's counterclaim, ordering rescission of the lease agreement and awarding Telum restitution with interest and costs.

On appeal, Hutton argues that the trial court erred in failing to enforce the jury waiver provision of the contract without proof that the waiver provision was itself fraudulently induced. We agree.

The right to a jury trial in the federal courts is governed by federal law. Simler v. Conner, 372 U.S. 221, 221-22, 83 S.Ct. 609, 609-10, 9 L.Ed.2d 691 (1963) (per curiam) (jury trial right controlled by federal law to insure uniformity in exercise required by seventh amendment). Agreements waiving the right to trial by jury are neither illegal nor contrary to public policy. McCarthy v. Wynne, 126 F.2d 620, 623 (10th Cir.), cert. denied, 317 U.S. 640, 63 S.Ct. 31, 87 L.Ed. 515 (1942); see Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir.1986) (right to jury trial, although fundamental, may be knowingly and intentionally waived by contract); K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 755 (6th Cir.1985) (considering it "clear that the parties to a contract may by prior written agreement waive the right to jury trial").

Appellees acknowledge the possibility of waiver but rely on several cases where courts have refused to uphold contractual jury waiver provisions. See National Equip. Rental v. Hendrix, 565 F.2d 255 (2d Cir.1977); Dreiling v. Peugeot Motors of America, 539 F.Supp. 402 (D.Colo.1982). These decisions relied on facts such as inconspicuous fine print or a gross disparity in bargaining power to invalidate jury waiver provisions. Telum and Hutton, on the other hand, were both sophisticated parties, and the provision here was in the normal print size of the contract. Moreover, the trial judge did not invalidate the waiver based on such findings, but rather seemed to conclude that Telum's allegations of fraud in the inducement relating to the contract as a whole were sufficient to vitiate the provision. Rec. vol. IV at 16-17; id. vol. XII at 8-9.

The parties have not cited any federal cases dealing specifically with this issue, and we have found none. Appellants urge us to accept by analogy the federal cases dealing with the effect of fraud in the inducement upon the enforceability of contract arbitration clauses. Both the United States Supreme Court and this court have held that allegations of fraud in the inducement relating specifically to an arbitration provision may suspend application of such a provision. Allegations of fraud in the inducement going to the contract generally, however, have been held not to affect the agreement to arbitrate. ¹ See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967); Meyer v. Dans un Jardin, S.A., 816 F.2d 533, 538 (10th Cir.1987). This analogy is especially appropriate here because submission of a case to arbitration involves a greater compromise of procedural protections than does the waiver of the right to trial by jury. See Hart v. Orion Ins. Co., 453 F.2d 1358, 1361 (10th Cir.1971) ("[a]rbitration differs radically from litigation, and one who chooses it must be content with its informalities and looser approximations"). ² For these reasons, we hold that the trial judge erred in ruling that general allegations of fraud are sufficient to invalidate a jury waiver provision. Appellees were not entitled to a jury trial as a matter of law. Accordingly, we vacate the judgment entered by the trial court and remand for a new trial without a jury.

III.

We now address evidentiary issues raised on appeal and cross-appeal. First, Hutton argues that the trial judge erred by failing to admit a financial statement for the purpose of showing the existence of a joint venture between Telum and Pinder.

Hutton offered a financial statement containing an account receivable referring to the "Telum joint venture." Rec. vol. IX at 895-96. Pinder testified that the receivable reflected an amount owed to J.P....