MICHAEL J. SENG, Magistrate Judge.
The action is before the Court on Fresno Madera Federal Land Bank Association's motion for reconsideration and/or clarification of the Court's order denying their motion to strike jury demand. (ECF No. 936.) For the reasons set forth below, the motion will be granted in part. Additionally, to enable the Court and the parties to properly address the issues raised by the motion,
This action has involved multiple claims and counter-claims against and amongst various parties. Only the following claims remain: Fresno Madera Federal Land Bank Association, FCLA ("Land Bank") sued Aron and Carrie Margosian for breaching their guaranty of a $4.8 million restructured loan made to ZM Fresh Special T's, Inc., formerly known as ZMC Fresh, Inc. The Margosians counter-claimed, alleging, as relevant here, that the Land Bank fraudulently misrepresented that the guaranty was only a name-change document and would not expose the Margosians to personal liability for ZM's indebtedness.
The matter is set for trial on May 31, 2016. The Margosians demanded a trial by jury. (ECF No. 675.) The Land Bank moved to strike the jury demand. (ECF No. 913.) The Court denied the Bank's motion to strike. (ECF No. 935.)
The Land Bank now brings this motion for reconsideration and/or clarification. (ECF No. 936.) The Margosians filed an opposition. (ECF No. 939.) The Land Bank filed a reply. (ECF No. 941.) The matter was heard on February 26, 2016 and now stands ready for adjudication.
Federal Rule of Civil Procedure Rule 60(b) allows the Court to relieve a party from a final judgment on grounds of: "(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence . . .; (3) fraud . . ., misrepresentation, or misconduct by an opposing party; (4) the judgment is void; (5) the judgment has been satisfied . . .; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or (6) any other reason that justifies relief." Fed. R. Civ. P. 60(b). Rule 60(b)(6) "is to be used sparingly as an equitable remedy to prevent manifest injustice and is to be utilized only where extraordinary circumstances" exist.
"A motion for reconsideration should not be granted, absent highly unusual circumstances, unless the district court is presented with newly discovered evidence, committed clear error, or if there is an intervening change in the controlling law."
In the order denying the Land Bank's motion to strike, the Court concluded that the issues remaining to be tried are legal in nature and thus the Margosians have a constitutional right to have these matters tried to a jury.
According to the Land Bank, the Margosians "initially appeared to assert two separate and conflicting fraud-based affirmative defenses: (1) Fraud in the Inducement (i.e., a claim that the Margosians knew what they were signing was it was a guaranty, but they were induced to enter into it based upon false promises that it would not reach their personal assets), and (2) Fraud in the Execution or Factum (i.e., a claim that the Margosians never knowingly entered into a guaranty, but rather signed the guaranty document based upon misrepresentations that it was simply a name change document)." The Land Bank states that its motion to strike was premised on its understanding that the Margosians had alleged fraud in the inducement. Under California law, a contract tainted by fraud in the inducement is voidable and must be rescinded for a party to escape from its obligations. According to the Land Bank, the Margosians changed course during the hearing on the motion to strike, and instead represented that they were pursuing a defense of fraud in the execution. A contract tainted by fraud in the execution is void and may be disregarded without the necessity of rescission.
Based on the foregoing, the Land Bank seeks the Court's clarification of the basis for the Court's ruling. If the Court concluded that the Margosians have a right to trial by jury because their defense is based on fraud in the execution, the Land Bank asks that the Margosians be precluded from presenting at trial any evidence relating to a defense for fraud in the inducement. Alternatively, if the Margosians are permitted to present a defense of fraud in the inducement, they do not have a right to trial by jury.
With regard to election of remedies, the Land Bank argues correctly that a party seeking rescission is not thereafter barred from seeking damages if he is unsuccessful. Howeever, the reverse is not true. A party who first seeks damages but is unsuccessful may not thereafter seek rescission. The Land Bank argues that, because the Margosians have herein elected to sue for damages, they may not later disaffirm the guaranty and seek equitable rescission. Thus, the Land Bank seeks reconsideration/clarification as to whether it may seek entry of judgment on its guaranty prior to trial of the Margosians' counter-claims. The Land Bank also argues that the election to pursue damages bars the Margosians from presenting an affirmative defense based on fraud in the inducement.
The Margosians argue that the Land Bank's motion is procedurally improper under Federal Rule of Civil Procedure 60(b) because it is based on neither surprise nor newly discovered evidence. Counsel's argument at the motion hearing does not constitute new evidence.
The Margosians argue that the Land Bank's attempt to dispose of the Margosians' defense of fraud in the inducement is procedurally improper at this juncture. The dismissal of an affirmative defense must be done through summary judgment, and any evidentiary issues relating to a defense of fraud in the inducement are more properly addressed at or immediately prior to trial.
The Margosians also argue that they are not required to elect between damages under the contract or rescission of the contract because no contract existed. Put differently, in the circumstances as alleged by the Margosians, they are not required to affirm the contract in order to seek damages. Indeed, the Margosians state that they are not seeking contract damages, but other damages resulting from the fraud. In any event, they claim, they are permitted under California law to proceed on alternative, and even inconsistent theories.
Lastly, the Margosians argue that neither their counter-claim nor their affirmative defense alters the legal nature of the case.
The Land Bank states that it is not attempting to "box in" the Margosians' case, but rather to determine which claims and defenses will be presented at trial, and to whom — the Court or the jury — they will be presented.
The Land Bank reiterates that fraud in the inducement and fraud in the execution are separate affirmative defenses. It is the Bank's understanding that the Court has ruled only that the Margosians have a right to trial by jury on their defense of fraud in the execution.
The court finds that the Land Bank's motion, triggered by Margosian counsel argument at the hearing on the original motion, served to bring to the fore issues, discussed below, which had not previously been addressed and resolved adequately by the Court's original ruling on the jury issue and which need be resolved before trial or injustice could result. Accordingly, the Court grants the request for reconsideration/clarification under Federal Rule of Civil Procedure Rule 60(b) (6).
The primary issue raised by the Land Bank is whether the Margosians may present a defense of fraud in the inducement to a jury. The Court did not directly address this question in its prior ruling. The Margosians do not state that they wish to pursue this defense; at the same time, however, they have not foresworn it. For purposes of this Order the Court will proceed on the assumption that the Margosians do, in fact, intend to pursue this defense. However, the Court also will require the Margosians to definitively state, in subsequent briefing to be described below, whether this defense is at issue.
The Court is cognizant of the Land Bank's argument that, under California law, a claim of fraud in the inducement requires rescission before a party may avoid his or her obligations. The Land Bank cites numerous cases stating that a claim of fraud in the inducement is a claim for rescission, and a claim for rescission is an equitable claim to which no jury trial right attaches. However, these cases differ slightly from the situation presented here: a defense of fraud in the inducement, where no rescission is affirmatively sought. Accordingly, the Court resorts to the historical inquiry of whether the defense would have been heard at common law in 1791.
Historically, common law courts recognized the defense of fraud in the factum to a breach of contract claim, but refused to recognize the defense of fraud in the inducement. Bernard E. Gegan,
Nevertheless, the Margosians cite to
In sum, the defense of fraud in the inducement originally was available only in courts of equity. The effect of such defense is rescission, an equitable remedy. The defense therefore is equitable in nature and, except for any issues which may be common to the Margosians' legal claims, is to be resolved by the Court.
The Land Bank argues that, because the Margosians have elected to sue for damages, they may not later disaffirm the guaranty and seek equitable rescission. Thus, the Land Bank seeks reconsideration/clarification as to whether it may seek entry of judgment on its claims prior to trial of the Margosians' counter-claims.
However, the Margosians have stated that both their claim for damages and their defense of fraud are based, at least in part, on fraud in the execution. As the Land Bank points out, a contract tainted by fraud in the execution is void, and rescission is not a necessity. Thus, the Court does not see how the Land Bank's claims may be adjudicated separately from the Margosians' counter-claims or from the Margosians' defense of fraud in the execution. This counter-claim and defense attacks the heart of the Land Bank's claim for breach.
The Margosians' potential defense of fraud in the inducement raises a more complex issue.
However, the determination of legal issues prior to equitable ones in this action may bear on the issue of election of remedies. As the Court previously acknowledged, California law requires a person claiming to be defrauded by false representations to elect between two inconsistent remedies: rescission of the contract or affirmance and a suit for damages.
In the instant action, if the jury finds against the Margosians on their counter-claim for damages, the doctrine of election of remedies would appear to bar the Court from thereafter resolving the Margosians' equitable defense of fraud in the inducement. This is because such defense would have the effect of rescinding the contract, a remedy which cannot be obtained after the contract has been affirmed through an action seeking damages.
At this point in the litigation, these concerns are largely academic. It is unclear whether the Margosians even intend to present a defense of fraud in the inducement. To the extent they do, the Court is without sufficient information to determine whether the legal and equitable defenses involve common factual issues. If they do not, the Court may adjudicate the equitable defense before the Margosians' legal claim is presented to the jury. If the legal and equitable defenses
Because of the significant lack of clarity regarding the defenses the Margosians intend to present and the facts applicable to those defenses, the Court cannot resolve this issue absent further briefing. Accordingly, the parties will be ordered to submit further briefing including a binding Trial Plan in accordance with the specifications and the schedule set forth below.
"[T]he district court is charged with effectuating the speedy and orderly administration of justice. There is universal acceptance in the federal courts that, in carrying out this mandate, a district court has the authority to enter pretrial case management and discovery orders designed to ensure that the relevant issues to be tried are identified, that the parties have an opportunity to engage in appropriate discovery and that the parties are adequately and timely prepared so that the trial can proceed efficiently and intelligibly."
On or before March 25, 2016, the
In addition to the Joint Pre-trial Statement discussed above, the Margosians shall, on or before March 25, 2016, file and serve a written Trial Plan consisting of the following:
In addition to the Joint Pre-trial Statement discussed above, the Land Bank shall on or before March 25, 2016, file and serve a written Trial Plan consisting of the following:
The Trial Plans provided in response to the foregoing, insofar as accepted by the Court and permitted by the Court to be followed, shall govern the nature, course and scope of the issues and evidence to be presented at the trial of this case.
Each party shall file
For the reasons stated, it is HEREBY ORDERED that:
IT IS SO ORDERED.