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Arkansas Supreme Court Reviews Borrower Right to Jury Trial

Posted By USFN, Thursday, January 18, 2018
Updated: Thursday, January 18, 2018

January 18, 2018

by Charles Ward
Wilson & Associates, PLLC – USFN Member (Arkansas, Mississippi, Tennessee)

The Arkansas Supreme Court recently issued an opinion in Tilley v. Malvern National Bank, 2017 Ark. 343 (Dec. 7, 2017), holding that a borrower has no right to a jury trial under Arkansas law on a judicial foreclosure claim brought against him by a bank. However, the ruling also recognizes the same borrower’s right to trial by jury on his counterclaims for money damages despite a pre-dispute jury waiver clause in the loan agreement. Accordingly, the Supreme Court affirmed the trial court’s decision denying the borrower’s request for a jury trial on the underlying foreclosure claim, but reversed the trial court’s holding that the pre-dispute jury waiver contained in the parties’ loan agreement was valid.

Tilley borrowed $221,000 from Malvern National Bank in 2010. A loan agreement, promissory note, and mortgage were executed. The loan agreement included a jury-waiver clause. Tilley later defaulted and the Bank filed a foreclosure action against him. Tilley’s answer to the Bank’s complaint demanded a jury trial. His counterclaim asserted six separate claims for money damages — including breach of contract, tortious interference with a business expectancy, negligence, and fraud — plus included a demand for a jury trial.

State Supreme Court’s Analysis
The issue of a right to a trial by jury was before the Court in two different contexts. First, the Court addressed the right of a borrower to a jury trial in a foreclosure proceeding. Second, the Court looked at a borrower’s right to a jury trial on the legal issues raised in the counterclaims.

Bank’s Foreclosure Claim — With regard to the foreclosure claim, the Court followed established case law and held that a foreclosure proceeding, historically, is an equitable proceeding to which the constitutional right to a jury trial does not extend. The trial court’s denial of the borrower’s request for a jury trial on the Bank’s foreclosure claim was upheld by the Arkansas Supreme Court.

Borrower’s Counterclaims — The Court then turned to the Bank’s arguments against a jury trial on the counterclaims. The Bank contended that the “clean-up doctrine” required that Tilley’s counterclaims for damages be decided by the trial court, not a jury. In considering this point, it is important to know that prior to 2000, Arkansas maintained separate systems of trial courts. Circuit courts decided legal claims for money damages, such as cases for breach of contract, personal injury, or property damage. These legal claims generally were decided by juries. Chancery courts, on the other hand, determined equitable claims such as divorce actions and foreclosures. Historically, equitable claims were decided by the court, not by a jury. Some lawsuits, though, raise both legal and equitable claims. In order to avoid the time and expense involved in having one court decide the legal claims and another court the equitable claims, the so-called “clean-up doctrine” was developed, which allowed the chancery court to decide both types of claims.

In 2000 Arkansas’s circuit and chancery courts were merged, and their legal and equitable jurisdictions were combined into the circuit courts. The Bank contended that the trial court — a circuit court having both legal and equitable jurisdiction as a result of the merger — could decide not only the Bank’s equitable foreclosure claim without a jury but also the borrower’s legal counterclaims for damages under the clean-up doctrine. The Supreme Court rejected this argument by noting that after the merger of law and equity in Arkansas, that doctrine was abolished.

In place of applying the clean-up doctrine to decide right-to-jury-trial issues, trial courts (after the merger of law and equity) were to review the historical nature of the allegations, distinguishing legal from equitable, and then resolve the jury trial question by deciding equitable claims itself and having a jury decide the legal ones. The Supreme Court determined that the borrower’s counterclaims (such as breach of contract, tortious interference, and fraud) were legal, not equitable, and should have been decided by a jury.

After rejecting the Bank’s assertion that the trial court was correct in ruling on the merits of the borrower’s counterclaims itself, the Supreme Court took up the Bank’s argument that the borrower waived his right to a jury trial on the counterclaims in the jury-waiver clause of the loan agreement. The Supreme Court noted that the Arkansas Constitution allows that the right to a jury trial may be waived, but only in the manner prescribed by law. For example, a borrower’s waiver of a right to a jury trial in an arbitration agreement is a waiver made in the manner prescribed by law; that is, as prescribed by the Arkansas Arbitration Act. However, except for matters of arbitration, Arkansas law does not allow for waivers of the right to a jury trial before the onset of an actual dispute between parties; the Arkansas Rules of Civil Procedure provide for a waiver of a jury trial after litigation has begun, not before. Consequently, the trial court erred in holding that Tilley had effectively waived his right to a jury trial in the loan agreement he executed at the time the Bank made the loan.

Tilley may well result in more counterclaims being filed in Arkansas judicial foreclosure proceedings by borrowers. Lenders holding Arkansas mortgages will want to avoid the time and expense of defending against these claims in jury trials. One possible response to this risk would be to insert a provision in the loan agreement, or mortgage, requiring arbitration of such claims.

Arbitration provisions are enforceable under Arkansas law. However, if the lender plans on selling the mortgage to Fannie Mae, be aware that the Fannie Mae form mortgage for Arkansas does not contain a mandatory arbitration provision. Moreover, Part B8-3-02 of the Fannie Mae Servicing Guide states that “[m]ortgages that are subject to mandatory arbitration are ineligible for sale to, or securitization by, Fannie Mae unless the mandatory arbitration provision provides that, in the event of a transfer or sale of the mortgage or an interest in the mortgage to Fannie Mae, the mandatory arbitration clause immediately and automatically becomes null and void and cannot be reinstated.” Although this restriction against use of a mandatory arbitration provision applies only to mortgages purchased by Fannie Mae, and not to other investors, some of these other investors adopt the Fannie Mae guidelines as their own.

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