Asserting an Equitable Defense or Counterclaim? “Waive” Your Jury Goodbye!

January 27, 2022

Most New York practitioners are aware that certain causes of action are triable by a jury, while other claims are triable only by the court. For example, causes of action for money damages, such as tort claims, contract claims, and certain statutory claims, are triable by a jury, while equitable claims, such as claims for rescission or reformation of a contract, are triable by the court.

But what if a litigant defending an action for money damages asserts an equitable defense or counterclaim? CPLR § 4101 specifically addresses that situation, providing that “equitable defenses and equitable counterclaims shall be tried by the court.” Consequently, where a plaintiff brings a legal claim triable by a jury and the defendant interposes equitable defenses or counterclaims arising from the same transaction, the defendant waives its right to a jury trial, even on the main, legal claim.

A defendant’s waiver of its right to a jury trial was recently addressed by the Albany County Commercial Division (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 that case, plaintiff Real Estate Webmasters, Inc. (“REW”) commenced an action against defendant Rodeo Realty, Inc. (“Rodeo”), seeking damages for Rodeo’s alleged anticipatory breach of an agreement (“Service Agreement”), pursuant to which REW was to develop a custom website for Rodeo. After issue was joined, REW moved for partial summary judgment on liability on its sole claim against Rodeo for anticipatory repudiation, and sought dismissal of Rodeo’s affirmative defenses and counterclaims (the “SJ Motion”).

The Court dismissed most of Rodeo’s affirmative defenses and counterclaims, but found triable issues of fact as to Rodeo’s counterclaim for fraudulent inducement and its affirmative defense alleging rescission and/or restitution based upon REW’s alleged fraud. Following discovery, REW filed a note of issue requesting a trial without jury. Rodeo responded by serving a jury demand. REW moved to strike the demand.

Justice Richard M. Platkin of the Albany County Commercial Division struck Rodeo’s jury demand, concluding 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 its right to a jury trial when it asserts an equitable counterclaim arising from the same set of facts as the plaintiff’s main claim – even if the plaintiff’s main claim is legal in nature. The Court then noted that whether a fraudulent inducement counterclaim is “equitable” or “legal” depends on whether the defrauded party disaffirmed the contract by prompt rescission (thus giving rise to an equitable claim or defense), or affirmed the contract and later pursued a legal claim for damages arising from the fraud.

Based on the position taken by Rodeo in opposition to the SJ Motion, the Court concluded Rodeo “unequivocally elected 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’s principal represented the Service Agreement “was rescinded” upon learning of REW’s allegedly false representations;
Rodeo’s principal stated he personally “terminated Rodeo’s relationship with [REW]” due to its “false representations” and “lying”;
Rodeo did not deny REW’s allegation that it had repudiated the Service Agreement. Rather, Rodeo argued the repudiation was “not wrongful” because it possessed “a valid rescission defense based on fraud”; and
Rodeo’s counsel affirmed Rodeo “justifiably rescinded the Service Agreement based upon fraudulent misrepresentations.”

Having elected to disaffirm the Service Agreement and defend against REW’s claim of anticipatory repudiation on the basis of the equitable defense of rescission, the Court concluded Rodeo’s counterclaim for fraudulent inducement was equitable, not legal, and Rodeo therefore waived its right to a jury trial.

Critically, the Court held that Rodeo’s fraudulent inducement counterclaim was equitable even though Rodeo expressly sought money damages in the counterclaim and in its prayer for relief. According to the Court, “the only damages identified in Rodeo’s counterclaim is 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 “restitutionary in nature” and “incidental to the equitable remedy of rescission” sought by Rodeo under its remaining affirmative defense. As the Court explained,

[F]ollowing its binding election to disaffirm the Agreement, Rodeo is limited to pursuing damages incidental or collateral to its equitable defense of rescission, including the recovery of the funds necessary to unwind the transaction and restore the parties to the status quo. This is a claim of an equitable nature.

The Court therefore concluded that Rodeo waived its right to a jury trial by interposing an equitable defense and counterclaim arising from the same transaction as REW’s claim of anticipatory repudiation.

Takeaways:

There are three main takeaways from the Court’s decision in Real Estate Webmasters:

First, equitable defenses and counterclaims (such as rescission or reformation of contract, or restitution) are triable by the court only – even if the plaintiff’s claim is legal in nature;
Second, a party who disaffirms a contract by seeking prompt rescission (as opposed to affirming the contract and later seeking damages) asserts an equitable – not a legal – claim; and
Third, an explicit demand for money damages will not transform an otherwise equitable counterclaim into a legal one, especially where, as in Real Estate Webmasters, the only damages alleged were “restitutionary” or incidental to the equitable relief.

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