Special Assets Law–What is Judicial Reference?

In 2005, the California Supreme Court overruled the practice of including waivers of the right to a trial by jury in commercial agreements and loan documents before a lawsuit has been filed. For many years, sophisticated commercial businesses and institutional lenders included a clause in their agreements providing that the parties waive the right to a jury trial. A jury trial waiver authorizes a judge to try the case without a jury, resulting in a speedier, less costly trial and avoiding the possibility of jury prejudice against banks and institutional lenders.

Approved Alternatives to Jury Trial Waivers.
Fortunately, the Supreme Court did not leave parties to commercial contracts and loan documents without an alternative to a jury trial. The Supreme Court specifically noted that California statutes authorize alternatives, including arbitration and referral to a referee.

Arbitration. Arbitration is a familiar process. The parties agree to select one or more persons to act as arbitrators to decide a dispute. Although arbitration has many favorable qualities, in commercial cases, concerns are often raised because arbitrators are not always required to follow the law, there is no right of appeal and timetables that might otherwise be enforceable in a court proceeding can drag out, thus delaying the ultimate decision and increasing costs.

Reference. The other approach expressly approved by the Supreme Court involves the referral to a court-appointed “referee.” Under Section 638 of the California Code of Civil Procedure, a court is empowered to transfer a dispute to a referee upon the agreement of the parties. Section 638 expressly provides that a contract, agreement or lease made before a lawsuit has been filed can require that any controversy arising out of that contract or lease shall be heard by a referee.

The reference procedure is similar to that of arbitration in that one party to a contract or lease files a lawsuit to compel the resolution of the matter by referral to a referee. The court then appoints the referee who acts as decision-maker. Typically, the contract requires the referee to be a former judge. The advantage of using the referral procedure is that the referee must follow the law and the decision rendered by the referee will become a judgment that can be enforced and appealed.

Review Your Contracts, Leases and Loan Agreements.
Many existing loan documents, contracts and leases now contain jury waiver clauses that are no longer enforceable. We recommend that clients change these provisions in each and every one of their contracts, leases and loan agreements, particularly those that come up for renewal or need amendment.

While arbitration may be the best method of dispute resolution in certain circumstances, our experience at JMBM is that the referral process is a better choice in most commercial cases. This is particularly true where provisional remedies such as injunctions, claim and delivery, attachment and the appointment of a receiver are desirable.

The JMBM Special Assets Team™ has successfully invoked the judicial reference clause many times. We understand how to put this valuable tool to work for you immediately.

JMBM has also developed standardized clauses that address alternative dispute resolution –whether by arbitration or by judicial referral — that can be readily inserted into new agreements or inserted into existing agreements that are being amended. Please contact JMBM if you have any questions or need assistance in making certain that your new or existing agreements and forms are in compliance.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.