The U.S. District Court for the Eastern District of Pennsylvania has issued a ruling upholding choice of law and forum selection clauses. PPL Energy Svcs. Holdings, Inc. v. Zoot Properties, LLC, 2006 WL 2524228 (E.D. Pa. Aug. 30, 2006).
PPL Energy Services Holdings, Inc. ("PPL") sold certain fuel cells to Zoot Properties, LLC ("Zoot Properties") on credit. Zoot Properties executed a loan agreement and note for the amount financed through PPL. Zoot Enterprises, Inc. ("Zoot Enterprises" and, together with Zoot Properties, the "Zoot Entities"), the parent to Zoot Properties, further secured the obligation by executing a guaranty agreement. The loan agreement and guaranty contained both a choice of law and forum selection clause designating that any lawsuits would be filed in Pennsylvania and that Pennsylvania law would apply.
Zoot Properties alleged that immediately upon installation, the fuel cells failed to properly function. Nevertheless, Zoot Properties made payments to PPL pursuant to the note until August 2005, at which time the parties attempted to consensually resolve their dispute. The parties entered into a tolling agreement extending the payment due date and the statute of limitations period to Nov. 15, 2005.
As of Nov. 14, 2005, the parties had not resolved their dispute, and the Zoot Entities filed an action in the U.S. District Court for the District of Montana, seeking rescission of the purchase agreement and damages. PPL subsequently notified Zoot Properties that it was in default on the loan agreement and related notes, and therefore obtained a confession of judgment against Zoot Properties in the Court of Common Pleas for Lehigh County, Pennsylvania.
The Zoot Entities successfully removed the state court action in Pennsylvania to the U.S. District Court for the Eastern District of Pennsylvania. Thereafter, the Zoot Entities filed motions seeking to (i) transfer venue to the District of Montana, and (ii) strike or open the confessed judgment entered by the Pennsylvania state court.
The Zoot Entities argued that the first-filed rule applied, and therefore the case must proceed in the District of Montana. PPL, on the other hand, argued that the forum selection and choice of law provisions of the loan documents required the case to remain in Pennsylvania.
Significantly, as acknowledged by both parties, confession of judgment was not available in the Montana courts. The district court accepted PPL’s argument that the Zoot Entities attempted to avoid the consequences of a confession of judgment by rushing to file their action in the District of Montana before PPL initiated suit.
The court ultimately determined that the parties had agreed to litigate disputes in Pennsylvania, and found no reason to forego enforcement of the forum selection and choice of law clauses in the agreements. Furthermore, the court departed from the first-to-file rule because the Zoot Entities had acted in bad faith and with the blatant attempt to forum shop. Therefore, the District Court for the Eastern District of Pennsylvania denied the motion to transfer the case to the District of Montana.
However, recognizing that the Zoot Entities had articulated facts whereby a jury might conclude that they had defenses to the confession of judgment, the court opened the confession of judgment.
This case is good news for lenders that seek to avail themselves of confession of judgment provisions in certain jurisdictions. Such lenders should include forum selection and choice of law clauses in all of their agreements with borrowers to ensure that cases will be litigated in favorable venues where confession remedies are available.
This article is presented for informational purposes only and is not intended to constitute legal advice.