Forum selection clauses are favored by most courts in most jurisdictions, as a contractual mechanism to provide certainty with respect to where a litigation may be commenced in the event of a dispute between the contracting parties. However, not all forum selection clauses are created equal.

One type of forum selection clause which courts have generally declined to enforce, are those which are deemed to be overbroad and, therefore, do not serve the statutory purpose of providing certainty as to where a litigation may take place. An example of such a clause would be one that allows one of the contracting parties to sue the other "in any court located in the United States". Brooke Group Ltd. v. JCH Syndicate, 87 N.Y. 2d 530 (1996).

Another type of forum selection clause that has not been universally enforced is the so-called "floating" forum selection clause. A floating forum selection clause is one which subjects a contracting party to jurisdiction and venue wherever an assignee of the other contracting party may be located, even if the assignee is unknown or unidentified at the time of the contract. Courts which have been critical of floating forum selection clauses have typically focused on the fact that at the time of execution of the agreement containing such a clause, at least one of the contracting parties does not know where a potential assignee may be located and, therefore, where they may be subjecting themselves to jurisdiction and venue. Preferred Capital, Inc. v. Power Engineering Group, Inc., 112 Ohio St. 3d 429 (2007).

Nevertheless, floating forum selection clauses are widely used in the lending and finance industry and courts have recognized that the clauses serve a valid business purpose by making agreements more readily assignable (such as in capital markets, syndications or other similar credit facilities), which results in lower pricing to customers. IFC Credit Corp. v. Aliano Brothers General Contractors, Inc., 437 F. 3d 606 (7th Cir. 2006). Even courts that have refused to enforce floating forum selection clauses on state law public policy grounds have recognized their valid business purpose. Preferred Capital, supra.

Recently, the enforceability of a floating forum selection clause under both New York and Federal law was addressed by a Federal judge in the Southern District of New York in a case entitled Signature Financial, LLC v. Neighbors Global Holdings, LLC et al., 281 F. Supp. 3d 438 (SDNY 2017).

In an Opinion dated December 19, 2017, the Court explained a prior "bottom-line Order" which had denied in its entirety the defendants' motion to either dismiss Signature's case against them for lack of personal jurisdiction, or, alternatively, transfer venue to the Southern District of Texas. The Opinion recognized that the question of personal jurisdiction was governed by New York State law, while the question of venue was governed by Federal law. Therefore, the Court was required to analyze the enforceability of the floating forum selection clause under both New York State law and Federal law. After a detailed analysis, the Court held that the floating forum selection clause is enforceable under both New York State and Federal law, subject to the traditional grounds for invalidating forum selection clauses generally, such as fraud relating to procuring the clause (which was not present in the Signature case). As Judge Rakoff stated when discussing the floating forum selection clause's enforceability under New York State law:

Floating mandatory consent to jurisdiction clauses are enforced in New York because they facilitate the loan assignment market by allowing lenders to assign loans to other lenders and still sue borrowers for non-payment of rent in their home jurisdictions. The purpose of the clauses is not to surprise or inconvenience defendants, but to lower the cost of servicing lease portfolios. Lenders with large books of leases bring many suits for non-payment, and they can manage these portfolios more efficiently if they can bring all such suits in one place.

By enforcing these clauses, New York courts lower borrowing costs for lessees by expanding the pool of capital available to finance leases. Were New York courts to invalidate these clauses, financial institutions in New York might refrain from buying leases extended in other states, such as Texas, reducing access to capital for individuals and businesses in these areas. The negative effects may be particularly pronounced in those areas with lower concentrations of banking assets.

The opinion distinguished the "series cases arising out of the nationwide fraud perpetuated by a defunct firm call NorVergence ... where the defendants were small, out-of-state, local businesses ill-equipped to litigate in New York", and some courts refused to enforce floating forum selection clauses. However, where the party opposing enforcement of the floating forum selection clause is a "sophisticated business", as was the case in the Signature matter, the Court found no reason to refuse enforcement of the clause.

As a postscript to the December 2017 Federal court decision upholding jurisdiction to allow Signature to pursue its claims for its defaulted finance leases, on May 9, 2018, the Court filed a final decision in Signature v. Neighbors, which granted Signature's motion for summary judgment in full on all counts. 2018 U.S. Dist. LEXIS 78428. The Summary Judgment Decision first analyzed the validity of the assignments of the subject leases from the original vendor of the equipment to the first assignee, EverBank, and then from EverBank to Signature. After finding the assignments valid, the Court then disposed of allegations of fraudulent inducement that Neighbors had made against the vendor in an effort to void the leases. Finally, the Court enforced the "hell-or-high-water" provision and waiver of defenses against assignees, noting that the leases expressly provided that, if they were assigned by the vendor, the assignees would have all of the vendors' rights and benefits under the leases, but not its obligations. Therefore, any allegations of a failure to provide ongoing service or other obligations under the leases could not be asserted as a defense to Signature's claims. The end result was an award to Signature of the full accelerated lease balances, possession of the leased equipment, and attorney's fees and costs.

Originally published in The Secured Lender

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.