We are frequently asked by our lender clients whether a choice of forum clause should be included in loan documents and, if so, is it enforceable against a borrower who lives in a state other than the state of the lender? The answer to the first question is “always”; the response to the second is “almost always.”
In the recent case of Republic Credit Corporation v. Rance, an Iowa lender sued John Rance (“Rance”), a resident of California, who had borrowed $850,000. Rance had executed three notes to evidence the loans. Each note provided as follows: “This note has been delivered to Lender and accepted by Lender in [the] State of Iowa. If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction of Warren County, State of Iowa. This note shall be governed by and construed in accordance with the laws of the State of Iowa.”
The lending bank became insolvent, and the Federal Deposit Insurance Corporation assigned Rance’s notes to Republic Credit Corporation (“Republic”). After Rance failed to pay the notes, Republic sued Rance in Iowa. Rance contested the jurisdiction of the Iowa court. Citing a seminal United States Supreme Court decision, the federal district court said Republic could proceed with its action against Rance in Iowa. The U.S. Supreme Court decision held that an out-of-state defendant can be subjected to the jurisdiction of courts in a particular state when the defendant’s conduct and connection to the forum state are such that the defendant can “reasonably anticipate being hauled into court there.”
While the execution of an agreement containing a choice of forum clause is not by itself sufficient to force the defendant into a foreign jurisdiction, the federal district court noted the notes executed by Rance provided, in bold typeface, “This note has been delivered to the Lender and received by the Lender in the State of Iowa.” This conduct, the court concluded, was sufficient for Republic to assert that Rance was subject to jurisdiction in the state of Iowa.
The lesson lenders should take from this case is that their loan documents must not only provide for the choice of the forum, but the lender should also be certain that the borrower undertakes some overt action, i.e., delivery of loan documents, that will permit the courts to determine that the borrower has submitted himself to the jurisdiction of the state in which the suit is filed.
Our Firm spends a substantial amount of our time representing lenders in loan documentation, workouts, and litigation. Do not hesitate to telephone us if you have any questions with respect to any aspect of a loan transaction