The Lessor of equipment is in New Jersey; the Lessees (hundreds of them) are all over the east coast. The Lessor has arranged financing by entering into an agreement with an Ohio bank or other funding source. All of the leases provide that the Lessees consent to jurisdiction in the state where the Lessor is located (New Jersey) or, if the lease is assigned to facilitate financing, where the assignee is located (Ohio). The Lessees are all commercial entities, not consumers. Three months later the Ohio bank provides funding and becomes the assignee. After a Lessee defaults and the Bank sues to recover damages or the equipment, is the jurisdictional consent in the forum selection clause effective? Don’t count on it!
In 2007, the Ohio Supreme Court decided Preferred Capital, Inc. v. Power Engineering Group, Inc., holding that the forum selection clause described above (a “floating forum selection clause”) would not be enforced because the Lessor knew that it was going to assign the lease but failed to inform the Lessees of that fact. The trial court had found that it was the Lessor’s practice to assign most of its leases the day after their execution and that it was clear that the leases in question in the case were not exceptions. On those facts, the Supreme Court upheld the trial court’s decision that the forum selection clauses were unenforceable. The Court reasoned that the Lessor knew it would be assigning the leases to someone in a jurisdiction where it might be inconvenient for the Lessee to defend against a claim and it had an obligation to disclose that fact to the Lessees. Yes, the Lessees were presumed to have read the contract and to have known that the leases might be assigned and enforced in another state but they did not know that this was a virtual certainty. Therefore, the Supreme Court held that the forum selection clause was unreasonable and unenforceable.
So, when is a floating forum selection clause enforceable? Perhaps not very often, if you follow the recent opinion of the 12th District Court of Appeals in National City Commercial Capital Corp. v. Bullard, Butler App. Nos. CA 2010-10-276 and CA 2010-10-296, 2011-Ohio-5780. There, the assignee argued that the assignment did not occur until 30 days after the lease execution, that not all leases were assigned by the Lessor all of the time, that this assignee was one of many utilized by Lessor and that, therefore there was no knowledge by the Lessor at the time that the leases were executed that there was going to be an assignment to a “distant” forum. Nevertheless, the court found that the Lessor knew it was probable that the lease would be assigned, giving the Lessor “superior information” than the Lessees had; yet it “withheld” that information, failing to point out that it was likely that the leases would be assigned out of state. The court held that it would be unreasonable and unjust to enforce the floating forum selection clause where the Lessor had failed to disclose that likelihood.
While the decision did not come from Ohio’s highest court, it is a fair warning to all Ohio banks and others providing financing and taking contract assignments as security that enforcement of your rights on default may require that you file suit in a jurisdiction that is inconvenient to you.