Seventh Circuit Finds 'Floating' Forum Selection Clauses Valid

The Seventh Circuit Court of Appeals, in an opinion that Judge Richard A. Posner authored, put to rest all of the arguments against the enforceability of the forum selection clause quoted above. It held that the clause was not only not confusing, but that it made clear that the venue of any suit under the ERA is the location of principal offices of either the lessor or, if the ERA had been assigned, of its assignee. IFC Credit Corp. v. Aliano Bros. Gen. Contractors, Inc., 437 F.3d 606 (7th Cir. 2006).

Aliano Brothers General Contract-ors, Inc. ('Aliano') was a lessee that had stopped making payments under its ERA when Norvergence stopped providing it with telecommunications services. When Norvergence's assignee, IFC Credit Corporation ('IFC') sued Aliano in federal court in Cook County, IL, the location of its principal offices, Aliano, a New Jersey corporation, contested personal jurisdiction at the federal district court level and won, resulting in the trial court judge dismissing IFC's claims. IFC then appealed to the U.S. Court of Appeals for the Seventh Circuit. Noting the potentially arbitrary result that could arise between outcomes under state law and federal law, the Aliano court reserved decision on whether the forum selection clause should be analyzed under either federal or state law, and instead analyzed how the appeal would be decided under both with the 'hope that the result will be the same.' Judge Posner found that it was.

Under federal law, a forum selection clause is as enforceable as any other contract term ' even between a business entity and a consumer ' absent evidence that the clause itself was procured through fraud. The Aliano court found that as a 25-year-old construction firm mainly dealing with public institutions, Aliano clearly had some degree of sophistication as a result of entering into many complex contracts throughout the years. Moreover, Aliano failed to allege or demonstrate that inclusion of the clause itself was the result of fraud. Thus, under federal law, the clause was enforceable.

The Aliano court also found that Illinois law regarding the validity of forum selection clauses was materially the same as federal law, with the caveat that Illinois law is slightly more indulgent toward a defendant contesting personal jurisdiction when there is a significant inequality of size or sophistication between the parties. Additionally, the Aliano court found that the forum selection clause was not ambiguous as it unequivocally designated the forum as the home state of either Norvergence or, if the ERA is assigned, the state in which the assignee's principal office is located. Finally, the Aliano court briefly discussed the effect of the forum selection clause from a commercial paper aspect and stated that to find the forum selection clause unenforceable would impede the assignment of contracts. If assignors would have to compensate their assignees for having to litigate in an inconvenient forum, assignments would become so burdensome that they would hinder the contracts' negotiability.

Thus, under the Seventh Circuit's careful analysis in Aliano, 'floating' forum selection clauses are valid under both federal law and Illinois law despite the fact that they do not identify a particular forum by name. The Aliano court's ruling is significant in that it validates an important consideration for lease finance companies that engage in vendor financing or the regular purchase of lease paper: the convenience and utility of the ability to litigate in your home forum. Substantial amounts of Norvergence ERA-related lawsuits have been put on hold while the issue of the forum selection clause's enforceability was sorted out. It is hoped that the decision in Aliano will pave the way to that litigation moving forward on the merits.

Aliano has been cited by other courts as controlling authority and has been followed in other Seventh Circuit decisions and by the Eleventh Circuit Court of Appeals. In addition, at least one state court has also decided to follow Aliano. See Secure Financial Service, Inc. v. Popular Leasing USA, Inc., 391 Md. 274, 892 A.2d 571 (2006). Additionally, a number of appeals are currently pending in the Illinois Appellate Court, First District, addressing the same issues as decided in Aliano. With a growing number of federal and state courts following the reasoning and holding in Aliano, equipment lessors can take comfort in placing reliance on the floating forum selection clauses in equipment leases that they purchase.

Vincent T. Borst is a partner in the Chicago firm of Askounis & Borst, P.C. He has litigated cases throughout the United States, at the trial and appellate levels, representing a wide variety of corporations in commercial matters involving equipment leasing, secured lending, and franchise-related issues. Borst represented IFC Credit Corporation at both the trial and appellate levels in the Aliano case and presented IFC's oral argument on appeal. He may be reached at [email protected].

The sale of individual equipment leases from one equipment lessor to another, or entire portfolios of equipment leases, is common practice in the United States. One component that parties interested in purchasing equipment leases or portfolios of equipment leases desire in the equipment lease contract is a choice of forum clause that provides the flexibility for the purchasing party to initiate litigation in its own home state. However, the enforceability of forum selection clauses providing for one or more appropriate forums has been the question of some debate both in the federal and state courts. Recently, the Seventh Circuit Court of Appeals issued an opinion coming down squarely in favor of the enforceability of such forum selection clauses.

In the fall of 2003, Norvergence, Inc. ('Norvergence') was a seemingly fast-growing, highly profitable telecommunications company. Norvergence contracted with thousands of small- to mid-size businesses throughout the United States, entering into Equipment Rental Agreements ('ERAs') for the lease of telecommunications equipment that was deemed to be proprietary, cutting-edge, and to be used in conjunction with telecom services that Norvergence would provide. After entering into an ERA, Norvergence would sell the payment rights under the ERA to a third-party leasing company. Norvergence retained all service obligations under the ERAs, and the ERAs provided that the lessees' payments under the leases to any subsequent assignee were unconditional. Additionally, the ERAs were fully integrated contracts, providing that there were no side agreements outside of the ERAs, that oral promises not contained in the ERAs cannot be enforced, and that the ERAs can only be modified by written agreement. Lease finance companies could not get enough of the ERAs into their portfolios, and lined up to take assignments of them from Norvergence. It was not until Norvergence collapsed into bankruptcy that these companies realized that they had the makings of a vendor financing fiasco on their hands. As lessee after lessee stopped making their payments under the ERAs when Norvergence became unable to provide them the promised telecommunications services, lease finance companies found themselves holding portfolios with astronomical delinquency rates and the prospect of protracted litigation to protect their investment.

As if mass defaults were not bad enough, when the lease finance companies began to pursue enforcement of the ERAs, they realized they had another, completely unforeseen problem; the ERA assignees found themselves faced with unprecedented opposition to the forum selection clauses contained in the ERAs. The ERAs have 'floating' forum selection clauses that shift venue upon assignment to the state in which the subsequent assignee's principal office is located. The clauses provide:

APPLICABLE LAW: This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which Rentor's principal offices are located or, if this Lease is assigned by Rentor, the State in which the assignee's principal offices are located, without regard to such State's choice of law considerations and all legal actions relating to this Lease shall be venued exclusively in a state or federal court located within that State, such court to be chosen at Rentor or Rentor's assignee's sole option. You hereby waive right to a trial by jury in any lawsuit in any way relating to this rental.

The 'floating' forum selection clauses are obviously attractive in that because venue shifts upon assignment, an assignee does not have to sue a defaulting lessee in a distant forum and instead can file suit in the state where its principal offices are located. Clearly, the conveniences associated with these 'floating' forum selection clauses render the paper easily transferable and appealing to third-party financing companies. However, when the lease finance companies went to suit in their home jurisdictions based upon this clause they found a formidable collection of courts and state and federal agencies arrayed against them, all making one form or the other of an argument that the forum selection clauses were unenforceable because they were confusing or unclear, and thus violated one statute or another, or public policy.

The Seventh Circuit Court of Appeals, in an opinion that Judge Richard A. Posner authored, put to rest all of the arguments against the enforceability of the forum selection clause quoted above. It held that the clause was not only not confusing, but that it made clear that the venue of any suit under the ERA is the location of principal offices of either the lessor or, if the ERA had been assigned, of its assignee. IFC Credit Corp. v. Aliano Bros. Gen. Contractors, Inc. , 437 F.3d 606 (7th Cir. 2006).

Aliano Brothers General Contract-ors, Inc. ('Aliano') was a lessee that had stopped making payments under its ERA when Norvergence stopped providing it with telecommunications services. When Norvergence's assignee, IFC Credit Corporation ('IFC') sued Aliano in federal court in Cook County, IL, the location of its principal offices, Aliano, a New Jersey corporation, contested personal jurisdiction at the federal district court level and won, resulting in the trial court judge dismissing IFC's claims. IFC then appealed to the U.S. Court of Appeals for the Seventh Circuit. Noting the potentially arbitrary result that could arise between outcomes under state law and federal law, the Aliano court reserved decision on whether the forum selection clause should be analyzed under either federal or state law, and instead analyzed how the appeal would be decided under both with the 'hope that the result will be the same.' Judge Posner found that it was.

Under federal law, a forum selection clause is as enforceable as any other contract term ' even between a business entity and a consumer ' absent evidence that the clause itself was procured through fraud. The Aliano court found that as a 25-year-old construction firm mainly dealing with public institutions, Aliano clearly had some degree of sophistication as a result of entering into many complex contracts throughout the years. Moreover, Aliano failed to allege or demonstrate that inclusion of the clause itself was the result of fraud. Thus, under federal law, the clause was enforceable.

The Aliano court also found that Illinois law regarding the validity of forum selection clauses was materially the same as federal law, with the caveat that Illinois law is slightly more indulgent toward a defendant contesting personal jurisdiction when there is a significant inequality of size or sophistication between the parties. Additionally, the Aliano court found that the forum selection clause was not ambiguous as it unequivocally designated the forum as the home state of either Norvergence or, if the ERA is assigned, the state in which the assignee's principal office is located. Finally, the Aliano court briefly discussed the effect of the forum selection clause from a commercial paper aspect and stated that to find the forum selection clause unenforceable would impede the assignment of contracts. If assignors would have to compensate their assignees for having to litigate in an inconvenient forum, assignments would become so burdensome that they would hinder the contracts' negotiability.

Thus, under the Seventh Circuit's careful analysis in Aliano, 'floating' forum selection clauses are valid under both federal law and Illinois law despite the fact that they do not identify a particular forum by name. The Aliano court's ruling is significant in that it validates an important consideration for lease finance companies that engage in vendor financing or the regular purchase of lease paper: the convenience and utility of the ability to litigate in your home forum. Substantial amounts of Norvergence ERA-related lawsuits have been put on hold while the issue of the forum selection clause's enforceability was sorted out. It is hoped that the decision in Aliano will pave the way to that litigation moving forward on the merits.

Aliano has been cited by other courts as controlling authority and has been followed in other Seventh Circuit decisions and by the Eleventh Circuit Court of Appeals. In addition, at least one state court has also decided to follow Aliano. See Secure Financial Service, Inc. v. Popular Leasing USA, Inc., 391 Md. 274, 892 A.2d 571 (2006). Additionally, a number of appeals are currently pending in the Illinois Appellate Court, First District, addressing the same issues as decided in Aliano. With a growing number of federal and state courts following the reasoning and holding in Aliano, equipment lessors can take comfort in placing reliance on the floating forum selection clauses in equipment leases that they purchase.

Vincent T. Borst is a partner in the Chicago firm of Askounis & Borst, P.C. He has litigated cases throughout the United States, at the trial and appellate levels, representing a wide variety of corporations in commercial matters involving equipment leasing, secured lending, and franchise-related issues. Borst represented IFC Credit Corporation at both the trial and appellate levels in the Aliano case and presented IFC's oral argument on appeal. He may be reached at [email protected].