MULTIPLE STATE TRANSACTIONS
THE JURISDICTIONAL QUESTION: WHERE TO FILE YOUR LITIGATION
In circumstances where parties to a credit agreement are located in different states, creditors are faced with important and many times difficult questions as to where to initiate collection litigation. Generally speaking, absent a contractual agreement to the contrary, in order to pursue a defendant, you must go to the state in which the defendant is located and into any county within which the defendant conducts its business. However, certain credit applications, purchase orders, and other sundry contracts associated with a sale agreement may provide for a “stipulated” jurisdictional forum. These contractual provisions are generally known as “forum selection provisions” and contractually provide for the right of the creditor to file in its “home state.” Subject to reasonableness requirements, these agreements are enforceable.
In the collection industry, there is a general presumption that, despite the presence of a forum selection provision, it is most advisable to initiate your litigation within the state of the defendant. This is based upon the ultimate necessity of proceeding through this debtor’s state courts for the purpose of enforcing your judgment rights, once obtained. Although a judgment may be obtainable in a foreign jurisdiction (Michigan judgment against a company located in Wisconsin), it is necessary to take your judgment to the defendant’s state and go through a domestication procedure. This will transform your foreign state judgment into a “domestic judgment” and provide the creditor with access to the judicial powers for the purposes of asset execution, attachment, and levy.
Notwithstanding the domestication procedure, in order to domesticate a foreign judgment, many states require that the defendant be notified and given a minimum opportunity to defend. In essence, the creditor is providing the defendant with a “second bite at the apple” to institute or assert various defenses to the underlying debt. Furthermore, the defendant is always entitled to attack whether or not the foreign state actually possessed personal jurisdiction so as to render a binding and enforceable judgment. This would test the reasonableness of the forum selection provision. Any challenge of the enforceability of the provision could result in extended litigation and additional delay. Should the creditor lose on a reasonableness basis, the entire litigation process must start over.
Also, there always exists the possibility to seek collection within Federal Court. In the event the plaintiff (creditor) and defendant (debtor) are from different states and the amount sought is greater than $50,000, the Federal Court should have jurisdiction over the matter. However, generally speaking, the Federal Court is not an attractive alternative for collection litigation. This is due to the necessity of ultimately having to take advantage of state law asset attachment/execution procedures and time delays associated with federal docket backlog.
Therefore, when choosing the individual state within which to litigate, the following general rules should be followed:
i) Absent a contractual forum selection provision, the case should be initiated in the defendant’s home state and in the principal county where its primary office is located. Federal Court should only be used in extreme circumstances and upon advice of counsel.
ii) In the event a contractual arrangement provides for forum selection, the creditor’s state should only be chosen as a site of regulation under the following circumstances:
a) The defendant has “some” contacts with the creditor state (this will make the provision more reasonable), and
b) The case is disputed and is anticipated to require involvement and activity of various parties as witnesses, and
c) It is not believed that the subject defendant is financially incapable of meeting the obligation and satisfying the outstanding debt.
We hope the foregoing information will be of assistance in evaluating your cases and preparing for the necessity of initiating litigation for the collection of your receivables.