Best Practices: Jurisdiction, Venue and Choice of Law: Why Does Where Matter?

Buried in the terms of a lender’s loan documents there are several provisions that are usually titled “jurisdiction, venue and/or choice of law.” It is important for lenders to review these terms to ensure that the provisions protect the lender and the lender’s interest in the collateral securing the loan, especially in the event of a default.   Generally, jurisdiction refers to which courts have the authority to hear a particular lawsuit. Venue refers to the location where the lawsuit is filed. Finally, choice of law refers to which state laws apply to any dispute between the parties to the loan documents. This article will briefly discuss the importance of each term in the context of commercial lending.

For a court to have jurisdiction over a party, whether a person or an entity, that party has to be located within the state or have “minimum contacts” with that state. While “minimum contacts” is determined on a case by case basis, generally courts will look to see if a party does activities or conducts business in a particular state or has any ties to a particular state that would permit a court in that state to hear a case involving that party. This can impact a lender located in one state, such as California, who is making loans across the country. That lender may be pulled into courts in Florida by a borrower located there, if a dispute over the loan arises. Even if this lender has no offices or other contacts to that state, the court may find the lender has minimal contacts with that state.

Venue falls along the same lines as jurisdiction. Venue outlines where a party may file a lawsuit. Most times the rules of court in each state govern where a party may file a lawsuit. This pertains to both the state, and more specifically, the county where the lawsuit may be filed. Most times the venue for a lawsuit must be a location where the parties are presently located or where the transaction or occurrence that gave rise to the lawsuit occurred.

With respect to both jurisdiction and venue, the parties can establish and agree to which courts have jurisdiction over the parties and where the lawsuit may be filed in the loan documents. The majority of courts will uphold those agreed upon terms for jurisdiction and venue allowing the lender to control where a lawsuit may be filed. A lender may require jurisdiction and venue where the lender’s headquarters are located. This may save the lender time and money from having to litigate a case on the other side of the country. Loan documents with these specific provisions may also help avoid a fight over where the lawsuit has or should be filed.

Choice of law relates to which state laws will be applied to the facts of the lawsuit. For example, a lender may file a lawsuit in New Jersey, but the contract provides for California law to govern the contract. The court sitting in New Jersey will have to apply California law to determine the lawsuit. This is important because state laws vary. One state’s laws may result in a more favorable result for a lender, depending on the issue being litigated.

When a lender has collateral located in multiple states, a lender may want the laws of the state where the collateral is located to be applied to the lawsuit involving the collateral, such as a foreclosure or a replevin action. This can be accomplished by including proper choice of law language in the loan documents.

Jurisdiction, venue and choice of law provisions can significantly impact the lender if the loan goes into default. Lenders should take an opportunity to review these terms to make sure they are appropriate for each loan. For assistance with litigation and servicing matters, please contact Lyndsay at 267.470.1154 or at lrowland@starfieldsmith.com.