Preferred Capital v. Power Engineering

• Decision Date: 07 February 2007
• Docket Number: No. 2005-2134.,2005-2134.
• Parties: PREFERRED CAPITAL, INC., Appellee, v. POWER ENGINEERING GROUP, INC; PAC Heating, Inc., et al., Appellants.
• Court: Ohio Supreme Court

860 N.E.2d 741

112 Ohio St.3d 429

2007-Ohio-257

PREFERRED CAPITAL, INC., Appellee, v. POWER ENGINEERING GROUP, INC; PAC Heating, Inc., et al., Appellants.

No. 2005-2134.

Supreme Court of Ohio.

Submitted September 20, 2006.

Decided February 7, 2007.

COPYRIGHT MATERIAL OMITTED

Roderick Linton, L.L.P., Tamara A. O'Brien, T. Anthony Mazzola, and Jason E. Hickman, Akron, for appellee.

Mark S. Shearer, Broadview Heights, for appellants PAC Heating, Inc., Hambergs Dr. BM Tru-Site Optical Co., and Donn C. Lamon, d.b.a. Lamon Associates.

Sutter, O'Connell & Farchione, Matthew C. O'Connell, and Victoria Barto, Cleveland, for appellants Houston Chapter Association General Contractors of America, Inc., and Tiny's Tire Center, Inc.

Julius P. Amourgis for appellant Pro Temps, Inc.

Gary Brown, Greenville, for appellant Doug Johnson & Associates, Inc.

Oldham & Dowling and Hamilton DeSaussure Jr., for appellants Rick Hore and Location Real Estate.

Gregory Glick, L.L.C., and Gregory Glick, Cleveland, for appellants Plyley Enterprises, Inc., and Custom Data Solutions, Inc.

Roetzel & Andress, Bradley A. Wright, and Jerome G. Wyss, Akron, for appellant Home Furnishings of Clarkston, Inc.

Dykema Gossett, P.L.L.C., Edward A. Groobert, Washington, DC, and Jill M. Wheaton, Ann Arbor, MI, for amicus curiae Equipment Leasing Association of America, Inc., in support of appellee.

Coley & Associates Co., L.P.A., and William P. Coley II, West Chester, for amicus curiae National City Commercial Capital Corporation, in support of appellee.

Tom Reilly, Attorney General of Massachusetts, and Scott D. Schafer and Geoffrey G. Why, Assistant Attorneys General, for amici curiae Attorneys General for the states of Arizona, California, Connecticut, Illinois, Iowa, Maryland, New York, Ohio Pennsylvania, Rhode Island, and Massachusetts, in support of appellants.

Fiehrer & Lane, L.P.A., and Stephen C. Lane, for amici curiae A & B Express USA, Inc., et al., in support of appellants.

MOYER, C.J.

{¶ 1} In this appeal, we are asked to determine whether a forum-selection clause that does not name a specific jurisdiction is valid and enforceable.

{¶ 2} Appellants are 12 out-of-state commercial entities that entered into lease agreements for telecommunications equipment with NorVergence, Inc., a New Jersey corporation. The lease agreements signed by appellants were virtually identical. The leases required appellants to make payments for 60 months and included a forum-selection clause stating: "This agreement shall be governed by * * * 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 assignees' principal offices are located * * * and all legal actions relating to this Lease shall be venued exclusively in a state or federal court located within that State * * *." At the time the leases were entered into, NorVergence's principal office was located in New Jersey.

{¶ 3} On September 30, 2003, before appellants signed the leases, NorVergence executed a Master Program Agreement with appellee, Preferred Capital, Inc. This agreement allowed NorVergence, "from time to time" to assign its interest in these lease agreements to Preferred Capital. Preferred Capital's principal offices are in Ohio.

{¶ 4} NorVergence assigned its interest in the appellants' lease payments to Preferred Capital — in most cases the day after the leases were executed. Averring that NorVergence had failed to provide the savings promised, the appellants stopped making their lease payments. NorVergence subsequently filed for bankruptcy protection and was later found to have violated the Federal Trade Commission Act. Fed. Trade Comm. v. NorVergence, Inc. (July 22, 2005), N.J. No. 04-5414, 2005 WL 3754864.

{¶ 5} Preferred Capital sued each of the appellants separately in the Summit County Court of Common Pleas. The trial court sustained appellants' individually filed Civ.R. 12(B)(2) motions to dismiss for lack of personal jurisdiction. On appeal, the court of appeals consolidated the cases and reversed the judgments, holding that the forum-selection clauses were valid and enforceable; we accepted appellants' discretionary appeal.

{¶ 6} We begin our analysis by reiterating our previous holding that "the requirement that a court have personal jurisdiction over a party is a waivable right and there are a variety of legal arrangements whereby litigants may consent to the personal jurisdiction of a particular court system. Moreover, in the light of present-day commercial realities, it has been stated that a forum selection clause in a commercial contract should control, absent a strong showing that it should be set aside." Kennecorp Mtge. Brokers, Inc. v. Country Club Convalescent Hosp., Inc. (1993), 66 Ohio St.3d 173, 175, 610 N.E.2d 987, citing The Bremen v. Zapata Off-Shore Co. (1972), 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513.

{¶ 7} In Kennecorp, we adopted a three-pronged test, similar to the test in Bremen, to determine the validity of a forum-selection clause: (1) Are both parties to the contract commercial entities? (2) Is there evidence of fraud or overreaching? (3) Would enforcement of the clause be unreasonable and unjust? Kennecorp, 66 Ohio St.3d 173, 610 N.E.2d 987 syllabus. In Kennecorp, a specific forum, Ohio, was specified in the clause. Here, the facts are slightly different. Rather than a specific named forum, such as Ohio or New Jersey, the clause allows for the forum to change depending on the state in which the headquarters of the entity that holds the interest in the lease payments are located. This type of forum-selection clause has been called a "floating forum clause." While this distinction is important in the application of the test, we conclude that the rule set forth in Kennecorp still applies. We next apply the test to the facts of this case.

Commercial Nature of the Contract

{¶ 8} "Commercial forum-selection clauses between for-profit business entities are prima facie valid. * * * By contrast, in Ohio, forum-selection clauses are less readily enforceable against consumers." Information Leasing Corp. v. Jaskot, 151 Ohio App.3d 546, 2003-Ohio-566, 784 N.E.2d 1192, ¶ 13. Appellants argue that they are "mom and pop" or small businesses and should not be considered sophisticated commercial entities. We reject that argument. First, there is nothing in the record to suggest that all appellants are indeed small businesses; moreover, appellants' suggestion that they are small businesses or sole proprietorships is not material. The contracts are commercial in nature between two for-profit entities. "Unlike a consumer who enters into a contract with a commercial entity, [a sole proprietor] is presumed to have some experience in contractual and business matters." Id. at ¶ 14. As we articulated in Kennecorp, forum-selection clauses should be distinguished between commercial and noncommercial parties. If both parties are for-profit, commercial entities, the relative size or sophistication of the parties is not a material factor.

Fraud or Overreaching

{¶ 9} There is no evidence of fraud or overreaching in this case. While appellants do allege that NorVergence intended to defraud them, there is no evidence that appellants agreed to the forum-selection clause as a result of fraud. The clause was clearly and legibly printed on the second page of a two-page contract. No effort was made to conceal or hide the clause. In fact, printed in large type and in all capitals directly above the signature line of the guaranty on the front page is the sentence "You agree to jurisdiction and venue as stated in the paragraph titled Applicable Law of the rental [agreement]." Additionally, there is a valid business reason for including a floating forum clause in a contract. Appellee and its amici point out that a floating forum clause makes it easier for the lessor to sell his interest in the lease payments to a finance company. We therefore conclude that there is an absence of fraud and overreaching by NorVergence in relation to the forum-selection clause.

Unreasonable or Unjust

{¶ 10} The final question to be answered under Kennecorp is whether enforcing the clause would be unreasonable and unjust. We begin our analysis by reiterating the long-held principle that parties to contracts are presumed to have read and understood them and that a signatory is bound by a contract that he or she willingly signed. Haller v. Borror Corp. (1990), 50 Ohio St.3d 10, 14, 552 N.E.2d 207; DeCamp v. Hamma (1876), 29 Ohio St. 467, 471-472.

{¶ 11} Appellants aver that litigating in Ohio would be burdensome because they are out-of-state entities. However, none of the appellants have offices in New Jersey, which is where the contract would have been litigated had NorVergence not assigned its interest. We are not persuaded that litigating a claim in Ohio would be any more burdensome for appellants than litigating a claim in New Jersey or that requiring the parties to litigate in Ohio would deprive them of their day in court. Presumably, for some appellants, litigating a dispute in Ohio would be less onerous than litigating in New Jersey.¹

{¶ 12} Although it does not appear in this case that enforcing the floating forum clause would deprive any appellant of its day in court, we hold that the clause is unreasonable because even a careful reading of the clause by a signatory would not answer the question of where he may be forced to defend or assert his contractual rights. At the time the contract was entered into, the appropriate forum would have been New Jersey; the very next day, in most cases, the lease was assigned to Preferred Capital and the appropriate forum became Ohio. Nothing prevented Preferred Capital from assigning its interest and changing the forum yet again. It is one thing for a contract to include a waiver of personal jurisdiction and an agreement to litigate in a foreign jurisdiction. It is...