Choice of law and venue provisions are the legal equivalent of choosing your battlefield. A favorable choice of law provision (like New York) can ensure that the lender does not run afoul of, for example, usury statutes, or prevent the borrower or guarantor from taking advantage of onerous state-law provisions. Similarly, a venue provision can ensure that disputes are litigated in a forum that is convenient for your organization.
State substantive law can be outcome-determinative.
In California, for example, guarantors sued for a deficiency may avoid liability by arguing that they are not “true guarantors.” Under California law, a person is not a true guarantor if that person is already personally liable for the underlying loan apart from any additional personal guaranty. Talbott v. Hustwit, 78 Cal. Rptr. 3d 703, 706 (Cal. Ct. App. 2008). This situation might arise, for instance, in the case of a loan to a partnership where the general partners themselves are personally liable for the partnership’s debts regardless of whether they sign any additional personal guaranty.Id. In such a situation, California law provides that “where a principal obligor purports to take on additional liability as a guarantor, nothing is added to the primary obligation.” Id.
While California Courts have held that there is no “true guarantor” problem when the loan is made to an entity whose principals are shielded from personal liability by a corporate structure, id. at 706-707, there is no reason to allow for this argument in a transaction having connections to jurisdictions other than California. So, even if your guarantors are California residents (or the bank is), if you can choose the law of some other state, do so.
Try to maintain the home-court advantage.
Related to choice of law, but different, is venue. A venue provision identifies the location in which disputes arising out the transaction can be tried. There are two things to remember about venue provisions: (1) they can be mandatory or permissive; and (2) they should be consistent across documents.
A mandatory venue provision reads like this:
Any dispute arising under or in connection with this Agreement or related to any matter which is the subject of the Agreement shall be subject to the exclusive jurisdiction of the state and/or federal courts located in Dallas County, Texas.
Under this provision, any suit arising out of the loan transaction must take place in courts located in Dallas County. By contrast, these are permissive venue provisions:
Any dispute arising under or in connection with this Agreement shall come within the jurisdiction of the state and/or federal courts located within Dallas County, Texas.
Any dispute arising under or in connection with this Agreement may be brought in the state and/or federal courts located within Dallas County, Texas.
Under these provisions, litigation can take place in any court of competent jurisdiction, and one such jurisdiction is courts located in Dallas County. If your client wants the option of filing suit elsewhere, you need a permissive venue clause. But if your client only wants to litigate in one place (i.e., his backyard), you need a mandatory clause.
The other thing to keep in mind is that all loan transaction documents should choose the same venue. Be sure to read the note, the security instrument and the guaranty. Do all three have the same venue? If not, choose one. Please.
Choice of law and venue are powerful provisions that can make a real difference in both the cost and outcome of litigation. So don’t default to what you’ve always done. Give some real thought to what law is best for your organization and what courts you want applying it.© 2014 Andrews Kurth LLP