Commercial Division Enforces Forum-Selection Clause

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Can the purchasers of promissory notes containing non-New York forum-selection clauses enforce the notes in the Commercial Division?  Not without an extraordinary showing as to why the clauses should be set aside, according to Commercial Division Justice Elizabeth Emerson’s recent decision in Stein v. United Wind, Inc.[1]  In Stein, Justice Emerson granted a motion to dismiss an action to enforce promissory notes where the notes designated Delaware as the exclusive forum for any disputes arising in connection with the notes. 

Background

The dispute in Stein arose from defendant United Wind’s efforts to raise additional funds for its wind-energy development and leasing operations.  In 2017, plaintiffs Howard and Cathy Stein (the “Steins”), and Jeremy Tark (“Tark”) entered into subscription agreements and purchased convertible promissory notes.  The Steins invested $75,000 and Tark invested $100,000.[2]

In 2018, United Wind entered into a term sheet with defendants Eocycle Technologies (“Eocycle”) to obtain a secured loan for $100,000 and an additional $776,754 in funding through a jointly formed entity, defendant 18373510, Inc. (the “Joint Entity”), that would then purchase United Wind’s assets.[3]  United Wind’s noteholders were asked to consent to the new transaction and execute a waiver-and-amendment agreement.  Neither the Steins nor Tark consented or executed the agreement.[4]  Nevertheless, United Wind entered into an asset-purchase agreement with the Joint Entity in October 2018. 

The notes matured on December 31, 2019, but neither the Steins nor Tark were paid.  They filed suit in the Commercial Division against United Wind, Eocycle, the Joint Entity, and United Wind’s President and CEO, Russell Tencer (“Tencer”) for breach of the promissory notes, breach of the subscription agreements, fraud in the inducement, fraudulent conveyances, conversion, unjust enrichment, and an accounting.[5]

Enforcement of the Forum-Selection Clauses

The promissory notes that the Steins and Tark purchased contained forum-selection clauses providing that “the state and federal courts sitting in the State of Delaware shall have exclusive jurisdiction over any dispute arising in connection with this Note.”[6]  The notes also provided that Delaware law governed.  Neither the Steins nor Tark had signed the promissory notes.  The subscription agreements, which were signed by the Steins and Tark, respectively, contained only the Delaware choice-of-law provision; the subscription agreements were silent as to forum.

The defendants moved to dismiss the complaint on the basis that the promissory notes could only be enforced in Delaware.[7]  The plaintiffs countered that the forum-selection clauses were unenforceable because they did not sign the notes, the parties had no connection to Delaware, and they were fraudulently induced to purchase the notes.

Justice Emerson quickly concluded that “it was not necessary for the plaintiffs to sign each individual note” to be bound by the forum-selection clause.[8]  She noted that plaintiffs signed the subscription agreements “on which the promissory notes are based.”[9]  The plaintiffs also performed under the notes by paying the subscription price to United Wind, and ultimately sought to enforce the notes.[10]  Given these facts, “the plaintiffs, who are sophisticated parties, clearly manifested their assent to the terms of the subscription agreements and notes.”  And, although Eocycle and the Joint Entity were not parties to the subscription agreements, their relationship with United Wind was “sufficiently close” to allow them to enforce the clauses.[11]

Having concluded that the Steins and Tark were bound by the forum-selection clauses, Justice Emerson turned to the arguments that the clauses were unreasonable or otherwise unenforceable.  At the outset, she noted “it is now recognized that parties to a contract may freely select a forum to resolve any disputes over the interpretation or performance of a contract.”[12]  Given the certainty and predictability offered by forum-selection clauses, they are enforced “absent a strong showing that they are unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or that a trial in the selected forum would be so gravely difficult that the opposing party would, for all practical purposes, be deprived of his day in court.”[13]  Importantly, according to the court, the fraudulent inducement of a contract as a whole does not warrant invalidating a forum-selection clause; rather, the clause itself must be procured by fraud.[14]

The court concluded that plaintiffs had not made a “strong showing” that the forum-selection clause should be set aside.  The court rejected the “conclusory allegation” that none of the parties had substantive connections to Delaware, and noted that United Wind and the Joint Entity are both Delaware corporations.  The court also rejected fraud as a basis for invalidating the clauses because plaintiffs did not allege specific fraud with respect to the forum-selection clauses (and allegations of fraud with respect to the transaction as a whole were barred by the prominent disclosures in the subscription agreement that the investment in United Wind was “speculative” and involved a “high degree of risk”).[15]  Without allegations of fraud regarding the clauses themselves, nor any other reason to ignore the forum-selection provisions, the court concluded that the clauses were enforceable.

Finally, the court turned to the question of the scope of the clauses.  Justice Emerson noted that New York public policy “favors enforcement of forum-selection clauses and supports a broad reading of those clauses.”[16]  In this case, the clauses covered “any dispute arising in connection with the Note[s].”[17]  Such language has previously been construed by New York courts to include not only contractual claims, but also “tort claims, [and] fraud-in-the-inducement claims.”[18]  The Court reasoned that the forum-selection clause in the promissory notes covered all of plaintiffs’ claims because the claims “arise out of the contractual relationship between United Wind and plaintiffs, without which there would be no relationship between the parties.”  Further, the claims “all seek the same relief, repayment pursuant to the terms of the notes and subscriptions.”[19]  The clause, therefore, “applies to all of the plaintiffs’ claims.”[20]

Since the forum-selection clause was found enforceable and applicable to all of plaintiffs’ claims, Justice Emerson granted all defendants’ motions to dismiss the action.

Conclusion

The Commercial Division’s ruling in Stein is another reminder that, unless there are good reasons otherwise, forum-selection clauses will be broadly enforced by New York courts.  Plaintiffs seeking to bring claims in the Commercial Division where a non-New York forum-selection clause is involved should be aware that an exceptional and specific showing will be required to avoid the effect of the clause and keep the case in the Commercial Division.


[1] 70 Misc. 3d 1215(A), 2021 BL 46405 (Sup. Ct. N.Y. Cnty. 2021).

[2] Id. at *1.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id. at *2.

[8] Id.

[9] Id.

[10] Id.

[11] Id. at *3.

[12] Id. at *2 (citing Brooke Grp. v. JCH Syndicate, 87 N.Y.2d 530, 534, 663 N.E. 625, 640 N.Y.S.2d 479 (N.Y. 1996).

[13] Id. (citing Di Ruocco v. Flamingo Beach Hotel & Casino, 163 A.D.2d 270, 271-72, 557 N.Y.S.2d 140 (N.Y. App. Div. 2d Dep’t 1990); Shalam v. KPMG, LLP, 13 Misc. 3d 1205(A) (N.Y. Sup. Ct. 2006), aff’d 43 A.D.3d 752, 843 N.Y.S.2d 17 (N.Y. App. Div. 1st Dep’t 2007)).

[14] Id. at *2.

[15] Id.

[16] Id. at *3 (citing Triple Z Postal Serv., Inc. v. United Parcel Serv., Inc., 13 Misc. 3d 1241(A), 831 N.Y.S.2d 357).

[17] Id. at *3.

[18] Id. at *3.

[19] Id.

[20] Id.

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