• Forum Selection Clauses In Promissory Notes May Be Effective Against Guarantors
  • January 20, 2012
  • Law Firm: Lerch Early Brewer Chartered - Bethesda Office
  • A federal court in Kansas recently held that guarantors who were residents of Arizona, and who absolutely and unconditionally guaranteed the payment of an Arizona company’s debt for the purchase and improvement of real property located in Arizona, could be sued in Kansas and Kansas law could govern. The guarantees stated that the guarantors were subject to all the terms in the promissory note and the note selected Kansas as the forum for disputes.

    In 2007, First National Bank of Olathe issued a $9.1 million loan to Dove Valley LLC, evidenced by a promissory note. Among other things, the note was secured by guaranties from 11 individuals (all of whom resided in Arizona) and one corporation, which was based in Arizona. Sunflower Bank, among others, entered into a Loan Participation Agreement with First National and purchased a 55% participation interest in the loan.

    In 2010, a few years after the loan was executed, Dove Valley LLC defaulted. The parties engaged in negotiations which resulted in a renewed loan for $9,117,999 with Sunflower assuming First National’s position as lead lender. The parties executed new loan documents, including guaranty agreements, to that effect.

    In 2011, after Dove Valley LLC again defaulted, Sunflower accelerated the loan and filed suit seeking enforce the 2010 guaranty agreements. The guarantors filed motions to dismiss, arguing that Kansas did not have personal jurisdiction over them “and that for reasons of convenience, the court should transfer the action to the United States District court for the District of Arizona.” The court denied the guarantors’ motions to dismiss.

    The court first looked at the choice of law provision found in the signed guaranties. The provision stated that: “This Guaranty is governed by the laws of Kansas, the United States of America, and to the extent required, by the laws of the jurisdiction where the Property is located, except to the extent such state laws are preempted by federal law.” The court noted that it found no circumstances that required the application of Arizona law, as Arizona law did not compel a contrary result. The court stated that the guaranties required the application of Kansas law to reflect the parties’ effective and voluntary choice.

    The guarantors contended that because the Kansas forum selection clause was found only in the note, and not the guaranties, keeping the lawsuit in Kansas was not justified. The court held that the guarantors were subject to the provision in the note selecting Kansas as the forum. The court explained that the guaranties expressly directed the guarantors “to abide by the terms of the [n]ote” because the under the guaranties, the guarantors absolutely and unconditionally guaranteed the payment and performance of the “Debt”—which term was expressly defined in the guaranties to include the note.

    The guarantors further argued that when they executed the guaranties, they did not intend to subject themselves to jurisdiction in Kansas. The court did not find this argument persuasive and explained that, “an agreement to litigate in a specific forum cannot be later thwarted by the expediency of asserting a contrary subjective intention” or by “an alleged failure to subjectively understand the import of the agreement.” The court further held the enforcement of the forum selection clause was reasonable, stating that while the guarantors “may indeed suffer some inconvenience by defending this action in Kansas, such a result by itself does not authorize ignoring the agreement of the parties.”

    Furthermore, the court held that even if the note did not contain a Kansas forum selection clause, the action could be maintained in Kansas. The action could be maintained in Kansas because the minimum contacts requirement of due process clause of the Fourteenth Amendment—“that a non-resident defendant had sufficient contacts with Kansas to reasonably anticipate being hauled into court here”—was satisfied when the guarantors “purposefully engaged in commercial activities with Kansas financial institutions” and Sunflower’s alleged damages arose from these activities. As examples of these contacts, the court cited numerous emails, phone calls and letters with Sunflower in Kansas. The court stated that “a reasonably prudent guarantor would have understood that by executing the 2007 and 2010 [guaranties]—which explicitly identify the lender as a Kansas bank, with a Kansas address, creating an agreement that is subject to Kansas law, and which explicitly or by incorporation included a provision for exclusive Kansas jurisdiction - the guarantor was subjecting himself or herself to jurisdiction in Kansas.”

    The court’s decision was not affected by the guarantors’ course of dealings with the Scottsdale, Arizona office. The court held that the localized course of dealings could not alter the express terms of the guaranties “which provide that the guarantors were formally and explicitly agreeing that they were undertaking their obligations in order to induce a Kansas bank to extend credit.” Additionally, the lenders never waived their right to expect performance in Kansas, and reminded the guarantors to send communications to Kansas.

    This case is cited as Sunflower Bank, N.A. v. Lund, 2011 WL 4526780 (D. Kan. 9/28/11).