"Floating" Forum-Selection Clauses are Invalid in Ohio
State and Federal Courts
By:
Thomas R. Himmelspach
The
Sixth Circuit held recently that parties cannot
contractually agree that disputes involving an assignee
of a party will be litigated where the assignee’s
principal offices are located. The decision marks a
change of view by the court, and the law in the Sixth
Circuit is now consistent with state law in Ohio.
In Preferred Capital, Inc. v.
Sarasota Kennel Club, Inc. (6th Cir.
2007), 489 F.3d 303, a Florida resident and his
corporation, Sarasota Kennel Club, rented
telecommunications equipment from a New Jersey
Corporation, Novergence, Inc. The contract contained a
forum-selection clause stating that if Novergence
assigned the agreement to another business, any disputes
would be litigated in the state where the assignee had
its principal offices.
One day after Sarasota Kennel
signed the contract, Novergence assigned the agreement
to Preferred Capital, an Ohio corporation, and told
Sarasota Kennel to send payments to Preferred Capital.
Sarasota Kennel later claimed that Novergence had failed
to perform and stopped making payments.
Preferred Capital sued Sarasota
Kennel in an Ohio state court. Sarasota Kennel removed
the case to federal court based on a federal law that
gives federal courts jurisdiction to hear disputes
between citizens of different states. Sarasota Kennel
moved to dismiss the case for lack of personal
jurisdiction, i.e., lack of sufficient contacts with
Ohio to be subject to personal jurisdiction there. The
district court agreed, rejecting the argument by
Preferred Capital that jurisdiction was proper under the
forum-selection clause.
Preferred Capital appealed the
dismissal to the Sixth Circuit Court of Appeals in
Cincinnati, citing a 2006 decision by the Sixth Circuit
that held the identical forum-selection clause to be
enforceable. The court decided the issue differently
this time, however, noting that the Ohio Supreme Court
had recently held the same clause to be invalid in
violation of Ohio’s public policy (Preferred Capital,
Inc. v. Power Eng’g Group, Inc., (2007), 860 N.E.2d
741). Citing the principle that federal courts should
try to provide uniform outcomes with state courts, the
court held that “Ohio law should apply to the
interpretation of this forum selection clause,” and that
“to apply federal law…would encourage forum shopping by
providing differing outcomes in federal and state
court.”
The court concluded the opinion by explaining that the
clause presented the opportunity for fraud by the
assignor, who could secretly intend to transfer the
contract immediately to a business in another
jurisdiction and force the other party to litigate
there. Given the risk of unfairness, the court agreed
with the Ohio Supreme Court that a floating
forum-selection clause is unreasonable and violates
public policy.
Tom Himmelspach
is a Partner in the Health & Medicine
Practice Group. He can be contacted at
thimmelspach@bdblaw.com or
330.491.5284.
By:
David Kern
The
law commonly known as the “Sarbanes-Oxley Act”
(actually, the American Competitiveness and Corporate
Accountability Act of 2002), which was signed into law
July 30, 2002, was passed in response to recent
corporate and accounting scandals. Most of the
provisions of Sarbanes-Oxley do not apply to nonprofit
organizations and generally are viewed as best
practices, but two arguably do apply: document
destruction and anti-retaliation (commonly referred to
as whistleblower protection), which are in the Federal
Criminal Code. It is advisable for nonprofits to adopt
document destruction and whistleblower policies.
As nonprofit organizations adopt
best practice standards, they have been organizing audit
committees, although these are not required by law. The
audit committee’s most important function is to select
the outside auditor. Acting on its own and without
management, the audit committee selects the auditor and
ensures that the auditor works for the nonprofit’s board
of directors, without any conflict of interest or other
loyalties owed to management. The audit committee must
then work closely with the auditor to monitor the
nonprofit organization’s financial condition.
In addition, the audit committee
meets with the auditor before the end of the nonprofit’s
fiscal year for formal updates, obtains the auditor’s
review of the adequacy of internal controls, and gathers
any recommendations for preventing financial
irregularities.
The audit committee should also
meet with the auditor and review the proposed audit
opinion prior to issuance, as well as the auditor’s
management letter, because it generally will contain
recommendations for strengthening financial reporting
and detecting any weaknesses in internal controls.
David Kern
is a Shareholder in the
Business Law, Health & Medicine
and
Trusts & Estates Practice Groups.
He can be contacted at
dkern@bdblaw.com
or
330.258.6489.
Corporate Law...
By:
Andrew W. Bernat
Limited Liability Companies Are Becoming a
Preferred Way of Doing Business
Is a limited liability company, or LLC, right for your
business? Benefits include:
- The ability of all owners to
participate in management and retain limited
liability.
- Pass-through tax treatment;
the owner pays tax.
- The flexibility to choose
treatment as a partnership, an S corporation, or a C
corporation for federal tax purposes.
- The ability to make
disproportional distributions to owners at their
discretion.
- Flexibility in how the LLC
will be operated, by the owners or by managers.
- The ability to issue more than
one class of ownership interests.
- Advantages for estate
planning.
The attorneys in BDB’s Corporate
Subgroup can help you identify and establish the right
type of entity, based on your objectives.
Employee Benefits Law...
By:
Lisa M. deFilippis, Employee Benefits Group
Chair
IRS Extends IRC §409A Compliance Deadline
On October 22, 2007, the IRS issued Notice 2007-86,
which extended the deadline to January 1, 2009 for
nonqualified deferred compensation plans to comply with
IRC §409A. Plans do not need to be amended to comply
and can be operated in “good faith” compliance with the
Final Regulations until that date.
IRC §409A, enacted in October 2004, imposed significant
new rules and restrictions on nonqualified deferred
compensation programs. Since then the IRS has issued
substantial regulatory guidance, including Notice
2005-1, Proposed Regulations, and Final Regulations.
The Final Regulations were to be effective January 1,
2008. Subsequent IRS guidance (Notice 2007-78) extended
the deadline for amending plans to comply with IRC 409A
to January 1, 2009; however, the deadline for
establishing deferral and distribution rules and for
making changes to existing deferral and distribution
elections was not extended by Notice 2007-78, and
remained January 1, 2008. Notice 2007-86 extended all
IRC §409A compliance until January 1, 2009.
Environmental Law...
By:
William L. Caplan, Environmental Group Chair and
David J. Hrina
A Bright Idea
Did you know that some fluorescent lamps contain as much
as 40 mg of mercury? The Ohio EPA does, and recommends
managing waste fluorescent lamps under the Universal
Waste Rule (UWR), which streamlines collection
requirements. Benefits include:
1. Avoiding having waste fluorescent lamps counted
towards your hazardous waste-generator status.
2. Fewer administrative requirements (i.e.,
recordkeeping, training and emergency preparedness).
3. Increased storage time allowed before disposal.
Finally, note that you should not break your waste
fluorescent lamps, or they will not qualify for the UWR
and must be disposed of as hazardous waste.
Finance & Public
Law...
By:
Stephen M. Hammersmith, Finance & Public Law
Group
Chair
IDBs on the Increase with Rising Interest Rates
Tax-exempt Industrial Development Bonds (IDBs), which
finance capital expenditures for manufacturing
facilities, are increasingly attractive as conventional
interest rates rise. Expenditures are limited to land
and depreciable property. In Ohio, the project must
create and retain jobs within the state.
IDBs are typically issued by a county, city or port
authority to benefit private borrowers, who must obtain
a bank letter of credit to secure the IDB. The bank’s
credit analysis for the IDB is the same as it would be
for a conventional commercial loan. Because of higher
closing costs, deal sizes usually should exceed
$2,000,000.
Borrower should obtain an inducement from the
governmental IDB issuer before making capital
expenditures to ensure that they are financing-eligible.
Call Steve Hammersmith
at 330.258.6417 if
you have any questions.
International Business
Law...
By:
Frank Schuckmann, International Business Law
Group
Chair
Benefiting From a Foreign-Trade Zone
A Foreign Trade Zone, or FTZ, is an area within the U.S.
that is in or near a customs port of entry, and that is
part of the Foreign Trade Zone Program. In general,
merchandise located in the FTZs is considered to be
outside the country for customs purposes. Accordingly,
many customs formalities (including payment of duties)
may be avoided or delayed until the merchandise enters
U.S. commerce. Among the activities permitted to occur
in the FTZ are assembly, testing, destruction and
repackaging. Upon special approval, even manufacturing
may be permitted. Use of an FTZ may benefit companies in
multiple ways, including reducing customs duties,
reducing delays created by longer hold times at a
customs port of entry, and tighter control over
inventory.
Mergers &
Acquisitions...
By:
John F. Ballard
Material Adverse Changes-You Can’t Always Get What
You Want
Since 9/11, considerable effort is being spent on
defining the exact parameters that allow a purchaser to
withdraw from a deal or renegotiate the price, where the
seller has undergone a serious hiccup between signing
and closing.
But two recent transactions teach that there are dangers
to buyers in invoking the MAC clause. In the first, the
Delaware Chancery Court ordered the buyer to complete a
deal on the original terms even though the seller had
experienced a bad quarter just before closing. The Court
reasoned that the buyer’s goals were long-term and
weren’t really impacted by a single bad quarter. Since
State courts, including Ohio’s, often follow Delaware’s
lead in M & A matters, this decision has relevance for
Ohio dealmakers.
In the other transaction, a buyer who invoked the MAC
clause because of the seller’s declining stock price
soon found that other buyers were happy to complete the
deal on the original terms, or better, and that the
seller’s board of directors was more than happy to deal
with them. The buyer lost the deal to a better bid.
Nonprofit Law...
By:
Gerald B. Chattman,
Nonprofit Law Group Chair
Care in Creating a Code of Ethics
An important issue facing the non-profit community is
the development, implementation and monitoring of an
agency Code of Ethics. Although a formal Code of Ethics
is not currently required by federal or most state laws,
the Internal Revenue Service has given a pretty strong
signal that it is seriously considering doing so: Form
990 now asks whether an agency has a Code of Ethics.
While a Code of Ethics is an important tool, agencies
must not set overly lofty standards which could create
new rights for the public, consumers or dissident board
members. In addition, an agency committee must monitor
compliance and review the document annually for
potential changes. The BDB Non-Profit Group has recently
developed and implemented Codes for a number of our
clients.
Securities Law...
By:
John F. Ballard, Securities
Law Group Chair
Enforcement of The Foreign Corrupt Practices
Act Increases
Businesses with international operations often face the
troublesome issue of what to do when foreign bureaucrats
demand "a little something extra" for just doing their
jobs. These payments are often considered to be just an
annoying “cost of doing business,” but it is a mistake
to avoid a full consideration of the real financial and
legal risks involved in violating the federal Foreign
Corrupt Practices Act (FCPA). Fines assessed under the
FCPA can greatly exceed the amount of the improper
payment made, not to mention the costs of litigation.
Because of these risks, and due to increasingly vigorous
enforcement of the FCPA, many companies now have review
procedures in place to control such payments or prohibit
them entirely.
In considering whether to make "facilitating payments,"
companies are well advised to seek legal advice.
Tax Law...
By:
David J. Lewis, Taxation Group Chair
Contract Termination Payments
In Private Letter Ruling 200730014, the Internal Revenue
Service advised that a payment made by a buyer of a
business to terminate a supply contract did not create a
capital asset. According to Internal Revenue Code
Section 263, payments used to acquire capital assets
both tangible and intangible are not deductible in full
when paid but rather must be capitalized and are then
deductible over their useful life. In PLR 200730014,
after the closing the buyer paid a termination fee to a
customer that had rights to purchase from the acquired
business a supply of product at less than market prices.
The buyer would incur losses on its purchases of product
to supply the customer. Rather than requiring the buyer
to book these losses as a contingent liability subject
to capitalization and amortization in connection with
the acquired business, the Service ruled the payments
could be current-period deductions. Payments made to
acquire or terminate contracts should be reviewed for
capital or current-period deductibility.
