March 2006

Enforceable Forum Selection Clauses

Contracts sometimes provide that any disputes will be resolved in the courts of a particular jurisdiction. Some courts have held, however, that such provisions are enforceable only when they name the specific state where suit is to be brought. Forum selection clauses that simply provide a framework for identifying the forum state, such as the state of residence of a party or its assignee, have been held invalid by these courts. The Ohio Supreme Court is now considering whether to hear an appeal that would decide whether a forum selection clause must specify the name of the state in whose courts any dispute will be resolved.

In a case decided February 1, 2006, the Seventh Circuit Court of Appeals (covering Illinois, Indiana, and Wisconsin) considered the validity of a forum selection clause that did not identify the forum state by name. It also addressed for the first time whether a federal court can exercise jurisdiction over a non-resident defendant who otherwise lacked the requisite minimum contacts to be subject to jurisdiction in that Circuit.

An Out-of-State Assignee

The dispute in IFC Credit Corp. v. Aliano Bros. 7^th Cir. 2006, Case No. 05-1720, 2006 U.S. App. LEXIS 2439, arose out of a contract for the leasing of telecommunications equipment. NorVergeance, Inc. leased the equipment to Aliano Bros., a construction firm, for a monthly rental fee of $20,000. Both NorVergeance and Aliano Bros. were New Jersey corporations. The contract provided that if Aliano Bros. defaulted on the payments, NorVergeance, or any business to whom it assigned the contract, could sue in a state or federal court in the state of the principal place of business of NorVergeance or its assignee.

NorVergeance assigned the contract to IFC, an Illinois corporation, and shortly thereafter Aliano Bros. defaulted. IFC sued Aliano Bros. in federal district court in Illinois for non-payment of the contract obligation, and Aliano Bros. moved to dismiss the case for lack of jurisdiction, arguing that it had no contact with Illinois. The federal district court granted the motion, holding that the forum selection clause was invalid. IFC appealed to the Seventh Circuit.

The Circuit court acknowledged the basis on which the federal district court had reached its decision. The Circuit court noted that IFC had sued many times in various Illinois state courts as assignee of NorVergeance contracts under the same forum selection clause. The Circuit court further noted that in most of those cases the courts had found the clause invalid on grounds that it was insufficiently specific, i.e., that it failed to identify by name the state where suit would be brought. It was on that basis that the federal district court had dismissed the case.

The Seventh Circuit, however, reversed. It noted that counsel for Aliano Bros. had agreed at oral argument that the clause would have been sufficiently specific if it had said suit could be brought in New York or Vermont, or in a federal district court in the First Circuit, “or in any state that George W. Bush carried in the 2004 presidential election.” The court observed that in each of those circumstances the specific forum state would not be known at the time of contracting.

Courts Protect the Freedom of Assignment

The court wrote that “[p]arties to contracts are not benefited by rules that make assignment burdensome,” and noted that if the contract had to identify the forum state by name, that requirement would impede the assignment of contracts. The requirement would be burdensome because the assignee would have to litigate in a state that might be inconvenient for it.

In reversing the district court’s dismissal order, the Circuit court also distinguished between contracts involving an individual and those involving two corporations. In IFC, the court noted that the contract was between two corporations and that Aliano Bros., a construction firm, was experienced in interpreting contracts. The court noted other decisions where forum selection clauses were not enforced when invoked against an individual who contracted with a corporation. Had this been such a case, the court would likely have applied the specificity requirement more rigorously.

Current Decisions in Ohio Courts

The IFC decision is consistent with some Ohio appellate court decisions that a forum selection clause, to be valid, need not identify the specific forum. For example, in Preferred Capital, Inc. v. Ferris Bros., Inc. 9^th Dist. No. 22581, 2005-Ohio-6221 (November 23, 2005), the court (in another telecommunications equipment lease case) upheld a clause stating that any action to enforce the contract would be brought where the rentor or its assignee had its principal offices. The court noted other Ohio decisions upholding forum selection clauses “in commercial contracts in which the jurisdiction is not stated with particularity.” The Ohio Supreme Court has yet to address the issue, however.

The court in Preferred Capital noted also that under Ohio law a defendant who agrees to a valid forum selection clause cannot argue insufficient contacts with the forum state to support jurisdiction “because the parties have waived the due process/minimum contacts requirement for personal jurisdiction by way of the forum selection clause….” A dissenting judge in Preferred Capital noted that the Ohio Supreme Court had recognized a forum selection clause as effecting such a waiver only in a case where the forum state was specifically identified.

The decision in Preferred Capital was appealed to the Ohio Supreme Court in January of 2006 on a discretionary appeal. The court has not yet decided whether to hear the case. The IFC decision should be instructive to the Ohio court if it accepts the appeal in Preferred Capital.

Thomas Himmelspach is a Partner in the Health & Medicine Practice Group of Buckingham, Doolittle & Burroughs, LLP. He can be reached at thimmelspach@bdblaw.com or 330.491.5284.

If you’re a real estate investor or own commercial property for your business, and you noticed an increase in your last real estate tax bill, the elimination of the 10 percent real estate property tax rollback may help explain why. As part of the state’s extensive budget bill signed into law by Governor Taft in June 2005, the tax reform package repealed a long-standing 10 percent real estate rollback on all commercial and industrial classified properties.

Beginning in tax year 2005, the 10 percent reduction of the property tax bill (or “rollback”) will apply only to property not intended primarily for use in a business activity.

Those uses of real property that are still eligible for the rollback are limited to:

All other real property activities are deemed to be a “business activity” and are therefore ineligible for the rollback. Every year, the county auditor will review each real property parcel to determine if it qualifies for the rollback as of January 1^st of the current tax year.

If you would like more information about how the repeal of the 10 percent property tax rollback may affect you, contact any Buckingham real estate attorney.

Brent Rosenthal is a Shareholder in the Business Law and Real Estate & Construction Practice Groups of Buckingham, Doolittle & Burroughs, LLP. He can be reached at brosenthal@bdblaw.com or 614.227.4266.

If you are an employer who sponsors a retirement plan for your employees, whether it is a 401(k) Plan, a Profit-Sharing Plan, or a Defined Benefit Plan, you know that the retirement plan must satisfy numerous IRS requirements in form and in operation in order to be qualified for tax purposes. When Congress changes or adds new qualification requirements, plans must be amended to maintain their tax-qualified status. It is very difficult to make all necessary amendments by the effective dates of the new legislation. So it has become common practice for the IRS to grant a specific period of time during which a retirement plan can be amended retroactively, provided that the plan is being operated in accordance with the new qualification requirements. This period of time is known as the “remedial amendment period.” The term also refers to the period of time that a retirement plan sponsor has to retroactively amend a newly adopted plan or to adopt other amendments that affect the plan’s qualified status, and remain in compliance. In addition, an individually designed plan (and sometimes a pre-approved plan) is generally submitted to the IRS for a determination that the plan is tax qualified within the remedial amendment period. Recently the IRS has changed its approach to reviewing retirement plans for tax qualification and to issuing determination letters.

The IRS has established a system of rolling remedial amendment periods so that retirement plans have a five- or six-year remedial amendment period cycle. Each individually designed plan has a five-year remedial amendment cycle. The cycles are staggered, so different plans have different five-year cycles. A plan’s five-year remedial amendment cycle is based on the last digit of the employer identification number (EIN) of the employer sponsoring the plan. The first of the five-year staggered cycles runs from February 1, 2006 to January 31, 2007. Under the new system, an individually designed plan must be operated in accordance with all tax-qualification requirements, but is required to be amended, and to be submitted to the IRS for a determination letter confirming its qualified status, only once every five years.

Pre-approved plans (meaning prototype and volume submitter plans) have six-year remedial amendment period cycles. For defined contribution plans, such as 401(k) plans, the end of the first six-year cycle and the deadline for prototype or volume submitter plan sponsors to submit such plans to the IRS was February 1, 2006. Once the IRS approves a prototype or volume submitter plan, the adopting employers will have specific period of time, established by the IRS, to adopt the updated plan. Employers adopting pre-approved plans will need to adopt a new plan document only every six years.

The remedial amendment period cycles apply to amendments required by EGTRRA, changes adopted by a particular plan, and changes in tax-qualification requirements during a plan’s remedial amendment period cycle.

A retirement plan sponsor should determine the remedial amendment period cycle and last day of the cycle for the plan. Plan sponsors should confirm that all amendments necessary to maintain compliance with tax-qualification requirements since December 31, 2001, have been made or are retroactively adopted, and that the plan is, and continues to be, operated in compliance with all requirements during the plan’s remedial amendment cycle.

Employers who maintain an individually designed plan, and in some cases employers who have adopted pre-approved plans, should prepare a determination letter submission prior to the end of the plan’s remedial amendment period cycle. For more information or for assistance in preparing a submission, please call me or any member of the BDB Taxation & Employee Benefits Practice Group.

Lisa deFilippis is a Partner in the Taxation & Employee Benefits Sub-Group, which is a part of the Business Law Practice Group of Buckingham, Doolittle & Burroughs, LLP. She can be reached at ldefilippis@bdblaw.com or 216.615.7345.

G. Brenda Coey (Buckingham Canton^SM) presented to the Ohio Health Care Association. Her topic was "The Federal Pressure Ulcer Guidelines for Nursing Homes."

Dirk E. Riemenschneider (Buckingham Cleveland^SM) lectured at Baldwin Wallace College to the athletic training students on "Malpractice Issues and Sports Related Injuries."

Christopher M. Ernst (Buckingham Cleveland^SM) spoke at the Wintergreen Expo and Conference sponsored by the Ohio Landscape Association. His topic was "Business Operations Update: Hot Topics." He discussed the latest legal and tax issues.

Dale A. Nowak (Buckingham Cleveland^SM) spoke at Cleveland State University Cleveland-Marshall College of Law. His topic was "Discovery Strategies."

On February 23, BDB sponsored the Annual Real Estate & Construction Law Seminar. Speakers and topics were as follows:

John P. Slagter (Buckingham Cleveland^SM) presented "Recent Developments in Land Use and Eminent Domain."

Steven A. Dimengo (Buckingham Akron^SM) spoke on "Section 1031 - Deferring Tax on Real Estate Sales."

David W. Woodburn (Buckingham Akron^SM) discussed "Wealth Planning: Protecting Your Real Estate Assets."

Robert A. Hager and Henry I. Reder (Buckingham Cleveland^SM) presented "AIA Construction Contracts: Pros, Cons and the Path Forward."

Thomas J. Sigmund (Buckingham Columbus^SM) made a presentation to a group of planned giving representatives for a Lutheran Foundation discussing the pitfalls and opportunities of charitable giving.

Michael A. Renne (Buckingham Columbus^SM) spoke on "Estate Planning" at the National Rural Electric Cooperative Association (NRECA) Retirement Planning Seminar in Columbus.

If you are interested in obtaining information on upcoming seminars or would be interested in having speakers from Buckingham, Doolittle & Burroughs, LLP make a presentation to your organization, please contact: Lorna Henderson, Client Relations Administrator, at lhenderson@bdblaw.com or 800.686.2825 ext. 86473.