Article

Note: In June 2007, Robert Langley (Mortgagor/Applicant) applied for two adjustable-rate mortgage loans for approximately US$73,000,000 and US$14,000,000 from Prudential Mortgage Capital Company, LLC (Mortgagee/Beneficiary) to finance two separate commercial real estate projects. The parties negotiated two "Rate Lock Agreements" which required Mortgagor to pay "unwind costs if the loans failed to close for any reason." The contracts also contained a forum selection clause which stated that "any litigation arising out of this Agreement shall be brought only in a state or federal court sitting in New York County in the State of New York." When the subprime mortgage crisis occurred and the rate on 10-Year Treasury Notes fell, Mortgagee classified the event as a "material adverse change" and demanded an increase in the rate lock deposits from Mortgagor, but the parties disagreed as to the rate-fixing mechanism. Mortgagor then applied for two LCs from National City Bank (Issuer) to prevent Mortgagee from declaring an "unwind event" and because he hoped that the LCs would facilitate resolution of the Rate Lock Agreement dispute. Nonetheless, Mortgagee claimed that the failure to finalize the loans constituted an unwind event and drew on the LCs. Mortgagor then sued Mortgagee and Issuer to enjoin Issuer from honoring the LCs.

The United States District Court for the Eastern District of Kentucky, Hood, J., applying Kentucky law, issued a preliminary injunction. The Judge agreed with Mortgagor that "as there was no meeting of the minds regarding the Rate Lock Agreements, the choice of law and forum selection clauses [choosing New York as the forum and New York law]...do not control this litigation."

On appeal, the United States Court of Appeals for the Sixth Circuit, in a per curiam opinion, vacated and remanded. The court ruled that the trial court had properly applied Kentucky law, but that the contracts were enforceable, and "[b]ecause the record indicates that this disagreement is the result of a good faith dispute and that both interpretations are supported by the evidence, the meaning of the contested term must be determined." Since the contract was enforceable, the appellate court concluded that the trial court had not had time to entertain motions regarding the proper venue and that the injunction should accordingly be vacated and the case remanded for further proceedings by the trial court.

In a dissent, Merritt, J., stated that the appellate court's procedural decision unnecessarily prolonged the litigation in the improper forum: "The forum shopping and procedural fencing litigation tactics of [Mortgagor's] lawyers in this case are obvious. The case was filed in an alien forum in contravention of a perfectly valid forum selection clause for the purposes of delay and obfuscation...The proper solution to this problem is to terminate this action brought in the wrong court so that the parties can either settle their dispute or litigate it in the proper forum."

Comment:

It is unclear how a forum selection clause in the underlying contract can bind an actor to enjoin payment under an LC that does not have a forum selection clause.

[JEB/plc]

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