Forum Shopping is OK

By Harold Stotland

In any commercial dispute, the party who goes to court first has a tremendous advantage because that party can often choose where to file the suit.

Any attorney presented with a creditor's claim with multi state aspects has to consider whether the proposed venue is the best one. Multi-state transactions occur when the recipient of goods or services is in one state, and the vendor or supplier is in another. These types of transactions enable credit professionals to choose a forum for litigation that will benefit the creditor by increasing its chance for a successful outcome of litigation.

Claims against consumers covered by the Fair Debt Collection Practices Act (FDCPA) limit the choice of location where a creditor can sue. The FDCPA requires that the debtor be sued in the district where the document or contract was signed, or the district where the debtor resides at the time the suit is filed. Commercial claims, however, present the creditor with a good deal of latitude regarding the place or venue for litigation.

Here's an example illustrating how commercial claim venues are determined. A manufacturer of hardware headquartered in Kentucky sells to a California purchaser by entering into a purchase agreement at a trade show in Chicago. If the goods are manufactured in Kentucky, the purchaser can probably be sued in Kentucky and served with Summons in California. Every state has a "long arm" statute that permits plaintiffs to sue out-of-state parties under certain circumstances. However, since the contract was formed in Illinois, the purchaser can also be sued in Illinois. Finally, since the purchaser is a resident of California, the creditor can also proceed with litigation in that state.

In this example, commercial, multi-state transactions allow for at least three possible forums where litigation can be started to collect the balance due for goods or services. But how does the creditor choose where to file the suit?

A basic principle of all litigation is that the plaintiff should sue in the locale that is the most convenient for the creditor - and the most inconvenient to the debtor. To determine which forum to choose, the following factors should be considered:

1. Amount of claim - If the claim amount is small, it may not pay to litigate anywhere except where the debtor is located. Otherwise, two sets of attorneys are needed: one set to sue and obtain a judgment, and another set to enforce the judgment in the defendant's forum. With a small claim, the cost of long-arm litigation precludes its use.

2. Location of the debtor's assets - Many debtors have assets that can be reached in every state (e.g., credit card receivables). Therefore, it is possible to litigate in the creditor's home locale without the necessity of hiring a second law firm to enforce the judgment.

3. Possibility of affirmative defenses or counterclaims - If the debtor has raised affirmative defenses or there is the possibility of a counterclaim as a response to demands for payments, creditors always should consider suing in their home forum, if possible. This makes it more difficult for the debtor to raise these defenses. If there is a trial, then it is on the client's home turf where the client has available witnesses.

4. Litigation expense - Can the creditor sue in its home venue by using house counsel or a local attorney? If so, litigation is usually engaged at a reduced rate because of a long-established relationship with the law firm or attorney.

5. Location of enforcement - Will the judgment have to be enforced at the debtor's resident state? If the debtor will pay a possible judgment, then there is no problem suing in the creditor's home state. However, if it is known that any judgment will have to be enforced by execution, then long-arm litigation is disadvantageous because a second law firm must be hired to enforce the judgment locally.

Why do credit professionals have to consider venue issues? If a collection agency or attorney does not consider these dynamics, the creditor's credit manager has to be familiar with the possibility of long-arm litigation to know what questions to ask. In addition, just as credit professionals have to participate in the decision to sue, they also have to determine where to sue by considering the possibility of alternative forums for litigation in every multi-state transaction.