Venue Clauses — A Critical Component To Help Manage Receivables and Collect Debt
David J. Gengler
dgengler@kmksc.com
(414) 962-5110
When filing a lawsuit, one of the key factors to consider is where the action can be filed. As a general rule, most lawsuits relating to a breach of contract will be filed in the county where the defendant is located. However, there are many exceptions to this general rule. One important exception is that parties can agree in advance where any litigation will be commenced by including a provision in their contract specifying that the parties consent to a particular venue. These provisions are typically known as “venue provisions” or “venue clauses.”
Venue clauses can provide several potential benefits to a creditor. For example, a company based in Milwaukee, Wisconsin, may want to include a venue clause in its contracts that allows for any lawsuit to be heard in Milwaukee County, Wisconsin. Having the lawsuit heard in a creditor’s own “backyard” can benefit the creditor, as it is likely that many of its witnesses will be based nearby and it will be more convenient for those witnesses to appear in Milwaukee if the case proceeds to trial and they are required to give testimony (rather than having to travel to where the defendant resides). Additionally, filing suit outside of the county where the debtor resides will also make it more difficult for the debtor to contest the lawsuit, increasing the likelihood that the debtor will settle the dispute or decline to fight it.
There are two main types of venue provisions. The first are permissive venue clauses. These clauses specify that a case may be brought in a particular venue, or that the creditor has the option to file the lawsuit in a particular venue. By contrast, a mandatory venue clause requires a lawsuit to be commenced in a particular venue. These types of clauses should have precise language, for instance that any lawsuit “shall be exclusively brought” or “must be filed exclusively” in that specific venue.
Given the apparent benefits of filing a lawsuit in one’s own backyard, a creditor may wonder whether it should make it mandatory to file every lawsuit there. One important factor to consider when weighing that option is that the jurisdiction in which judgment is entered and the jurisdiction in which the judgment is enforced (e.g., the debt collected) may be different. Once judgment is entered, post-judgment collection options are available to be pursued if the defendant debtor does not voluntarily make payment arrangements. One of KMK’s most effective tools to collect on a judgment is a bank garnishment, where we obtain a court order instructing the bank to turn over any funds held in the defendant’s bank account. However, if the defendant and its bank are located in a different state, our judgment would need to be domesticated in the jurisdiction where the defendant is located before a bank garnishment can be pursued.
For example, if the creditor filed suit and obtained judgment in Milwaukee County (taking advantage of a venue clause), but the defendant debtor resided in Tampa, Florida, additional steps would need to be taken to domesticate the Wisconsin judgment in Florida before collection efforts were commenced. This would require additional time and costs involved in domesticating the judgment in the new venue, and both can vary by jurisdiction. Some states recognize a judgment entered in another state with a simple filing and a modest fee, while others require creditors effectively to file a second lawsuit to have the judgment entered in the new state. In those cases, it might be preferable to file suit in the jurisdiction where the debtor is located in the first instance.
There are many factors that should be considered when determining where to initiate a lawsuit if the creditor’s contracts have venue provisions. If the matter is highly disputed, a creditor would likely value the potential “chilling effect” of filing suit outside of the defendant’s home venue, even if a domestication of the judgment in another jurisdiction would be required before it can be enforced. On the other hand, if the expectation is that the lawsuit will not be defended and the creditor’s hope is to obtain a default judgment and pursue swift collection efforts, then a creditor could consider filing suit in the jurisdiction in which the debtor is located rather than incurring the additional time and costs involved in filing the initial lawsuit in one jurisdiction and then domesticating a judgment in a second jurisdiction.
Mandatory venue provisions can present obstacles to filing in the jurisdiction of the creditor’s choice. For instance, if a Milwaukee-based creditor expects to obtain a quick default judgment and opts to file suit where the defendant is located, but the venue clause requiring suit in Milwaukee County is mandatory, the creditor should be aware of the potential risks in pursuing this strategy. For instance, a defendant could plead improper venue as an affirmative defense, asserting that the creditor filed the lawsuit in the wrong court and seeking dismissal of the lawsuit. While the creditor could attempt to waive the venue provision, ignoring a mandatory venue clause could potentially put the case in jeopardy of dismissal. In some instances, a court may even take it upon itself to verify that a lawsuit is in the proper venue and dismiss the action if the court concludes it was filed in the improper venue. The creditor would then have to refile the lawsuit in the jurisdiction provided in the mandatory venue clause, and then domesticate the judgment (once entered) in the jurisdiction where the debtor is located.
Many creditors acquire new businesses from time to time. When reviewing customer accounts that may need to be sent to collection, creditors should ensure that they review the contracts and terms and conditions (including credit applications) they have inherited for venue provisions, as the presence (or absence) of a venue clause can substantially impact the creditor’s optimal collection strategy. A newly acquired company could have been formerly based in a state where the creditor does not currently have any business activity, but a mandatory venue provision could necessitate initiating suit in that state where now neither the creditor nor the debtor are located. This could result in additional time and expenditures that do not tend to benefit either party. In these instances, when possible, creditors should try to obtain a new credit application or other agreements with the newly acquired customers that contain more favorable terms, including appropriate venue provisions.
Creditors should consider reviewing and updating their credit application, contracts and terms and conditions to ensure that they reflect the terms most favorable to them, including a review of appropriate venue provisions. If you have any questions concerning updating your credit application and contracts, or drafting a new credit application and contracts, or have any questions about venue clauses, please contact KMK Attorneys Darrell R. Zall (dzall@kmksc.com) or David J. Gengler (dgengler@kmksc.com). Both can be reached at (414) 962-5110.