If a choice-of-law clause matters, so does the forum

by Timothy M. Kowal, Esq.

A recent opinion of the California Court of Appeal held a New York choice-of-law clause was ineffective to enforce a party's waiver of jury trial. In Rincon EV Realty LLC v. CP III Rincon Towers, Inc., New York-based parties negotiated a loan agreement with a New York choice-of-law clause, signed the agreement in New York, and disbursed the funds in New York, with the funds ultimately going to build apartments in San Francisco. In a lawsuit following a default of the loan, the California court nonetheless held that, although New York law generally allows jury-trial waivers, and although the parties expressly agreed to New York law, the waiver would violate a fundamental policy of California and thus was unenforceable.

Shareholder protections also are implicated by this ominous exception to choice-of-law enforceability. Under Nevada law, for example, judgment creditors may not obtain a turnover order against a shareholder of a Nevada corporation - the shares may not be seized, and the sole remedy is a charging order against future distributions. (Nev. Rev. Stats. 78.746.) Predicting a judgment creditor would seek to apply contrary California policy, TVA recently filed a complaint for declaratory relief in Nevada state court, seeking an order that Nevada's shareholder protections apply. To avoid the outcome and dismiss the suit, the judgment creditor was forced to promise, on the record, that it would not seek to overcome Nevada's shareholder protections.

As a result of TVA's Nevada lawsuit, when the creditor sought to enforce its judgment in California court, the creditor had to acknowledge that Nevada law applied.

Beware of depending unduly on a choice-of-law provision.