Adam R. Shaw ()
This column reports on notable decisions of the U.S. District Court for the Northern District of New York. This installment discusses an opinion by District Judge Mae A. D’Agostino evaluating whether a forum selection clause precludes removal to federal court; an opinion by Chief District Judge Gary L. Sharpe delineating when a settlement is final and enforceable; and an opinion by Senior District Judge Norman A. Mordue discussing waiver of the affirmative defense of insufficient service of process.
Forum Selection Clause
In Peracchio v. National Sports Academy,1 Judge D’Agostino reminds litigants that forum selection clauses in contracts require precision. Plaintiff John Peracchio joined the Board of Trustees of the non-profit National Sports Academy and promptly lent it over $100,000 under a promissory note. The note provided for the academy’s consent to the jurisdiction of any state or federal court in New York for an action on the note. It also provided that Peracchio could accelerate repayment in the event of default, which included Peracchio no longer serving on the board.
When Peracchio resigned from the board, he demanded the loan be repaid and later sued in the state court in New York to recover the funds. After the academy removed the action to federal court, Peracchio moved to remand the case back to state court arguing that the forum selection clause precluded removal. The academy cross-moved to dismiss, arguing that Peracchio could not unilaterally create an event of default in order to accelerate repayment of the note.
As to removal, the court ruled that the forum selection clause was valid, but it did not serve to limit the academy’s right to remove the action from state court to federal court. According to the court, a forum selection clause will preclude a defendant’s right to remove an action to federal court only when that preclusion is clear and equivocal.
While the forum selection clause at issue unequivocally selected New York State as the forum, the court found that it did not clearly preclude the right to remove. The court reasoned that a forum selection clause that permits an action in either state or federal court and provides for consent to the jurisdiction of either court is “a permissive clause permitting jurisdiction in either forum” which does not preclude a party’s right to remove an action commenced in state court.
The court also rejected the academy’s argument that Peracchio wrongfully created an event of default to accelerate the note. The court noted that acceleration clauses are typically enforced according to their terms. However, there are circumstances where full acceleration of a note may be viewed as an unconscionable penalty for merely trivial or inconsequential breaches. The court ruled that while the academy may be able to submit proof later in the case to demonstrate that acceleration was an unconscionable penalty under the circumstances, the court would not evaluate those circumstances on a motion to dismiss. Accordingly, the court denied the motion to dismiss.
Finality of Settlements
When is a settlement really final? Chief Judge Sharpe confronted that question in Balaban-Krauss v. Executive Risk Indemnity.2 There, the plaintiffs sought a declaratory judgment for an insurance defense in an underlying state court action. The parties’ settlement discussions were fruitful, and in July 2013, they settled on a dollar amount to resolve the case. But then came the paperwork. The parties exchanged a series of emails with dueling versions of a settlement agreement and release. Finally, in August 2013, defendant’s counsel sent plaintiffs’ counsel an email with a new version of the settlement agreement and release indicating that she accepted plaintiffs’ changes and made no other changes and asked plaintiffs’ counsel to “let [her] know if this will do.”
The agreement provided that the defendant would pay the plaintiff the agreed amount within 21 days of receiving the executed agreement, after which plaintiffs were to formally discontinue the action. Plaintiffs never signed the agreement, and the parties had no further communications. Months later, defendant sought to enforce the settlement and dismiss the action based on the settlement.
According to the court, a settlement can be enforced summarily if the parties reach a binding and enforceable agreement. The court explained that when a settlement agreement has not been signed there are four factors it considers to determine whether an agreement is binding: (1) whether there is an express reservation requiring a writing; (2) whether there has been partial performance; (3) whether all terms were agreed upon; and (4) whether the agreement is of a type typically committed to writing.
Based on these factors, the court found that the settlement was not binding. First, the court reasoned, the parties clearly intended to complete the settlement only with a signed release, because they conditioned the settlement payment on the receipt of the executed agreement. According to the court, the signed release was the consideration for the defendant’s promise to pay. Without the signed release there was no consideration for the obligation to pay.
There was also no partial performance. Contrary to defendant’s argument, the court found that exchanging final drafts is not the equivalent of entering into a settlement in open court, and without the document being executed or money being paid, there was no partial performance. Finally, although the court found that all the terms appeared to have been agreed to and had been reduced to a writing, typically settlement agreements are actually signed, and the failure to sign the agreement at issue indicated that it was not fully committed to writing.
Waiver of Affirmative Defense
The affirmative defense of insufficient service of process is different than the defense of lack of personal jurisdiction and must be asserted separately in the first responsive pleading. That was the import of Senior District Judge Mordue’s ruling in Stuart v. Paulding.3 There, plaintiff asserted a §1983 action against six defendants. Three defendants successfully moved to dismiss the case against them before filing an answer based on the plaintiff’s failure to serve the complaint within 120 days. The other three defendants’ motion to dismiss based on the same grounds was denied, because the court ruled that they had waived the defense of insufficient service of process by not asserting it in answer to the complaint, which they had filed before their motion.
On reconsideration the defendants argued the motion to dismiss was governed by Rule 4(m) of the Federal Rules of Civil Procedure, which requires dismissal if the complaint is not served within 120 days, and was not governed by the waiver standards found in Rule 12(h). The court disagreed. According to the court, Rule 12(b) and (h) allow a party to assert the defense of “insufficient service of process,” but provide that the party waives that defense if it is not made in a pre-answer motion to dismiss or is not included in the answer.
According to the court, quite simply, if a defendant does not raise any objection to insufficient service of process in his first responsive submission, he waives it. Accordingly, the court rejected defendant’s argument that when service is not made within 120 days as required by Rule 4(m), Rule 12′s waiver previsions do not apply. Although the rules have some apparent tension, the court ruled that the overwhelming authority concludes that Rule 4(m) does not trump Rule 12(h) and that an objection that service is untimely under Rule 4(m) is subject to waiver if not asserted in a pre-motion answer.
The court also rejected defendants’ argument that they raised the defense of insufficient service of process by asserting the defense of lack of personal jurisdiction in their answer. The court explained that while those defenses are often related, they are not the same. Personal jurisdiction questions go to the defendant’s contacts with the forum that give the court the right to exercise power over the defendant, whereas, questions of sufficiency of service concern the manner in which service was made and not the court’s power to adjudicate the case. Accordingly, the court held, each defense has to be asserted specifically.
1. 14-CV-0005 (MAD/CFH), 2014 WL 1775509 (N.D.N.Y. May 2, 2014)
2. 13-CV-282 (GLS/CFH), 2014 WL 2927289 (N.D.N.Y. June 27, 2014).
3. 12-CV-25 (NAM), 2014 WL 2011240 (N.D.N.Y. May 16, 2014).