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A recent federal court decision reinforces judicial deference to forum and venue clauses in business contracts.
The case of D.E. Frey Group v. FAS Holdings involved two parties who had entered into a contract specifying venue in New York County (Manhattan). Frey (Debtor) filed for Chapter 11 (reorganization) in federal bankruptcy court in Colorado.
Debtor listed FAS (Creditor) as a creditor whose claim was in dispute. The Debtor then commenced an adversary proceeding against Creditor, which was a way to get the bankruptcy court to hear Debtor's assertion that Creditor had breached the contract and therefore was not entitled to any money; indeed Debtor claimed that Creditor owed money.
Once in bankruptcy, the powers of the bankruptcy Judge are broad, and encompass the ability to deal with other litigation which is part of the "core proceeding." The bankruptcy court held a bench trial and found that Creditor owed Debtor the amount of $6 million.
At this point, the loser (Creditor) appealed on several grounds. The appellate court disposed of the case on the sole ground of the forum selection clause.
The contract between Frey and FAS specified New York County as the venue for any dispute, and the appellate court held that the bankruptcy court erred in not sending the matter to the federal court in New York.
While this matter involved a court proceeding, it is important to note that the appellate court explicitly noted that a similar logic would have applied to an arbitration provision since "As noted by the Supreme Court, arbitration agreements are merely forum selection clauses."
The appellate court in D.E. Frey began its analysis with Bremen v. Zapata Offshore (1972), the granddaddy of modern "forum selection" jurisprudence.
In Bremen, the Supreme Court upheld a clause specifying venue in a London court; the shift in attitude quickly led to a series of cases in the 1980s which firmly reversed the traditional judicial hostility toward arbitrations that went back to Wilko v. Swan (1953). Justice Frankfurter's dissent in Wilko specifically supported arbitration as an alternative to "the tortuous course of litigation, especially in the City of New York," and Frankfurter's dissent has now become the law.
The lesson here for franchisees:
Seeking refuge in bankruptcy court does not necessarily mean that you can escape the clause in your franchise contract that requires you to travel to the franchisor's hometown to arbitrate or litigate.
While the bankruptcy court may exercise discretionary authority to take cognizance of your franchise dispute as part of the "core proceeding" this is a fact-specific inquiry and your franchisor may successfully overturn on appeal any judgment of your bankruptcy judge.