Sued in New York for a Loan? How BCL § 1314 and GOL § 5-1402 Protect Out-of-State Borrowers

New York's Business Corporation Law § 1314 governs when foreign entities and non-residents can sue in New York courts. Despite its title, it applies to actions against and by foreign corporations and non-residents. This law balances court access with preventing an influx of cases lacking strong state connections. Out-of-state parties must understand BCL § 1314's specific conditions for permitting legal action in New York.

Business Corporation Law § 1314: The Statute with Short Explanations

"Actions or special proceedings against foreign corporations"

(a) An action or special proceeding against a foreign corporation may be maintained by a resident of this state or by a domestic corporation of any type or kind for any cause of action. (Explanation: New York residents and domestic companies can sue foreign corporations for any reason.)

(b) Except as otherwise provided in this article, an action or special proceeding against a foreign corporation may be maintained by another foreign corporation of any type or kind or by a non-resident in the following cases only: (Explanation: Non-New York residents and foreign companies can only sue foreign corporations in specific situations, as listed below.)

(1) Where it is brought to recover damages for the breach of a contract made or to be performed within this state, or relating to property situated within this state at the time of the making of the contract. (Explanation: Lawsuits about contracts made or performed in New York, or about property in New York.)

(2) Where the subject matter of the litigation is situated within this state. (Explanation: When the issue being disputed is physically located in New York.)

(3) Where the cause of action arose within this state, except where the object of the action or special proceeding is to affect the title of real property situated outside this state. (Explanation: When the reason for the lawsuit happened in New York, unless it's about property ownership outside New York.)

(4) Where, in any case not included in the preceding subparagraphs, a non-domiciliary would be subject to the personal jurisdiction of the courts of this state under section 302 of the civil practice law and rules. (Explanation: Other situations where New York courts have authority over non-residents.)

(5) Where the defendant is a foreign corporation doing business or authorized to do business in this state. (Explanation: When the foreign corporation operates or is allowed to operate in New York.)

(c) Paragraph (b) does not apply to a corporation which was formed under the laws of the United States and which maintains an office in this state. (Explanation: The restrictions in (b) don't apply to federal corporations with offices in New York.)

What is the Purpose of Business Corporation Law § 1314?

Business Corporation Law (BCL) § 1314 is a New York statute that governs when and how lawsuits can be brought against foreign corporations in New York state courts. It exists for several important reasons:

1. Jurisdictional Boundaries: BCL § 1314 helps define the jurisdictional boundaries for New York courts in cases involving foreign corporations. It specifies under what circumstances New York courts can entertain lawsuits against companies incorporated outside of New York.
2. Protection of Court Resources: The law helps prevent New York courts from being overburdened with cases that have little connection to the state. By limiting the types of cases that can be brought by non-residents against foreign corporations, it preserves judicial resources for matters more closely tied to New York.
3. Fairness to Defendants: It provides some protection to foreign corporations from being sued in New York when they have minimal connections to the state, promoting fairness in the legal system.
4. Clear Guidelines: The statute offers clear guidelines for both plaintiffs and defendants about when a foreign corporation can be sued in New York, reducing uncertainty in legal proceedings.
5. Balance of Interests: BCL § 1314 attempts to balance the interests of providing access to courts for legitimate claims while preventing abuse of the New York court system for disputes that should be litigated elsewhere.
6. Economic Considerations: By providing some limitations on lawsuits against foreign corporations, the law may encourage businesses to operate in New York without fear of excessive litigation exposure.

In essence, BCL § 1314 exists to provide a structured framework for determining when New York courts should exercise jurisdiction over foreign corporations, balancing access to justice with practical and economic considerations.

Expanding Access to New York Courts: New York General Obligations Law §§ 5-1402 and 5-1401

New York's General Obligations Law §§ 5-1402 and 5-1401 represent a fundamentally expansive approach to court access and contract governance for high-value transactions. These statutes broaden the circumstances under which parties can choose New York as their legal forum and apply New York law to their agreements, even when the transaction has little or no connection to the state.

§ 5-1402: Choice of Forum

• Allows maintenance of action against foreign entities in New York courts if:
  1. Contract chooses New York law per § 5-1401
  2. Transaction covers at least $1 million
  3. Foreign entity agrees to submit to New York jurisdiction
• Does not affect other forum selection provisions

§ 5-1401: Choice of Law

• Parties may choose New York law to govern contracts:
  1. For transactions of at least $250,000
  2. Even without reasonable relation to New York
• Exceptions:
  1. Labor or personal services contracts
  2. Personal, family, or household transactions
  3. Certain UCC provisions
• Does not limit enforcement of other choice of law provisions

At their core, GOL §§ 5-1402 and 5-1401 accomplish two key objectives:

1. They expand access to New York courts for foreign entities and non-residents involved in substantial commercial transactions.
2. They allow parties to apply New York law to their contracts, regardless of the transaction's relationship to the state.

Unlike the more restrictive approach of Business Corporation Law § 1314, which limits when foreign entities can sue in New York, GOL §§ 5-1402 and 5-1401 open the doors wider. They allow parties to contractually agree to New York jurisdiction and law, bypassing many traditional jurisdictional hurdles.

The $1 million threshold for forum selection (§ 5-1402) and the $250,000 threshold for choice of law (§ 5-1401) ensure that these provisions primarily apply to significant commercial transactions, aligning with New York's interest in hosting major business litigation.

New York's Permissive Approach to Forum Selection and Choice of Law in High-Value Transactions

New York has adopted a notably liberal stance towards enforcing contractual forum selection and choice of law clauses in high-value transactions. The Court of Appeals has recognized that these provisions serve important commercial interests by providing certainty and predictability in business dealings. See IRB-Brasil Resseguros, S.A. v Inepar Invs., S.A., 20 NY3d 310, 315-316, 982 NE2d 609, 958 NYS2d 689 (2012).

In GE Oil & Gas, Inc. v Turbine Generation Servs., L.L.C., the Appellate Division, First Department affirmed that New York was an appropriate forum for a lender's claims against foreign defendants where the loan agreement exceeded $1 million and contained provisions selecting New York law and submitting to New York jurisdiction. 140 AD3d 582, 583, 35 NYS3d 311 (1st Dept 2016).This decision underscores the courts' willingness to honor parties' contractual choices in significant commercial transactions.

The partial retroactivity of § 5-1402, as noted in Babcock & Wilcox Co. v Control Components, Inc., further demonstrates New York's commitment to enforcing these provisions. 161 Misc 2d 636, 639, 614 NYS2d 678 (Sup Ct, NY County 1993). This approach aligns with the state's interest in maintaining its status as a leading commercial center by providing a predictable legal framework for complex business transactions.

Analysis of Jurisdictional Barriers in Cross-State Contract Disputes: Bankers Healthcare Group, LLC v. Pediatric Associates, Inc.

In Bankers Healthcare Group, LLC v. Pediatric Assoc., Inc., the forum selection clause was not enforced and the case was dismissed for several specific reasons:

1. Lack of Personal Jurisdiction:
   • The court applied CPLR § 302(a)(1), which allows for jurisdiction over non-domiciliaries who transact business within New York or contract to supply goods or services in the state.
   • Despite the forum selection clause, the court found no actual connection between the defendants and New York. The defendants were Pennsylvania-based, and all payments were to be made to the plaintiff's Florida address.
   • This highlights that a forum selection clause alone is not always sufficient to establish personal jurisdiction if there's no other connection to the forum state.
2. General Obligations Law § 5-1402 Requirements:
   • This law allows non-residents to agree to New York jurisdiction for large transactions, but it has specific requirements: a) The contract must involve at least $1 million (this contract was for less than $300,000). b) The contract must choose New York law (this contract chose Florida law). c) The non-resident must agree to submit to New York jurisdiction.
   • The case demonstrates that all these conditions must be met; partial compliance is insufficient.
3. Interplay between Forum Selection and Choice of Law:
   • The contract had a split clause: it allowed for either Florida or New York as a forum but only specified Florida law.
   • The court emphasized that for § 5-1402 to apply, both New York forum and New York law must be chosen.
   • This reveals the critical interrelationship between forum selection and choice of law provisions in contracts.
4. Business Corporation Law § 1314:
   • The court's examination of BCL § 1314 demonstrates its thorough approach to jurisdictional analysis, considering all statutory avenues for establishing jurisdiction over foreign corporations.
   • BCL § 1314(b) provides five specific grounds for New York courts to exercise jurisdiction over foreign corporations: (1) The corporation is doing business in New York; (2) The action is brought to recover damages for the breach of a contract made or to be performed within the state; (3) The action is based on a cause of action arising within the state; (4) The action is brought to recover real property or a chattel within the state; (5) The defendant is a foreign corporation subject to service under CPLR § 301.
   • In this case, the court found that none of these grounds applied:
     • The defendants were not doing business in New York;
     • The contract was not made or to be performed in New York;
     • The cause of action did not arise within New York;
     • The action did not involve recovery of property in New York;
     • The defendants were not subject to service under CPLR § 301.
   • This detailed analysis underscores the court's commitment to ensuring it has proper jurisdiction before proceeding with a case.
   • It also highlights the limitations of New York's jurisdiction over foreign entities, even when there's a contractual forum selection clause.
   • The court's consideration of BCL § 1314 serves as a secondary check on jurisdiction, reinforcing the conclusion that there was no substantial connection between the defendants and New York to justify the exercise of jurisdiction.

This comprehensive examination of BCL § 1314 in conjunction with other jurisdictional considerations demonstrates the multi-faceted approach New York courts take in determining their authority to hear cases involving out-of-state parties. It also emphasizes the importance of satisfying statutory requirements, beyond mere contractual agreements, to establish jurisdiction in cross-state disputes.

Case 1: Dismissal of Foreign Entity Lawsuit Despite Forum Selection Clause

A New York court dismissed a lawsuit between two foreign entities for lack of subject matter jurisdiction, despite a contractual forum selection clause designating New York as the forum. The court held that the requirements of Business Corporation Law § 1314(b) must be met for New York courts to have jurisdiction over foreign entities.

Key Legal Principles:

1. A forum selection clause alone is insufficient to confer subject matter jurisdiction on New York courts in cases between foreign entities.
2. To maintain an action in New York, foreign entities must satisfy one of the conditions outlined in Business Corporation Law § 1314(b).
3. Unsubstantiated claims of maintaining an office in New York are insufficient to confer jurisdiction under Business Corporation Law § 1314(c).

Conclusion: The main takeaway is that New York courts strictly interpret jurisdictional requirements for cases involving foreign entities, prioritizing statutory compliance over contractual forum selection clauses. This approach significantly limits the ability of foreign entities to litigate in New York unless they meet specific statutory criteria.

Case Citation: Fox Capital Group, Inc. v Tomassetti, No. 523737/2021, (N.Y. Sup. Ct. Kings Cnty. Dec. 20, 2022).

Case 2: Foreign Corporation Lacks Subject Matter Jurisdiction in New York Court

A foreign limited liability company sued another foreign LLC and its foreign resident owner in New York to recover damages for breach of contract. The defendants moved to vacate a default judgment and dismiss the action for lack of subject matter jurisdiction. The court granted the motion, finding it lacked subject matter jurisdiction under New York's Business Corporation Law and General Obligations Law.

Key Legal Principles:

1. BCL § 1314(b) governs actions between foreign corporations and non-residents, specifying limited circumstances where New York courts have subject matter jurisdiction.
2. Consent to personal jurisdiction does not establish long-arm jurisdiction under CPLR 302 for purposes of BCL § 1314(b)(4).
3. GOL § 5-1402, which allows certain actions between foreign parties in New York courts, only applies to cases involving at least one million dollars.

Conclusion: The main takeaway is that New York courts have limited subject matter jurisdiction over disputes between foreign entities, even if the parties consented to jurisdiction in their contract. Courts must carefully analyze whether the case falls within the specific categories outlined in BCL § 1314(b) or meets the requirements of GOL § 5-1402.

Citation: Harper Advance v Chance Reynolds Trucking LLC, 522065/2020 (Sup Ct, Kings County 2023). 

Case 3: Foreign Corporation Lacks Subject Matter Jurisdiction in New York Despite Forum Selection Clause

A Delaware corporation authorized to do business in New York sued a California corporation and individual in New York. The defendants moved to dismiss for lack of subject matter jurisdiction. The court granted the motion, finding that the case did not fall within the limited categories allowing New York courts to exercise jurisdiction over disputes between foreign entities under the Business Corporation Law.

Key Legal Principles:

1. BCL § 1314(b) specifies five limited categories in which New York courts have subject matter jurisdiction over actions brought by foreign corporations or non-residents against other foreign corporations.
2. For BCL § 1314(b)(1) to apply, there must be sufficient evidence that the contract was made or intended to be performed within New York State.
3. Consent to jurisdiction through a forum selection clause does not establish long-arm jurisdiction under CPLR 302 for purposes of BCL § 1314(b)(4).

Conclusion: The main takeaway is that New York courts lack subject matter jurisdiction over disputes between foreign entities, even when there is a forum selection clause, unless the case falls within the specific categories outlined in BCL § 1314(b). A forum selection clause alone is insufficient to confer jurisdiction.

Citation: Pearl Beta Funding, LLC v Elegant Trio Colors Corp, 706306/2022 (Sup Ct, Queens County 2023). 

Case 4: Action Dismissed for Lack of Subject Matter Jurisdiction Under Business Corporation Law § 1314

A plaintiff company sued a Delaware corporation with its principal place of business in Massachusetts. The court granted the defendant's motion to dismiss for lack of subject matter jurisdiction, finding that the case did not fall within the limited categories allowing New York courts to exercise jurisdiction over disputes between foreign entities under the Business Corporation Law.

Key Legal Principles:

1. BCL § 1314(b) specifies limited categories in which New York courts have subject matter jurisdiction over actions involving foreign corporations.
2. Payments made to a New York bank account are insufficient alone to establish that a contract was made or to be performed in New York under BCL § 1314(b)(1).
3. The court must dismiss an action if it lacks subject matter jurisdiction.

Conclusion: The main takeaway is that New York courts lack subject matter jurisdiction over certain disputes involving foreign entities unless the case falls within the specific categories outlined in BCL § 1314(b), and merely having a New York bank account for payments is not enough to confer jurisdiction.

Citation: Parkview Advance LLC v High Purity Cleaning Servs., Inc., 527753/2021 (Sup Ct, Kings County 2023). 

Case 5: Lack of Subject Matter Jurisdiction for Connecticut Corporation's Action Against Non-Resident Defendants

A Connecticut corporation filed a lawsuit in New York against non-resident defendants based on a financial agreement. The court dismissed the case for lack of subject matter jurisdiction, finding that the plaintiff failed to establish a substantial nexus between the transaction and New York.

Key Legal Principles:

1. New York courts lack subject matter jurisdiction over actions between non-residents unless there is a substantial nexus between the transaction and New York.
2. A forum selection clause alone is insufficient to establish subject matter jurisdiction in New York for a case between non-residents.
3. The plaintiff bears the burden of establishing subject matter jurisdiction when challenged.

Conclusion: The case underscores that out-of-state corporations cannot rely solely on forum selection clauses to establish subject matter jurisdiction in New York courts for disputes with non-residents. There must be a substantial connection between the transaction and New York. This ruling limits the ability of companies to forum shop and force out-of-state defendants to litigate in New York without a meaningful connection to the state.

Citation: Speedy Funding LLC v Red Door Mich. LLC, E2022010367 (Sup Ct, Monroe County 2023). 

Case 6: American Express, Utah Lender's Default Judgment Denied Due to Jurisdictional and Evidentiary Issues

A Utah-based lender sought default judgment against out-of-state borrowers in New York. The court denied the motion, citing issues with establishing jurisdiction under New York's Business Corporation Law and insufficient evidence of the debt owed.

Key Legal Principles:

1. For service on out-of-state residents to be valid, the court must have personal jurisdiction over that resident under CPLR 301 or 302.
2. Business Corporation Law § 1314(c) exempts corporations formed under U.S. law that maintain an office in New York from restrictions on foreign corporations suing in New York courts.
3. The alter-ego/department test is applied to determine if a parent company's office can be imputed to a subsidiary for jurisdictional purposes under BCL § 1314(c).

Conclusion: The main takeaway is that out-of-state lenders face significant hurdles in obtaining default judgments in New York courts against non-resident borrowers, including strict jurisdictional requirements and the need for specific, documented evidence of the debt owed. Merely being a subsidiary of a New York-based company is insufficient to establish jurisdiction without meeting the alter-ego/department test.

Citation: Am. Express Natl. Bank v Pino Napoli Tile & Granite, LLC, 79 Misc 3d 668, 191 NYS3d 898 (Sup Ct 2023).

Case 7: Choice of New York Law and Forum in International Contracts Upheld Against Constitutional Challenges

A foreign manufacturer sued a foreign buyer in New York for breach of a supply agreement. The agreement included choice of law and forum selection clauses designating New York. The buyer moved to dismiss, arguing that New York statutes allowing jurisdiction over foreign parties who choose New York law violate the Commerce Clause and Due Process Clause of the U.S. Constitution. The court rejected these constitutional challenges and upheld jurisdiction based on the parties' contractual agreement.

Key Legal Principles:

1. General Obligations Law §§ 5-1401 and 5-1402 allow parties to choose New York law and courts for contracts over $1 million, even without other New York connections.
2. Contractual choice of law and forum selection clauses in international business agreements are generally enforceable and do not violate the Commerce Clause when voluntarily agreed to by sophisticated parties.
3. Applying chosen law based on parties' contractual agreement does not violate due process, as it is neither arbitrary nor fundamentally unfair.

Conclusion: The court upheld the constitutionality of New York statutes allowing jurisdiction based solely on contractual choice of law and forum in high-value international agreements. This reinforces New York's position as a preferred forum for international business disputes.

Citation: Hemlock Semiconductor Pte. Ltd. v Jinglong Indus., 56 Misc 3d 324 (Sup Ct, NY County 2017).

Court of Appeals Holds Non-Compliance with CPLR 3215(f) in Default Judgment is Non-Jurisdictional

Summary: The New York Court of Appeals addressed whether failure to provide "proof of the facts constituting the claim" under CPLR 3215(f) when obtaining a default judgment is a jurisdictional defect. The court held that such non-compliance is not jurisdictional and does not render the default judgment a nullity.

Key Legal Principles:

1. Subject matter jurisdiction refers to objections that are "fundamental to the power of adjudication of a court," not merely the absence of elements of a cause of action.
2. A court's failure to comply with CPLR 3215(f) is an error that can be corrected through CPLR 5015, not a jurisdictional defect.
3. Non-jurisdictional defects in default judgments can be addressed through motions to vacate based on excusable default under CPLR 5015(a)(1).

Conclusion: The main takeaway is that failure to provide sufficient proof under CPLR 3215(f) when obtaining a default judgment is a correctable error, not a jurisdictional defect that automatically voids the judgment. This ruling resolves a split among Appellate Division departments and clarifies the narrow interpretation of jurisdictional defects in default judgments.

Citation: Manhattan Telecom. Corp. v H & A Locksmith, Inc., 21 NY3d 200, 991 NE2d 687 (2013).