Thought Leadership

Standard Choice of Forum Clause in Agricultural Loan Documents

Could a Standard Choice of Forum Clause in an Agricultural Loan Document Subject Your Bank to a $2,500.00 Penalty?

While care must always be employed when drafting loan documents, a bank must be extra diligent in preparing appropriate documents when the loan proceeds will be used for agricultural purposes. There are a whole host of statutory requirements that come into play for agricultural lending that simply do not exist in the general commercial context.

One such requirement is found in Minnesota Statutes Section 550.42, which prohibits loan documents from requiring an agricultural borrower to waive any applicable statutory rights, specifically including the right to engage in Farmer-Lender mediation. If a bank violates this statutory provision and refuses to acknowledge that the provision is void, it could be forced to pay the borrower $2,500.00 plus any attorneys’ fees incurred by the borrower.

This statutory provision could arguably come into play for something as benign as a standard choice of forum provision in a loan agreement. If the agreement provides that “any” dispute arising out of the agreement shall be heard in the county courthouse, it is possible that this could be construed as an attempt to get the borrower to prospectively waive Farmer-Lender mediation in contravention of Minnesota Statutes Section 550.42.

Fortunately, however, the concerns raised by this statute can be avoided through crafting the language of the forum selection clause so that it does not arguably function as an impermissible waiver of the right to Farmer-Lender mediation. Other concerns associated with this statutory provision could also likely be alleviated or mitigated through appropriately crafted anti-waiver language that makes it clear that the loan documents should not be construed as a waiver of statutory rights applicable to farmers.

It is important to keep in mind that provisions such as Minnesota Statutes Section 550.42 take on heightened significance during economic downturns where workouts and collection actions become far more prevalent. An invalid provision that very well may never have come to light during good times might be front and center once a default has occurred. As such, it is more important now than ever before to ensure that your bank is using tight loan documents that are in compliance with all applicable statutory requirements.