Jtf Aviation v. Cliftonlarsonallen LLP ( 2020 )

IN THE
SUPREME COURT OF THE STATE OF ARIZONA
JTF AVIATION H OLDINGS INC, ET AL.,
Plaintiffs/Appellants,
v.
CLIFTONLARSONALLEN LLP,
Defendant/Appellee.
No. CV-19-0209-PR
Filed September 18, 2020
Appeal from the Superior Court in Maricopa County
The Honorable Daniel G. Martin, Judge
No. CV2017-003641
REVERSED AND REMANDED
Opinion of the Court of Appeals, Division One
247 Ariz. 78 (2019)
VACATED
COUNSEL:
Larry L. Debus, Debus & Kazan Ltd, Phoenix; and Joseph A. Schenk,
Heather A. Macre, Fennemore Craig PC, Phoenix, Attorneys for JTF
Aviation Holdings Inc and Jeremy T. Freer
Thomas J. Shroyer, Joshua P. Oie, Charles E. Jones, Taylor D. Sztainer, Moss
& Barnett PA, Minneapolis, MN; and John A. Klecan, Kelly A. Hedberg,
Renaud Cook Drury Mesaros PA, Phoenix, Attorneys for
CliftonLarsonAllen LLP
Cameron C. Artigue, Lane R. Conrad, Gammage & Burnham PLC, Phoenix,
Attorneys for Amicus Curiae Arizona Society of Certified Public
Accountants
JTF AVIATION ET AL V. CLIFTONLARSONALLEN LLP
Opinion of the Court
JUSTICE MONTGOMERY authored the opinion of the Court, in which
CHIEF JUSTICE BRUTINEL, VICE CHIEF JUSTICE TIMMER, and
JUSTICES BOLICK, GOULD, LOPEZ, and BEENE joined.
JUSTICE MONTGOMERY, opinion of the Court:
¶1 The sole issue before us is whether the court of appeals erred
by concluding that a contractual limitations 1 provision can preclude
nonparties to the contract from asserting tort claims that do not arise out of
the contractual relationship. To reach its conclusion, the court relied on
the “closely related party doctrine,” which looks to the relationship
between a nonparty and parties to the agreement, as well as the relationship
between a nonparty and the agreement itself. No Arizona court has
previously adopted this doctrine to impose a contractual limitations
provision on a nonparty—nor has any other court for that matter—and we
decline to do so now. Therefore, we hold that the court of appeals erred
in binding a nonparty to a contractual limitations provision based on the
closely related party doctrine (the “Doctrine”).
I.
¶2 CliftonLarsonAllen (“CLA”) is a Minnesota limited liability
partnership operating as a national accounting firm with offices across the
United States, including one in Maricopa County. Jeremy T. Freer
(“Freer”) is the founder, President, and sole Shareholder of JTF Aviation
(“JTF”), which is a Colorado corporation with its principal place of business
in Maricopa County. 2
¶3 JTF engaged CLA to audit JTF’s consolidated financial
statements and perform certain non-audit services. The purpose was to
provide an objective opinion as to whether JTF’s consolidated financial
1 Although the provision at issue is one of “repose,” the parties and the
courts below consistently labeled it a limitations provision. We therefore
use limitations, as well.
2 JTF Aviation previously conducted business as Aviation West Charters,
Inc. dba Angel MedFlight. We use the current corporate name for clarity.
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JTF AVIATION ET AL V. CLIFTONLARSONALLEN LLP
Opinion of the Court
statements were fairly presented, in all material respects, in conformity
with generally accepted accounting principles in the United States
(“GAAP”). The parties memorialized their agreement in a letter drafted
by CLA dated December 30, 2013 (“Engagement Letter”). The signatories
to the Engagement Letter were Chad Kunze, a principal with CLA, and
JTF’s Chief Financial Officer, Dick Larson.
¶4 Among various provisions, the Engagement Letter included
the following language:
The parties agree that, notwithstanding any statute or law of
limitations that might otherwise apply to a Dispute, any
action or legal proceeding by you against us must be
commenced within twenty-four (24) months (“Limitation
Period”) after the date when we deliver our final audit report
under this agreement to you, regardless of whether we do
other services for you relating to the audit report, or you shall
be forever barred from commencing a lawsuit or obtaining
any legal or equitable relief or recovery. The Limitation
Period applies and begins to run even if you have not suffered
any damage or loss, or have not become aware of the
existence or possible existence of a Dispute.
In February 2014, CLA delivered its Independent Auditors’ Report on JTF’s
consolidated financial statements for the year ending December 31, 2013.
¶5 In June 2014, JTF and Freer entered into an Asset Purchase
Agreement with Vistria Group, LP (“Vistria”) for $80,000,000, plus
assumed liabilities. In the agreement, JTF warranted to Vistria that JTF’s
financial statements “were prepared in accordance with GAAP consistently
applied and present fairly the financial position and results of operations.”
¶6 In September 2014, Vistria sued Freer, JTF, and JTF’s chief
financial officer, alleging that the defendants fraudulently induced it to
purchase JTF at an inflated price because JTF’s financial statements did not
conform to GAAP. Vistria asserted that Freer and Larson inflated JTF’s
2013 earnings before interest, taxes, depreciation, and amortization to
$40,800,000, when they were only $11,000,000. In September 2016, Freer
and the other defendants settled Vistria’s claims for $4,850,000.
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JTF AVIATION ET AL V. CLIFTONLARSONALLEN LLP
Opinion of the Court
¶7 On April 10, 2017, well past the twenty-four months since
CLA provided its Independent Auditors’ Report, Freer sued CLA. 3 Freer
alleged professional negligence, negligent misrepresentation, and breach of
fiduciary duty by CLA, which gave rise to Vistria’s claims against Freer.
In its answer, CLA raised several defenses, including that Freer’s
“purported claims are barred by applicable statutes of limitations, and
contractual limitations periods” and that “[s]ome or all of [Freer’s]
purported claims are barred by the terms of the . . . Engagement Letter.”
¶8 Freer sought partial summary judgment with respect to the
limitations defenses raised by CLA. In turn, CLA asserted in a cross-
motion for summary judgment that the limitations terms in the
Engagement Letter barred Freer’s claims. Freer responded that the terms
of the Engagement Letter did not apply to him because he did not sign the
agreement and was not a party to it.
¶9 The trial court granted CLA’s motion and entered judgment
on its behalf. Though acknowledging that Freer never signed the
Engagement Letter, the court ruled he was bound by its terms given how
“closely related” he was to JTF, to the relationship between CLA and JTF,
and to the Engagement Letter. To support its decision, the court cited the
Ninth Circuit’s opinion in Manila Indus., Inc. v. Ondova, Ltd. Co., 334 F.
App’x 821, 823 (9th Cir. 2009) (citing Manetti-Farrow, Inc. v. Gucci Am., Inc.,
858 F.2d 509, 514 n.5 (9th Cir. 1988)), which enforced a forum selection
clause against a nonparty to an agreement because the nonparty’s alleged
conduct was so “closely related” to the contractual relationship.
¶10 Freer appealed, arguing that because he was not a party to the
agreement the trial court erred in granting summary judgment for CLA.
CLA responded that the trial court’s imposition of the limitations provision
to Freer should be upheld given Freer’s ownership of JTF and that Freer’s
claims are “closely related” to the contractual relationship established by
the Engagement Letter.
¶11 The court of appeals affirmed, JTF Aviation Holdings Inc., v.
CliftonLarsonAllen LLP, 247 Ariz. 78, 79 ¶ 1 (App. 2019), also applying the
3 JTF is also a party to the underlying lawsuit and referenced pleadings but
is not a part of this appeal.
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Opinion of the Court
Doctrine and likewise looking to Freer’s ownership of JTF, his relationship
to JTF and CLA, his involvement in the negotiations between them, as well
as whether he received a direct benefit from the agreement. Id. at 82 ¶ 15
(citing Carlyle Inv. Mgmt. LLC v. Moonmouth Co. SA, 779 F.3d 214, 219 (3d
Cir. 2015)). The court also took into account “whether ‘enforcement of the
clause by or against the non-signatory would be foreseeable.’” Id.
(quoting In re McGraw-Hill Glob. Educ. Holdings LLC, 909 F.3d 48, 64 (3d Cir.
2018)). Accordingly, the court “conclude[d] that Freer is so ‘closely
related’ to the contract or its signatories that enforcement of the contract
terms was ‘foreseeable.’” Id. ¶ 18.
¶12 We granted review to address whether Arizona courts should
adopt the Doctrine and apply it to impose a contractual limitations
provision on nonparties to a contract. This is a matter of first impression,
and the Doctrine’s application to contractual rights and obligations is a
matter of statewide importance. We have jurisdiction pursuant to article
6, section 5(3), of the Arizona Constitution.
II.
¶13 Freer urges that he cannot be bound by the contractual
limitations term in the Engagement Letter because he did not sign it and
was not a party to it. CLA argues that the Doctrine, while not previously
applied in Arizona, is nonetheless “consistent with Arizona law and is well-
accepted in other jurisdictions” and that the facts of the case support
applying the limitations provision to Freer.
¶14 “We review a grant of summary judgment de novo.” Teufel
v. Am. Family Mut. Ins., 244 Ariz. 383, 385 ¶ 10 (2018). We also review
issues of law arising out of a contract de novo. Am. Power Prods., Inc. v.
CSK Auto, Inc., 242 Ariz. 364, 367 ¶ 12 (2017). “[W]hether a nonparty is
bound by [a contract term] is properly resolved by the [C]ourt as a matter
of law.” Duenas v. Life Care Ctrs. of Am., Inc., 236 Ariz. 130, 138 ¶ 23 (App.
2014).
A.
¶15 “The closely related doctrine developed in the federal courts
as a matter of federal common law.” Peterson v. Evapco, Inc., 188 A.3d 210,
229 (Md. Ct. Spec. App. 2018) (citing In re Howmedica Osteonics Corp., 867
F.3d 390, 407 n.11 (3d Cir. 2017)). The Seventh Circuit has offered that one
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Opinion of the Court
reason for the Doctrine’s development is to preclude signatories to a
contract from utilizing nonsignatory affiliates to circumvent forum
selection clauses. Adams v. Raintree Vacation Exch., LLC, 702 F.3d 436, 439–
441 (7th Cir. 2012). Federal courts determining whether to apply the
Doctrine consider factors that focus on “the non-signatory’s ownership of
the signatory, its involvement in the negotiations, the relationship between
the two parties and whether the non-signatory received a direct benefit
from the agreement.” Carlyle, 779 F.3d at 219.
B.
¶16 We note at the outset that the cases cited here by both courts
to reach their respective conclusions in applying the Doctrine all address
enforcement of a forum selection clause. JTF Aviation, 247 Ariz. at 81–82
¶¶ 13–15. The contractual provision before us, though, is a provision
limiting when a claim may be brought, not where it may be brought.
Notably then, while CLA’s assertion that the Doctrine is well-accepted in
other jurisdictions is true, it has only been accepted for a different and more
limited purpose than what is proposed here.
¶17 The only published Arizona case to review the Doctrine is
Sierra Tucson, Inc. v. Bergin, 239 Ariz. 507 (App. 2016). The court was
“urge[d] . . . to adopt the reasoning of ‘several other courts’ purportedly
finding forum selection clauses ‘can apply to non-signatories . . . if the
claims are closely related to the agreement’” in a case considering whether
a venue selection provision was binding on surviving beneficiaries in a
wrongful death suit. Id. at 511 ¶ 16. The court concluded that “[n]one
[of the cases cited] convince us we should abandon the general rule that
only parties to a contract are bound by its terms.” Id. (citing Treadway v.
W. Cotton Oil & Ginning Co., 40 Ariz. 125, 138 (1932)).
¶18 Nonetheless, there are other theories available to bind
nonsignatories to the terms of a contract as amici Arizona Society of
Certified Public Accountants (“ASCPA”) notes in citing Duenas Life Care
Ctrs. of Am., Inc. 4 The Duenas court, in determining whether to enforce an
arbitration agreement against nonparties, listed “incorporation by
reference, assumption, agency, veil-piercing or alter ego, equitable
4 CLA also notes the same theories, citing Bridas S.A.P.I.C. v. Gov't of
Turkmenistan, 345 F.3d 347 (5th Cir. 2003).
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Opinion of the Court
estoppel, and third-party beneficiary.” 236 Ariz. at 139 ¶ 26 (citing Bridas
S.A.P.I.C. v. Gov’t of Turkmenistan, 345 F.3d 347, 356 (5th Cir. 2003)). See
also Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009) (citation
omitted) (noting that “‘traditional principles’ of state law allow a contract
to be enforced by or against nonparties to the contract through ‘assumption,
piercing the corporate veil, alter ego, incorporation by reference, third-
party beneficiary theories, waiver and estoppel’”); Smith v. Pinnamaneni,
227 Ariz. 170, 177 ¶ 23 (App. 2011) (stating that “[n]onsignatories, however,
can be required to arbitrate under certain circumstances” and citing to cases
espousing the same theories as in Duenas). As ASCPA further
acknowledges, “[t]hese . . . theories are not analytically distinct. They are a
toolbox that courts can use to get at the essential justice of each case.” The
Doctrine, however, is not among the tools listed.
C.
¶19 CLA views the Doctrine as consistent with Arizona law. But
there are important distinctions regarding how the Doctrine treats the
corporate form. For example, “courts consider the non-signatory’s
ownership of the signatory” for purposes of determining whether to
impose a contract’s terms on a nonsignatory under the Doctrine. Carlyle,
779 F.3d at 219; see also In re McGraw-Hill Global Educ. Holdings LLC, 909 F.3d
at 62–63 (considering ownership relationship between nonparties and a
party to the agreement to determine whether to impose contract term).
The existence of an ownership relationship may be significant for purposes
of precluding a party from circumventing a forum selection clause, but
applying the Doctrine in a case like this places too much emphasis on
Freer’s ownership of JTF and minimizes the importance of the corporate
form recognized by Arizona law.
¶20 Arizona law is clear that the “corporate status will not be
lightly disregarded.” Chapman v. Field, 124 Ariz. 100, 102 (1979); see also
Mod. Pioneers Ins. Co. v. Nandin, 103 Ariz. 125, 130 (1968) ( “The concept of
a corporation as a separate entity is a legal fact [,] not a fiction.”); Hidalgo v.
McCauley, 50 Ariz. 178, 183 (1937) ( “Even when all the stock is owned by a
sole shareholder, there seems no adequate reason to depart from the
general rule that the corporation and its shareholders are to be treated as
distinct legal persons.”). Yet the weight the Doctrine gives to the fact of
ownership effectively functions to pierce the corporate veil or establish that
an entity is the alter ego of an individual. To pierce the corporate veil or
succeed in an alter ego claim, neither of which CLA has sought to do,
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JTF AVIATION ET AL V. CLIFTONLARSONALLEN LLP
Opinion of the Court
requires more under Arizona law than proof of the existence of an
ownership relationship.
¶21 “A corporate entity will be disregarded, and the corporate
veil pierced, only if there is sufficient evidence that 1) the corporation is the
‘alter ego or business conduit of a person,’ and 2) disregarding the
corporation’s separate legal status is ‘necessary to prevent injustice or
fraud.’” Loiselle v. Cosas Mgmt. Grp., LLC, 224 Ariz. 207, 214 ¶ 30 (App.
2010) (internal citations omitted). To establish that a corporation is the
alter ego of an individual, a plaintiff must present “substantial evidence of
intermingling of corporate and personal assets, affairs or funds, or that the
corporate structure was in any way used for other than legitimate corporate
purposes.” Chapman, 124 Ariz. at 103 (quoting Ferrarell v. Robinson, 11
Ariz. App. 473, 476 (1970)). These factors call for more analysis of the
entities or individuals in question than what is considered in applying the
Doctrine. See supra ¶ 15.
¶22 The importance of the corporate form and the protections
afforded it as provided by Arizona law weigh heavily against adopting the
Doctrine, which was developed for a different purpose and in a different
context than presented here.
III.
¶23 While the Doctrine has been accepted by other jurisdictions
to impose forum selection clauses on nonsignatories, we decline to adopt it
here. The availability of other avenues for determining whether a
nonsignatory should be bound by the terms of an agreement renders
adoption unnecessary. Additionally, the ability for a party to negotiate
terms to delineate contractual duties and obligations provides further
options. Here, for example, if CLA had wished to bind Freer to the
Engagement Letter, it could have stated so in the Letter and had Freer sign
it in his personal capacity. Regardless, we do not express an opinion as to
whether the limitations provision may be applicable based on any other
theory.
IV.
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Opinion of the Court
¶24 We vacate the opinion of the court of appeals, and we reverse
the decision of the superior court and remand for proceedings consistent
with this opinion.
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