JTF Aviation Holdings Inc. v. CliftonLarsonAllen LLP

249 Ariz. 510

472 P.3d 526

JTF AVIATION HOLDINGS INC, et al., Plaintiffs/Appellants,

v.CLIFTONLARSONALLEN LLP, Defendant/Appellee.

No. CV-19-0209-PR

Supreme Court of Arizona.

Filed September 18, 2020

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

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 limitations¹ 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 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.

¶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, 445 P.3d 1043, 1044 (App. 2019), also applying the 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, 445 P.3d at 1047 (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, 419 P.3d 546, 548 (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, 396 P.3d 600, 603 (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, 336 P.3d 763, 771 (App. 2014).

A.

¶15 "The closely related doctrine developed in the federal courts as a matter of federal common law." Peterson v. Evapco, Inc. , 238 Md.App. 1, 188 A.3d 210, 229 (2018) (citing In re Howmedica Osteonics Corp. , 867 F.3d 390, 407 n.11 (3d Cir. 2017) ). The Seventh Circuit has offered that one 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, 445 P.3d at 1046–47. 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...