Karty v. Mid-America Energy, Inc.

• Decision Date: 10 April 2009
• Docket Number: No. 07-P-585.,07-P-585.
• Citation: 903 N.E.2d 1131,74 Mass. App. Ct. 25
• Parties: Kevin KARTY v. MID-AMERICA ENERGY, INC., & others.<SMALL><SUP>1</SUP></SMALL>
• Court: Appeals Court of Massachusetts

903 N.E.2d 1131

74 Mass. App. Ct. 25

Kevin KARTY v. MID-AMERICA ENERGY, INC., & others.¹

No. 07-P-585.

Appeals Court of Massachusetts, Middlesex.

Argued January 14, 2008.

Decided April 10, 2009.

Daniel E. Pogoda, Boston, for the plaintiff.

Present: PERRETTA, LENK, & SIKORA, JJ.

PERRETTA, J.

This appeal by Kevin Karty raises the question whether the judge correctly dismissed Karty's complaint against Mid-America Energy, Inc. (Mid-America), and Clinton C. Goff on the basis of the forum-selection clause set out in his, Karty's, subscription agreement with Mid-America, which required that the parties resolve any disputes arising thereunder in Kentucky. A Superior Court judge ruled that the clause was enforceable and allowed Mid-America's motion to dismiss. See Mass.R.Civ.P 12(b)(3), 365 Mass. 755 (1974). Karty's argument on appeal is that because he was fraudulently induced to enter into the subscription agreement, the forum-selection clause should not be enforced. Since Karty's amended complaint fails to contain any allegation that the forum-selection clause was obtained by fraud, we affirm the judgment.

1. The applicable standard of review. Although the motion to dismiss was based upon a claim of improper venue and brought pursuant to Mass.R.Civ.P. 12(b)(3), 365 Mass. 754 (1974), the judge properly treated the motion as one brought under rule 12(b)(6), 365 Mass. 755 (1974). See Casavant v. Norwegian Cruise Line, Ltd., 63 Mass.App.Ct. 785, 789-790, 829 N.E.2d 1171 (2005), cert. denied, 546 U.S. 1173, 126 S.Ct. 1337, 164 L.Ed.2d 52 (2006) (motion to dismiss based on forum-selection clause properly treated under rule 12[b][6]). In reviewing a rule 12(b)(6) dismissal of an action, we accept as true the allegations in the complaint as well as any inferences reasonably drawn therefrom in the plaintiff's favor. Otherwise put, a motion to dismiss brought under rule 12(b)(6) is to be denied unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Nader v. Citron, 372 Mass. 96, 98, 360 N.E.2d 870 (1977), quoting from Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). See Eigerman v. Putnam Invs., Inc., 450 Mass. 281, 282, 877 N.E.2d 1258 (2007).²

2. The alleged facts. We recite the facts as set out in Karty's amended complaint as well as the pertinent provisions of the subscription agreement attached to the defendants' motion to dismiss.³ Karty is a resident of Massachusetts and Mid-America is a Nevada corporation. In November, 2005, Karty submitted information to an Internet Web site seeking information about investment opportunities. Mid-America responded and sent Karty a prospectus and other materials concerning its sale of interests in a limited liability partnership organized to drill and to operate oil wells in Kentucky.

In its prospectus, as well as in subsequent oral and electronic mail communications, Mid-America or its employees and agents represented the nature of an investment by Karty as one that guaranteed three oil producing wells and assured him that if those wells did not produce oil, Mid-America would drill new wells at its own expense. Mid-America also made representations to Karty relating its history of success in oil drilling ventures, the strength of its financial condition, the amount of income Karty could expect as a result of any investment he might make, and the time frame within which he would receive his first payment of income.

On or about December 17, 2005, Karty executed a subscription agreement with Mid-America for the purchase of one unit of a limited liability partnership known as Eagle Oil # 5, LLP (Eagle). In that agreement, Karty represented that he was an "accredited investor."⁴ However, the success of that venture did not live up to Mid-America's representations.

Initial reports that Eagle had struck oil were followed by continuing reports of production delays accompanied by assurances that such issues would promptly be resolved, that production would "ramp [up] shortly." By the summer of 2006, drilling efforts had failed to yield an oil producing well. Moreover, Karty discovered that Mid-America had misrepresented certain information related to the cause of production delays, avoided or delayed disclosure of information calling into question the viability of Eagle's wells, and grossly overstated the success and profitability of Mid-America's other drilling projects while, at the same time, soliciting his investment of additional funds in Eagle or in one of its other drilling projects.

In July, 2006, Karty brought the present action in which he alleged fraud in the inducement of the subscription agreement.⁵ More specifically, Karty alleged that Mid-America had fraudulently induced his investment by misrepresenting its financial conditions, its history of success in oil drilling ventures, and Eagle's profit potential

Section 1.N(1) of the subscription agreement signed by Karty reads:

"I understand and accept that all provisions of this Agreement are made in Warren County, Kentucky, and that exclusive venue and jurisdiction for all matters in dispute shall also be in Warren County, Commonwealth of Kentucky. All disputes and breaches hereunder shall be submitted to binding arbitration pursuant to the rules of the American Arbitration Association then pertaining in Bowling Green, Kentucky."

3. Discussion.⁶ While sitting in admiralty in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S.Ct. 1907, 32 L.Ed.2d 513 (1972), the United States Supreme Court considered the enforceability of a forum-selection clause contained in an international towage agreement. There the Court departed from the historic disfavor of such clauses and held that such a clause contained in a "freely negotiated private international agreement," id. at 12, 92 S.Ct. 1907, is "prima facie valid," id. at 10, 92 S.Ct. 1907, and should be enforced unless the party seeking to avoid the clause demonstrates that enforcement of the clause would be "unreasonable and unjust," id. at 15, 92 S.Ct. 1907, that the agreement was "unaffected by fraud, undue influence, or overweening bargaining power," id. at 12, 92 S.Ct. 1907, or that enforcement would "contravene a strong public policy of the forum in which suit is brought." Id. at 15, 92 S.Ct. 1907. In Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 n. 14, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974), the Court emphasized that The Bremen was not to be read

"[to] mean that any time a dispute arising out of a transaction is based upon an allegation of fraud ... the [forum-selection] clause [in a contract] is unenforceable. Rather, it means that an arbitration or forum-selection clause in a contract is not enforceable if the inclusion of that clause in the contract was the product of fraud or coercion" (emphasis in original).

It was observed in Haynsworth v. The Corp., 121 F.3d 956, 962 (5th Cir.1997), cert. denied, 523 U.S. 1072, 118 S.Ct. 1513, 140 L.Ed.2d 666 (1998), that Federal courts "have not hesitated to apply [The Bremen's] enforceability standards in non-admiralty cases." When faced with the question of the enforceability of a forum-selection clause, Federal courts consistently have held that general allegations of fraud in the inducement of a contract are an insufficient basis for declining to enforce the clause, and that a party seeking to avoid a forum-selection clause on grounds of fraud must show that inclusion of that clause in the contract was the result of fraud. See, e.g., Haynsworth v. The Corp., supra at 963 (fraud and overreaching must be specific to a forum-selection clause to invalidate it; allegations of fraud as to the contract as a whole or as to portions other than the forum-selection clause are insufficient; claims of fraud or overreaching must be aimed straight at the forum-selection clause to succeed). See also Marano Enterprises of Kansas v. Z-Teca Restaurants, L.P., 254 F.3d 753, 757 (8th Cir.2001); Lipcon v. Underwriters at Lloyd's, London, 148 F.3d 1285, 1296-1297 (11th Cir.1998), cert. denied, 525 U.S. 1093, 119 S.Ct. 851, 142 L.Ed.2d 704 (1999); Afram Carriers, Inc. v. Moeykens, 145 F.3d 298, 301-302 (5th Cir.1998), cert. denied sub nom. de Panta v. Afram Carriers, Inc., 525 U.S. 1141, 119 S.Ct. 1031, 143 L.Ed.2d 40 (1999); Richards v. Lloyd's of London, 135 F.3d 1289, 1296-1297 (9th Cir.), cert. denied, 525 U.S. 943, 119 S.Ct. 365, 142 L.Ed.2d 301 (1998); Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953, 960 (10th Cir.), cert. denied, 506 U.S. 1021, 113 S.Ct. 658, 121 S.Ct. L.E.2d 584 (1992); Moses v. Business Card Exp., Inc., 929 F.2d 1131, 1138 (6th Cir.), cert. denied, 502 U.S. 821, 112 S.Ct. 81, 116 L.Ed.2d 54 (1991).

Karty has not provided us with any Massachusetts precedent or authority that squarely addresses the question whether general allegations of fraud in the inducement of a contract constitute a sufficient basis for declining the enforcement of a forum-selection clause. There is, however, language in Supreme Judicial Court decisions that indicates that the "fraud" exception to the enforceability of forum-selection clauses is more limited than Karty contends and that Massachusetts is in accord with Federal authority.

In Jacobson v. Mailboxes Etc. U.S.A., Inc., 419 Mass. 572, 574-575, 646 N.E.2d 741 (1995), the court adopted the view expressed in Restatement (Second) of Conflict of Laws § 80 (1988 revision) ...