Karon v. Elliott Aviation

Decision Date10 January 2020
Docket NumberNo. 18-1199,18-1199
Citation937 N.W.2d 334
Parties Roy KARON and Peddler LLC, Appellants, v. ELLIOTT AVIATION, James Mitchell, Wynn Elliott, Elliott Aviation Aircraft Sales, Inc., and Elliott Jets, Appellees.
CourtIowa Supreme Court
I. Introduction.

This case, involving an alleged scheme to inflate the purchase price of a general aviation jet aircraft, presents the question of what must be shown to avoid the effects of a contractual forum-selection clause. Is fraud in general enough, or does the fraud have to relate specifically to the clause? Joining the Restatement (Second) of Conflict of Laws, the United States Supreme Court, and a number of our fellow state supreme courts, we conclude that the fraud must relate to the clause itself. This is a logical corollary to our prior holding that the fraud necessary to set aside an agreement to arbitrate must relate to the arbitration clause itself. See Dacres v. John Deere Ins. , 548 N.W.2d 576, 578 (Iowa 1996).

In the present case, the plaintiffs contend that the defendants cheated them, but they have not alleged fraud with respect to the forum-selection clause in the written contract. Accordingly, we affirm the district court’s order dismissing this action without prejudice and requiring any future action to be brought in Kansas.

II. Facts and Procedural History.

Because we are reviewing the grant of a motion to dismiss, we take as true the plaintiffs’ factual allegations. See Venckus v. City of Iowa City , 930 N.W.2d 792, 798 (Iowa 2019).

A. The Parties Involved. Roy Karon is an Iowa resident and the sole member of Peddler, LLC, an Iowa limited liability company. Karon is also the sole shareholder of BVS, Inc., a nonparty Iowa corporation based in Cedar Rapids. Peddler leases an aircraft to BVS and Karon so their personnel can travel the United States and Canada to provide training to financial institutions.

Wynn Elliott is the president and a director of Elliott Aviation Aircraft Sales, Inc., an Iowa corporation, and the president and a director of Elliott Aviation, Inc., an Iowa corporation. At all relevant times, James Mitchell was an aircraft sales manager at Elliott Aviation Aircraft Sales, Inc. The parties have collectively referred to Wynn Elliott, James Mitchell, Elliott Aviation Aircraft Sales, and Elliott Aviation as "the Elliott Defendants."

B. The Cessna Citation X Agreement. In April 2014, Karon was looking to upgrade Peddler’s 1999 Cessna Citation Bravo jet aircraft to a Cessna Citation X, a larger, faster jet. Karon wanted Peddler to sell the Bravo and purchase a Citation X in a tax-free exchange pursuant to § 1031 of the Internal Revenue Code. See 26 U.S.C. § 1031 (2012).1

Karon had been doing business with the Elliott Defendants for over thirty years, and he decided to use their services in purchasing the Citation X. Thus Karon proposed to Mitchell, who was acting on behalf of the Elliott Defendants, that (1) Karon would search for and find a Citation X suitable for Peddler’s needs, (2) Karon would negotiate a price with the Citation X seller on the behalf of Peddler, (3) Karon would notify the Elliott Defendants, and (4) the Elliott Defendants would act as the broker to accomplish the § 1031 exchange. In the brokered transaction, the Elliott Defendants would acquire the chosen Citation X from the seller for Peddler, and then Peddler would trade in the Bravo to the Elliott Defendants for an agreed-upon $1.8 million, pay the remaining cash balance due, and immediately accept delivery of the Citation X. The Elliott Defendants would be compensated through a transaction fee of $100,000 plus whatever profit they received on the lease or resale of the Bravo. Mitchell, on the behalf of the Elliott Defendants, orally accepted Karon’s proposal.

Although Karon was to be responsible for finding the Citation X, both Mitchell and Karon researched the aircraft market and found a used 2000 Citation X that would suit Peddler’s needs. The Citation X was being sold by Kansas-headquartered Cessna Aircraft Company, a company for which Mitchell used to work. When Karon contacted Mitchell to inform him that he would begin price negotiations with Cessna, Mitchell offered to negotiate the price himself. Mitchell represented that he (Mitchell) would be able to negotiate a lower price because of his prior relationship with Cessna. Karon agreed.

Karon alleges that Mitchell informed him Cessna wanted $6 million for the Citation X. Karon responded to Mitchell that he would pay no more than $5.8 million. The negotiations continued.

Mitchell and Cessna arrived at a final acquisition price, which Mitchell told Karon was $5.8 million. Karon accepted this price, and the parties then negotiated additional details, including the installation of winglets to increase the plane’s range and capacity, pilot training, and subscriptions to certain service programs. A written purchase agreement (Purchase Agreement) was drawn up between the parties based upon the $5.8 million aircraft acquisition price. The brokerage fee, winglets, pilot training, and service program subscriptions brought the total contract value to approximately $6.7 million. Karon signed the Purchase Agreement on behalf of Peddler on May 30, and Mitchell signed on behalf of Elliott Aviation Aircraft Sales on June 2. Approximately three weeks later, on June 26, the Citation X was transferred from Cessna to Elliott Aviation Aircraft Sales and then immediately to Peddler. At that time, Peddler paid the Elliott Defendants the $100,000 brokerage fee.

The Purchase Agreement contained the following paragraph:2

9. CHOICE OF LAW AND JURISDICTION. [Elliott Aviation Aircraft Sales] and [Peddler] agree this Agreement will be deemed made and entered into and will be performed wholly within the State of Kansas, and any dispute arising under, out of, or related in any way to this Agreement, the legal relationship between [Elliott Aviation Aircraft Sales] and [Peddler], or the transaction that is the subject of this Agreement will be governed and construed under the laws of the State of Kansas, USA, exclusive of conflicts of laws. Any dispute arising under, out of, or related in any way to this Agreement, the legal relationship between [Elliott Aviation Aircraft Sales] and [Peddler] or the transaction that is the subject of this Agreement will be adjudicated solely and exclusively in the United States District Court for the State of Kansas, in Wichita, Kansas, or, if that court lacks jurisdiction, Kansas state courts of the 18th Judicial District. Each of the parties consents to the exclusive, personal jurisdiction of these courts and, by signing this Agreement, waives any objection to venue of the Kansas courts.

The Purchase Agreement also had a "severability and waiver" clause:

If any provision of this Agreement is or becomes null or unenforceable by operation of law, the other provisions will remain valid and enforceable. The waiver by either party of a breach of any provision of this Agreement will not constitute a waiver of any subsequent breach of the same or any other provision nor will it be considered a waiver of the provision itself.

Furthermore, the Purchase Agreement contained an integration clause: "This Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior written or oral agreements, representations, negotiations, proposals or discussions between the parties with respect to its subject matter."

C. The Litigation. In February 2015, "an outside source" informed Karon that the actual acquisition price for the Citation X was likely far less than $5.8 million. Accordingly, Karon contacted the Elliott Defendants and requested documentation of the acquisition price. Peddler and Karon allege they ultimately discovered "via a separate and independent source" that the acquisition price was indeed misrepresented, and they demanded reimbursement of the $400,000 difference between $5.8 million and the actual $5.4 million acquisition price. The Elliott Defendants refused. This litigation followed.

On February 26, Peddler filed suit against Elliott Aviation Aircraft Sales in the Iowa District Court for Linn County. Fact discovery took place. The defendant filed a motion for summary judgment which, on April 7, 2016, the district court denied.3 A jury trial was scheduled for January 9, 2017. On December 29, 2016—eleven days prior to the scheduled commencement of trial in Linn County—Peddler voluntarily dismissed its petition without prejudice pursuant to Iowa Rule of Civil Procedure 1.943.

Over a year later, on February 23, 2018, Peddler, this time joining with Karon, refiled its action in the Iowa District Court for Polk County against all the Elliott Defendants. The petition alleged that the Elliott Defendants had breached their oral brokerage contract with Peddler; the Elliott Defendants had fraudulently misrepresented the acquisition price of the Citation X and failed to disclose the true acquisition price; and Mitchell, acting individually and as an agent of the Elliott Defendants, had breached a fiduciary duty to Peddler by misrepresenting the acquisition price.

The Elliott Defendants, in lieu of filing an answer, moved to dismiss on three grounds. First, the Elliott Defendants maintained the claims were barred by the applicable Kansas statutes of limitations. Second, the Elliott Defendants asserted improper venue based on the forum-selection clause in the Purchase Agreement. Third, the Elliott Defendants urged that the petition failed to allege a cause of action against Wynn Elliott or Elliott Aviation, Inc. Peddler and Karon resisted, and a hearing was held on June 7.

On June 13, the district court issued an order dismissing the case without prejudice based on improper venue:

Defendants ask this Court to enforce Paragraph 9. Specifically, Defendants ask this Court to: (1.) dismiss with prejudice because, inter alia , Plaintiffs’ claims are barred by the applicable Kansas statutes of
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