In The Supreme Court of Iowa, Roy Karon and Peddler LLC, v. Elliott Aviation, Docket No. 18-1199

Contractual Forum-Selection Clause

What Must Be Shown to Avoid Its Effects?

Venue

Fraud

(“Severability and Waiver” Clause)

(Integration Clause)

(Choice-of-Law Clause)

Contract Drafting

Iowa Law

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.

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).

If Peddler did not use a § 1031 exchange, it would presumably be liable for income tax on recaptured depreciation when it sold the Bravo.

The Purchase Agreement contained the following paragraph: 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.”

(…) On June 13, the district court issued an order dismissing the case without prejudice based on improper venue.

Importantly, though, Plaintiffs’ fraud claims are about the transaction as a whole, through which they were allegedly “defrauded out of $400,000.” Plaintiffs make no claim that Paragraph 9 was induced by fraud. Nor do Plaintiffs claim that Paragraph 9 itself is otherwise invalid.

Thus, the problem before the Court is similar to one that sometimes arises in the context of arbitration: If a contract contains an arbitration clause, and if the plaintiff claims that the entire contract was fraudulently induced, should the arbitration clause be enforced?

In Prima Paint, the United States Supreme Court held that if the plaintiff’s allegations of fraud are directed to the total transaction, and not to the arbitration clause itself, then the arbitration clause should be enforced. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). Arbitrators, not judges, should resolve allegations of fraud in the transaction “as a whole.” See Madol v. Dan Nelson Auto. Grp., 372 F.3d 997, 1000 (8th Cir. 2004) (applying Prima Paint).
Iowa has adopted the Prima Paint rule. [The court went on to quote from Dacres, 548 N.W.2d at 578].

Of course, Paragraph 9 is not an arbitration clause. Instead, it contains venue and choice of law provisions. Courts have held, however, that the Prima Paint rule applies with equal force to venue and choice of law provisions. See, e.g., Stamm v. Barclays Bank of N.Y., 960 F. Supp. 724, 729 (S.D.N.Y. 1997) (citing Prima Paint and other authorities for the proposition that a “claim of fraud in the inducement of a contract is insufficient to invalidate a forum selection or choice-of-law clause found in that contract”). As Magistrate Judge Walters correctly observed, venue and choice of law provisions “would be practically unenforceable if they could be avoided simply by an allegation of fraud in the inducement.” Morris v. McFarland Clinic P.C., No. CIV. 4:03- CV-30439, 2004 WL 306110, at *2 (S.D. Iowa Jan. 29, 2004).

The Court concludes, therefore, that the Prima Paint rule should be used to determine whether Paragraph 9 is enforceable. See Dacres, 548 N.W.2d at 578. As already explained, Plaintiffs’ claims of fraud are about the transaction as a whole. Plaintiffs do not claim that Paragraph 9 itself was fraudulently induced. Therefore, under the Prima Paint rule, Paragraph 9 should be enforced.

Unlike in the arbitration context, where the FAA applies, there is no federal legislation that governs state court proceedings when a forum-selection clause is at issue. Cf. Stewart Org., Inc., 487 U.S. at 28–29, 108 S. Ct. at 2243 (holding that 28 U.S.C. § 1404(a) governs the enforceability of a forum-selection clause in a diversity case in federal court). Accordingly, enforcement of a forum-selection clause in state court is a matter of state law. See Perkins v. CCH Computax, Inc., 415 S.E.2d 755, 757 (N.C. Ct. App. 1992) (declining to apply federal law), rev’d, 423 S.E.2d 780, 781 (N.C. 1992), superseded in part by statute, 1993 N.C. Sess. Laws ch. 436.


(In The Supreme Court of Iowa, January 10, 2020, Roy Karon and Peddler LLC, v. Elliott Aviation, Docket No. 18-1199, all justices concur except Appel, J., who dissents)