In 2013, JTF Aviation (JTF) hired CliftonLarsonAllen (CLA) for auditing and other accounting-related services. The engagement letter provided, among other things, that litigation arising from the audit needed to be commenced within 24 months of completion. CLA finalized its audit in February 2014, finding that JTF’s financial statements conformed to GAAP.
In June 2014, JTF and Jeremy Freer (JTF’s founder, president, and sole shareholder) entered into an asset purchase agreement with Vistria Group for $80 million. The sale led to litigation, with Vistria alleging that JTF and Freer fraudulently induced the sale because JTF’s financial statements lacked compliance with GAAP. The litigation settled two years later for several million dollars.
In April 2017, Freer sued CLA for professional negligence, negligent misrepresentation, and breach of fiduciary duty. CLA moved for summary judgment, arguing that the contractual limitations clause barred the action, which was filed more than three years after the audit. The trial court and Arizona Court of Appeals agreed. The Court of Appeals applied the closely related party doctrine and looked to Freer’s ownership of JTF, his relationship to the contract, his involvement in the negotiations, and the benefit he received from the agreement. The appellate court also considered whether enforcement of the clause against a nonparty was “foreseeable.”
The Arizona Supreme Court was not persuaded. Treating the issue as one of first impression, the Court distinguished cases applying the closely related party doctrine by noting that all involved forum-selection clauses — not repose limitations. In the Court’s view, forum-selection clauses are “more limited” than repose provisions, which speak to
when
a party must commence an action, not
where.
The Court then examined Arizona law’s treatment of the corporate form. The Court explained that the doctrine’s consideration of corporate ownership effectively amounted to piercing the corporate veil, which JTF did not argue applied. Ultimately, the Court found that “[t]he importance of the corporate form and the protections afforded it as provided by Arizona law weigh heavily against adopting the [d]octrine, which was developed for a different purpose and in a different context.” The Court therefore declined to apply the doctrine to the contract’s 24-month limitations provision.
If we may be of assistance to you or to review your legal matter, please call
Robert Mitchell at (602) 452-2730 or
Chris Waznik at (602) 452-2729.
