N111KJ, LLC v. Cessna Aircraft Company

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 16-12198
Non-Argument Calendar
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D.C. Docket No. 9:15-cv-80058-KLR
KENNETH J. SACK, et al.,
Plaintiffs,
N111KJ, LLC,
Plaintiff-Appellant,
versus
CESSNA AIRCRAFT COMPANY,
Defendant-Appellee,
CITATION AIR,
a wholly owned subsidiary of
Cessna Aircraft Company,
Defendant.
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________________________
Appeal from the United States District Court
for the Southern District of Florida
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(January 19, 2017)
Before ED CARNES, Chief Judge, HULL and WILSON, Circuit Judges.
PER CURIAM:
Plaintiff N111KJ, LLC bought a plane from Cessna Aircraft Company on
the condition that Cessna’s wholly owned subsidiary, CitationShares Management,
LLC, would manage the jet and rent it out on plaintiff’s behalf for five years.
Three years later Cessna informed plaintiff that it would no longer manage the jet,
and plaintiff responded by bringing suit for fraudulent inducement and breach of
contract. The district court dismissed its claims, and plaintiff appeals.
I.
Because we are reviewing the district court’s grant of Cessna’s motion to
dismiss, we assume all facts alleged in the complaint are true and view them in the
light most favorable to plaintiff. Butler v. Sheriff of Palm Beach Cty., 685 F.3d
1261, 1265 (11th Cir. 2012).
Plaintiff and Cessna entered into a purchase agreement in which plaintiff
agreed to buy a Cessna Citation CB 525B private jet for $7.2 million. During the
contract negotiations, Cessna, through its agents, promised that it would manage
the plane for the first five years, renting it out to third parties so that plaintiff could
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recoup part of the purchase price. Cessna also promised that the jet would still be
worth 90% of its purchase price after five years. As a result, the purchase
agreement contained a “Special Condition[ ]” providing that:
This Agreement is contingent upon [Cessna] agreeing to pay for the
management fee for participation in CitationAir Jet Management
program for a period of five (5) years. The payment for CitationAir
Jet Management program is not transferable to a third party.
Cancellation of the CitationAir Jet Management program by [plaintiff]
will not result in the refund of any CitationAir Jet Management
program fees to [plaintiff].
The management program was administered by Cessna’s wholly owned subsidiary
CitationShares. The purchase agreement also contained a choice of law clause
providing that all disputes would be resolved under Kansas law.
About three years after the purchase, Cessna informed plaintiff that the jet
would no longer be enrolled in the management program. According to plaintiff,
Cessna made that abrupt change because it was selling $1 billion in airplanes to a
company called NetJets — on the condition that Cessna would end any competing
airplane management programs. Faced with onerous maintenance and storage
expenses, plaintiff was forced to sell the jet for $5.15 million, which is less than
90% of the purchase price. 1
In response to Cessna’s cancellation of the management program, plaintiff
brought this lawsuit. In its amended complaint, it set out three claims. First, it
1
Ninety percent of $7,200,000 is $6,480,000. The amount plaintiff actually sold the jet
for — $5,150,000 — is 72% of the original purchase price.
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claimed that Cessna knew that its promises about maintaining the jet and
representations about the jet’s future value were false when Cessna made them,
meaning that Cessna fraudulently induced plaintiff to enter into the contract.
Second, plaintiff claimed that the jet’s disenrollment from the management
program breached the purchase agreement. The amended complaint did not cite
any authority for that claim, but it apparently relied on a common law breach of
contract theory. Third, plaintiff claimed that the disenrollment was also a breach
of contract under Article 2 of the Uniform Commercial Code, which Kansas had
adopted, Kan. Stat. Ann. §§ 84-2-101 to -725.
Cessna moved to dismiss all three claims for failure to state a claim under
Federal Rule of Civil Procedure 12(b)(6). The district court granted Cessna’s
motion, dismissing the amended complaint with prejudice.
II.
Plaintiff challenges the district court’s dismissal of all three of its claims.
“We review de novo the district court’s grant of a motion to dismiss under 12(b)(6)
for failure to state a claim . . . .” Butler v. Sheriff of Palm Beach Cty., 685 F.3d
1261, 1265 (11th Cir. 2012). Plaintiff’s allegations “must be enough to raise a
right to relief above the speculative level, on the assumption that all the allegations
in the complaint are true (even if doubtful in fact).” Id.
A.
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Plaintiff contends that the district court erred by applying Florida law to its
fraudulent inducement claim, and contends that it pleaded a viable fraudulent
inducement claim under Kansas law. “In a diversity action such as this one, a
federal court must apply the choice-of-law principles of the state in which it sits.”
Michel v. NYP Holdings, Inc., 816 F.3d 686, 694 (11th Cir. 2016). That means
that we must use Florida conflict of laws rules to determine whether the fraudulent
inducement claim is governed by Florida substantive law or Kansas substantive
law.
In Mazzoni Farms, Inc. v. E.I. DuPont De Nemours & Co. (“Mazzoni Farms
I”), 761 So. 2d 306 (Fla. 2000), this Court certified to the Supreme Court of
Florida the question of whether “a choice-of-law provision . . . control[s] the
disposition of a claim that the agreement was fraudulently procured, even if there
is no allegation that the choice-of-law provision itself was fraudulently procured.”
Id. at 310. The Florida court answered that the choice of law provision controls.
Id. at 313; see also Mazzoni Farms, Inc. v. E.I. DuPont De Nemours & Co.
(“Mazzoni Farms II”), 223 F.3d 1275, 1276 (11th Cir. 2000) (receiving the
Supreme Court of Florida’s answer). The key factor in the court’s analysis in that
case was that the plaintiffs had “affirmed” the contract by suing for damages.
Mazzoni Farms I, 761 So. 2d at 313. By affirming the contract, they had also
affirmed the choice of law provision, meaning that that provision governed which
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state’s substantive law controlled the analysis of the fraudulent inducement claim.
Id. That was so even though the plaintiffs had, in the alternative, requested
rescission of the contract. Id.2
Here too plaintiff has affirmed the purchase agreement by “demand[ing] . . .
monetary damages” as relief for Cessna’s fraudulently inducing plaintiff to enter
into the contract. That means that plaintiff has implicated the agreement’s choice
of law provision, so its fraudulent inducement claim is to be decided under Kansas
law. The fact that the amended complaint asks, in the alternative, for the district
court to void the purchase agreement does not change that result. See id.
Having decided that Kansas law applies, we now turn to the substance of the
fraudulent inducement claim. “Kansas courts have recognized that promises
regarding future income and earnings can constitute actionable fraud.” K-B
Trucking Co. v. Riss Int’l Corp., 763 F.2d 1148, 1157 (10th Cir. 1985) (citing
2
After this Court received the Supreme Court of Florida’s answer to that question, this
Court held in a different case that a choice of law provision in a contract did not control which
state’s law applied to a fraudulent inducement claim. Green Leaf Nursery v. E.I. DuPont De
Nemours & Co., 341 F.3d 1292, 1301 (11th Cir. 2003) (applying Florida law). Whether or not
that decision was correct, we must follow the rule set out in the Mazzoni Farms I decision and
received by this Court in a published decision, Mazzoni Farms II, 223 F.3d at 1276, because it
predates Green Leaf Nursery and it is squarely on point, see Cohen v. Office Depot, Inc., 204
F.3d 1069, 1072 (11th Cir. 2000) (holding that we are bound to follow an earlier decision to the
extent it conflicts with a later decision). Moreover, the Green Leaf Nursery decision is based on
the fact that the choice of law clause in that case did not cover “disputes . . . arising out of the
relationship of the parties,” leading the Court to conclude that the clause was “narrow.” 341
F.3d at 1300. By contrast, the clause in the purchase agreement at issue here expressly provides
that “the legal relationships between the parties shall be determined[ ] in accordance with the
commercial laws of the State of Kansas.” That clause is broader than the clause in Green Leaf
Nursery, and our decision in that case does not dictate the result here.
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Fisher v. Mr. Harold’s Hair Lab, Inc., 527 P.2d 1026, 1034–35 (Kan. 1974)). They
are especially likely to find a viable claim for fraud where the promising party has
superior knowledge about the subject of the promise. Id. In addition, Kansas
courts consider the “degree of certainty or uncertainty” at the time of the promise
“as to what the future will bring.” Fisher, 527 P.2d at 1035. For example,
statements about a new business “may involve too much guesswork to constitute
actionable fraud,” while statements about an established business with a long
financial history may be certain enough to give rise to an action for fraud. Id.
In its amended complaint, plaintiff alleged that Cessna made specific
promises about the jet’s “net cash flow” and residual value at the end of five years.
It also alleged that it relied on those statements when it decided to enter into the
purchase agreement, and that Cessna knew at that time that the statements were
false. And it alleged that Cessna had sold over 6,000 Citation jets and ran the
management program, putting Cessna in a vastly superior position to know what
the jet’s future value and earnings would be. With all of that, plaintiff has alleged
sufficient facts to support a claim of fraudulent inducement under Kansas law.
The district court believed that plaintiff was “precluded” from relying on
Cessna’s allegedly fraudulent statements by Florida’s version of the parol evidence
rule. According to the district court, the purchase agreement’s merger clause
prevented plaintiff from introducing any oral statements outside the four corners of
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the written agreement. But Kansas law, not Florida law, is the applicable law, and
Kansas courts “permit[ ] the use of [parol] evidence where a contract is procured or
induced by the fraudulent representations of one of the parties which were relied
upon by the other.” Culp v. Bloss, 457 P.2d 154, 157 (Kan. 1969). That is so even
when the parties have expressly disclaimed any oral representations not reflected in
the written contract, as they did here. See Miles Excavating, Inc. v. Rutledge
Backhow & Septic Tank Servs., Inc., 927 P.2d 517, 518 (Kan. Ct. App. 1996).
Plaintiff’s claim falls within that exception to the parol evidence rule
because it has pleaded that it relied on the allegedly fraudulent statements. As a
result, plaintiff has properly pleaded a claim for fraudulent inducement under
Kansas law. We reverse the part of the district court’s judgment dismissing that
claim.
B.
Plaintiff also contends that the district court should not have dismissed its
breach of contract claim centering on Cessna’s failure to continue managing the
jet. Because that is a breach of contract claim arising from the purchase
agreement, the choice of law provision controls that claim, Dataline Corp. v. L.D.
Mullins Lumber Co., 588 So. 2d 1078, 1079 (Fla. 4th DCA 1991), meaning that
Kansas substantive law applies.
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1.
In its amended complaint plaintiff asserts two separate claims of breach of
contract, one under Kansas’ incorporation of the UCC and one, apparently, under
the common law. The problem is that the UCC displaces the common law where
the UCC is applicable, Kan. Stat. Ann. § 84-1-103(b), and the UCC has its own
breach of contract rules, id. §§ 84-2-501 to -725. As a result, if the UCC applies to
the purchase agreement, plaintiff’s common law breach of contract claim is out.
But if the UCC does not apply to the agreement, then plaintiff does not have a
viable claim for breach under the UCC (but it may have a viable claim under the
common law). It must be one or the other; it cannot be both. See Golden v. Den-
Mat Corp., 276 P.3d 773, 791 (Kan. Ct. App. 2012).
The purchase agreement is a “mixed contract” because it involves the sale of
goods (the airplane), and the sale of services (the management program). Kansas
courts use the “predominant purpose” test to determine whether a mixed contract is
governed by the common law or the UCC. Id. That “test attempts to discern the
principal nature of the transaction: Is the buyer seeking services to which the
goods are incidental, or is the buyer acquiring goods to which the services are
auxiliary?” Id.
Applying the predominant purpose test to this set of facts is not difficult.
The purpose of the “Purchase Agreement” obviously was to obtain the airplane.
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The enrollment in the management program was secondary to that, which is why
the only mention of the program comes in an exhibit attached to the end of the
contract. Because plaintiff was acquiring goods to which services were only
auxiliary, the UCC governs the contract. See id.
The district court came to the opposite conclusion based on its belief that the
predominant factor test “is not applicable where two separate contracts — one
addressing goods, and one addressing services — are involved.” In this case it
found that the purchase agreement was a contract for acquiring goods, and the
management agreement between plaintiff and CitationShares was a contract for
performing services. Because the dispute centered on the jet’s disenrollment from
the management program, and it was enrolled in that program pursuant to the
management agreement, the district court believed that the rules governing
contracts for services — that is, the common law — were the applicable ones.
We are of a different view. It may be that plaintiff could have sued
CitationShares for breach of the management agreement, and that claim would
have been decided under common law principles. But plaintiff sued Cessna only
for breach of the purchase agreement. That agreement dispute is governed by the
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UCC. The fact that plaintiff could have, but did not, sue a different party on a
different contract or claim does not change the conclusion. 3
Accordingly, plaintiff cannot state a claim for relief on a theory of common
law breach of contract, so the district court properly dismissed that claim — albeit
on a different ground.
2.
However, plaintiff’s UCC breach of contract claim does state a plausible
claim for relief. In its analysis of plaintiff’s claims, the district court found that the
purchase agreement did not “require [Cessna] to maintain the jet in the
management program for five years, nor d[id] the agreement bar [Cessna] from
ending Plaintiff’s participation in the program.” It is true that the agreement does
not contain an express provision to that effect, but it cannot be that plaintiff
bargained for and obtained a management arrangement that could be rendered
valueless an hour later if Cessna decided it no longer wanted to manage the jet.
See Johnson Cty. Bank v. Ross, 13 P.3d 351, 353 (Kan. Ct. App. 2000) (“The law
favors reasonable interpretations, and results which vitiate the purpose of the terms
of the agreement to an absurdity should be avoided.”). In addition, the
3
As part of the UCC breach of contract claim, the amended complaint contains
allegations that Cessna breached “the Management Agreement.” We interpret that term to refer
to the “Special Condition” in which Cessna agreed to pay the fees for the jet’s enrollment in the
management program. It does not seem reasonable to interpret it to mean the contract between
plaintiff and CitationShares because that contract is never mentioned in the amended complaint
and the amended complaint only alleges that Cessna, not CitationShares, breached the contract.
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management program provision expressly permits plaintiff to remove the jet from
the program, but it contains no provision permitting Cessna to end the program.
The parties obviously agreed that Cessna would continue managing the jet for the
five year period, unless plaintiff relieved Cessna of the obligation to do so.
To put it in technical terms, the provision contains an “implied in fact
condition” that Cessna not disenroll the jet from the management program.
“Implied in fact conditions are similar in their nature to express conditions, except
that the parties have expressed their intentions not in words but in the nature of
their undertakings.” Bergman v. Commerce Tr. Co., 129 P.3d 624, 627 (Kan. Ct.
App. 2006). They are conditions that are “necessarily inherent in the actual
performance of the contract.” Id. at 628 (quoting 13 Richard A. Lord, Williston on
Contracts § 38:11 (4th ed. 2001)). Here, it was inherently necessary for Cessna to
keep the jet enrolled in the management program in order for plaintiff to get the
benefit of its bargain.
“The duty of good faith and fair dealing” that is imposed by the UCC, see
Kan. Stat. Ann. § 84-1-304, “requires at least that a party do nothing to prevent the
occurrence of a condition of that party’s duty.” M W., Inc. v. Oak Park Mall,
L.L.C., 234 P.3d 833, 846 (Kan. Ct. App. 2010). Plaintiff has alleged that Cessna
prevented a condition of its obligation to pay the jet’s management fees from
occurring by disenrolling the jet from the management program. That allegation
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states a claim for violation of the duty of good faith and fair dealing that the UCC
imposes.
Cessna argues that, even if it had a duty to keep the jet enrolled in the
management program, that duty ended three years into the contract. It bases that
argument on the management agreement between plaintiff and CitationShares,
which enrolled the jet in the management program for three years, with automatic
one-year renewals after that. But that provision is entirely consistent with the five-
year term of the purchase agreement. The purchase agreement gave plaintiff two
options: it could keep the jet in the CitationAir Management Program for up to
five years, in which case Cessna would pay the management fees; or plaintiff could
at some point use a different management program (or no management program at
all), in which case Cessna would no longer be obligated to pay the management
fees. It makes sense under those conditions that plaintiff would initially enroll for
only three years, subject to renewals thereafter.
Plaintiff’s bargained-for flexibility does not change the fact that Cessna was
obligated to pay the management fees for up to five years if plaintiff decided to
keep the jet in the program that long. There is no indication at this stage of the
litigation that plaintiff disenrolled the jet from the program or that more than five
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years passed since the jet entered the program, so Cessna’s obligation was still
effective at the time it allegedly caused the jet to be disenrolled.4
For those reasons, we reverse the district court’s dismissal of plaintiff’s
fraudulent inducement and UCC breach of contract claims, and the case is
remanded for further proceedings consistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.
4
Although plaintiff does not specifically allege it, we can infer that the alleged breach
occurred either before the jet’s initial three-year term in the management program was complete
or after the term had been renewed. To the extent that Cessna asserts that the jet was no longer
in the management program because plaintiff did not renew the program’s term, Cessna will be
free to adduce evidence proving that assertion if and when the parties enter discovery.
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