A Morris James blog reports on yet another Delaware decision involving claims of contractual fraud. The Delaware Superior Court ‘s decision in Aveanna Healthcare v. Epic/Freedom LLC (Del. Super.; 7/21) reached the usual conclusions about the usual issues — a reliance disclaimer isn’t going to absolve a party of fraudulent statements within the contract itself, and an owner that knowingly causes a misrepresentation can’t avoid liability just because it isn’t a party to the contract.
The transaction involved the sale of two companies. The purchase agreement contained representations by the companies — but not by the seller & its owner — as to the accuracy of their financial statements. Following the closing, the buyer found evidence that the seller had allegedly falsified those financial statements to inflate the purchase price for the companies. The sellers moved for a judgment on the pleadings, but the Court denied that motion. This excerpt from the blog summarizes the Court’s decision:
The Court held that, under its own terms, the anti-reliance clause at issue expressly was applicable to extra-contractual representations, not the intra-contractual representations concerning the companies’ financial statements; its plain language thus mirrored the result impliedly compelled by Delaware public policy. The Court also rejected the seller’s argument that the fraud claim was based on extra-contractual statements merely because alleged evidence of the alleged fraud came from documents (here, internal company emails discovered post-closing) outside of the purchase agreement.
The Court also held that certain owners could not avoid fraud liability simply because the company made the representations at-issue in the purchase agreement. Reviewing Delaware cases on this issue, the Court reasoned that under the Court of Chancery’s 2006 ABRY Partners decision and its progeny, sellers may be liable for fraud if they knew the representations were false when made. Here, the buyer had sufficiently pleaded the seller’s knowledge.
The decision wasn’t a complete victory for the buyers, because the Court declined to dismiss counterclaims by the sellers arising out of the buyer’s alleged failure to comply with contractual obligations to release certain tax refunds and amounts held in escrow.
-John Jenkins, DealLawyers.com October 6, 2021