DealLawyers.com Blog

As I read the Chancery Court’s recent decision in Pilot Air Freight v. Manna Freight Systems, (Del. Ch.; 9/20), I experienced a very strong feeling of deja vu.  Maybe that’s because, for the third time in the past three months, the Court upheld a plaintiff’s efforts to plead around a contractual reliance disclaimer on the basis of a fraud claim tied to the language of the reps & warranties themselves.

That sense of deja vu became even stronger when I realized that this case, like the Swipe Acquisition case decided in August, involved alleged misrepresentations in a purchase agreement concerning customer relationships.  One of the more remarkable aspects of this decision, however, is the way that the contractual fraud claim here permitted the plaintiff to dig itself out of a really deep hole that it dug for itself.

What do I mean by that?  Well, the plaintiff didn’t file a lawsuit against the seller until after the 15 month survival period set forth in the asset purchase agreement had expired. In addition, the plaintiff had signed on to a very explicit and broad-based disclaimer of reliance on any reps not made in the purchase agreement.

Undeterred, the plaintiff threw everything at the defendant but the kitchen sink, in the hope that something would stick. It claimed claimed breach of various reps & warranties relating to customer and vendor relationships, asserted contractual rights to indemnity, alleged violations of the implied covenant of good faith and fair dealing, and threw in fraud claims for good measure.

It seems fair to say that Vice Chancellor Slights wasn’t impressed with the plaintiff’s efforts to overcome the formidable impediments to its contractual claims.  In fact, he devoted 57 pages of his 65-page opinion to smacking down every theory of contractual liability advanced by the plaintiff.

But then he got to the fraud claim. Although fraud has to be pled with particularity, the Vice Chancellor provided some insight into the recent success – at the motion to dismiss stage – of fraud claims tied to the language of reps & warranties. The truth is that, in these cases, it’s usually not hard to satisfy that requirement:

To meet the particularity requirement, Rule 9(b) often will require a plaintiff making a fraud claim to allege: “the time, place, and contents of the false representation, the identity of the person(s) making the representation, and what he intended to obtain thereby.”  “When a party sues based on a written contract, as [Pilot] has done here, it is relatively easy to plead a particularized claim of fraud.”

“The plaintiff can readily identify who made what representations where and when, because the specific representations appear in the contract. The plaintiff likewise can readily identify what the defendant gained, which was to induce the plaintiff to enter into the contract.” Given that state of mind and knowledge may be averred generally when pleading fraud, an allegation that a contractual representation is knowingly false typically will be deemed well pled (even if ultimately difficult to prove).

VC Slights walked through the specific language of each rep which the plaintiff alleged to have been fraudulent, and found that it had pled its claims with the requisite particularity. Like Vice Chancellor Fioravanti in Swipe Acquisition, he also brushed aside the defendant’s allegations that the plaintiff was merely “bootstrapping” its breach of contract claims into a fraud claim.

In doing so, he noted that a plaintiff will be regarded as having bootstrapped a fraud claim when it merely “tacked on conclusory allegations that the defendant made the contract knowing it would not or could not deliver on its promises.”  He also laid out the factual circumstances that will lead a Delaware court to conclude that a fraud claim wasn’t bootstrapped:

As our law in this area has evolved, it is now clear that improper bootstrapping does not occur: (1) “where a plaintiff has made particularized allegations that a seller knew contractual representations were false or lied regarding the contractual representation,” (2) “where damages for plaintiff’s fraud claim may be different from plaintiff’s breach of contract claim,” (3) when the conduct occurs prior to the execution of the contract “and thus with the goal of inducing the plaintiff’s signature and willingness to close on the transaction” or (4) when the breach of contract claim is not well-pled such that there is no breach claim on which to “bootstrap” the fraud claim.

He ultimately concluded that the plaintiff’s fraud claim fell squarely within several of the enumerated “non-bootstrapping spaces,” and declined to dismiss the allegations.  For more on this topic, check out this Francis Pileggi blog on the various issues involved in these recent decisions. His blog also includes a helpful compendium of other Delaware cases involving contractual fraud allegations and the relationship between those allegations and contractual non-reliance clauses.

– John Jenkins