DealLawyers.com Blog

The Delaware Chancery Court’s recent decision in Roma Landmark Theaters v. Cohen Exhibition, (Del. Ch.; 9/20) represents the latest in a series of M&A-related lawsuits in which a buyer’s contract fraud claims have survived motions to dismiss.

The litigation arose out of the parties’ disagreement over post-closing purchase price adjustments arising out of the sale of the sellers’ membership interests in an LLC. The securities purchase agreement required them to submit any dispute over adjustments to an independent accounting firm for a binding resolution. After the accounting firm ruled in the sellers’ favor, they filed suit in the Chancery Court seeking confirmation of the decision & release of escrowed funds.  The buyer counterclaimed, alleging that the sellers misrepresented the target’s financial information, in breach of contractual obligations under the purchase agreement. The buyer also alleged that these misrepresentations amounted to fraud and bad faith.

This excerpt from Morris James’ recent blog on the case says that Vice Chancellor Fioravanti dismissed the buyer’s contractual claims, but declined to dismiss its fraud claims based on the language of the contract:

The Court dismissed buyer’s contract claims against sellers. In the purchase agreement only the company, not sellers, provided representations and warranties regarding the company’s financials. The Court reasoned that the buyer was not entitled to representations and warranty protections from sellers beyond those afforded under the plain terms of their purchase agreement. The Court also dismissed buyer’s implied covenant claim because the buyer had not alleged an implied obligation or contractual gap in the parties’ purchase agreement.

The Court, however, upheld a part of buyer’s fraud claims at the pleadings stage. The Court found that buyer had pled with sufficient particularity that sellers knowingly omitted certain liabilities from interim financial statements, but that buyer had inadequately pled seller’s knowledge of alleged  misrepresentation of other payments and expenses.

In upholding the buyer’s contractual fraud claims, the Vice Chancellor noted that those claims were based on allegations that knowingly provided false representations about the Company’s financial condition which induced Buyer to enter into the purchase agreement. Citing the same Delaware authority that he relied upon in recently upholding another contract-based fraud claim, Vice Chancellor Fioravanti pointed out that:

“It is relatively easy to plead a particularized claim of fraud” “based on a written representation in a contract,” because the allegedly false contractual representation satisfies much of the requirement to plead a claim of fraud with particularity. The only remaining allegations necessary are “facts sufficient to support a reasonable inference that the representations were knowingly false.”

He went on to observe that under Delaware precedent, the plaintiff must “allege sufficient facts from which it can reasonably be inferred that [the falsity] was knowable and that the defendants were in a position to know it” in order to satisfy the knowing falsity requirement, and that the plaintiff met that standard here.

– John Jenkins