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Chancery Dismisses Fraud, Misrepresentation and Mistake Claims Based on Anti-Reliance Provisions

Posted In Fraud Claims

Midcap Funding X Trust v. Graebel Companies, Inc., C.A. No. 2018-0312-MTZ (Del. Ch. Apr. 30, 2020)

The Court of Chancery found on a motion to dismiss that the plaintiffs’ allegations regarding misrepresentations in contractual negotiations were irrelevant due to the contract’s anti-reliance and integration clauses, and that the plaintiffs in the action otherwise were “scouring and stretching” the contract’s plain terms. 

Plaintiffs in the action, an insolvent company in receivership and its secured creditors (“Plaintiffs”), claimed that the defendant entities owed them approximately $13 million in accounts receivable (“Defendants”). The accounts receivable were outstanding payments which the company in receivership had due and owing, and in which the creditors had a security interest. The parties negotiated and executed a Settlement Agreement (the “Settlement Agreement”) in which Defendants agreed to deliver certain funds to the insolvent company. Following the execution of the Settlement Agreement, Plaintiffs discovered that Defendants had in fact already billed and/or collected a larger sum of the accounts receivable than previously stated, contradicting the representations Defendants made during the settlement negotiations.

Plaintiffs brought this action in the Court of Chancery alleging, inter alia, that Defendants’ actions constituted misrepresentation, fraudulent concealment, breach of the implied covenant of good faith and fair dealing, mistake, and unjust enrichment. The Court rejected these claims and granted Defendants’ motion to dismiss as to those counts. Specifically, the Court found that Plaintiffs failed to state a valid claim for misrepresentation, fraudulent concealment, and mistake because the settlement agreement contained anti-reliance and integration clauses, which precluded those causes of action. The Settlement Agreement stated each party “is not entering into this Agreement in reliance upon any representations, promises or assurance other than those expressly set forth in this Agreement.” The integration clause also stated that the Settlement Agreement “supersedes any prior contracts, understandings, discussions, and agreements among the parties.” As the Court explained, “the [n]egotiations leading up to the Settlement Agreement,” were outside “the four corners of the Settlement Agreement” and were thus barred by the contract’s plain terms which “disclaim[ed] reliance on [] extra-contractual representations.” The Court also held that, as a result of the anti-reliance provisions, the Plaintiffs’ consequent “failure of justifiable reliance [was] fatal to [the] claim for mutual mistake” and unilateral mistake because the claims were premised on “extracontractual representations and omissions.”

In dismissing the good faith and fair dealing claim, the Court held that Plaintiffs’ theory was premised on obligations that the contract did not create, and that were inconsistent with the Settlement Agreement’s terms. Lastly, the Court dismissed the unjust enrichment claim because it found that the Settlement Agreement “govern[ed] the relevant relationship between the parties,” which precluded a cause of action under that theory. The Court denied Defendants’ motion to dismiss, however, as to three claims regarding the Settlement Agreement’s ongoing obligations.

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