No Reliance Clause in Asset Purchase Agreement must be specific in order to preclude Fraudulent Misrepresentation Claim

A recent case out of Kings County, I&M Kosher Catering LLC v BHNG Inc., explains that a Non-Reliance Clause must be specific to preclude a claim for fraudulent misrepresentation.

The case concerns a business asset purchase gone wrong. The plaintiff purchased a bagel store on Coney Island Avenue and, in doing so, relied on the seller’s statement that the store generated an annual net profit of $250,000, which later turned out was wrong.

The parties had entered into an Asset Purchase Agreement that did not contain any warranties and representations regarding any financials or whether any statements the seller made about the store’s revenue were accurate. However, the Agreement contained a clause that reads, “Except as otherwise expressly set forth herein, Seller has not made, and Purchaser had not relied on any representations or warranties with respect to the Assets and/or the Sublease hereunder.”

So Plaintiff sued for fraudulent misrepresentation, and Seller, now Defendant, argued that the reliance clause would preclude any such claim, i.e. such claim should be dismissed outright. The court disagreed, citing from relevant New York cases:

However, in Dannan Realty Corp. v. Harris, 5 NY2d 317, 184 NYS2d 599 (1959), the New York Court of Appeals essentially changed direction and held that a disclaimer regarding reliance will preclude a claim of fraudulent misrepresentation if the disclaimer is sufficiently specific as to the particular facts that are the subject of the disclaimer and that the alleged misrepresentation did not concern facts within the knowledge of the party making the misrepresentation (see, Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc., 115 AD3d 128, 980 NYS2d 21 [1st Dept., 2014]). Thus, “only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter” (id). Thus, in DiFilippo v. Hidden Pond Associates, 146 AD2d 737, 537 NYS2d 222 (2d Dept., 1989), the court held that claims of fraudulent misrepresentation were not barred where the provision did not “specifically disclaim reliance on any oral representation concerning the particular matter as to which plaintiff now claims he was defrauded” and that such provision did not foreclose the plaintiff “from offering evidence of the defendants’ oral representations to the contrary” (id). Again, in GTE Automatic Electric Inc., 127 AD2d 545, 512 NYS2d 107 (1st Dept., 1987), the court held claims of fraudulent misrepresentation were not barred where any guaranty lacked a specific disclaimer. Further, in Goodridge v. Fernandez, 121 AD2d 942, 505 NYS2d 144 (1st Dept., 1986), the court held claims of fraudulent misrepresentation were permitted where the guaranty did not contain specific disclaimers.

An examination of the no-reliance clauses in the agreement in this case reveals that no such disclaimer regarding revenue earned was ever negotiated and thus the no-reliance clause is not specific to the matter of the alleged misrepresentation. Article 4.G of the Asset Purchase Agreement states that “except as otherwise expressly set forth herein, Seller has not made and Purchaser has not relied on any representations or warranties with respect to the Assets and/or the Sublease hereunder” (id). This clause only concerns the assets and any subleases. Clearly, it does not involve the specific representations concerning the revenue earned. Further, Article 10.1 of the agreement states that “all representations, warranties and covenants contained in this Agreement shall be deemed continuing representations, warranties and covenants, and shall survive the execution of this Agreement for a period of six (6) months from the Closing Date. Any investigations by or on behalf of any party hereto shall not constitute a waiver as to enforcement of any representation, warranty or covenant contained herein” (id). Again, this provision is limited to representations contained “in this agreement” (id). The complaint alleges misrepresentations that are beyond the agreement that induced the plaintiff to enter the agreement. Therefore, there are no provisions of the agreement which create a bar to any claims for fraudulent misrepresentation.

Frankly, if I had been the purchaser’s counsel in this asset purchase transaction, I would have insisted on a representation that all financial information presented to the purchaser was accurate when given. If it later turns out it was wrong, the purchaser would have a breach of contract claim against the seller.

If I had been the seller’s counsel and we really wanted to cut off any claims about financials, I would have included a reliance clause that specifically mentions financial representations and that the purchaser relied on its own analysis of any financial condition or any numbers presented.