Infomedia Group, Inc. v. Orange Health Solutions, Inc. ( 2020 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
INFOMEDIA GROUP, INC.,
Plaintiff,
Vv.
C.A. No. N19C-10-212 AML CCLD
ORANGE HEALTH SOLUTIONS,
INC. and GREAT POINT
PARTNERS, LLC,
4444 ae ae a a
Defendants.
Submitted: April 23, 2020
Decided: July 31, 2020
MEMORANDUM OPINION
Upon Defendants’ Motions to Dismiss: GRANTED
Daniel J. Brown, Esquire, Hayley J. Reese, Esquire, MCCARTER & ENGLISH,
LLP, Wilmington, Delaware; Attorneys for Plaintiff Infomedia Group, Inc.
Daniel B. Rath, Esquire, Rebecca L. Butcher, Esquire, Nicolas E. Jenner, Esquire,
LANDIS RATH & COBB LLP, Wilmington, Delaware and Alan S. Wachs, Esquire,
SMITH, GAMBRELL & RUSSELL, LLP, Jacksonville, Florida; Attorneys for
Defendants Orange Health Solutions, Inc.
Daniel B. Rath, Esquire, Rebecca L. Butcher, Esquire, Nicolas E. Jenner, Esquire,
LANDIS RATH & COBB LLP, Wilmington, Delaware and Donald H. Chase,
Esquire of MORRISON COHEN LLP, New York, New York; Attorneys for Great
Point Partners, LLC.
LEGROW, J.
The buyer under an asset purchase agreement purchased the seller’s rights and
obligations under a series of service contracts. The buyer now contends the seller
fraudulently and negligently represented during the parties’ negotiations that the
seller had not received notice of any customer’s intent to terminate the service
contracts. This representation, the buyer contends, was false or misleading because
several days before the parties executed their agreement, the seller received oral
notice that one of its customers intended to terminate several contracts. The
representations that form the basis of the buyer’s claims, however, were not
contained in the asset purchase agreement the parties signed, and the buyer expressly
represented in that agreement that it was not relying on any extra-contractual
representations.
The issue in this case is whether the buyer can maintain tort claims based on
extra-contractual representations in the face of unambiguous contractual language in
which the seller expressly disclaimed making any such representations and the buyer
expressly warranted that it was not relying on any such representations. The buyer
employs various tactics to try to plead around the contractual anti-reliance clause,
arguing that the buyer is relying on extra-contractual “omissions” rather than overt
representations, and that Delaware law permits it to maintain a claim for fraudulent
concealment notwithstanding the contractual language. None of these arguments is
persuasive or allows the buyer to escape the contractual limitations to which it
expressly agreed. Delaware law enforces sophisticated parties’ agreements to limit
their reliance to contractual representations. Because the buyer cannot plead
justifiable reliance, its claims must be dismissed.
FACTUAL AND PROCEDURAL BACKGROUND
Unless otherwise noted, the following facts are drawn from the complaint and
the documents it incorporates. On July 1, 2019, plaintiff Infomedia Group, Inc.,
d/b/a Carenet Health Services (“Carenet” or “Plaintiff’) entered into an asset
purchase agreement (the “Purchase Agreement”) with defendant Orange Health
Solutions, Inc. (hereinafter, “Citra”). Carenet and Citra are healthcare companies
that provide various services to clients in the healthcare field. Before the parties
entered into the Purchase Agreement, one of the services Citra provided its clients
was a Nurse Advice Line. Under the Purchase Agreement, Carenet purchased
Citra’s rights and obligations under those Nurse Advice Line contracts (the
“Contracts”).
The parties began discussing the potential asset purchase in August 2018,
when defendant Great Point Partners, LLC “(Great Point,” and collectively with
Citra, “Defendants”) advised Carenet that Citra was exploring selling its rights and
obligations under the Contracts. Great Point allegedly owns or controls Citra, and
Great Point participated in the parties’ negotiations and discussions. During due
diligence, Carenet expressly inquired whether any of Citra’s customers had
expressed an intent to amend, modify, or terminate any of the Contracts and whether
there was a risk of such termination as a result of the proposed transaction. Great
Point and Citra assured Carenet that there was minimal risk that any of Citra’s
customers would terminate the Contracts. Defendants also orally represented to
Carenet on “numerous occasions [before] the execution of any agreement that
[Defendants] were not aware of any customer that intended to terminate any of the
Contracts.”!
Humana was one of Citra’s top customers and the source of several of the
Contracts. On June 21, 2019, approximately two weeks before the Purchase
Agreement was signed, Humana and Citra participated in a phone call during which
Citra learned that Humana intended to terminate the majority of its nurse advice line
contracts. Humana advised Citra that written notice of the termination would follow.
Although Great Point also was aware of Humana’s orally stated intent to terminate,
neither defendant advised Carenet of the conversation. To the contrary, Citra
instructed its employees not to disclose Humana’s intent to anyone. Carenet alleges
Defendants intentionally concealed Humana’s intent to terminate, and Carenet
would not have entered into the Purchase Agreement if it was aware of Humana’s
plans.
' Compl. 4 23.
The parties executed the Purchase Agreement on July 1, 2019, and the
transaction closed that day. In the Purchase Agreement, Citra expressly represented
that it had not received written notice from any customer of an intent to terminate
the Contracts, specifically:
Neither [Citra], or to the knowledge of [Citra], any other party thereto,
(i) is in material breach of or material default under any Contract, or (ii)
except as set forth on Section 2.4(d) of the Seller Disclosure Schedule,
has provided or received any written notice of any material breach or
alleged material breach of, audit of, or intention to terminate, amend,
or modify (including any material change in anticipated call volume),
any Contract.”
After the transaction closed, Carenet discovered that Humana intended to
terminate the Contracts to which it was a party. Carenet then filed this action against
Citra and Great Point, alleging claims for fraudulent inducement and negligent
misrepresentation. Carenet seeks compensatory and punitive damages, as well as
interest and attorneys’ fees. Defendants have moved to dismiss all the claims. This
is the Court’s decision after considering the briefs and the parties’ arguments.
ANALYSIS
Upon a motion to dismiss, the Court (i) accepts all well-pleaded factual
allegations as true, (ii) accepts even vague allegations as well-pleaded if they give
* Def. Orange Health Sols., Inc.’s Opening Br. in Supp. of its Mot. to Dismiss (hereinafter “Orange
Health’s Mot. to Dismiss”), Ex. A Purchase Agreement (hereinafter “Purchase Agreement”) §
2.4(d). Although the Purchase Agreement was not attached to the complaint, the parties conceded
the Court may consider it because it was incorporated by reference in the Complaint. See Winshall
v. Viacom Int'l, Inc., 76 A.3d 808, 817-18 (Del. 2013).
4
the opposing party notice of the claim, (iii) draws all reasonable inferences in favor
of the non-moving party, and (iv) only dismisses a case where the plaintiff would
not be entitled to recover under any reasonably conceivable set of circumstances.°
The Court, however, must “ignore conclusory allegations that lack specific
supporting factual allegations.” Moreover, when a complaint pleads claims of fraud
or negligence, Superior Court Civil Rule 9(b) imposes a heightened pleading
standard. To plead fraud or negligence claims, a plaintiff must allege with
particularity the circumstances constituting the fraud or negligence.® Allegations of
malice, intent, or knowledge may be averred generally.’
Carenet has not filed a breach of contract claim based on Citra’s contractual
representation that it had not received written notice that any customer intended to
terminate the Contracts. Instead, Carenet contends Citra’s representations before the
Purchase Agreement was signed negligently or fraudulently were made. In support
of their motions to dismiss, Defendants argue Carenet’s fraud and negligent
misrepresentation claims are barred by several clauses in the Purchase Agreement in
which Carenet disclaimed reliance on any extra-contractual representations.
Defendants further argue that Carenet also cannot plead that Defendants’
3 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 536 (Del. 2011);
Doe v. Cedars Acad., LLC, 2010 WL 5825343, at *3 (Del. Super. Oct. 27, 2010).
4 Ramunno v. Cawley, 705 A.2d 1029, 1034 (Del. 1998).
> Avve, Inc. v. Upstack Techs., Inc., 2019 WL 1643752, at *5 (Del. Super. Apr. 12, 2019).
® Super. Ct. Civ. R. 9(b).
1 Id.representations regarding oral notice of termination were material, since Carenet
agreed to a contractual representation that was limited to whether Defendants had
received written notice of termination. For the reasons set forth below, both those
arguments independently support dismissal of the complaint with prejudice.®
A. Carenet’s fraud and negligent misrepresentation claims are barred by
the Purchase Agreement’s anti-reliance and related provisions.
Defendants first argue that the Purchase Agreement’s anti-reliance provisions
bar any claim for fraud or negligent misrepresentation, since both causes of action
require the claimant to show that it justifiably relied on the representation.’ A claim
for fraud consists of: (i) a false representation, usually one of fact, made by a
defendant; (ii) the defendant knowing or believing the representation was false, or
making it with reckless indifference to the truth; (iii) an intent to induce the plaintiff
to act or refrain from acting; (iv) the plaintiff acting or refraining from acting in
justifiable reliance on the representation; and (v) damage resulting from such
reliance.'° A claim for negligent misrepresentation is similar, except a claimant need
® Defendants, individually or jointly, raise a number of other arguments, including that Carenet
has not plead fraud with the requisite particularity, has not alleged the existence of a special
relationship supporting a negligent misrepresentation claim, and cannot maintain a claim for
attorneys’ fees or damages above the contractual limit. Because the arguments addressed above
support dismissal of the entire complaint with prejudice, these alternative arguments are moot and
are not addressed herein.
” Progressive Int'l Corp. v. E.L DuPont de Nemours & Co., 2002 WL 1558382, at *6 (Del. Ch.
July 9, 2002).
10 Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983).
6
not prove that the defendant made the misrepresentation knowingly or recklessly."
Instead, the plaintiff must establish that the defendant owed the plaintiff a duty to
provide accurate information.!
1. Defendants cannot state a claim for fraudulent inducement or
negligent misrepresentation based on __ extra-contractual
representations.
Defendants argue that Carenet’s claims are predicated on representations that
Defendants allegedly made during the parties’ negotiations and the due diligence
leading up to the Purchase Agreement. A fraud or misrepresentation claim based on
those extra-contractual representations, Defendants contend, specifically is barred
by the language in the Purchase Agreement in which Carenet agreed it was not
relying on such representations and in which Citra disclaimed making any such
representations.
There are several clauses in the Purchase Agreement that Defendants assert
preclude Carenet from alleging it relied on any representations other than those
found in the Purchase Agreement. First, as set forth above, Citra represented in
Section 2.4(d) that it had not received and was not aware of “any written notice of
any... intention to terminate, amend, or modify .. . any Contract.” Second, Citra
'l Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371, at *9 (Del. Ch. Jan. 30,
2015).
'2 Td.; Sanders v. Devine, 1997 WL 599539, at *6-7 (Del. Ch. Sept. 24, 1997).
7
specifically stated that it was not making any representations or warranties other than
those contained in the Purchase Agreement. Specifically, Section 2.9 provides:
Section 2.9 No Other Representations and Warranties. Except for the
representations and warranties expressly set forth in this Article II, (1)
neither [Citra] nor any other person or entity makes, or shall be deemed
to have made, any representation or warranty (whether express or
implied) on behalf of [Citra], the Purchased Assets, the Assumed
Liabilities, the Services or the Transactions, and (ii) [Citra] hereby
disclaims any such representation or warranty, express or implied, oral
or written, including any implied warranty or representation as to
condition, value, merchantability, validity, completeness, fitness or
suitability for any specific purpose, or as to future revenue, profitability
or success of the Contracts, the other Purchased Assets, the Assumed
Liabilities or the Services, notwithstanding the delivery or disclosure to
[Carenet] . . . of any materials, documentation or other information
during the course of due diligence or any negotiation process... .'°
Under Delaware law interpreting similar contractual provisions, Section 2.9,
without more, likely would not preclude Carenet’s reliance on extra-contractual
representations.'4 There is, however, “more” in this case, namely the critical clause
in which Carenet confirmed it was not relying on any such representations. In
Section 3.6 of the Purchase Agreement, Carenet stated:
Section 3.6 Acknowledgement of Seller Representations and
Warranties. [Carenet] acknowledges that, except for the
representations and warranties contained in Article I, it is not relying
on any representation or warranty (whether express or implied) by or
on behalf of [Citra] or any other person or entity in connection with the
Transaction Documents or the Transactions, notwithstanding the
delivery or disclosure to [Carenet] . . . of any materials, documentation
13 Purchase Agreement § 2.9.
\4 See FdG Logistics LLC v. A&R Logistics Holdings, Inc., 131 A.3d 842, 860 (Del. Ch. 2016)
(holding that, in order to bar fraud claims, a disclaimer of reliance “must come from the point of
view of the aggrieved party”).
or other information during the course of due diligence or any
negotiation process (including information memoranda, data room
materials, projections, estimates, management presentations, budgets
and financial data and reports)."°
In Section 3.6, Carenet further acknowledged that it was a “sophisticated party” that
“made its own independent investigation, review and analysis regarding [Citra], the
Contracts, and the Services... .” Carenet expressly agreed that it decided to proceed
with the transaction on the basis of its own investigation and the representations and
warranties contained in Article II of the Purchase Agreement.!°
Finally, the Purchase Agreement included a standard integration clause in
which the parties agreed that the Purchase Agreement and associated transaction
documents constituted the parties’ entire agreement:
Section 7.1 Entire Agreement; Assignment; Successors. This
Agreement, together with the other Transaction Documents, constitute
[sic] the entire agreement among the Parties with respect to the subject
matter hereof and supersedes all other prior and contemporaneous
representations, warranties, covenants, agreements and understandings,
both written and oral, among the Parties with respect to the subject
matter hereof and thereof."
Citra contends these clauses, taken together, amount to Carenet’s unequivocal
waiver of any reliance on any extra-contractual representations. According to Citra,
the failure to enforce the parties’ agreement regarding the representations they were
or were not making and relying upon would be antithetical to Delaware’s pro-
'S Purchase Agreement § 3.6.
6 Td.
Td. 871.
contractarian roots. Carenet, on the other hand, contends that foreclosing its fraud
and misrepresentation claims would fly in the face of Delaware’s policy against
fraud.
It is true that Delaware has a firm public policy against fraud. It equally is
true that Delaware prides itself on having and adhering to a body of efficient
commercial laws and precedent in which sophisticated contracting parties’ voluntary
agreements are enforced as written.!® Although Carenet attempts to pit these policies
against each other, they are not in conflict. Rather, sophisticated parties are free to
limit the possibility of future claims of fraud or misrepresentation by contractually
specifying what representations the parties are and are not making and relying upon.
Such clauses reduce the risk that the parties later will become embroiled in litigation
regarding what was or was not said.'? Delaware courts routinely enforce these anti-
reliance provisions as long as the contractual language, when read as a whole, “can
be said to add up to a clear anti-reliance clause by which the plaintiff has
'8 Libeau v. Fox, 880 A.2d 1049, 1056-57 (Del. Ch. 2005) (“When parties have ordered their affairs
voluntarily through a binding contract, Delaware law is strongly inclined to respect their
agreement, and will only interfere upon a strong showing that dishonoring the contract is required
to vindicate a public policy interest even stronger than freedom of contract. Such public policy
interests are not to be lightly found, as the wealth-creating and peace-inducing effects of civil
contracts are undercut if citizens cannot rely on the law to enforce their voluntarily-undertaken
mutual obligations.”); see also Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004); [AC
Search, LLC v. Conversant LLC, 2016 WL 6995363, at *6 (Del. Ch. Nov. 30, 2016).
'9 Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1058 (Del. Ch. 2006).
10
contractually promised that it did not rely upon statements outside the contract’s four
corners in deciding to sign the contract.””°
For example, in Prairie Capital III, L.P. v. Double E Holding Corp., the Court
of Chancery dismissed fraud claims based on extra-contractual representations
because the plaintiff/buyer specifically acknowledged in the parties’ stock purchase
agreement that it (i) conducted independent due diligence, (ii) was relying on that
due diligence and the express representations and warranties in the agreement, and
(iii) was not relying on — and expressly was disclaiming — any other
representations.”! Similarly, in JTW Global Investments Inc. v. American Industrial
Partners Capital Fund IV, L.P., this Court dismissed fraud claims based on
misrepresentations allegedly made during the course of the parties’ negotiations
regarding their securities purchase and sale agreement.”” The JTW Global Court held
the plaintiff waived any reliance on those extra-contractual representations by
warranting in the agreement that it was not relying on any representations other than
those expressly contained in the agreement.”> Delaware trial courts have dismissed
fraud claims based on extra-contractual representations in several similar cases,”
0 Kronenberg, 872 A.2d at 593.
21132 A.3d 35, 50 (Del. Ch. 2015). The parties’ stock purchase agreement also included a standard
integration clause much like the language in the Purchase Agreement at issue in this case.
2.2015 WL 3970908, at *8 (Del. Super. June 24, 2015).
3 Td.
*4 See, e.g., IAC Search, 2016 WL 6995356 (dismissing fraud claims premised on information
provided during due diligence because the agreement contained clauses in which (i) the seller
disclaimed making any representations other than those in the agreement, (ii) the buyer warranted
11
and the Delaware Supreme Court affirmed one such decision, holding that anti-
reliance clauses “emphasize[] to an objective reader that the merger negotiation
process would not be one during which [the acquiring company] could reasonably
rely on oral assurances.”
The clauses at issue in this case are, if anything, more plainly worded than
those at issue in Prairie Capital and ITW Global. Citra made clear in Section 2.9
that the only representations it was making were those in the Purchase Agreement.
Carenet expressly stated in Section 3.6 that it was not relying on extra-contractual
representations and only was relying on its due diligence and the contractual
representations. Both sides agreed that the Purchase Agreement and related
documents constituted the parties’ complete agreement. To allow Caremark’s
claims to proceed in the face of such disclaimers would create a “double liar”
problem. As the Court of Chancery explained in Abry Partners V, L.P. v. F&W
Acquisition LLC:
it was a sophisticated party that had conducted due diligence, and (iii) the buyer acknowledged
that seller was not making any representations other than those in the agreement); Progressive,
2002 WL 1558382 (dismissing fraud and misrepresentation claims because licensor could not
reasonably rely on oral representations when the license agreement contained a clause in which
both sides agreed that no party had made any representation to induce the other to execute the
agreement and no party had executed the agreement in reliance on an extra-contractual
representation); Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544 (Del. Ch. 2001)
(dismissing fraud claims on the basis of contractual disclaimers in which buyer agreed that it was
not relying on any forecasts or predictions furnished by seller that were not the subject of a
warranty in the parties’ written agreement).
25 RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107, 114 (Del. 2012) (applying New
York law but noting the result would be the same under Delaware law) (quoting Jn re IBP, Inc.
S’holders Litig., 789 A.2d 14, 32 (Del. Ch. 2001)).
12
To fail to enforce non-reliance clauses is not to promote a public policy
against lying. Rather, it is to excuse a lie made by one contracting party
in writing—the lie that it was relying only on _ contractual
representations and that no other representations had been made—to
enable it to prove that another party lied orally or in a writing outside
the contract's four corners. For the plaintiff in such a situation to prove
its fraudulent inducement claim, it proves itself not only a liar, but a liar
in the most inexcusable of commercial circumstances: in a freely
negotiated written contract. Put colloquially, this is necessarily a
“Double Liar” scenario. To allow the buyer to prevail on its claim is to
sanction its own fraudulent conduct.”°
Although Carenet may now regret its agreement to disclaim any reliance on
representations other than those in the Purchase Agreement, to permit claims based
on extra-contractual representations to proceed effectively would allow Carenet to
escape its own fraudulent representations regarding reliance.
Carenet, however, argues the extra-contractual representations may be
considered by the Court to show that Citra’s contractual representations — although
facially true — created a false impression and therefore amounted to a false or
misleading representation.?” This argument primarily is premised on two cases:
1.28
Norton v. Poplos and Prairie Capital.“° Neither case rescues Carenet from the effect
of its unambiguous contractual waiver.
26 89] A.2d at 1058.
27 P].’s Answering Br. in Opp’n to Defs.’ Mots. to Dismiss (hereinafter “P1.’s Answering Br.”) 7,
10.
8 Carenet also relies on TransDigm Inc. v. Alcoa Glob. Fasteners, Inc., 2013 WL 2326881 (Del.
Ch. May 29, 2013). That case, which relates to Carenet’s fraudulent concealment argument, is
addressed in Section I(A)(2), below.
13
In Norton, the Delaware Supreme Court held buyers of a commercial property
could pursue a claim for misrepresentation despite language in the real estate sales
contract stating that the buyers were not relying on any written or oral
representations not contained in the contract.2? The contract at issue stated the
property was zoned “M-1,” which was true, but incomplete, because the industrial
park’s building committee also had to give prior approval for many uses ordinarily
permitted under M-1 zoning. The Delaware Supreme Court held that “although a
statement or assertion may be facially true, it may constitute an actionable
misrepresentation if it causes a false impression as to the true state of affairs, and the
actor fails to provide qualifying information to cure the mistaken belief”? Based
on that reasoning, the Court allowed the buyers to proceed with their innocent
misrepresentation claim.
In Prairie Capital II, L.P., as discussed above, the Court of Chancery
dismissed several fraud claims based on extra-contractual representations because
the parties’ contract contained unambiguous anti-reliance language that precluded
the plaintiff's reliance on any such representations. Sidestepping this portion of the
ruling, Carenet instead relies on the Court’s statement that “[a] party may use
29 443 A.2d 1,3 (Del. 1982).
30 Td. at 5.
14
external sources of information to plead that a contractually identified fact was false
or misleading[.]’?!
Carenet’s reliance on these cases is problematic for a number of reasons.
First, in several cases that post-date the Norton decision, Delaware courts have
explained that Norton “involved simple real estate contracts having boilerplate,
unnegotiated disclaimer language” and therefore was distinguishable from cases
involving highly sophisticated parties who were assisted by industry consultants and
experienced legal counsel and who entered into “carefully negotiated disclaimer
9932
language after months of extensive due diligence. Second, the quotation from
Prairie Capital on which Carenet relies is taken out of context of language that
precedes and follows it. In context, the quote reads:
For arms’ length counterparties, therefore, contractual provisions that
identify the representations on which a party exclusively relied define
the universe of information that is in play for purposes of a fraud claim.
A party may use external sources of information to plead that a
contractually identified fact was false or misleading, but a party cannot
point to extra-contractual information and escape the contractual
limitation by arguing that the extra-contractual information was
incomplete.*?
As an initial matter, this Court rejects Carenet’s ipse dixit argument that the
failure to disclose receipt of oral notice rendered misleading a contractual
representation regarding written notice. The fundamental premise underlying that
31 Prairie Capital, 132 A.3d at 52; see Pl.’s Answering Br. 7.
32 Great Lakes, 788 A.2d at 555.
33 Prairie Capital, 132 A.3d at 52.
15
reasoning is flawed. By expressly giving a representation about the receipt (or lack
thereof) of written notice, the parties limited the scope of the representation to that
type of notice. The fact that oral notice might have been received does not make the
representation about written notice misleading. Moreover, Carenet’s argument
seeks to do precisely what Prairie Capital says is not permitted: escape the anti-
reliance clause and the limits of Section 2.4(d) by arguing that Citra’s disclosures
were incomplete. Delaware case law is clear that sophisticated parties who craft and
negotiate contractual limitations regarding what representations they are relying on
may not escape those limitations by arguing that other, extra-contractual
representations made the contractual representations misleading.
2. Defendants cannot avoid the antireliance clause by arguing the clause
does not apply to material omissions or fraudulent concealment of
information.
Carenet next attempts to avoid the anti-reliance clause’s limitations by
arguing the clause only applies to overt misrepresentations and does not bar claims
for fraudulent concealment or fraudulent omissions. In support of this argument,
Carenet primarily relies on the Court of Chancery’s decision in TransDigm Inc. v.
Alcoa Global Fasteners, Inc.** In TransDigm, the Court of Chancery refused to
dismiss claims for fraudulent concealment, notwithstanding the presence of an anti-
reliance clause in the contract, because the Court concluded the disclaimer did not
342013 WL 2326881.
16
apply to extra-contractual omissions or active concealment. Defendants, on the
other hand, argue TransDigm factually is distinguishable from this case, and, in any
event, more recent cases have called into question the 7ransDigm Court’s reasoning.
Delaware law establishes that fraud may occur in three ways: (1) an overt
misrepresentation, (2) an omission in the face of a duty to speak, or (3) deliberate
concealment of a material fact.*> In TransDigm, the Court of Chancery concluded
that an anti-reliance clause precluded fraud claims to the extent they were based on
overt misrepresentations, but did not bar fraud claims based on omissions or active
concealment. The alleged fraud in that case arose in connection with a stock
purchase agreement. The buyer alleged that during the parties’ negotiations the
seller failed to reveal, and in fact actively concealed, the fact that a key customer
intended to shift a large portion of its business to a competitor. The seller also
allegedly concealed the fact that the same customer had been offered and accepted
a 5% price discount effective after the closing date. The stock purchase agreement
contained an anti-reliance clause in which the buyer represented that it had
undertaken the due diligence necessary to make an informed decision and was
entering into the stock purchase agreement “without reliance upon any express or
implied representations or warranties of any nature, whether in writing, orally or
35 Stephenson, 462 A.2d at 1074.
17
otherwise, . . . except as expressly set forth in this Agreement.”°° The Court of
Chancery nevertheless refused to dismiss the buyer’s fraud claim to the extent it
relied on TransDigm’s active concealment of material facts, concluding the anti-
reliance clause did not “clearly disclaim reliance on the type of concealment and
omission” alleged by the buyer.>”
In reaching that conclusion, the TransDigm Court distinguished the stock
purchase agreement’s anti-reliance clause from those in other cases in which
Delaware courts dismissed fraud claims based on omissions or concealment. In
those cases, the TransDigm Court explained, the anti-reliance clauses at issue
“contained language expressly disclaiming reliance on both the omission of
38 ~=The absence of similar
information and extra-contractual representations.
language in the stock purchase agreement persuaded the TransDigm Court that the
fraudulent concealment and fraudulent omissions claims could proceed.
Delaware courts have declined to follow TransDigm in two more recent
decisions. First, in Prairie Capital, the Court of Chancery held that an anti-reliance
clause barred fraud claims based on both overt misrepresentations and omissions
even though the clause did not expressly state that the buyer was not relying on
omissions. The Prairie Capital Court disagreed with the TransDigm Court’s
36 9013 WL 2326881, at *7.
37 Td. at *9,
38 7d. (citing RAA, 45 A.3d 107; In re IBP, 789 A.2d 14; Great Lakes 788 A.2d 544).
18
reasoning that a clause must expressly refer to omissions in order to bar a fraudulent
omissions claim.*? Similarly, in Universal American Corp. v. Partners Healthcare
Solutions Holdings, L.P., the United States District Court for the District of
Delaware held that an anti-reliance clause barred claims for both fraudulent
representations and omissions even though the clause did not expressly refer to
omissions.*” Both those courts reasoned that anti-reliance clauses have a
“representation defining effect” that extends to claims based on omissions.*!
In my view, Section 3.6 bars Carenet’s fraud claims based on both overt
representations and omissions. The language in the Purchase Agreement
unambiguously defines the universe of information on which Carenet relied in
deciding to purchase the assets. The fact that Section 3.6 does not expressly refer to
“omissions” is not, in my view, determinative. Citra and Carenet agreed to limit the
representations on which they relied to those expressly contained in the Purchase
Agreement. “The critical distinction is not between misrepresentations and
omissions, but between information identified in the written agreement and
information outside of it.”4?
3° Prairie Capital, 132 A.3d at 54.
40 176 F. Supp. 3d 387, 400-02 (D. Del. 2016).
4 Prairie Capital, 132 A.3d at 54; accord Universal, 176 F. Supp. 3d at 402.
* Prairie Capital, 132 A.3d at 52.
19
The alternative conclusion reached by the TransDigm Court effectively would
eviscerate these clauses’ effect and eliminate sophisticated parties’ ability to define
the representations upon which they agreed to bargain. This is so, as the Prairie
Capital Court persuasively explained, because virtually any misrepresentation can
be re-framed as an omission.
If a plaintiff could escape a provision like [an anti-reliance clause] by
re-framing an extra-contractual misrepresentation as an omission, then
the clause would be rendered nugatory. When parties identify a
universe of contractually operative representations in a written
agreement, they remain in that universe. A party that is later
disappointed with the written agreement cannot escape through a
wormhole into an alternative universe of extra-contractual omissions.”
As to Carenet’s argument that its fraud claim should survive because it is
based on Defendant’s active concealment of information, that position falters for at
least two reasons. First, even if TransDigm remains good law, the relevant
contractual provisions in the Purchase Agreement materially are different from the
clause at issue in TransDigm. Specifically, the TransDigm court distinguished its
holding from other Delaware precedent on the basis that the anti-reliance clause at
issue did not refer to “omissions” and did not disclaim the “accuracy or
completeness” of information provided in due diligence.** Unlike that case, in
Section 2.9 of the Purchase Agreement Citra expressly disclaimed making any
8 Td. at 52-53.
“4 TransDigm, 2013 WL 2326881, at *9.
20
representation or warranty, including any implied warranty “as to condition, value,
merchantability, validity, completeness, fitness or suitability for any specific
purpose,” notwithstanding the disclosure to Carenet of information during the
negotiation process.*° That express repudiation of the validity and completeness of
information provided during due diligence distinguishes the Purchase Agreement
from the stock purchase agreement at issue in TransDigm.
Second, even if a fraudulent concealment claim theoretically could be alleged
despite Sections 2.4(d), 2.9, and 3.6 of the Purchase Agreement, Carenet does not
adequately plead one here. To plead a fraud claim based on active concealment, the
plaintiff must allege that the defendant took an affirmative action designed or
intended to prevent the discovery of material facts and which does in fact prevent
such discovery.** In TransDigm, the buyer pleaded that before the parties began
negotiations, the seller knew material facts regarding price and order reductions
relating to a key customer. During the parties’ negotiations, however, the seller
concealed that information despite direct questions from the buyer relating to it.‘”
Here, in contrast, Carenet does not plead that Defendants’ alleged instruction to
employees not to disclose the June 21st call with Humana prevented Carenet from
45 Purchase Agreement § 2.9 (emphasis added).
46 Restatement (Second) of Torts § 550 (1977); Metro Commc’n Corp. BVI vy. Advanced
Mobilecomm Techs. Inc., 854 A.2d 121, 150 (Del. Ch. 2004).
‘7 TransDigm, 2013 WL 2326881, at *2.
21
discovering that information. Carenet has not pleaded that Citra made
representations after that phone call or that Carenet asked about such information
after that call. Carenet has not pleaded, and presumably cannot plead, that it would
have discovered this information before closing had Defendants not instructed their
employees as they allegedly did.
3. The anti-reliance provisions in the Purchase Agreement apply with
equal force to Carenet’s claims against Great Point.
Finally, Carenet argues that even if its claims against Citra are barred by
Section 3.6, that Section does not prohibit fraud or negligent misrepresentation
claims against Great Point because Great Point was neither a party to the Purchase
Agreement nor a third-party beneficiary thereunder. This argument misses its mark.
It is of no moment that Great Point is not a party to the agreement or a third-party
beneficiary.*® Section 3.6 operates to bar Carenet from making any claims based on
any extra-contractual representations; the disclaimer is not expressly or impliedly
limited to representations by contracting parties or third-party beneficiaries. To the
contrary, Carenet disclaimed reliance on extra-contractual representations and
warranties made by Citra “or any other person or entity.”4? As explained above, to
“8 Great Point in fact argues it is a third-party beneficiary of the Purchase Agreement, pointing to
Section 5.3, which contains Carenet’s indemnification obligations. I need not address this
argument in light of the conclusion reached above.
° Purchase Agreement § 3.6.
22
allow Carenet to now pursue claims based on those very same representations would
countenance a “double-liar” scenario.
B. Carenet has not adequately pleaded that the misrepresentations were
material.
Carenet also cannot adequately plead its fraud or negligent misrepresentation
claims in this case because the Purchase Agreement demonstrates that Citra’s receipt
of oral notice regarding a customer’s intent to terminate a Contract was not material
to Carenet’s decision to enter into the Purchase Agreement. Although Carenet
alleges in the complaint that it “would not have entered [into] the Purchase
Agreement had it been aware of Humana’s intent to terminate the Nurse Advice Line
Contracts[,]’>° the terms of the Purchase Agreement demonstrate that the oral notice
Citra received was not something that Carenet deemed material.
Carenet represented that it was not relying on any representations other than
©! Carenet further represented
those expressly contained in the Purchase Agreement
that in deciding to proceed with the transaction, Carenet relied upon: (i) its own
independent investigation, and (ii) the representations and warranties set forth in the
Purchase Agreement.°? The only representation in the Purchase Agreement
regarding notice of a customer’s intent to terminate a Contract is Section 2.4(d),
which is limited to whether Citra received written notice of such intent. If Carenet
°° Compl. 41.
>! Purchase Agreement § 2.9.
2 Id. § 3.6.
23
believed Citra’s extra-contractual representation regarding oral notice were material,
Carenet should have negotiated to include that representation in the Purchase
Agreement.°? By limiting the contractual representation to one about written notice,
and by representing that it was making its decision to enter into the Purchase
Agreement solely based on the contractual representations and its own independent
investigation, Carenet unequivocally indicated that other information it received was
not material to its decision.
C. The complaint is dismissed with prejudice because amendment would be
futile.
Finally, Carenet asserts that, to the extent the Court dismisses the claims, the
dismissal should be without prejudice and with leave to file an amended complaint.
But, the deficiencies in Carenet’s complaint are not ones that can be cured through
an amended pleading. The Purchase Agreement precludes Carenet’s claims for
fraud and negligent misrepresentation, so there are not additional or different facts
upon which Carenet successfully could plead that the extra-contractual
representations were material or that Carenet justifiably relied upon them.
Accordingly, the complaint must be dismissed with prejudice.
°3 See Progressive, 2002 WL 1558382, at *8-9 (reasoning that if buyer believed representations
regarding cost or market appeal were important to its decision to contract, buyer could have
negotiated to have those representations reduced to writing and included in the contract).
Again, this limitation regarding materiality applies with equal force to Carenet’s claims against
Great Point, as discussed above in Section (A)(3).
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CONCLUSION
For the forgoing reasons, Defendants’ Motions to Dismiss are GRANTED.
IT IS SO ORDERED.
25