Hovis v. General Dynamics Corporation

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 07-1506
In Re: MARINE ENERGY SYSTEMS CORPORATION,
Debtor.
------------------------------------
W. RYAN HOVIS, Trustee for Marine Energy Systems
Corporation,
Plaintiff − Appellant,
v.
GENERAL DYNAMICS CORPORATION; ELECTRIC BOAT CORPORATION,
Defendants – Appellees,
and
SIEMENS WESTINGHOUSE POWER CORPORATION; VIACOM,
INCORPORATED,
Defendants.
Appeal from the United States District Court for the District of
South Carolina, at Charleston. Patrick Michael Duffy, District
Judge. (2:06-cv-02483-PMD; BK-97-01929; AP-98-80220)
Argued: September 25, 2008 Decided: November 6, 2008
Before WILLIAMS, Chief Judge, GREGORY, Circuit Judge, and James
C. CACHERIS, Senior United States District Judge for the Eastern
District of Virginia, sitting by designation.
Affirmed by unpublished per curiam opinion.
ARGUED: Thomas Scott Harty, LEVY, ANGSTREICH, FINNEY, BALDANTE,
RUBENSTEIN & COREN, P.C., Philadelphia, Pennsylvania, for
Appellant. Lawrence Scott Schaner, JENNER & BLOCK, Chicago,
Illinois, for Appellees. ON BRIEF: Steven E. Angstreich, Paul
N. Bonavita, LEVY, ANGSTREICH, FINNEY, BALDANTE, RUBENSTEIN &
COREN, P.C., Philadelphia, Pennsylvania, for Appellant. George
B. Cauthen, Jody A. Bedenbaugh, NELSON, MULLINS, RILEY &
SCARBOROUGH, L.L.P., Columbia, South Carolina; Andrew W. Vail,
JENNER & BLOCK, Chicago, Illinois, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
W. Ryan Hovis, the bankruptcy trustee for the estate of
Marine Energy Systems Corporation (“MESC”), appeals the district
court’s order affirming the bankruptcy court’s grant of summary
judgment in favor of General Dynamics Corporation and Electric
Boat Corporation (collectively “General Dynamics”) on MESC’s
claims that General Dynamics used fraud and negligent
misrepresentations to induce it to enter into an agreement to
acquire the assets of General Dynamics’ Charleston, South
Carolina manufacturing facility. Both the bankruptcy court and
the district court granted summary judgment to General Dynamics,
concluding that the non-reliance provisions in the parties’
Confidentiality Agreement and Asset Purchase Agreement (“APA”)
barred MESC’s fraud and negligent misrepresentation claims. In
his capacity as trustee, Hovis argues (1) that the APA’s non-
reliance provisions are insufficient to bar MESC’s reliance on
General Dynamics’ allegedly fraudulent or negligent
misrepresentations and (2) that the parole evidence rule and the
APA’s merger clause prohibit consideration of the terms of the
Confidentiality Agreement to bar MESC’s fraud and negligent
misrepresentation claims. We disagree and affirm the district
court’s decision upholding the grant of summary judgment in
favor of General Dynamics.
3
I.
In the early 1970s, General Dynamics constructed a facility
in Charleston, South Carolina to manufacture aluminum spherical
cargo tanks for the transportation and storage of liquefied
natural gas (“LNG”). The facility incorporated a proprietary
manufacturing technology that enabled General Dynamics to finish
construction of the LNG tanks at the Charleston facility and
then deliver the tanks to shipyards where they could be loaded
onto ships. The ability to construct a tank outside of the ship
itself gave General Dynamics a substantial competitive advantage
over other LNG tank builders who had to construct tanks directly
on the ship — a much more difficult, costly, and time-consuming
process. In 1980, however, General Dynamics suspended its LNG
shipbuilding program and decided to put the Charleston facility
to other uses, including building sections of nuclear submarines
and producing waste treatment tanks, oil rigs, and hydrofoils.
In late 1993, General Dynamics decided to focus its
resources on its core defense businesses and retained Goldman
Sachs to help sell the assets of the Charleston facility.
Goldman Sachs prepared a document (“Prospectus”) that described
the business opportunity presented by the Charleston facility.
The Prospectus focused mainly on the possible resumption of the
LNG tank manufacturing business, but also contained a short
4
section describing the possible use of the facility to
manufacture barge-mounted power plants (“BMPPs”).
Goldman Sachs required potential investors to execute and
return a confidentiality agreement (“Confidentiality Agreement”)
before receiving a copy of the Prospectus. The Confidentiality
Agreement included a non-reliance provision, which read as
follows:
We acknowledge that neither you, nor Goldman Sachs or
its affiliates, nor your other Representatives, nor
any of your or their respective officers, directors,
employees, agents or controlling persons within the
meaning of Rule 12b-2 under the Securities Exchange
Act of 1934, as amended, makes any express or implied
representation or warranty as to the accuracy or
completeness of the information, and we agree that no
such person will have any liability relating to the
information or for any errors therein or omissions
therefrom. We further agree that we are not entitled
to rely on the accuracy or completeness of the
information and that we will be entitled to rely
solely on such representations and warranties as may
be included in any definitive agreement with respect
to the Transaction, subject to such limitations and
restrictions as may be contained therein.
(J.A. at 620.)
In early 1994, New Charleston Capital (“NCC”), an
investment firm based in Charleston, expressed interest in
purchasing the assets of the Charleston facility, and entered
into the Confidentiality Agreement. The Confidentiality
Agreement was executed on behalf of NCC by William J. Gilliam,
NCC’s chairman and sole shareholder and a sophisticated
businessman with extensive experience buying and selling
5
companies and making investments. After Gilliam received the
Prospectus on behalf of NCC, he and other representatives of
MESC, a South Carolina corporation created by NCC for the
purpose of receiving the purchased assets, engaged in
discussions with Goldman Sachs and General Dynamics. Gilliam
was assisted in these negotiations by a well-known law firm, a
major accounting firm, and a prominent investment banking firm,
as well as in-house counsel. Ultimately, the negotiations led
to the execution of the APA, dated June 10, 1994.
The APA provided that General Dynamics would sell and NCC
would purchase “certain assets associated with [General
Dynamics’] Charleston, South Carolina facility.” (J.A. at 103.)
The assets to be acquired were listed on schedules to the APA.
In consideration for these assets, NCC agreed to pay General
Dynamics $12 million at the closing as well as royalties on
sales of LNG tanks and BMPPs.
Important to this appeal, Section 3.14 of the APA provided
as follows:
DISCLAIMER OF WARRANTIES. EXCEPT FOR THE SPECIFIC
REPRESENTATIONS, WARRANTIES AND COVENANTS SET FORTH IN
THIS AGREEMENT, THE PURCHASED ASSETS WILL BE
TRANSFERRED AT THE CLOSING IN “AS IS” CONDITION AS OF
THE DATE HEREOF AND ALL OTHER REPRESENTATIONS AND
WARRANTIES, INCLUDING ANY WARRANTY OF MERCHANTIBILITY
OR FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY
EXPRESSLY DISCLAIMED.
(J.A. at 112.)
6
Section 10.10 of the APA further provided:
Entire Agreement. This Agreement (including the
documents referred to herein) constitutes the entire
agreement among the parties and supersedes any prior
understandings, agreements or representations by or
among the parties, written or oral, that may have
related in any way to the subject matter hereof.
(J.A. at 127.)
On October 27, 1994, General Dynamics and NCC entered into
an amendment to the APA, in which the parties endeavored to
eliminate any possible uncertainty as to the identity of the
assets that were the subject of the transaction, and the APA
eventually closed on December 22, 1994. Upon closing, NCC
transferred the purchased assets to MESC, whose sole shareholder
and chairman was Gilliam. (MESC and NCC are collectively
referred to hereafter as MESC.)
Subsequently, in 1997, MESC experienced difficulties and
filed a petition for Chapter 11 bankruptcy, which was later
converted to a Chapter 7 bankruptcy after MESC’s plan of
reorganization failed. Hovis was appointed to act as the
Chapter 7 Trustee.
Prior to the Chapter 7 conversion, on October 15, 1998,
MESC filed an adversary proceeding against General Dynamics in
the Bankruptcy Court for the District of South Carolina. The
complaint sought to compel General Dynamics to turn over all
intellectual property acquired under the APA and, in the
7
alternative, asked the court to reform the APA based on General
Dynamics’ alleged fraud, accident, or mistake in failing to
include the intellectual property in the APA. After the Chapter
7 conversion, in January 2000, MESC filed an amended complaint,
asserting claims for breach of contract (for failure to turn
over certain unidentified intellectual property), breach of the
implied covenant of good faith, specific performance, fraud, and
constructive fraud. On June 26, 2003, MESC filed a “Third
Amended Complaint,” adding claims against General Dynamics for
negligence, negligent misrepresentation, detrimental reliance,
and conspiracy, and substantially expanding the allegations
relating to its pre-existing breach of contract and fraud
claims.
On October 13, 2004, the parties filed cross-motions for
summary judgment. The bankruptcy court, the Honorable William
Thurmond Bishop presiding, heard oral argument on the motions
and entered an order dated April 22, 2005, denying MESC’s motion
in its entirety and granting General Dynamics’ motion with
respect to the following claims: breach of contract, breach of
the implied covenant of good faith, specific performance,
constructive fraud, negligence, detrimental reliance, and
conspiracy. The court, although it expressed “doubts as to
whether MESC c[ould] prevail on its fraud claim,” concluded that
“there [we]re genuine issues of fact that preclude[d] the entry
8
of summary judgment” on both the fraud and negligent
misrepresentation claims and denied General Dynamics’ motion
with respect to those claims. In re Hovis, 325 B.R. 158, 167-68
(Bankr. D.S.C. 2005) (“Hovis I”).
On September 7, 2005, MESC amended its answers to General
Dynamics’ interrogatories in which MESC identified thirty-seven
alleged misrepresentations. General Dynamics contended that
MESC had previously asserted only nineteen of these
misrepresentations and asked the court to bar MESC from
presenting evidence at trial on the other eighteen “new” fraud
allegations. The bankruptcy court denied General Dynamics’
request and allowed General Dynamics to conduct limited
discovery on these allegations.
On February 28, 2006, the case was reassigned to Judge John
E. Waites following Judge Bishop’s retirement, and on June 16,
2006, General Dynamics moved for summary judgment on MESC’s
“new” fraud allegations. On July 31, 2006, the bankruptcy court
granted summary judgment in favor of General Dynamics on the
“new” fraud allegations. The bankruptcy court concluded that
each of the “new” fraud allegations was individually deficient
in that each failed to state a claim of fraud or negligent
misrepresentation, and that, in any event, “[b]ased upon the
specific, unambiguous language of the Confidentiality Agreement
and the APA, MESC could not reasonably rely on any
9
representation not made to it in the APA.” In re Hovis, 362
B.R. 247, 275 (Bankr. D.S.C. 2006) (“Hovis II”); see also id.(“[T]here was a specific agreement by MESC not to rely and not
to hold [General Dynamics] liable for any representations
contained in the APA.”). Thereafter, the parties stipulated
that MESC’s remaining fraud claims were barred by the court’s
decision because the representations at issue in those claims
were also not made in the APA, and by a Stipulation of
Dismissal, General Dynamics was awarded summary judgment on
MESC’s remaining fraud and negligent misrepresentation claims on
August 7, 2006.
The district court affirmed the bankruptcy court’s entry of
summary judgment in favor of General Dynamics on the fraud and
negligent misrepresentation claims, concluding that “[b]ased on
the specific, unambiguous language of the Confidentiality
Agreement and Sections 3.14 and 10.10 of the APA, MESC could not
reasonably rely on any representation outside of the
representations in the APA.” In re Hovis, No. 2:06-2483-PMD,
2007 U.S. Dist. LEXIS 47151, at *54 (D.S.C. Apr. 18, 2007)
(“Hovis III”).
MESC timely appealed, and we have jurisdiction pursuant to
28 U.S.C.A. § 158(d) (West 2006 & Supp. 2008).
10
II.
“We review de novo a bankruptcy court’s grant of summary
judgment and a district court’s affirmance thereof.” In re
Ballard, 65 F.3d 367, 351 (4th Cir. 1995). In an adversary
proceeding in bankruptcy, summary judgment is governed by the
standards of Federal Rule of Civil Procedure 56, see Fed. R.
Bankr. P. 7056, and a court should award summary judgment “if
the pleadings, the discovery and disclosure materials on file,
and any affidavits show that there is no genuine issue as to any
material fact and that the movant is entitled to judgment as a
matter of law,” Fed. R. Civ. P. 56(c).
On appeal, MESC argues that the district court erred in
affirming the bankruptcy court’s grant of summary judgment in
favor of General Dynamics on MESC’s claims of fraud and
negligent misrepresentation. Specifically, MESC contends that
the district court’s conclusion that the terms of the
Confidentiality Agreement and the APA bar MESC’s claims is
erroneous because the APA’s terms alone are insufficient to bar
MESC’s reliance on General Dynamics’ alleged misrepresentations
and the Confidentiality Agreement may not be considered because
the APA is an unambiguous, integrated contract.
Conversely, General Dynamics contends that the terms of
both the Confidentiality Agreement and the APA independently bar
MESC’s reliance on any representations made outside of the APA
11
and that neither the parol evidence rule nor the APA’s merger
clause precludes the court’s consideration of the terms of the
Confidentiality Agreement. Alternatively, General Dynamics
contends that it is entitled to summary judgment on MESC’s
claims of fraud and negligent misrepresentation because each
allegation is flawed as a matter of law.
A.
As a preliminary matter, we note that neither party
disputes that South Carolina law governs MESC’s fraud and
negligent misrepresentation claims. See In re Payless Cashways,
203 F.3d 1081, 1084 (8th Cir. 2000) (“The bankruptcy court
applies the choice of law rules of the state in which it
sits.”); Witt v. American Trucking Ass’ns, Inc., 860 F. Supp.
295, 300 (D.S.C. 1994) (noting that “[i]n tort actions, South
Carolina courts apply the law of the place where the wrong
occurred” and that “[i]n a fraud action . . . the wrong occurs
not where the alleged misrepresentations are made, but where the
plaintiff suffers the loss”).
Thus, to sustain its claim of fraud, MESC must prove:
(1) a representation; (2) its falsity; (3) its
materiality; (4) either knowledge of its falsity or
reckless disregard of its truth or falsity; (5) intent
that the representation be acted upon; (6) the
hearer’s ignorance of its falsity; (7) the hearer’s
reliance on its truth; (8) the hearer’s right to rely
12
thereon; and (9) the hearer’s consequent and proximate
injury.
Armstrong v. Collins, 621 S.E.2d 368, 375 (S.C. 2005) (citing
Regions Bank v. Schmauch, 582 S.E.2d 432, 444-45 (S.C. Ct. App.
2003)) (emphasis added).
And, to sustain its negligent misrepresentation claim, MESC
must show:
(1) the defendant made a false representation to the
plaintiff, (2) the defendant had a pecuniary interest
in making the statement, (3) the defendant owed a duty
of care to see that he communicated truthful
information to the plaintiff, (4) the defendant
breached that duty by failing to exercise due care,
(5) the plaintiff justifiably relied on the
representation, and (6) the plaintiff suffered a
pecuniary loss as the proximate result of his reliance
on the representation.
Id. (citing Brown v. Stewart, 557 S.E.2d 676, 680-61 (S.C. Ct.
App. 2001)) (emphasis added).
Although both parties agree that South Carolina law
controls the elements necessary to sustain MESC’s claims, the
parties disagree on what law we should apply to determine the
effect of the non-reliance provisions in the Confidentiality
Agreement and the APA. The Confidentiality Agreement states
that it “will be governed by and construed in accordance with
the laws of the State of New York applicable to contracts
between residents of that State and executed in and to be
performed in that State,” (J.A. at 622), and the APA states that
“[a]ll questions concerning the construction, validity and
13
interpretation of this Agreement . . . will be governed by the
internal law, and not the law of conflicts, of the State of
Delaware,” (J.A. at 128). Although the bankruptcy court noted
that “[c]ourts in [New York and Delaware] enforce the plain
meaning of an unambiguous contract,” it held that “South
Carolina law determines whether MESC had a right to reasonably
rely on the representations made to it.” Hovis II, 362 B.R. at272 n.35. The district court did not specifically find any
error in the bankruptcy court’s application of South Carolina
law, but concluded that the result would be the same regardless
of which state’s law governed. See Hovis III, No. 2:06-2483-
PMD, 2007 U.S. Dist. LEXIS 47151, at *39-*40 (“Thus, assuming
the Bankruptcy Court erred in looking to South Carolina law to
determine whether a court would give effect to these [non-
reliance] provisions, such error was harmless as the court
examined New York and Delaware law and determined the result to
be the same regardless of which state’s law governed.”); id. at
*40-*46 (applying New York law to the Confidentiality Agreement
and concluding that “the Bankruptcy Court did not err in
determining MESC did not have the right to rely on the alleged
misrepresentations”); id. at *46-*49 (“[T]he court agrees with
the Bankruptcy Court that Delaware courts would give effect to
the provisions [of the APA] and find that MESC could not
justifiably rely on MESC’s alleged misrepresentations.”); id. at
14
*49-*54 (applying South Carolina law to both the Confidentiality
Agreement and the APA and concluding that “MESC could not
reasonably rely on any representations outside of the
representations in the APA”).
On appeal, MESC, which argued before the district court
that the bankruptcy court incorrectly applied South Carolina law
to determine the effects of the agreements, has “chosen not to
challenge” the application of South Carolina law. (Appellant’s
Reply Br. at 6.) On the other hand, General Dynamics, which
argued before the district court that the bankruptcy court
correctly applied only South Carolina law, now argues that New
York law should control the effect of the Confidentiality
Agreement and that Delaware law should control the effect of the
APA. We need not resolve this choice of law issue because we,
like the courts below, conclude that the result is the same
regardless of whether South Carolina law controls the effects of
the non-reliance provisions of the APA and the Confidentiality
Agreement, or whether Delaware and New York law control the
effects of the non-reliance provisions of the APA and the
Confidentiality Agreement, respectively.
15
B.
We first analyze MESC’s arguments assuming that South
Carolina law governs the effects of the Confidentiality
Agreement and the APA.
In Redwend Ltd. P’ship v. Edwards, 581 S.E.2d 496 (S.C. Ct.
App. 2003), the South Carolina Court of Appeals concluded that a
merger clause which provided that “[e]ach party agrees that
representations, promises, agreements or understandings, written
or oral, not contained herein shall be of no force or effect,”
id. at 501, was not a non-reliance clause because it “neither
include[d] the words ‘rely’ or ‘reliance,’ nor d[id] it set
forth any statement that the parties did not, or could not, rely
on the representations of the other party,” id. at 502.
And, in Slack v. James, 614 S.E.2d 636 (S.C. 2005), the
South Carolina Supreme Court concluded that the following merger
and disclaimer provisions did not afford any protection to the
sellers against the buyers’ allegations of fraud and negligent
misrepresentation:
21. ENTIRE AGREEMENT. This written instrument
expresses the entire agreement, and all promises,
covenants, and warranties between the Buyer and
Seller. It can only be changed by a subsequent
written instrument (Addendum) signed by both parties.
Both Buyer and Seller hereby acknowledge that they
have not received or relied upon any statements or
representations by either Broker or their agents which
are not expressly stipulated herein.
16
Id. at 637. The court concluded that “[a]lthough the [last]
sentence in [Paragraph 21] . . . use[d] the words ‘relied upon,’
this sentence [wa]s not a non-reliance clause,” because the
sentence was not set apart and it was “contained in a paragraph
entitled, ‘ENTIRE AGREEMENT,’ which indicates that it [was]
merely an extension of the merger clause.” Id. at 640.
Moreover, the court noted that even if the last sentence of
Paragraph 21 could be considered a non-reliance clause, the
buyers could still assert their claims of negligent
misrepresentation and fraud because “[a] general non-reliance
clause . . . does not prevent one from proceeding on tort
theories of negligent misrepresentation and fraud” because to
hold otherwise “would leave swindlers free to extinguish their
victims’ remedies simply by sticking in a bit of boilerplate.”
Id. at 641 (internal quotation marks omitted).
MESC contends that, under Slack and Redwend, the non-
reliance language of the APA alone, specifically the language
contained in Sections 3.14 and 10.10, is insufficient to bar its
claims of fraud and negligent misrepresentation. We need not
determine the effectiveness of the APA’s non-reliance provisions
under South Carolina law to resolve the issue before us,
however, because we conclude that the non-reliance language in
17
the Confidentiality Agreement alone is sufficient to bar MESC’s
claims. 1
Paragraph 5 of the Confidentiality Agreement certainly
qualifies as a non-reliance clause under both Slack and Redwend.
First, it specifically uses the word “rely.” Second, it states
that MESC is “not entitled to rely” on the information in the
Prospectus and that MESC would only be entitled to rely on the
representations made in the APA. Third, it is more specific
than either of the clauses in Slack or Redwend.
Moreover, “[i]t is undisputed that this was an ordinary
commercial transaction between sophisticated parties.” Hovis I,
1
MESC argues that the parole evidence rule and the APA’s
merger clause prevent us from considering the terms of the
Confidentiality Agreement in determining whether MESC’s claims
may go forward. But, in South Carolina, “[n]either the parol
evidence rule nor a merger clause in a contract prevents one
from proceeding on tort theories of negligent misrepresentation
and fraud.” Slack v. James, 614 S.E.2d 636, 640 (S.C. 2005);
see also Gilliland v. Elmwood Props., 391 S.E.2d 577, 581 (S.C.
1990) (“The parol evidence rule has been held inapplicable to
tort causes of action (including negligent misrepresentation)
since the rule is one of substantive contract law. . . .We . . .
hold that neither the parol evidence rule nor the merger or
integration clause in the parties’ contract prevents Elmwood
from proceeding on its negligent misrepresentation theory.”).
Just as the parol evidence rule and the merger clause do not bar
MESC’s tort claims based on representations made before the APA
was signed, the parol evidence rule and the merger clause
likewise do not prevent the court from considering the terms of
the Confidentiality Agreement in determining whether MESC had a
right to rely on the alleged misrepresentations or whether
MESC’s reliance was justified—determinations that are made on
the totality of the circumstances. Florentine Corp. v. Peda I,
Inc., 339 S.E.2d 112, 114 (S.C. 1985); Redwend Ltd. P’ship v.
Edwards, 581 S.E.2d 496, 504 (S.C. Ct. App. 2003).
18
325 B.R. at 167. MESC was represented by a large, well-known
law firm and assisted by investment bankers, a major accounting
firm, and in-house counsel, and Gilliam, who executed the
Confidentiality Agreement on behalf of MESC, was a highly
experienced investment banker. Id. And, unlike the typical
case in which the aggrieved party seeks to avoid a non-reliance
clause in a contract entered into after the misrepresentations
have been made, MESC signed the Confidentiality Agreement as a
condition of receipt of the Prospectus and thus was put on
notice that it could not rely on any future representations not
contained in the parties’ final agreement.
As such, we conclude that, applying South Carolina law,
summary judgment in favor of General Dynamics is appropriate on
MESC’s fraud and negligent misrepresentation claims because
MESC, a sophisticated entity, could not justifiably rely, and in
fact did not have a right to rely, on any alleged
misrepresentations not in the APA when it expressly agreed in
the Confidentiality Agreement that it would not rely on those
statements. 2 See Florentine Corp. v. Peda I, Inc., 339 S.E.2d
2Having concluded that MESC could not reasonably rely on
any representation not made in the APA under the terms of the
Confidentiality Agreement, we do not address whether each
allegation of fraud and negligent misrepresentation is
individually flawed as a matter of law. We note, however, that,
in addition to asserting that General Dynamics’ alleged
misrepresentations induced it to enter into the APA, MESC also
(Continued)
19
112, 114 (S.C. 1985) (noting that in cases involving allegations
of fraud, “[t]he right to rely must be determined in light of
the [Plaintiff]’s duty to use reasonable prudence and diligence
under the circumstances” and that “[w]here there is no
confidential or fiduciary relationship and an arm’s length
transaction between mature, educated people is involved, there
is no right to rely”); Ama Mgmt. Corp. v. Strasburger, 420
S.E.2d 868, 874 (S.C. Ct. App. 1992) (noting that in an action
in tort for negligent misrepresentation, “[t]here is no
liability where information is furnished with a clear
understanding that the defendant assumes no liability for its
accuracy”).
C.
In the alternative, we conclude that, even assuming that
Delaware law determines the effect of the APA and that New York
alleges that, in Paragraph 2.1 of the APA, General Dynamics
misrepresented what assets it would deliver under the agreement.
Like MESC’s other contentions, this argument is without merit.
The bankruptcy court rejected this argument, noting that it had
already granted summary judgment to General Dynamics on MESC’s
breach of contract claim. In re Hovis, 362 B.R. 247, 270
(Bankr. D.S.C. 2006) (“Hovis II”). We find no error with the
bankruptcy court’s conclusion that MESC may not now “make an end
run around that ruling by repackaging a breach of contract claim
as a claim for misrepresentation.” Id.; see Vann v. Nationwide
Ins. Co., 185 S.E.2d 363, 364 (S.C. 1971) (noting that “a mere
violation of a contract will not support an allegation of
fraud”).
20
law governs the effect of the Confidentiality Agreement, summary
judgment in favor of General Dynamics is still appropriate.
As discussed above, MESC contends that the non-reliance
language of the APA alone is insufficient to bar its claims.
MESC correctly notes that the Delaware Supreme Court has stated
that “a merger clause does not preclude a claim based upon
fraudulent misrepresentations.” Norton v. Poplos, 443 A.2d 1, 6
(Del. 1982). But more recent Delaware decisions have read
Norton as “turn[ing] importantly on the relatively
unsophisticated nature of the parties involved in the case,
[and] the fact that they were entering a simple real estate
contract and did not bargain over the specific disclaimer
language.” Kronenberg v. Katz, 872 A.2d 568, 590 (Del. Ch.
2004). These more recent decisions have “consistently held that
sophisticated parties to negotiated commercial contracts may not
reasonably rely on information that they contractually agreed
did not form a part of the basis for their decision to
contract.” H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 142
n.18 (Del. Ch. 2003); see also Great Lakes Chem. Corp. v.
Pharmacia Corp., 788 A.2d 544, 556 (Del. Ch. 2001) (“To allow
Great Lakes to assert, under the rubric of fraud, claims that
are explicitly precluded by contract, would defeat the
reasonable commercial expectations of the contracting parties
and eviscerate the utility of written contractual agreements.
21
For those reasons, I conclude that in these circumstances,
Delaware law permits explicit contract disclaimers to bar Great
Lakes’ fraud claims.”). And, in Kronenberg, the Chancery Court
concluded:
[F]or a contract to bar a fraud in the inducement
claim, the contract must contain language that, when
read together, can be said to add up to a clear anti-
reliance clause by which the plaintiff has
contractually promised that it did not rely upon
statements outside the contract’s four corners in
deciding to sign the contract. The presence of a
standard integration clause alone, which does not
contain explicit anti-reliance representations and
which is not accompanied by other contractual
provisions demonstrating with clarity that the
plaintiff had agreed that it was not relying on facts
outside the contract, will not suffice to bar fraud
claims.
872 A.2d at 593.
In this case, MESC (represented by a team of commercially
experienced businessmen) and General Dynamics negotiated the
terms of the APA over a period of months. Section 10.10, the
merger clause, specifically states that the APA “supersedes any
prior understandings, agreements or representations by or among
the parties, written or oral, that may have related in any way
to the subject matter hereof,” (J.A. at 127) (emphasis added),
and Section 3.14 provides that, “except for the specific
representations . . . set forth in the agreement, the purchased
assets will be transferred at the closing in ‘as is’ condition .
. . and all other representations . . . are . . . expressly
22
disclaimed.” (J.A. at 112.) We think that, “when read
together,” these provisions “can be said to add up to a clear
anti-reliance clause by which the plaintiff has contractually
promised that it did not rely upon statements outside the
contract’s four corners in deciding to sign the contract.”
Kronenberg, 872 A.2d at 593. And, given the sophisticated
nature of the parties to the APA, we agree with the district
court that Delaware courts would find that MESC could not
justifiably rely on, and in fact had no right to rely on, any
representations not contained in the APA itself. Thus, if we
apply Delaware law to determine the effect of the APA’s non-
reliance provisions, we conclude that summary judgment in favor
of General Dynamics is appropriate on MESC’s fraud and negligent
misrepresentation claims based solely on Sections 3.14 and 10.10
of the APA, and we have no need to consider the effect of the
terms of the Confidentiality Agreement under New York law.
Moreover, even assuming that, under Delaware law, the APA’s
non-reliance provisions are ineffective to bar MESC’s claims,
MESC’s claims would still be barred because Paragraph 5 of the
Confidentiality Agreement is a valid non-reliance clause under
New York law. It is well-settled in New York that “[u]nlike a
general merger clause, a specific written disclaimer will
vitiate an allegation that one party reasonably relied on
alleged misrepresentations of the other party in executing a
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contract,” CFJ Assocs. of N.Y., Inc. v. Hanson Indus., 711
N.Y.S.2d 232, 235 (N.Y. App. Div. 2000), and we find this rule
particularly applicable where as here a commercially
sophisticated party agrees, prior to entering negotiations, that
it will not rely on any representations except those made in the
final agreement. 3
III.
For the foregoing reasons, we affirm the grant of summary
judgment to General Dynamics on MESC’s fraud and negligent
misrepresentation claims.
AFFIRMED
3
We note that New York law also provides that “even where
the parties have executed a specific disclaimer of reliance on a
seller’s representations, a purchaser may not be precluded from
claiming reliance on any oral misrepresentations if the facts
allegedly misrepresented are peculiarly within the seller’s
knowledge.” Comi v. Breslin & Breslin, 683 N.Y.S.2d 345, 349
(N.Y. App. Div. 1999). This rule is inapplicable here because
MESC agreed that it would not rely on any representations made
by General Dynamics, including those involving facts peculiarly
within General Dynamics’ knowledge, unless the representations
were included in the final agreement, the APA. None of the
alleged misrepresentations are included in the APA.
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