PLUTOCRATS CAN'T CLAIM THEY WERE GULLED ON INVESTMENT

September 3, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

Wealthy, sophisticated business people can wind up agreeing to be defrauded by signing a contract with nonreliance and integration provisions. Tirapelli v. Advanced Equities, 2004 WL 1713645 (1st Dist., July 30).

Two auto dealers filed a lawsuit in the Cook County Circuit Court alleging that misrepresentations were used to persuade them to purchase $250,000 of shares of stock in Telecom Capital Group. The complaint accused the defendants of deceit and of violating the Illinois Securities Law.

Summary judgment was entered against the plaintiffs because (1) the alleged misrepresentations were oral, (2) the subscription agreement signed by the plaintiffs contained nonreliance and integration provisions, (3) each plaintiff verified in the contract that he had a net worth of more than $ 1 million, and (4) they actually were financially sophisticated millionaires.

Applying the nonreliance and integration clauses, the trial judge ruled that the plaintiffs couldn't claim reasonable reliance on alleged misrepresentations that weren't contained in the subscription agreement.

According to the nonreliance provision:

"[I]n evaluating the suitability of an investment by the undersigned Company, the undersigned has relied solely upon the materials made available to the undersigned at the undersigned's request and independent investigations made by the undersigned in making the decision to purchase the Preferred Membership Interests subscribed for herein, and acknowledges that no representations or warranties (oral or written), have been made to the undersigned with respect thereto."

Providing further insulation for the defendants, the integration clause stated:

"The Subscription Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof and may be amended only by a written execution of all parties."
Attempting to escape the consequences of these provisions, the auto dealers appealed, but the Appellate Court affirmed. Here are highlights of Justice Michael J. Gallagher's opinion (with various omissions not noted in the quoted text):

"Although normally a question of fact, a court can determine reasonable reliance as a matter of law when no trier of fact could find that it was reasonable to rely on the alleged statements or when only one conclusion can be drawn. In determining whether a party's reliance was reasonable, the court must consider all of the facts that the party knew, as well as those facts that the party could have discovered through the exercise of ordinary prudence. Adler v. William Blair & Co.., 271 Ill.App.3d 117, 125 (1995)..

"Relying on Adler and Rissman v. Rissman, 213 F.3d 381 (7th Cir.2000), the trial court determined that the presence of the integration and nonreliance clauses in the subscription documents made plaintiffs' reliance on the alleged oral representations by defendants unreasonable as a matter of law.

"The gist of plaintiffs' primary argument in this appeal is that the 'automatic' rule established in those cases is unfair and would result in injustice against them. They invite this court to hold that, despite the presence of a nonreliance clause in a contract, the determination of whether reliance on oral statements not contained in the contract is reasonable should be determined on a case-by-case basis. We decline to do so.

"The plaintiffs in Adler, who had purchased interests in a real estate syndication, brought suit alleging common law fraud and violations of the Illinois Securities Law. Plaintiffs argued that they relied on alleged oral representations that one of the partners in the syndication would provide financial backing to the syndication.

"The subscription agreement which the Adler plaintiffs signed contained a nonreliance clause which stated: 'I have received and read the [private placement memorandum] and am hereby applying for the purchase of Units solely in reliance upon the information contained in the [memorandum] and not in reliance upon any other information.' The memorandum stated that the partner would provide only $100 of capital to the syndication.

"Because the representation on which the plaintiffs allegedly relied conflicted with the memorandum, and because the subscription agreement contained a nonreliance clause, the court held that the plaintiffs' reliance was unreasonable as a matter of law.

"The plaintiff in Rissman sold his shares in a business to the defendant, who was a co-owner in the business, in alleged reliance on the defendant's statement that he would not sell the business. The contract for the sale of the shares included a clause which stated: '[T]his Agreement is executed without reliance upon any statement or representation except as set forth herein.'

"After the defendant sold the business, the plaintiff sued to recover the amount he would have received from the sale of the business had he not sold his shares to the defendant, arguing that the defendant's statement that he would not sell the business was fraudulent under section 10(b) of the Securities Exchange Act, and Rule 10b-5.

"The Rissman court upheld the trial court's grant of summary judgment for the defendant and held that 'a written anti-reliance clause precludes any claim of deceit by prior representations.'

"There are sound policy reasons for precluding fraud claims based on oral statements outside the written agreement where the agreement includes a nonreliance clause. As the Rissman court noted, placing primacy on the written word is a primary function of securities law and reduces the possibility of faulty memories and fabrication. Further, without such a rule, parties to securities transactions would be unable to avoid the risk of claims based on oral representations, thus reducing the value of the securities.

"We believe that the same reasoning applies to the Illinois Securities Law.

"In the instant case, both plaintiffs own car dealerships. Each has substantial net worth and investments. Because private placement investments are inherently risky, they are not made available to unsophisticated investors. As sophisticated business people, plaintiffs certainly could have negotiated for inclusion in the subscription documents of the oral statements that were allegedly so important to their investment decision.

"Having agreed in writing that they did not rely on any representations found outside the subscription documents, plaintiffs cannot be allowed to argue fraud based on such representations.
"Plaintiffs now argue on appeal that the nonreliance clause should not preclude their fraud claims because the nonreliance clause conflicts with another clause in the subscription documents that urged the plaintiffs to request additional information from Wiskowski [one of the defendants]. Plaintiffs did not raise this argument below and may not raise it for the first time on appeal.

"In any event, plaintiffs' argument is meritless. It is perfectly consistent in a private securities transaction among sophisticated parties for the offeror to invite the prospective investor to make his or her own investigation and yet also require the investor to disavow reliance on any statements that were not contained in the final writing.

"The Adler court upheld a nonreliance clause despite the presence of a clause inviting the plaintiffs to ask questions about the investment and to verify the information in the documents because '[t]o accept the plaintiffs' contention [that the nonreliance clause is invalid] is to hold the written agreement for naught.'

"Plaintiffs attempt to distinguish the clause inviting questions in Adler from the clause in the instant case by arguing that the clause in Adler only pertained to information included in the written agreement, while the clause inviting questions in the instant case had no such limitation. But regardless of what information plaintiffs were invited to inquire about, the nonreliance clause clearly indicates that plaintiffs were not to rely on any information acquired from those inquiries, even information from Wiskowski, unless the information was included in the subscription documents.

"Plaintiffs also argue that the nonreliance clause functions as an exculpatory clause, and that exculpatory clauses do not protect against intentional torts. Plaintiffs cite several cases in support of this argument. However, none of those cases involved securities transactions between sophisticated parties. We find Rissman, 213 F.3d 381, and Adler to be more applicable to the instant case and reject plaintiffs' exculpatory clause argument.

"Finally, plaintiffs argue that the integration clause does not bar them from bringing fraud claims based on statements found outside the written agreements. To support this assertion, plaintiffs cite several cases: Salkeld v. V.R. Business Brokers, 192 Ill.App.3d 663 (1989); Spindler v. Krieger, 16 Ill.App.2d 131 (1958); Lehman v. Hill, 414 Ill. 173 (1953); and Vigortone AG Products Inc. v. PM AG Products Inc., 316 F.3d 641 (7th Cir.2002). However, those cases involved contracts that contained integration clauses, but which did not contain nonreliance clauses.

"In fact, the Vigortone court specifically noted this distinction, stating: '[P]arties to contracts who do want to head off the possibility of a fraud suit will sometimes insert a "no-reliance" clause into their contract. Since reliance is an element of fraud, the clause, if upheld precludes a fraud suit.' Thus, plaintiffs' argument that an integration clause does not preclude a fraud claim is not relevant.

"Plaintiffs' reliance was unreasonable as a matter of law. Therefore, plaintiffs are unable to establish the reliance element required by their Illinois Securities Law and common law fraud claims."

The moral of the story is: Caveat Plutocrats!

Back to Trial Notebook Main page