FIH, LLC v. Foundation Capital Partners, LLC.
Opinion
FIH, LLC ("FIH") appeals from a grant of summary judgment against it, entered by the United States District Court for the District of Connecticut (Arterton, J. ), in its action against Foundation Capital Partners, LLC ("Foundation"), the general partner in a private equity fund set up to invest in minority interests in general partnerships of large hedge funds, and its member-partners (collectively, "defendants"). FIH alleged that it had purchased a membership interest in Foundation on the basis of misrepresentations by defendants, and asserted claims against them under § 10(b) of the Securities Exchange Act of 1934, the Connecticut Securities Act, and Connecticut common law. The alleged misrepresentations are that Foundation had an active pipeline of investments and that two of Foundation's key partners were able to work together notwithstanding one partner's embittered divorce of the other's sister-in-law. The district court held that a merger clause in Foundation's LLC agreement, incorporated into the subscription agreements by which FIH invested in Foundation, precluded FIH's reasonable reliance on the alleged misrepresentations as a matter of law. For the reasons that follow, we VACATE and REMAND.
FACTUAL BACKGROUND 1
Foundation was formed to act as general partner in Foundation Capital Partners, L.P. (the "Fund"), a private equity fund formed to invest in minority interests in general partnerships of large hedge funds. Rather than directly invest in assets under management by such hedge funds, the *137 Fund was to receive a portion of the annual management and performance fees taken in by the hedge fund partnerships. Foundation was operated by four partners, Dean Barr, Joseph Meehan, Joseph Elmlinger, and Thomas Ward.
In the Fall of 2013, Foundation solicited FIH to invest directly in it-rather than in the Fund. As part of its solicitation of FIH, Foundation provided FIH with an offering memorandum entitled "Foundation Managing Member LLC Disclosure Statement November 13, 2013" (the "Offering Memo"). The Offering Memo represented that the Fund was "in active negotiations" with two hedge funds that it planned to invest in, codenamed "Granite" and "Lake," and highlighted the Fund's "Current Transaction Pipeline" of 23 supposed potential transactions relating to investment in other hedge funds. FIH alleges that "[r]epresentations about active transaction negotiations in the pipeline were key to [its] investment decision, because Foundation needed to close its first acquisition of a hedge fund minority interest to start generating substantial income." Appellant's Br. at 4.
In February 2014, Foundation gave FIH access to due diligence materials, which identified fourteen specific targets delineated by their code names: "Projects Lake, Apex, Corvette, Granite, Breakout, Pilot, Centaur, Pound, Tensor, Mainstay, Yale, Halo, Gun, and Bronco." App'x at 146. The targets were identified only by code names, ostensibly to protect the confidentiality of Foundation's negotiations. Thus, at this stage of Foundation's solicitation of FIH, FIH had no opportunity to verify Foundation's claims by contacting the purported target hedge funds. The due diligence materials explained that these targets were "the current representative [Foundation] Pipeline, including those with which the firm was in active discussion," and that "this pipeline has become increasingly active in recent months as a result of industry recovery, manager interest, regulatory reform and the presence of relatively few buyers." Id. These materials also "represented that non-disclosure agreements had been signed with the target hedge funds in Projects Lake and Granite." Id.
In addition, in an email to FIH on December 30, 2013, Barr represented that Foundation had four "possible transactions in the works," referencing Projects Bronco, Corvette, Lake, and Centaur. Id. On January 22, 2014, Barr emailed FIH to update it on Project Apex, and represented that "I believe we can move expeditiously on this deal." Id. And on February 3, 2014, Barr again emailed FIH to give an update on Project Pilot, representing that "[w]e have some reasonably good intel that suggests that this offer would be given serious consideration." Id.
Through due diligence, FIH also learned that Barr was in the process of divorcing Meehan's sister-in-law. At that time, Barr was the managing partner of Foundation and Meehan was the Chief Operating Officer of Foundation. Barr and Meehan were each also managing principals of Foundation, and each held equal 46.175% interests in the company. FIH specifically asked the two men if they would be able to continue working well together following a potential investment by FIH in Foundation. Barr and Meehan each represented that they could "work together" professionally in spite of the divorce, and that they could "keep their professional and personal lives separate." Id . at 910. Barr represented to FIH that the divorce was "under control," "getting better," and "amicable," and was thus "not material" to FIH's decision to invest in Foundation. Id. Barr also told FIH that "there was nothing FIH needed to know about [his] personality and there *138 were no other matters FIH should know about [him]." Id. at 913.
On February 11, 2014, FIH and Foundation executed a document entitled "Foundation Managing Member LLC Subscription Agreement" (the "Subscription Agreement"), 2 concretizing FIH's investment in Foundation. The Subscription Agreement identifies FIH as the "Subscriber" and Foundation as the "Company," and provides inter alia that FIH:
tenders this subscription for a membership interest in the Company on the terms and subject to the conditions set forth in the Company Agreement (as defined below) as amended through the Seventh Amendment to the Company Agreement dated as of the date of this Subscription Agreement[.]
Id . at 586.
The Subscription Agreement also contains the following provision within a section entitled "Representations and Warranties of the Subscriber":
The Subscriber has such knowledge and experience in financial and business matters that the Subscriber is capable of evaluating the merits and risks of an investment in the Interest, and of making an informed investment decision, and the Subscriber has consulted and relied solely upon the advice of its own counsel, accountant and other advisers with regard to such legal, investment, tax and other considerations regarding such investment and on that basis believes that an investment in an Interest is suitable and appropriate for such Subscriber. The Subscriber has had, either individually or through its duly authorized officers, employees or agents, an opportunity to (i) ask questions of and receive answers from the Company and its management concerning the terms and conditions of the Interests and the proposed operation of the Company and (ii) obtain information necessary to verify the accuracy of the information provided.
The Company hereby represents and warrants to, and agrees with, the Subscriber that (a) attached hereto as Exhibit A is a true and correct copy of the Company Agreement that has been conformed to reflect all amendments to the Company Agreement through the Seventh Amendment to the Company Agreement dated as of the date of this Subscription Agreement and (b) the salary of each Managing Principal in 2014 will not exceed the amount set forth with respect to that Managing Principal in Exhibit B attached hereto.
Id. at 588.
The "Company Agreement" to which the Subscription Agreement refers is a document identified as the Limited Liability Company Agreement. Paragraph 11.9 of the Company Agreement, entitled "Entire Agreement" (the "merger clause"), provides that "[t]his Agreement constitutes the entire agreement of the Members and supersedes all prior agreements among the Members with respect to the subject matter hereof, including the Original Agreement[.]" Id. at 637. The Subscription Agreement itself, however, does not contain any merger clause or disclaimers of reliance on outside representations. Indeed, the Subscription Agreement omits specific anti-reliance disclaimers that *139 Foundation had used in connection with other investments in the Fund. 3
Shortly after investing in Foundation, FIH learned that defendants' representations about the active "pipeline" and about Barr and Meehan's supposedly workable relationship, which were material to FIH's investment decision, were false. On March 4, 2014, Foundation disclosed to FIH the first in a series of internal documents called "Project Activity Logs." The Project Activity Logs listed hedge fund targets in Foundation's pipeline under three categories: Live Deals, Prospects, and Dead Projects. These documents revealed that Foundation had overstated its deal activity in the Offering Memo and due diligence materials. For example, Projects Granite and Lake, which had been touted in the due diligence materials as the most developed of the potential deals, were both "On Hold" with no ongoing negotiations. And although Foundation had stated in its February 2014 due diligence materials that the "pipeline has become increasingly active in recent months," in fact, Foundation had a decreasing number of active deals in February 2014 compared to prior months.
Similarly, in contrast to the representations about Barr and Meehan's supposedly cordial relationship, it became clear to FIH after investing in Foundation that the two were at loggerheads. A series of emails that FIH received from Meehan and Elmlinger one month after FIH's investment revealed that Barr and Meehan privately admitted that they were unable to work together (see emails in the margin). 4 Moreover, Barr, who apparently was on the verge of personal bankruptcy, had repeatedly threatened to quit working at Foundation (see emails in the margin). 5 None of these facts had been disclosed to FIH as a prospective investor.
PROCEDURAL HISTORY
Based on those misrepresentations, FIH filed this action against defendants in the District of Connecticut, alleging violations of § 10(b) of the Securities Exchange Act of 1934 and the Connecticut Securities Act, as well as related state common-law claims. After the district court, in a ruling not challenged on appeal by FIH, dismissed some of FIH's claims and limited the scope of potentially actionable misrepresentations, FIH filed its Second Amended *140 Complaint, the operative complaint on appeal, specifically alleging that it had purchased a $6.75 million interest in Foundation in reliance on the misrepresentations by defendants discussed above.
In September 2016, Meehan, with the consent of all parties, moved to extend by 60 days the deadlines for discovery and for filing dispositive motions. On September 26, 2016, the district court held a telephonic status conference, during which the parties discussed the reasons necessitating the extension of the discovery deadline. During that conference, the court asked whether it was still the case that neither party anticipated using experts. FIH's counsel stated, "I believe that's true your Honor, for us, speaking for the plaintiff."
FIH, LLC v. Found. Capital Partners LLC
, No. 15 Civ. 785 (JBA),
On January 31, 2018, the district court granted defendants' motions for summary judgement as to FIH's federal securities law claims, and declined to exercise supplemental jurisdiction over its state-law claims. Id . The court held that (1) there was no material dispute between the parties that FIH was a sophisticated investor with respect to its investment in Foundation; (2) the investment contract constituted a fully integrated agreement; and (3) the contract did not include the alleged misrepresentations at issue, and therefore as a matter of law FIH could not reasonably have relied on those misrepresentations. This appeal followed.
DISCUSSION
I. Standard of Review
We review a district court's decision granting summary judgment
de novo
, and will affirm only if the record, viewed in the light most favorable to the non-movant, shows no "genuine dispute of material fact" and demonstrates "the movant's entitlement to judgment as a matter of law."
Ace Partners, LLC v. Town of E. Hartford
,
II. Reasonable Reliance
FIH contends that the district court erred in holding that the merger clause contained in the Company Agreement made FIH's reliance on defendants' misrepresentations unreasonable as a matter of law. FIH makes three arguments in support of this position: First, FIH argues that the merger clause in the Company Agreement does not apply to the Subscription Agreement because the Subscription Agreement does not expressly incorporate all relevant provisions of the Company Agreement. Second, FIH argues that even if the Subscription Agreement had fully incorporated the Company Agreement, the merger clause does not make FIH's reliance on defendants' misrepresentations unreasonable as a matter of law because it is only a "general" merger clause, as opposed to a specific disclaimer. Third, FIH argues that it reasonably relied on defendants' misrepresentations because they involved the "deliberate concealment of facts" known only to the defendants, which *141 thus fell within the purview of the "peculiar knowledge doctrine." 7 Because we conclude that the general merger clause contained in the Company Agreement is not the type of disclaimer that could prevent FIH's reasonable reliance on defendants' alleged misrepresentations as a matter of law, we need not reach FIH's other arguments.
As we have repeatedly emphasized, the issue of reasonable reliance requires that we consider "the entire context of the transaction, including ... its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them."
Crigger v. Fahnestock & Co.
,
In
Caiola v. Citibank, N.A., New York
,
The district court dismissed Caiola's claims, finding
inter alia
that it was unreasonable as a matter of law for him to have relied on the oral representations from Citibank.
This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto ...
*142 [Caiola] has such knowledge and experience in financial, business and tax matters that render him capable of evaluating the merits and risks of this Agreement and the Transactions contemplated hereunder; [and] has determined that [ ] the Transactions contemplated hereunder are suitable for him ...
[Caiola] is not relying on any advice, statements or recommendations (whether written or oral) of the other party, ....
Citibank argued that a "reasonable investor of Caiola's sophistication would not have relied upon Citibank's oral misrepresentations" because of the disclaimers that "Caiola would not be relying on Citibank's advice or recommendations, that he would make his own investment decisions, and that Citibank would not be his fiduciary or advisor."
Similarly, in the instant case, there are no disclaimers sufficiently specific to satisfy the standard set forth in
Caiola
. Nowhere in the Company Agreement or elsewhere is there explicit language disclaiming reliance on external representations of the kind alleged by FIH in this case (
i.e.
statements about ongoing deal activity or about personal relationships between Foundation's directors or officers). Rather, the relevant language in the Subscription Agreement and the Company Agreement on which defendants rely, quoted above, is strikingly similar to the merger clause and "sophisticated investor" language found insufficient in
Caiola
. And neither agreement in this case contains any clause as strong as the general disclaimer, found insufficient in
Caiola
, of reliance on "any advice, statements or recommendations (whether written or oral) of the other party."
In its decision granting summary judgment in favor of defendants in this case, the district court attempted to distinguished
Caiola
by explaining that it did not find FIH's reliance unreasonable on the basis of the "admittedly generalized disclaimers" in the Subscription Agreement,
9
but rather on the basis of the merger clause in the Company Agreement.
FIH, LLC
,
A merger clause is a provision of a contract signifying that the contract is a complete statement of the parties' agreement, superseding any prior oral or written terms. In other words, a merger clause operates to limit the universe of the parties' contractual obligations to the text of the contract itself. This does not mean, however, that a merger clause serves as a catch-all disclaimer of reliance on any conceivable pre-contract misrepresentations about facts pertaining to the subject matter of the contract that could form the basis of a claim for fraud in the inducement.
As we explained in
Tempo Shain Corp. v. Bertek, Inc.
,
Moreover, contrary to defendants' characterization of
Emergent Capital
and
ATSI
, neither of those cases stands for the proposition that merger clauses can serve as all-encompassing disclaimers of pre-contract factual misrepresentations. The district court in
Emergent Capital
explicitly held that "a general merger clause 'stating that the signatories acknowledge [that] the written document supersedes all prior agreements and constitutes the sole embodiment of their obligations' does not bar an action for fraud."
This Agreement, together with the exhibits and schedules hereto and ancillary Agreements, contains the entire understanding and agreement between or among any of them, and supersedes all prior understandings or agreements between or among any of them with respect to the subject matter hereof.
On appeal, we affirmed the relevant part of the district court's decision, holding that "Emergent should have protected itself by insisting that [the alleged misrepresentations at issue] be included in the stock purchase agreement[, because] [g]iven [defendant's] extensive contractual representations about other matters , [Emergent's]
*144
sophistication, and the size of the transaction, Emergent's failure to do so precludes as a matter of law a finding of reasonable reliance upon defendants' misrepresentations."
Emergent Capital
,
Defendants argue that, like the plaintiff in Emergent Capital , FIH "did, in fact, actively negotiate and demand certain terms, representations and conditions in connection with its investment," and thus that Emergent Capital cannot be distinguished on that ground. Appellees' Br. at 21-22. But each of the negotiated terms that defendants cite-including that "Foundation's partners [would] defer some of their compensation until Foundation closed a pipeline hedge fund deal," id. at 22; that FIH would "share in any management fee earned by Foundation in managing the Fund," id. ; "a revised involuntary transfer provision[,] ... terms concerning rights of first refusal, most favored nation status, pre-emptive rights, and tag-along rights," id. -relate to the parties' obligations , and do not constitute affirmative factual representations of any kind. This is an entirely different situation from that in Emergent Capital , where the parties actually negotiated factual representations to be included in the written agreements that suggest a closed set of such representations upon which the plaintiff's reliance was acknowledged.
The
ATSI
decision, on which defendants similarly rely for the proposition that "[w]here the plaintiff is a sophisticated investor and an integrated agreement between the parties does not include the misrepresentation at issue, the plaintiff cannot establish reasonable reliance on that misrepresentation,"
We do not suggest in any way that general disclaimers or merger clauses, the sophistication of an investor, or the presence of various promises or representations *145 in a written agreement are irrelevant to the reasonableness of a party's reliance on pre-contract factual misrepresentations. The defendants here remain free to argue to a jury, based on these or other factors, that FIH did not reasonably rely on any misrepresentations the jury might conclude were made. Indeed, as Emergent Capital demonstrates, there may be circumstances where a general disclaimer or merger clause, together with an extensive roster of specifically negotiated factual warranties and representations, can lead to a conclusion that, in the particular circumstances of a case, no reasonable jury could find reasonable reliance on a representation not inserted into the written contract. And, of course, careful investors negotiating the terms of an individualized investment can protect themselves by demanding that any representation that is critical to their investment decision be incorporated into the written investment agreement.
III. Exclusion of the Expert Report
FIH also argues that the district court's summary judgment decision must be reversed because the court erred in excluding as untimely an expert report opining that in accordance with private equity industry practice, "FIH was reasonable in relying on defendants' false statements." Appellant's Br. at 36. FIH claims that the district court abused its discretion in excluding this report, which FIH attempted to serve on January 23, 2018 at 11:52 pm-eight minutes before the close of court-ordered discovery. Although we conclude above that the summary judgment decision must be vacated in any event, we address this argument because the district court's ruling on the proposed expert testimony is relevant to the anticipated trial of this matter.
We review a district court's discovery ruling for "abuse of discretion."
Wills v. Amerada Hess Corp.
,
Having considered each of the above factors, we conclude that the district court was within its discretion to exclude the expert report. Although the report was technically served before the close of fact discovery and the court's scheduling order did not contain an explicit deadline to disclose expert witnesses, such a deadline had not been set only because FIH had advised the court that it did not intend to submit expert testimony, and therefore no party requested that the court amend the discovery schedule to include one. In any event, the district court acted well within its discretion in enforcing the discovery deadline that it did set. Because FIH's proposed expert would still have needed to be deposed, and defendants would have needed an opportunity to present a counter-expert, the literally eleventh-hour disclosure of the expert report would have extended discovery beyond the already-extended, agreed-upon, and court-ordered discovery deadline. We therefore identify no error or *146 abuse of discretion in the district court's exclusion of the expert's report.
CONCLUSION
For the reasons stated above, we VACATE the judgment of the district court granting summary judgment in favor of appellees, and REMAND for further proceedings.
Delta hedging makes a derivative position, such as an option position, immune to small changes in the price of an underlying asset, such as a stock, over a short period of time. See John C. Hull, Options Futures, and Other Derivatives 311-12 (4th ed. 2000).
The facts recited below are based on the evidence in the summary judgment record, taken in the light most favorable to FIH and drawing all reasonable inferences in FIH's favor.
See
Nicosia v. Amazon.com, Inc.
,
On February 28, 2014, the parties executed a second subscription agreement that made several changes to the original Subscription Agreement, none of them relevant to this appeal.
For example, one such agreement stated that:
Other than the Memorandum and the Partnership Agreement, the Subscriber is not relying upon any other information, representation or warranty by the Fund, the General Partner, or the Investment Manager in determining to invest in the Fund.
App'x at 963.
For example: On November 1, 2013, Barr emailed Meehan stating "If you're going to continue to behave like this during the divorce, I really don't think it's wise for us to work together going forward." App'x at 1024. On September 25, 2013, Barr emailed Meehan stating "I know you despise me .... I'm really thinking of calling it quits .... We're all headed for disaster." Id . at 1031-32. On February 3, 2014, virtually contemporaneously with Barr's assurances to FIH that he could continue to work well with Meehan, Barr emailed Meehan stating "Joe, we are officially broken from each other." Id . at 1034.
For example: On January 16, 2014, Meehan emailed Elmlinger and Ward, stating that "[Barr] has again posited that he needs" an advance on his partner draw, or he would face immediate "bankruptcy, etc." App'x at 1045. On January 30, 2014, Barr emailed Meehan, Ward, and Elmlinger stating that "I probably have a week before things implode around me .... I'm on the verge of collapse." Id . at 1042. On February 4, 2014, Barr emailed Meehan stating that "I can't make it passed [sic] Friday. My world caves in. I'm not kidding and I don't know if I can live through it. It's that serious." Id . at 1038.
Concurrently, FIH moved for summary judgment on its claims regarding defendants' misrepresentations about the pipeline. FIH does not appeal from the district court's denial of that motion.
See
Warner Theatre Assocs. Ltd. P'ship v. Metro. Life Ins. Co.
,
The district court was correct not to rely on that disclaimer. The language in the Subscription Agreement stating that "the Subscriber has consulted and relied solely upon the advice of its own counsel, accountant and other advisers ... and on that basis believes that an investment in an Interest is suitable and appropriate for such Subscriber" is not specific enough to bar an action by FIH for fraudulent misrepresentation based on defendants' alleged misrepresentations.
Reference
- Full Case Name
- FIH, LLC, Plaintiff-Appellant, v. FOUNDATION CAPITAL PARTNERS LLC, Fka Foundation Managing Member LLC, Dean Barr, Joseph Meehan, Thomas Ward, Joseph Elmlinger, Defendants-Appellees
- Cited By
- 71 cases
- Status
- Published