Opinion ID: 723747
Heading Depth: 3
Heading Rank: 3

Heading: Specificity of Disclaimer

Text: 42 Harsco's last claim is that the no other representations clause of Section 2.05 is not so specific as to put Harsco on notice of what it could not reasonably rely on. Harsco correctly states the rule announced by the New York Court of Appeals in Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 184 N.Y.S.2d 599, 157 N.E.2d 597 (1959): where a party specifically disclaims reliance upon a particular representation in a contract, that party cannot, in a subsequent action for common law fraud, claim it was fraudulently induced to enter into the contract by the very representation it has disclaimed reliance upon. We have recognized a similar principle in the securities fraud context. See Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1033 (2d Cir.1993) (disclosure of risks in prospectus forecloses suit under 10b-5 claiming that the security was unsuited to plaintiff's investment objectives). 43 In Danann the contract (for the purchase of a lease on a building) stated that the seller had not made ... any representations as to the ... expenses [or] operation ... [of the building] and the Purchaser hereby expressly acknowledges that no such representations have been made. 5 N.Y.2d at 320, 184 N.Y.S.2d 599, 157 N.E.2d 597. The New York Court of Appeals held that this language destroys the allegations in plaintiffs complaint that the agreement was executed in reliance upon ... contrary oral representations. Id. at 320-21, 184 N.Y.S.2d 599, 157 N.E.2d 597. 44 Applying the Danann rule to the present circumstances, our task is to compare the language in Sections 2.04, 2.05, and 7.02 to the representations which Harsco claims are fraudulent, keeping in mind the arm's length nature of the negotiation and the sophistication of the parties. The purpose in making this comparison is to determine whether once Harsco entered into the Agreement, it became unreasonable to rely on the allegedly fraudulent representations. 45 To aid this analysis, we restate here the most relevant portion of Section 2.05. After reaffirming representations in article II (including the fourteen pages of Section 2.04 immediately preceding), Section 2.05 states that Defendants make no representation or warranty to Harsco regarding 46 (a) any projections, estimates or budgets heretofore delivered to or made available to Purchaser of future revenues, expenses or expenditures, future results of operations (or any component thereof), future cash flows or future financial condition (or any component thereof) of [MultiServ] or the future business and operations of [MultiServ]; or 47 (b) any other information or documents made available to [Harsco] or its counsel, accountants or advisors with respect to [MultiServ] or the business and operations of [MultiServ], except as expressly covered by a representation and warranty contained in Sections 2.01 through 2.04 hereof. 48 In light of this language, we review Harsco's various factual theories of fraud. 49
50 Paragraphs 48 and 49 of the Complaint asserted that the following allegations, made during the three days of preliminary due diligence in May 1993, were fraudulent: that plants in Italy, Germany, the United Kingdom, France and Austria would experience a financial turnaround in 1993; that MultiServ would place new emphasis on developing its core steel business and phase out other businesses; that MultiServ expected growth in new areas of the world; and that plants in China and Slovakia would be fully operational in 1993 with no significant start up problems. On their face, these representations are projections of ... future business and operations--exactly what Section 2.05 disclaims. In light of Sections 2.05 and 7.02, there is nothing in the Complaint which allows an inference of reasonable reliance on these representations. The district court correctly dismissed the claims relating to these representations. 51
52 In paragraph 52 the Complaint alleges that certain defendants represented in July 1993, during confirmatory due diligence, that the Russian Plant would be operating in the fourth quarter of 1993, and that those same defendants knew or should have known at that time that the main foundations for the Russian Plant had not been poured. 7 The question is whether the disclaimer of information ... with respect to ... operations of [MultiServ], except as expressly covered by a representation and warranty contained in Sections 2.01 through 2.04 hereof put Harsco on sufficient notice that representations regarding the Russian Plant could not reasonably be relied on. This is a closer call than the allegations contained in paragraph 48. Unlike relatively vague expectations of future performance complained of in that paragraph, here the allegation is more detailed: defendants knew the Russian Plant was not going to get built and represented otherwise. 53 Nevertheless, and again relying on the sophisticated context of this transaction, we hold that Harsco must be held to its agreement. There was no representation whatsoever about the Russian Plant in Sections 2.01 through 2.04. We think Harsco should be treated as if it meant what it said when it agreed in Section 2.05 that there were no representations other than those contained in Sections 2.01 through 2.04 that were part of the transaction. Here, as in our analysis of § 29(a) of the Exchange Act, a less detailed Section 2.04 might lead to a different result. But the exhaustive nature of the Section 2.04 representations adds to the specificity of Section 2.05's disclaimer of other representations. We can see no reason not to hold Harsco to the deal it negotiated. Claims relating to the Russian Plant were also properly dismissed. 54
55 The complaint alleges numerous instances of improper conduct by the president of MultiServ's French subsidiary and accuses certain defendants of failing to disclose their knowledge of that misconduct. pp 57-68. The district court properly held that this portion of the complaint was deficient because Harsco's complaint failed to connect the alleged duty to disclose the French self-dealing with any representation from Section 2.04. The district court afforded Harsco an opportunity to fix its pleading. Harsco opted not to. 56 The pleading needed fixing because, again, we hold Harsco to the Agreement it negotiated and entered into. Under the circumstances of this case, no other representations means no other representations. 57 Ironically, in this instance there was a Section 2.04 representation which appears sufficiently inconsistent with the allegations of French impropriety to have allowed this claim to continue past the Rule 12(b)(6) stage. Section 2.04(i)(1) states that MultiServ was not in violation ... of any Law ... where failure to be in compliance would have a Material Adverse Effect. Harsco's general citation to Section 2.04 does not suffice to invoke this small subset of the fourteen pages contained therein. As discussed below, fraud must be pleaded with particularity. Fed.R.Civ.P. 9(b). That requirement is not met by citing to fourteen pages of representations when only a few lines among those fourteen pages consist of a representation which plaintiff claims to be deceitful. 58
59 Scarfing is the process by which surface defects are removed from slabs cast from liquid steel, before those slabs are rolled. Scarfing is important to maintain the quality of the product. p 69. The offering memorandum stated that MultiServ owned the intellectual property rights to the Androfer scarfing technology. p 70. The sellers also represented that the Androfer technology is superior to other scarfing methods. p 70. In reality, the rights to the Androfer technology were in dispute. pp 71-75. Harsco claims that defendants were aware of this reality and misrepresented it to Harsco. p 76. The self-declared owner of the Scarfing technology has since offered the Androfer rights to Harsco for $3 million. p 79. 60 Notably, other than the general invocation of Section 2.04, Harsco's complaint nowhere directs the reader's attention to any provision in the Agreement that relates to the status of MultiServ's intellectual property rights. Accordingly, this claim was also properly dismissed. 61 As with the claims relating to French improprieties, here too there is a short passage within Section 2.04, Section 2.04(k)(2)(A), which appears sufficiently inconsistent with the allegations relating to the state of the Androfer patent to warrant this claim continuing past a 12(b)(6) motion. Noting this, the district court allowed Harsco an opportunity to replead claims relating to intellectual property rights. Harsco declined in order to take this appeal. 62
63 Harsco claims that two defendants represented that MultiServ would acquire the [Belgium] Plant in June or July of 1993 for approximately $13 million, p 80, and that this representation was fraudulent. Section 2.04(o)(3) of the Agreement incorporated Exhibit 2.04(o)(3) to the Agreement. Exhibit 2.04(o)(3) states that the Belgium acquisition is not expected to be completed until September or October of 1993. Sections 2.05 and 7.02, if they mean anything, mean that the representations in Section 2.04 trump representations outside the Agreement. Here again Harsco's complaint belies any suggestion of reasonable reliance. Dismissal under Rule 12(b)(6) was proper. 64