Client Alert

Anti-reliance clauses are intended to protect parties from post-closing fraud claims. 

They attempt to do so by providing that the parties are not relying on any representation—whether in writing or oral—outside of the agreement in question.

If you have ever worked with M&A lawyers, you know that they focus very closely on anti-reliance clauses.

For some reason, other lawyers, however, do not share such focus. 

But they should.

The issue of whether an anti-reliance clause precludes fraud claims can come up any time that a party alleges that the counterparty made a pre-closing misrepresentation outside of the agreement.

For instance, as evidenced by the cited decisions below, such issue can come up in the following contexts:

• Subordination agreements. In re Argon Credit, LLC, 596 B.R. 882, 894-96 (Bankr. N.D. Ill. 2019).

• Loan agreements.  Banco Panamericano, Inc. v. Consortium Serv. Mgmt. Grp., Inc., No. 07 C 15, 2008 WL 4006764, at **17-18 (N.D. Ill. Aug. 26, 2008).

• Court-approved section 363 asset purchase agreements.  Nilhan Developers, LLC v. Westplan Inv’rs Acquisitions, LLC (In re Bay Circle Props., LLC), 593 B.R. 14, 25-26 (Bankr. N.D. Ga. 2018) (C.J., Hagenau).

• Confidentiality and asset purchase agreements.  Hovis v. General Dynamics Corp. (In re Marine Energy Syss. Corp.), 362 B.R. 247, 272-74 (Bankr. D.S.C. 2006).

• Court-approved agreements for chapter 7 trustees to sell a lender’s collateral.  Miller v. Greenwich Capital Fin. Prods., Inc. (In re American Bus. Fin. Servs., Inc.), 384 B.R. 80, 89-90 (Bankr. D. Del. 2008).

As such decisions demonstrate, post-closing fraud claims can come up in a wide variety of commercial and insolvency contexts.

Although the issue could come up in numerous ways, let me give just two examples.

The Front End: The Loan Closing

On the front end, it is critical for lender’s counsel to make sure that the issue is buttoned up.  It is during this period—i.e., before the lender has advanced—that the lender will have the most leverage.

The Back End: Work-Out Negotiations

Now, let’s assume that the borrower is in default, and the lender isn’t being reasonable. Let’s further assume that lender’s counsel didn’t get things buttoned up with an air-tight anti-reliance clause. 

As a result, the borrower may not be foreclosed—by the loan documents—from asserting fraud claims against the lender.

In such a situation, it is critical for counsel for both the lender and the borrower to understand that the borrower may have more leverage in work-out negotiations. 

The next newsletter will discuss the prominent role state law plays in terms of the enforceability of anti-reliance clauses.

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This content is not intended to be and should not be relied upon as legal advice. In some jurisdictions, this may be considered “Attorney Advertising.”