Online HealthNow, Inc., et al: Anti-fraud provisions can be “too much dynamite”

In the fall of 2018, Online HealthNow, Inc. and Bertelsmann, Inc. (the Buyer) agreed to purchase OCL Holdings (OCL) and its related subsidiaries from CIP OCL Investments, LLP (the Seller). OCL sells continuing education programs to adults, mainly located in the United States. As part of the purchase, the Seller represented that OCL did not have any undisclosed liabilities. However, at the time of the sale, OCL owed an estimated US$8-9 million in unpaid sales and use taxes. According to the Buyer, the Seller knew of this liability and actively hid it from the Buyer, including by making representations in the purchase agreement that the Seller knew were false at the time the agreement was signed.

The Buyer brought suit after learning of the undisclosed tax liability. The Seller moved to dismiss, arguing, among other things, that all representations and warranties under the purchase agreement expired at closing, and further arguing that the agreement limited the parties who could be named in a suit relating to the transaction. 

The court denied the motion in its entirety, holding that the Seller could not invoke protections in a contract it was accused of procuring through fraud to block claims asserting that fraud. The court reiterated the importance of ABRY Partners V, L.P. v. F & W Acquisition LLC, which held that sellers could not rely on an anti-reliance provision in a purchase agreement to defeat claims alleging fraudulent misrepresentations within that same purchase agreement.

The court also rejected the Seller’s argument that the purchase agreement barred fraud claims by causing all contractual representations and warranties to expire at closing. The court called into doubt the Superior Court’s decision in Sterling Network Exchange LLC v. Digital Phoenix Van Buren LLC, which held that parties could limit the time period in which claims could be asserted so long as the limitations were “reasonable,” and found that that under the facts alleged, the restrictions at issue were neither reasonable nor enforceable.

The court also found that the contractual provisions prohibiting fraud claims against certain parties were also unenforceable if those parties were complicit in defrauding the Buyer into entering into the agreement that contained those protections.

Authored by Ryan M. Philp, David R. Michaeli, and Sam Dougherty.