Greer v. Advanced Equities, Inc.: Confirming That a Nonreliance Clause Precludes Fraud as a Matter of Law
In this month’s FlashPoints, we examine the First District’s holding in Greer v. Advanced Equities, Inc., 2012 IL App (1st) 112458, in which the court confirmed that a non-reliance clause precludes fraud based on oral representations as a matter of law.
In Greer, the plaintiffs purchased stock in Pixelon, Inc. from the defendants after receiving a private place memorandum (PPM) about the proposed investment. 2012 IL App (1st) 112458 at ¶2. To consummate the stock purchase, the plaintiffs signed a subscription agreement. Id. This agreement included a non-reliance clause that expressly disclaimed reliance on any oral or written representations other than those in the PPM:
In evaluating the suitability of an investment in [Pixelon], the undersigned [i.e., plaintiffs], having been delivered a copy of the [PPM], acknowledges that he has relied solely upon the [PPM], documents and materials submitted therewith, and independent investigations made by the undersigned in making the decision to purchase the Shares subscribed for herein, and acknowledges that no representations or agreements (oral or written), other than those set forth in the [PPM], have been made to the undersigned with respect thereto. Id.
Subsequently, the plaintiffs discovered that the defendants had made certain oral and written material misrepresentations about Pixelon and, therefore, filed suit against the defendants alleging common-law fraud and other claims. 2012 IL App (1st) 112458 at ¶3.
At issue in the appeal were the defendants’ alleged fraudulent representations. Id. In particular, the defendants had petitioned for leave to appeal pursuant to Supreme Court Rule 308, presenting the certified question of: “Where a purchaser of securities contractually agrees through a non-reliance clause that it is not relying on any oral representation made in connection with its purchase of the securities, is the purchaser barred as a matter of law from thereafter pleading in an action alleging common law fraud that it relied on oral statements when purchasing the securities?” 2012 IL App (1st) 112458 at ¶1, 4.
To answer this question, the court began by examining the elements of common-law fraud. 2012 IL App (1st) 112458 at ¶5. The court noted that one essential element of fraud is justifiable reliance on a false statement of material fact. Id. The court therefore analyzed whether the law permitted one to “claim to have justifiably relied on an oral representation while simultaneously disclaiming such reliance in the non-reliance clause.” Id. Illinois courts had addressed this same issue in three prior cases — Adler v. William Blair & Co., 271 Ill.App.3d 117, 648 N.E.2d 226, 207 Ill.Dec. 770 (1st Dist. 1995), Tirapelli v. Advanced Equities, Inc., 351 Ill.App.3d 450, 813 N.E.2d 1138, 286 Ill.Dec. 445 (1st Dist. 2004), and Benson v. Stafford, 407 Ill.App.3d 902, 941 N.E.2d 386, 346 Ill.Dec. 828 (1st Dist. 2010). — and this precedent formed the foundation for the Greer opinion. 2012 IL App (1st) 112458 at ¶¶6 – 9.
In Adler, supra, the appellate court held that the plaintiffs could not have justifiably relied on any oral misrepresentation given the non-reliance clause in the parties’ agreement. 2012 IL App (1st) 112458 at ¶6. The plaintiffs claimed that the governing agreement and other materials encouraged them to ask questions and verify the information that they had received and that this justified their reliance on the outside oral representations; the court rejected this argument. Id. The court explained that “[t]o accept the plaintiffs’ contention [would be] to hold the written agreement for naught.” Id. In Tirapelli, supra, the appellate court reaffirmed Adler, ruling that the plaintiffs’ reliance was unreasonable as a matter of law given the non-reliance clause. 2012 IL App (1st) 112458 at ¶7. The court explained that although whether reliance is reasonable is normally a question of fact for the jury to decide, a court can determine the reasonableness of reliance as a matter of law when only one conclusion can be drawn, such as when a nonreliance clause exists. Id. Then, in Benson, supra, the appellate court reviewed the issue once again, reaffirmed the Adler rule, and held that there was an “automatic rule precluding damages for fraud based on oral representations in the presence of a non-reliance clause.” 2012 IL App (1st) 112458 at ¶8. Additionally, the appellate court distinguished the Adler rule from certain federal opinions that only barred fraud claims based on conflicting oral and written representations. 2012 IL App (1st) 112458 at ¶¶8, 14.
Therefore, after reviewing the three prior Illinois cases on the issue, the Greer court stated that the law “seems quite clear”: a plaintiff cannot maintain a fraudulent oral misrepresentation claim if he or she signs an agreement containing a non-reliance clause that disclaims reliance on oral statements. 2012 IL App (1st) 112458 at ¶9. The court held that “[t]his is a logical rule, given that it is hardly justifiable for someone to rely on something that they have agreed not to rely on, and without justifiable reliance there can be no fraud.” Id.
Furthermore, the court rejected the plaintiffs’ attempt to carve out an exception for oral misrepresentations that merely reiterate or confirm written misrepresentations, as was the case for them. 2012 IL App (1st) 112458 at ¶¶9 – 15. The plaintiffs argued that Adler’s holding depended on the contradictions between the oral and written statements and, therefore, it was not controlling. 2012 IL App (1st) 112458 at ¶9. But the court disagreed, ruling that the basis of Adler’s holding instead was the contraction between the existence of a non-reliance clause and plaintiffs’ claim that they had in fact relied on oral representations. 2012 IL App (1st) 112458 at ¶10. Furthermore, the court noted that the Tirapelli and Benson cases demonstrated that whether the oral and written representations conflict is irrelevant. 2012 IL App (1st) 112458 at ¶12. Finally, the court stated that the plaintiffs’ federal cases interpreting Illinois law, which were merely persuasive authority, did not call for a different ruling. 2012 IL App (1st) 112458 at ¶¶3 – 15. In fact, the court noted that Extra Equipamentos E Exportcao LTDA v. Case Corp., 541 F.3d 719 (7th Cir. 2008), gave even more support for its interpretation of Adler and its view that the existence of a contradiction between the oral and written representations was inconsequential. 2012 IL App (1st) 112458 at ¶15. Therefore, the court held that the non-reliance clause controlled and rendered reliance on the oral representations unreasonable even when there was no contradiction between the oral and written representations. 2012 IL App (1st) 112458 at ¶16.
In brief, Greer confirmed that a non-reliance clause precludes all fraudulent oral misrepresentation claims as a matter of law. The First District made clear that whether the oral misrepresentation conflicted with the written representations is irrelevant. Instead, the mere existence of a non-reliance clause is an automatic bar, for as the court in Greer aptly stated, “it is hardly justifiable for someone to rely on something that they have agreed not to rely on, and without justifiable reliance there can be no fraud.” 2012 IL App (1st) 112458 at ¶9.