18-357-cv
FIH, LLC v. Foundation Capital Partners, LLC.



                              UNITED STATES COURT OF APPEALS
                                    FOR THE SECOND CIRCUIT



                                                 August Term, 2018

                         Argued: March 8, 2019              Decided: April 1, 2019

                                                Docket No. 18-357-cv



                                                     FIH, LLC,

                                                                   Plaintiff-Appellant,

                                                      — v. —

                   FOUNDATION CAPITAL PARTNERS LLC, FKA FOUNDATION
                   MANAGING MEMBER LLC, DEAN BARR, JOSEPH MEEHAN,
                           THOMAS WARD, JOSEPH ELMLINGER,

                                                                   Defendants-Appellees,




B e f o r e:

               JACOBS and LYNCH, Circuit Judges, and VILARDO, District Judge.*




*
 Judge Lawrence J. Vilardo, of the United States District Court for the Western
District of New York, sitting by designation.
       FIH, LLC (“FIH”) appeals from the district court’s grant of summary
judgment dismissing its federal securities law claims against Foundation Capital
Partners, LLC (“Foundation”), Dean Barr, Joseph Meehan, Thomas Ward, and
Joseph Elmlinger (collectively “defendants”). FIH argues that it had reasonably
relied on material misrepresentations by defendants in deciding to invest in
Foundation, and that defendants are therefore liable under federal and state law.
The district court concluded as a matter of law that FIH could not have
reasonably relied on the alleged misrepresentations, because such reliance was
precluded by a general merger clause in Foundation’s LLC agreement,
incorporated by reference into the subscription agreements by which FIH had
invested in Foundation. Concluding that the merger clause did not as a matter of
law preclude FIH’s reasonable reliance on the alleged misrepresentations, we
VACATE the judgment of the district court and REMAND for further
proceedings.



                  SAMUEL J. LIEBERMAN (Ben Hutman, on the brief), Sadis &
                       Goldberg LLP, New York, NY, for Plaintiff-Appellant.

                  DAVID G. TRACHTENBERG (Stephen J. Arena, on the brief),
                       Trachtenberg Rodes & Friedberg LLP, New York, NY,
                       for Defendant-Appellee Joseph Elmlinger.

                  Peter M. Nolin, Carmody Torrance Sandak & Hennessey LLP,
                        Stamford, CT, for Defendant-Appellee Dean Barr.

                  Stephen G. Walko, Andrea C. Sisca, Ivey, Barnum & O’Mara
                        LLC, Greenwich, CT, for Defendant-Appellee Thomas
                        Ward.

                  Jonathan P. Whitcomb, Diserio Martin O’Connor & Castiglioni
                        LLP, Stamford, CT, for Defendant-Appellee Joseph Meehan.




                                        2
GERARD E. LYNCH, Circuit Judge:

      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.



                                         3
                           FACTUAL BACKGROUND1

      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 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


1
 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., 834 F.3d 220, 229 (2d Cir.
2016).

                                          4
“[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.


                                         5
      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



                                         6
also told FIH that “there was nothing FIH needed to know about [his] personality

and there 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


2
 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.

                                          7
       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.

Id. The Subscription Agreement further provides the following within a section

entitled “Representations and Warranties of the Company”:

       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


                                          8
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 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



3
    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.


                                          9
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



4
 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.

                                           10
(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 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



5
  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.


                                          11
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), 2018 WL 638997, at *3 (D.

Conn. Jan. 31, 2018). Nevertheless, at 11:52 pm on the last day before discovery

closed, FIH attempted to serve an expert report, which the district court excluded

as untimely. In March 2017, defendants moved for summary judgment on all

claims.6

      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


6
 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.

                                         12
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, 883 F.3d 190, 194–95 (2d Cir. 2018). Issues of contract interpretation

are also “subject to de novo review.” In re Delta Air Lines, Inc., 608 F.3d 139, 145 (2d

Cir. 2010).

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


                                          13
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 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




7
 See Warner Theatre Assocs. Ltd. P’ship v. Metro. Life Ins. Co., 149 F.3d 134, 136 (2d
Cir. 1998) (A “specific disclaimer will not undermine another party’s allegation of
reasonable reliance on the misrepresentations” if “the allegedly misrepresented
facts are peculiarly within the misrepresenting party's knowledge.”)

                                          14
complexity and magnitude, the sophistication of the parties, and the content of

any agreements between them.” Crigger v. Fahnestock & Co., 443 F.3d 230, 235 (2d

Cir. 2006). The reasonableness of a plaintiff’s reliance is a “nettlesome” and “fact

intensive” question, Loreley, 797 F.3d at 186 n.19, quoting Schlaifer Nance & Co. v.

Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997) and thus “is often a question of fact

for the jury rather than a question of law for the court.” STMicroelectronics, N.V. v.

Credit Suisse Sec. (USA) LLC, 648 F.3d 68, 81 (2d Cir. 2011). Standing alone,

therefore, a general disclaimer (still less a general merger clause) is not sufficient

as a matter of law to preclude reasonable reliance on material factual

misrepresentations, even by a sophisticated investor.

      In Caiola v. Citibank, N.A., New York, 295 F.3d 312, 330–31 (2d Cir. 2002), we

held that general disclaimers are insufficient to defeat reasonable reliance on

material misrepresentations as a matter of law, even by a sophisticated party.

Accord, Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 186

n.19 (2d Cir. 2015). The plaintiff in Caiola was “an entrepreneur and sophisticated

investor,” engaged in complex trading activity with Citibank. Caiola, 295 F.3d at

315. Representatives of Citibank orally promised Caiola “that as his

counterparty[, Citibank] would control its own risks through a strategy known as


                                           15
‘delta hedging,’”8 id. at 317, and “that [Caiola’s] synthetic trading relationship

with Citibank would remain unaltered” by Citibank’s upcoming merger, id. at

318. “However, . . . contrary to its representations and unknown to Caiola,

Citibank had secretly stopped delta hedging and transformed Caiola’s synthetic

portfolio into a physical one by executing massive trades in the physical markets

that mirrored Caiola’s synthetic transactions.” Id. Consequently, Caiola brought

securities fraud claims against Citibank based on Citibank’s misrepresentations.

      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. Id. at 320. “Apparently resting its analysis on parol evidence

principles,” id., the district court relied on the following provisions in the

relevant agreements between the parties:

      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 . . .




8
 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).

                                          16
      [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, . . . .


id. at 317–18.

       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.” Id. at 330 On appeal, we

reversed: “We are not persuaded that these disclaimers barred Caiola from

relying on Citibank’s oral statements.” Id. We explained instead that “[a]

disclaimer is generally enforceable only if it tracks the substance of the alleged

misrepresentation,” and that “[t]he disclaimer provisions contained in the

[agreements] fall well short of tracking the particular misrepresentations alleged

by Caiola.” Id. (internal quotation marks omitted). The disclaimers were

ineffective because, while “Caiola specifically allege[d] that Citibank offered false

                                         17
assurances that after the . . . merger [that] the parties’ existing trading

relationship would not change and that Citibank would continue to act as a delta

hedging counterparty,” “[t]he disclaimer . . . state[d] only in general terms that

neither party relied ‘on any advice, statements or recommendation (whether

written or oral) of the other party.’” Id.

      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.” Id. at 317.




                                             18
      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, 2018 WL 638997, at *14 n.5.

On appeal, defendants argue that according to our decisions in Emergent Capital

Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189 (2d Cir. 2003) and ATSI

Commc’ns., Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007), even general merger

clauses (as opposed to disclaimers, as discussed in Caiola) can defeat reasonable

reliance when an investor is sophisticated and the representations at issue are not

contained in the operative agreement. We are not persuaded.

      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



9
 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.

                                         19
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., 120 F.3d 16, 21 (2d Cir.

1997), because the concept of a merger clause “rests on the rationale that a later

written agreement has supplanted prior negotiations, it follows that [it] does not

come into play until the existence of an enforceable written agreement has been

shown,” and thus it cannot be used to “exclude evidence to show that there was

no agreement or that the agreement was invalid.” Therefore, we held, a “general

merger clause does not preclude parol testimony where a claim is based on fraud

in the inducement.” Id. And it is for that reason that in Caiola we found

“questionable” the district court’s “importation of parol evidence principles into

the federal securities laws” when it found that “the oral misrepresentations

allegedly made by Citibank . . . can be disregarded” insofar as they contradict

“unambiguous language in the [agreements between the parties].” Caiola, 295

F.3d at 330, n.9.


                                          20
      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.” 195 F. Supp. 2d 551, 562 (S.D.N.Y. 2002). In that

case, the court considered a merger clause, similar to the one in this case, which

stated that:

      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.



Id. The court explained that “[i]f this merger clause stood alone, there would be

no question that it would not by itself preclude reasonable reliance as a matter of

law." Id. However, the court found that given the specific facts of that case,

Emergent could not claim reasonable reliance, because in addition to the merger

clause, the relevant agreements made “29 separate representations and



                                         21
warranties and 16 separate covenants in favor of the . . . purchasers, including

Emergent.” Id.

      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] 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, 343 F.3d at 195 (emphasis

added). Here, in contrast, there are no “extensive contractual representations”

about the status of the Fund’s transaction pipeline, the working relationships

between Foundation’s principals, or any similar subject matter, that might have

operated as an implicit disclaimer regarding Foundation’s extra-contractual

factual representations to FIH. Instead, there is only the general merger clause in

the Company Agreement.

      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


                                          22
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,” 493 F.3d at 105

(citing Emergent Capital, 343 F.3d at 196), is inapposite for the same reason. For

one thing, the agreement at issue in that case contained an explicit disclaimer as


                                         23
part of the merger clause, stating that “[t]here are no restrictions, promises,

warranties, or undertakings, other than those set forth or referred to herein.” Id.

at 95. We specifically noted that disclaimer in our decision with regard to the

plaintiff’s reasonable reliance on the alleged misrepresentations in that case. See

id. at 105 (“Of the misrepresentations that ATSI claims, we can quickly dispose of

all except the two alleged in the transaction agreements. The . . . agreement

between [the parties] plainly states that the only promises, restrictions, and

warranties to the transaction were those set forth in the transaction documents.”).

Moreover, the subject matter of some of the alleged oral misrepresentations in

ATSI—that defendants “would not engage in any activity to depress” the price of

“stock” by rapidly selling it, id. at 94,—was specifically addressed by written

representations in the agreements at issue, providing “that the [defendants]

would soon sell its converted common stock into the public markets” within “90

days of closing” the deal, id. at 95. In this case, by contrast, the merger clause

contains no disclaimer of any kind of representation, and the subject matter of

defendants’ alleged misrepresentations was not addressed by affirmative

representations in any agreement between the parties.




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      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 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

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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 11:52pm—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., 379 F.3d 32, 41 (2d Cir. 2004). A district court abuses

its discretion “when its decision cannot be located within the range of

permissible decisions or is based on a clearly erroneous factual finding or an

error of law.” United States v. Scully, 877 F.3d 464, 474 (2d Cir. 2017). The

reasonableness of a decision excluding expert testimony is evaluated according

to the following factors: “(1) the party’s explanation for the failure to comply

with the disclosure requirement; (2) the importance of the testimony of the

precluded witnesses; (3) the prejudice suffered by the opposing party as a result




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of having to prepare to meet the new testimony; and (4) the possibility of a

continuance.” Patterson v. Balsamico, 440 F.3d 104, 117 (2d Cir. 2006).

      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 abuse of discretion

in the district court’s exclusion of the expert’s report.




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                               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.




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