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Fraud Claims in the Context of Contract Representations: The Question of Reasonable Reliance

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A recent New York Court of Appeals decision provides some guidance of relevance to all transactional lawyers and clients relating to potential causes of action for contractual representations and warrantees, which prove to be untrue.

In DDJ Management, LLC, et al., v. Rhone Group L.L.C., et al., 15 N.Y.3d 147___N.Y.S.2d___ (June 24, 2010), the New York Court of Appeals addressed the following questions in its decision to allow Plaintiff DDJ Management’s $40 million fraud claim to proceed to a jury:

  • When can a recipient of written representations from a company, which prove to be untrue, sue third parties, such as shareholders and officers of the company making the representations?
  • In what circumstances does neglecting to conduct a due diligence investigation impede the  recipient of contract representations from bringing a fraud claim?

The basic facts, in a nutshell, are as follows:

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LLC Withdrawal and Dissolution: Why Explicit Provisions in the Operating Agreement are Necessary

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Over the past decade, the Limited Liability Company (“LLC”) has become one of the most favored forms of a closely held business organization in New York.  As an unincorporated business entity, the LLC is favored because of its pass-through tax treatment coupled with maximum operating flexibility.  However, an LLC also demands a well-written and comprehensive operation agreement - especially with regard to withdrawal and dissolution - because it may create the only chance for a member to exit the company.

Under Limited Liability Company Law (“LLCL”) §606, for example, unless the operating agreement specifically provides for the right of withdrawal, a member is not allowed to withdraw prior to dissolution of the LLC.  Thus, where there is no such provision, if a member wants to withdraw, he must try to force a dissolution under LLCL §702, which provides:

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Protecting Trade Secrets – Basic Practical Considerations

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The protection of trade secrets involves a combination of business and legal acumen.

The best way to protect a trade secret is not to disclose it to anybody.  This should be the default position – keep it secret!  But, in the real world, that is rarely possible or practical.  Often, trade secrets must be disclosed to be able to benefit from them.

Trade secret disclosures can generally be broken down into three categories: (1) Disclosure to employees; (2) Disclosure to potential strategic partners and (3) Disclosure to potential sources of financing.