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Contractual Disclaimers Undermine the Basis of Plaintiff’s Fraud-Based Claims

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  • Posted on: Jan 28 2025

By: Jeffrey M. Haber

As readers of this Blog know, to recover damages for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.”[1]

The element that most often spells failure for a plaintiff is reasonable reliance – that is, reliance on the alleged misrepresentation or omission. One reason for the difficulty in demonstrating justifiable reliance is the presence of a disclaimer clause in the parties’ contract. In prior articles, we have discussed the impact a disclaimer clause can have on a fraud claim. Namely, a disclaimer clause can preclude a fraud claim when (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party.[2]

In KSFB Mgt., LLC v. Focus Fin. Partners, LLC, 2025 N.Y. Slip Op. 50061(U) (Sup. Ct., N.Y. County Jan. 22, 2025 (here), the court examined, among other claims, fraud-based claims and the impact of disclaimers clauses on those claims. As discussed below, the court dismissed the fraud-based claims on the basis of those disclaimer clauses.

[Eds. Note: The following facts are drawn from the motion court’s recitation of the facts alleged in the complaint.]

KSFB involved an alleged scheme by defendants to mislead KSFB Management, LLC (“KSFB”) into pursuing a combined sale of KSFB and NKSFB, LLC (“NKSFB”), a wholly owned subsidiary of defendant Focus Financial Partners, LLC (“Focus”), while defendants secretly consummated a purportedly competing transaction without KSFB.

The parties’ dispute dates back to 1981, with the formation of Nigro Karlin & Segal, an accounting firm. Eventually becoming Nigro Karlin Segal Feldstein & Bolno LLC (“Nigro Karlin”), the firm developed into a business management company providing concierge-style services to high-net-worth individuals.

On April 1, 2018, Nigro Karlin and its principles sold its assets—including employees, revenue, and operating expenses—to Focus, an investor in fiduciary wealth and business management firms. Nigro Karlin’s assets were placed into NKSFB. Simultaneously, the principals of Nigro Karlin formed KSFB. Sometime following the sale of Nigro Karlin, KSFB and Focus entered into a Management Agreement pursuant to which KSFB provided management services to facilitate NKSFB’s business of providing family office, business management, consulting, tax, and other client services (the “NKSFB Business”) for a fee calculated based on NKSFB’s profits. This arrangement continued for years, allowing NKSFB to grow into Focus’s most valuable business management asset.

By early 2022, the principals of KSFB considered future opportunities in anticipation of the expiration of a non-competition period in 2023. As its principals considered their options, KSFB proposed having Focus purchase KSFB’s business. Conversely, if Focus was not interested, KSFB advised that they would offer KSFB for sale elsewhere in the market or start a business to compete in the same market as NKSFB.

According to the complaint, unbeknownst to NKSFB, Focus wanted to capitalize on NKSFB’s success and was working, together with its long-time investment adviser, defendant Goldman Sachs & Co. LLC (“Goldman Sachs”), to sell itself and NKSFB in a deal with a third party. By June 2022, several investors had expressed interest in such an acquisition, including, as is relevant to the action, Clayton Dubilier & Rice LLC (“CD&R”). KSFB alleged that Focus understood that the departure of either KSFB or its principals would undermine or devalue any potential deal with CD&R or other investors. As a result, Focus was determined to prevent KSFB from leaving its management role with NKSFB, and it pursued various strategies in furtherance of that goal.

On September 1, 2022, Focus proposed that it and KSFB team up to pursue a joint sale with KSFB of the NKSFB Business (the “Joint NKSFB Sale”). In furtherance of this proposal, Focus allegedly urged KSFB to retain Goldman Sachs to advise and assist with the joint sale. Initially, KSFB was opposed to Goldman Sachs’s involvement, citing concerns of a potential conflict of interest in having Goldman Sachs jointly represent KSFB and Focus. Nonetheless, over time, KSFB was convinced by Goldman Sachs’s Head of FIG Americas, that Goldman Sachs, Focus, and KSFB were fully aligned on the same goals. KSFB therefore agreed in principle that Goldman Sachs would serve as its representative for the Joint NKSFB Sale. But as alleged, KSFB contended that Goldman Sachs’s representations ultimately proved to be false because it was secretly engaged with Focus to find a buyer for Focus and the NKSFB Business without KSFB.

KSFB began sharing information with Goldman Sachs about the NKSFB Business and its financials in order to provide Goldman Sachs with a deep knowledge of the business and, in turn, facilitate a potential sale. In purportedly keeping up a pretense that Focus and Goldman Sachs were committed to such a transaction, Goldman Sachs began advising Focus and KSFB through the process of identifying buyers and soliciting their bids. Through this process, Goldman Sachs identified over two dozen potential buyers for the NKSFB Business, and it set up various in-person meetings with these buyers throughout December 2022 and into January 2023. Notably, KSFB alleged, Goldman Sachs never identified CD&R as a potential buyer for the Joint NKSFB Sale. The reason why, KSFB alleged, is because Goldman Sachs and Focus were simultaneously seeking to secure a deal with CD&R for the sale of Focus and NKSFB (but not KSFB).

According to KSFB, Focus and Goldman Sachs’s efforts to secure a deal with CD&R began in March 2022, when Focus’s Board of Directors (the “Board”) met with Goldman Sachs to discuss long-term strategic goals and plans for the company, including a potential sale of Focus. In June 2022, after the Board approved a study of potential financing and strategic opportunities, Focus met with representatives of CD&R to discuss a potential acquisition.

On September 14, 2022, CD&R submitted a written offer to acquire Focus. The offer came two days before Focus and Goldman Sachs convinced KSFB to hire Goldman Sachs for the Joint NKSFB Sale. Although it did not accept the offer, the Board authorized additional due diligence materials to be made available to CD&R, including Focus’s long-term financial projection and, as alleged upon KSFB’s information and belief, KSFB’s confidential information provided pursuant to an NDA.

KSFB maintained that, with CD&R receiving non-public due diligence materials, Focus and Goldman continued its “secret” negotiations with CD&R while simultaneously negotiating terms of the NDA with KSFB. By late January 2023, Focus and Goldman Sachs were purportedly nearing a definitive deal with CD&R. At no point, KSFB averred, did either Focus or Goldman Sachs disclose their negotiation efforts with CD&R. KSFB alleged that they instead went through the motions to ensure that KSFB remained aligned with NKSFB so as to retain CD&R’s interest in purchasing Focus and NKSFB.

According to KSFB, Focus and Goldman Sachs were aware that KSFB had no knowledge of its secret negotiations with CD&R and, if those negotiations were discovered, they would be exposed to significant liability. As a result, on January 25, 2023, Goldman Sachs insisted that KSFB sign an engagement letter with it (“Engagement Letter”). The Engagement Letter came just days prior to Focus and CD&R entering an exclusivity agreement.

In the Engagement Letter, Goldman Sachs continued to represent that it was “exclusively engaged” by Focus and KSFB as “financial advisor in connection with the possible sale of all or a portion of (i) NKSFB . . . and/or (ii) KSFB”. The parties agreed that (i) Goldman Sachs would advise [Focus and KSFB] on a collective basis, (ii) that no company would be advised independently of the other, (iii) Goldman Sachs would not negotiate for one company against the other with respect to any issue which could arise in connection with the transaction, and (iv) unless otherwise directed in writing, Goldman Sachs could share any information it received from one company with any other company. But notwithstanding the foregoing acknowledgments, each party to the Engagement Letter also expressly agreed that “Goldman Sachs[] may currently be providing and may in the future provide financial advisory and/or other investment banking services that could impact the transaction contemplated by this letter.”

Separately, the Engagement Letter included various terms that, in KSFB’s view, were intended to insulate Goldman Sachs from liability. For example, the Engagement letter stated that Focus and KSFB “understand[] and acknowledge[] that potential conflicts of interest, or a perception thereof, may arise as a result of” Goldman Sachs’s representation of both Focus and KSFB, and thus the parties agreed that such a situation “will not give rise to any claim of conflict of interest against Goldman Sachs.” The Engagement Letter further provided that “nothing in this letter or the nature of [Goldman Sachs’s] services in connection with this engagement or otherwise shall be deemed to create a fiduciary duty or fiduciary or agency relationship between” Goldman Sachs and Focus and KSFB, and “each of [Focus and KSFB] agrees that it shall not make, and hereby waives, any claim based on an assertion of such a fiduciary duty or relationship.”

KSFB maintained that, by the time it signed the Engagement Letter, it had been led to believe that Focus and Goldman Sachs were genuinely committed to a joint transaction. KSFB alleged that it reasonably relied on defendants’ conduct, including their purported assurances that Focus and Goldman Sachs were committed to the Joint NKSFB Sale, and signed the Engagement Letter.

On February 2, 2023, KSFB discovered that, unbeknownst to KSFB, Focus had entered into an exclusivity agreement with CD&R to negotiate the terms of a definitive agreement for CD&R to acquire Focus at $53 per share. KSFB further averred that such a deal would necessarily have involved NKSFB.

Several weeks later, on February 27, 2023, Focus revealed in a press release that it had reached a definitive agreement for CD&R to acquire Focus in an all-cash transaction with an enterprise value of $7 billion. It is through this press release that KSFB contended it learned that Goldman Sachs was acting as Focus’s financial advisor for the transaction while simultaneously searching for a prospective buyer for the NKSFB Business. KSFB alleged that the CD&R transaction necessarily relied on KSFB’s confidential information so as to sell Focus on the most favorable terms possible, and it also directly conflicted with the joint sale of the NKSFB Business by including one of the assets that were contemplated in that potential transaction.

KSFB maintained that, by stringing it along for months until the CD&R acquisition closed, Focus and Goldman enriched themselves at KSFB’s expense. KSFB further explained that Focus and KSFB had substantially similar business profiles, and thus defendants’ conduct spoiled the market for a transaction involving the NKSFB Business or KSFB.

KSFB commenced the action on February 8, 2024, asserting claims for (i) breach of the NDA against Focus and Goldman Sachs (Count I); (ii) breach of the covenant of good faith and fair dealing against Focus and Goldman Sachs (Count IV); (iii) fraudulent concealment, misrepresentation, and inducement against all defendants, as well as declaratory judgment regarding the enforceability of the allegedly fraudulently induced Engagement Letter (Counts VI, VII, & IX — the Fraud-Based Claims); (iv) breach of fiduciary duty against Goldman Sachs and aiding and abetting breach of fiduciary duty against Focus and certain individuals (Counts II & III); (v) tortious interference with prospective economic advantage (Count V); and (vi) unjust enrichment (Count VIII). Defendants moved to dismiss each of the foregoing claims. We examine the motion court’s decision concerning the Fraud-Based Claims.

Defendants sought dismissal of the Fraud-Based Claims because the claims were “contradicted by express disclaimers in the Engagement Letter”[3] and otherwise failed to allege justifiable reliance or intent to deceive.[4] For numerous reasons, the motion court dismissed the Fraud-Based Claims.

First, the motion court held that “KSFB ha[d] not plausibly alleged justifiable reliance on defendants’ purportedly false representations and omissions because any such reliance [was] belied by the specific disclaimers regarding conflicts and exclusivity set forth in the Engagement Letter.”[5] The motion court explained that “as part of the Engagement Letter, KSFB expressly agreed that ‘potential conflicts of interest, or a perception thereof, may arise as a result of [Goldman Sachs] rendering services to’ Focus and KSFB, and that the interests of Focus and KSFB ‘may not always be aligned.’”[6] The motion court further explained that “the Engagement Letter … clarified …[that] Goldman Sachs’s financial advisory services were intended to cover a ‘possible sale of all or a portion of’ the NKSFB Business ‘and/or’ KSFB.”[7] The motion court held that “[t]hese [were] not, as KSFB suggest[ed], mere boilerplate disclaimers.”[8] “To the contrary,” said the motion court, “construed in the context of the entire Engagement Letter, these representations contemplated the exact conflict at the center of KSFB’s claims, i.e., a situation wherein Goldman Sachs, in the course of advising … Focus in the Joint NKSFB Sale, could advise on other potential options favorable to Focus, but not necessarily KSFB, regarding a contemplated sale of ‘all or a portion of’ the NKSFB Business.”[9] “Consequently,” concluded the motion court, “the Engagement Letter’s specific and unambiguous conflict-of-interest disclaimer necessarily defeat[ed] KSFB’s fraud claims premised on the No Conflicts Representation.”[10]

The motion Court also held that KSFB’s Fraud-Based Claims premised on the Exclusive Engagement Representation were “similarly precluded by [the] plain terms of the Engagement Letter.”[11] “[L]ike the No Conflicts Representation,” said the motion court, “this situation was also expressly contemplated by the parties in the Engagement Letter.”[12] “Indeed,” explained the motion court, “KSFB specifically acknowledged in the Engagement Letter that Goldman Sachs ‘may currently be providing and may in the future provide financial advisory and/or other investment banking services that could impact the transaction contemplated by this letter.’”[13] “Again,” explained the motion court, “this [was] not a boilerplate disclaimer that [was] untethered to the claims at issue in this litigation. Rather, this disclaimer [was] clear and specific, and it plainly contemplate[d] the situation about which KSFB now complain[ed].”[14] Therefore, concluded the motion court, KSFB could not “plausibly allege that it was led to believe that the Joint NKSFB Sale was the only and exclusive transaction being contemplated by Goldman Sachs and Focus when it signed the Engagement Letter and agreed to continue pursuing the Joint NKSFB Sale.”[15]

Second, even if the Engagement Letter did not bar KSFB’s Fraud-Based Claims, the motion court held that the “they would still be dismissed insofar as they [were] based on a concealment or omission theory.”[16] For claims based on fraudulent concealment or omissions, a complaint must also allege a duty to disclose.[17] This requires a showing of a fiduciary relationship or some other circumstances establishing an affirmative duty to disclose material facts.[18] Generally, there is no duty to disclose in a transaction that is “at arm’s length, between sophisticated commercial parties ….”[19]  

The motion court found that the complaint “paint[ed] a picture of a quintessential arm’s length transaction involving sophisticated parties with an extensive history and business relationship exploring the possibility of a joint sale of the NKSFB Business.”[20] “There is nothing alleged that supports a conclusion, or even reasonable inference, that Goldman Sachs, Focus, or either’s principals, had a fiduciary relationship with KSFB or that there was some other affirmative duty to disclose material facts to KSFB as part of the Joint NKSFB Sale” said the motion court.[21]

The motion court rejected KSFB’s suggestion that defendants had superior knowledge of their participation in a competing transaction and, thus, were obligated to disclose that information to it.[22] A duty to disclose exists where a party has superior knowledge of certain information.[23] But, “superior knowledge of … alleged wrongdoing … and … admitted wrongdoing is not the type of unique or specialized expertise that would” give rise to a duty to disclose information.[24] To establish a special relationship mandating disclosure of information acquired through superior knowledge, a plaintiff must allege that the defendant is a “person[] who possess[es] unique or specialized expertise, or who [is] in a special position of confidence and trust.”[25] The motion court found that there was “no such ‘special relationship’ alleged in or even reasonably inferred from the Complaint.”[26]

Finally, the motion court held that “to the extent KSFB claims that it was induced to enter into the Engagement Letter because defendants purportedly withheld their use of confidential information under the NDA, this aspect of KSFB’s claim [was] duplicative of its breach of contract claim.”[27]

__________________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.


[1] Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996); see also Genger v. Genger, 152 A.D.3d 444, 445 (1st Dept. 2017).

[2] Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419 (1st Dept. 2011).

[3] Slip Op. at *5-*6.

[4] Id. at *6.

[5] Id. (citing Suber v. Churchill Owners Corp., 228 A.D.3d 414, 415 (1st Dept. 2024)).

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id. at *6-*7 (quoting Fifth Partners LLC v. Foley, 227 A.D.3d 543, 543-544 (1st Dept. 2024)). The No Conflicts Representation refers to defendants’ alleged misrepresentations that “there was ‘no conflict’” in having Goldman Sachs serve as KSFB’s and Focus’s investment advisor. Id. at *5.

[11] Id. at *7. The Exclusive Engagement Representation refers to defendants creating a false impression that Focus and Goldman Sachs were exclusively engaged in the process of soliciting bidders for the Joint NKSFB Sale. Id. at *5.

[12] Id.

[13] Id.

[14] Id.

[15] Id. at *7-*8 (citing First Inter-County Bank of N.Y. v. DeFilippis, 160 A.D.2d 288, 290 (1st Dept. 1990)).

[16] Id. at *8.

[17] Kaufman v. Cohen, 307 A.D.2d 113, 119-120 (1st Dept. 2003).

[18] See SNS Bank v. Citibank, 7 A.D.3d 352, 356 (1st Dept. 2004).

[19] See Cobalt Partners, L.P. v. GSC Capital Corp., 97 A.D.3d 35, 42-43 (1st Dept. 2012).

[20] Slip Op. at *8.

[21] Id.

[22] Id.

[23] See Banque Arabe et Internationale D’Investissement v. Maryland Natl. Bank, 57 F.3d 146, 155 (2d Cir. 1995).

[24] RKA Film Fin., LLC v. Kavanaugh, 171 A.D.3d 678, 680 (1st Dept. 2019) (alterations in original).

[25] Kimmell v. Schaefer, 89 N.Y.2d 257, 263 (1996).

[26] Slip Op. at *8.

[27] Id. at *9. (citing 110 E. 138 Realty LLC v. Rydan Realty, Inc., 210 A.D.3d 513, 514 (1st Dept. 2022)).

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