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Court Dismisses Fraudulent Inducement Claim in Merger Litigation

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  • Posted on: Nov 27 2019

Allegations of fraudulent inducement come in many contexts. Today, this Blog looks at a fraudulent inducement claim in the context of a merger. Kainz v. Bernstein, No. 19 Civ. 2499 (LLS) (S.D. N.Y. Nov. 13, 2019) (here).

As this Blog has noted, one of the more challenging elements of a fraudulent inducement cause of action for a plaintiff to satisfy is the justifiable reliance element. To satisfy this element, a plaintiff must demonstrate that he/she exercised the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality, of the subject of the representation being challenged. See Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997). If the plaintiff fails to “make use of those means,” he/she “will not be heard to complain that [she/he] was induced to enter into the transaction by misrepresentations.” Id. (citation and internal quotation marks omitted). However, when the truth of the representations at issue are “peculiarly within [the] defendant’s knowledge,” the plaintiff may rely on the representations “without prosecuting an investigation,” because he/she “would have ‘no independent means of ascertaining the truth.’” Ward v. TheLadders.com, Inc., 3 F. Supp. 3d 151, 166 (S.D.N.Y. 2014) (quoting Crigger v. Fahnestock & Co., 443 F.3d 230, 234 (2d Cir. 2006)).

The foregoing principles were at issue in Kainz. As discussed below, the Court found that Kainz could not have justifiably relied on any representation alleged to be false because the information that undergirded the representation was publicly available.

Kainz v. Bernstein


Plaintiff, Roman Kainz (“Kainz”), alleged violations of the federal securities laws, breach of contract, and fraud in the inducement in connection with the merger of XpresSpa Holdings, LLC and XpresSpa Group, Inc. (the “Merger”).

XpresSpa Holdings, LLC (“XpresSpa Holdings”) was an airport spa business in which Kainz held an equity interest of less than five percent.

On August 8, 2016, XpresSpa Holdings executed an agreement (the “Merger Agreement”) with defendant, XpresSpa Group, Inc. (“XpresSpa Group”). Under the Merger Agreement, unitholders representing 95 percent of XpresSpa Holdings units were required to join the Merger Agreement by signing a joinder agreement (the “Joinder Agreement”).

On December 23, 2016, the Merger closed. As a result, Kainz’s interest in XpresSpa Holdings was exchanged for XpresSpa Group shares.

Kainz alleged that defendants made numerous misrepresentations and omissions concerning the Merger that induced him to sign the Joinder Agreement and become a party to the Merger Agreement. In particular, Kainz alleged that defendant, Bruce T. Bernstein (“Bernstein”), falsely represented in an email on December 27, 2016, that “[w]ithout signing the Joinder Agreement, you will not be able to receive the new securities in Form that will be given in exchange for the Xspa shares.”

In reliance on defendants’ misrepresentation and omissions, including the December 27, 2016 email, Kainz executed the Joinder Agreement. Kainz claimed that he was purportedly damaged when XpresSpa Group’s stock price fell after the Merger when the truth about the company was revealed (i.e., that the XpresSpa Group was essentially a shell with no genuine, ongoing business or capital and subject to onerous loan covenants and a self-interested, conflicted board of directors).

Defendants moved to dismiss the complaint for failure to state a claim upon which relief could be granted.  The Court granted the motion.

The Court’s Decision

The Court found that Kainz’s fraud claims were deficient for two reasons: he failed to plead loss causation and he failed to demonstrate justifiable reliance.

The Court observed that Kainz’s failure to specify the date on which he signed the Joinder Agreement was fatal to his claim that the December 27, 2016 email induced him to sign the agreement and become a party to the Merger Agreement. If Kainz “signed the Joinder Agreement before the merger closed [on December 23, 2016],” said the Court, “he could not have relied on Mr. Bernstein’s statement, which did not occur until four days later.” On the other hand, the Court explained, if “Kainz signed the Joinder Agreement after Mr. Bernstein’s [December 27, 2016] email and after the merger had already closed [on December 23, 2016], his interest in XpresSpa Holdings would by then have been exchanged for XpresSpa Group shares regardless of whether or not he signed it.” Thus, concluded the Court, “Bernstein’s statement could not have been the cause of the decreased value of Mr. Kainz’s XpresSpa Group shares.”

Moreover, noted the Court, Kainz could not demonstrate justifiable reliance. As noted, Kainz alleged that in the December 27, 2016 email, Bernstein misrepresented the fact that Kainz would not receive shares of XpresSpa Group in exchange for his equity interest in XpresSpa Holding unless he signed the Joinder Agreement. The Court explained that the truth of the representation was available to Kainz had he looked because it was “disclosed in both the Merger Agreement and XpresSpa Group’s Form S-4 that was publicly filed with the SEC.” “Thus,” concluded the Court,” “Kainz had the independent means to know that he did not need to sign the Joinder Agreement, and reliance on Mr. Bernstein’s statement was unreasonable.”


Kainz reinforces the principle that a party claiming to be the victim of fraud has an obligation to learn the truth about the statements and representations upon which he/she relied. Courts show little patience for parties that have the means to conduct such an investigation and fail to do so. This is especially so for sophisticated parties. And, as shown in Kainz, courts will not find justifiable reliance on alleged false statements when the truth can be learned through publicly available information.

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