BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, August 28, 1998.)
A federal court has dismissed the claim of an investor in the theatrical production “Busker Alley” (the “Play”) who alleged that he was defrauded by the producer into making his investment.1 The decision indicates the reluctance of New York courts to entertain claims of justifiable reliance when a sophisticated businessperson has access to, but fails to take advantage of, critical information relating to a transaction.
In 1994, David Belin met Barry Weissler, who attempted to interest him in investing in the Play, which was designed as a star vehicle for the well-known Broadway star Tommy Tune. After Weissler had sent Belin certain promotional materials and financial projections, Belin asked Weissler what insurance coverage had been secured in the event that Tommy Tune was unable to perform.
Weissler responded that there was approximately $5.8 million of such coverage.
In a subsequent conversation, Weissler, in an effort to encourage Belin to invest, provided information concerning the last eight shows he and his wife Fran Weissler had produced and the profits earned by investors. When Belin spoke with Weissler a further time, Weissler again called Belin’s attention to the performance of his previous productions. During the course of that conversation, and relying upon the representations Weissler had made, including the representation as to insurance coverage, Belin informed Weissler that he had reached a preliminary decision to invest $100,000 in the Play.
In early March 1995, and in response to Belin’s continuing concerns regarding his investment, Weissler again represented to Belin that there was $5.8 million of insurance on Tommy Tune. When asked by Belin how long Tommy Tune was committed to star in the show, Weissler answered that the performer had signed an eighteen month agreement. Based on Weissler’s assurance that there was an insurance policy of $5.8 million in effect in the event of Tommy Tune’s inability to perform and the commitment of Tommy Tune to star in the show, Belin invested $100,000 as a limited partner in the limited partnership relating to the production.
On or about October 1, 1995, Tommy Tune suffered a serious injury which resulted in his inability to perform. The production was then closed and substantial losses were sustained by the limited partnership.
Thereafter, Belin learned that only $3.5 million of insurance had been secured and that the insurers had denied liability.2
He brought suit, claiming that he was induced to invest $100,000 in the limited partnership by the false statements made by Weissler regarding the fact that an insurance policy in the amount of $5.8 million had been issued. Weissler moved for dismissal of the complaint on the grounds that it failed to state a claim upon which relief can be granted.
In considering a motion to dismiss, the facts alleged in the complaint are presumed to be true, and all factual inferences must be drawn in favor of the plaintiff. The facts as stated above are taken from Belin’s complaint and do not constitute findings of fact by the Court. They are presumed to be true only for the purposes of deciding the present motion.
The elements necessary to sustain a claim of fraud under New York law are (1) misrepresentation of a material fact; (2) falsity of the misrepresentation; (3) intent to defraud; (4) reasonable reliance on that representation; and, (5) damage caused by such reliance.
The first issue discussed by the Court is whether the investment documents executed by Belin at the time of his investment in the limited partnership, which Weissler submitted in support of his motion, may be considered by the Court. Those documents include a Subscription Representation Agreement (the “Subscription Agreement”), the Busker on the Roof Limited Partnership Agreement dated August 18, 1994 (the “Partnership Agreement”), and an Investor Suitability Questionnaire (the “Suitability Questionnaire”). The decision indicates that if courts lack authority to consider documents integral to a complaint, a plaintiff with a legally deficient claim could survive a motion to dismiss simply by failing to attach a dispositive document upon which it relied. Consideration of integral documents is particularly appropriate where, as here, plaintiff undisputedly had notice of them when he filed his action.
The next issue addressed by the Court is whether Belin has adequately pleaded reasonable reliance. In this connection, under New York law, he must establish actual, direct reliance upon the oral representations made by Weissler regarding the insurance on Tommy Tune. The decision states that “a close study of Belin’s complaint indicates that Weissler’s oral representations may not have been the catalyst for Belin’s investment.”
After examining the content of the conversations between Weissler and Belin, the Court concludes that the complaint casts doubt as to whether it was the insurance representation or the track record of profit made by investors in Weissler’s previous productions that caused Belin to invest.
Even if Belin’s allegations of actual, direct reliance are adequately pleaded, the inquiry does not stop there; for, under New York law, the asserted reliance must be found to be justifiable under all of the circumstances before a complaint can be found to state a cause of action in fraud.
The Court cites Lazard Frere & Co. v The Protective Life Insurance Co.,3 which imposes a duty on sophisticated investors to obtain documentation of information material to their investment decisions. As stated therein, “[S]uccinctly put, a party will not be heard to complain that he has been defrauded when it is his own evident lack of due care which is responsible for his predicament.”
Belin, by his own admission, is a sophisticated investor, having both J.D. and M.B.A. degrees and managing over $40 billion in assets as a trustee for Kemper Mutual Funds. He represented in the Suitability Questionnaire that he had “sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks associated with investing in the limited partnership.” If, as he contends, he only was investing in the limited partnership based on Weissler’s representations that Tommy Tune was insured for $5.8 million, he had an obligation to secure and review a copy of the insurance policy upon which his investment decision was allegedly premised.
By proceeding to make an investment without asking for a copy of the policy, Belin willingly assumed the business risk that the amount of insurance coverage was as represented by Weissler. The Court indicates that even if Belin did not have ready access to the relevant information, his reliance would not have been reasonable because, as a sophisticated investor, he should have confirmed that the insurance existed and not relied on Weissler’s oral representations.
When Belin invested in the limited partnership, he executed the Subscription Agreement, explicitly disclaiming reliance on oral representations. That document stated that he “has been provided an opportunity to obtain any additional information concerning the Offering, the Partnership and all other information to the extent the Partnership or the General Partner possesses such information or could acquire it without unreasonable effort or expense; … and has been given the opportunity to obtain such addition information necessary to verify the accuracy of the information contained in the Partnership Agreement or which has otherwise been provided in order for him to evaluate the merits and risks on an investment in the Partnership….”
Further, the Partnership Agreement signed by Belin specifically provided that it incorporates the entire agreement among the parties. As noted in Lazard Frere, “where a party specifically disclaims reliance upon a representation in a contract, it cannot later assert that it was fraudulently induced to enter into the contract by the very representation it has disclaimed reliance upon.”
The Court rejects Belin’s assertion that the disclaimer and merger clauses are ineffective to vitiate his fraud claim because they are general, rather than specific, and broad, general disclaimers do not negate the element of reliance. Belin completed a detailed Suitability Questionnaire and, more importantly, specifically disclaimed reliance on any oral representations and expressly represented that he had been given an opportunity, not only to obtain whatever additional information he required, but also to verify the accuracy of that information. He executed these disclaimers subsequent to the time Weissler orally represented to him the amount of the insurance coverage. Having explicitly represented that he had an opportunity to verify the accuracy of information provided to him, Belin cannot now be heard to complain that he relied on information that he declined to verify, although he could have determined the amount of insurance secured for Tommy Tune simply by asked for a copy of the policy. Because of the foregoing, Belin cannot as a matter of law establish that he reasonably relied on the oral misrepresentation by Weissler when he invested in the limited partnership and his claim is dismissed without leave to amend.
This decision reinforces the high standard of diligence placed on sophisticated investors when investing in the risky business of theatrical productions. If such investors fail to expend the effort and finances involved in reviewing essential documents which are not covered by representations made in the offering materials supplied by the producer, they are adding a layer of additional risk to their investment.
1 Belin, as Trustee v. Weissler, U.S. District Court for the Southern District of New York, 97 Civil 8787 (July 14, 1998).
2 A dispute between the limited partnership and the insurers is the subject of an action pending in New York Supreme Court entitled “Busker On The Roof Limited Partnership Co. v. Lloyds of London Underwriters, index number 603759/96.
3 108 F.3d 1531 (2d Cir.).