Court Casts Doubts on Value of Information Disclaimers in Lease Syndications

The efficacy of these and similar disclaimers of representations and warranties by the seller as to the lessee's financial condition (also referred to as “information disclaimers”) are often called into question, however, whenever a lessee defaults amid allegations that false or misleading financial information was provided (or that adverse financial information was withheld) by or on behalf of the lessee, especially when the buyer of the lease can readily show it relied on this tainted financial data. Although such information disclaimers are often upheld in the courts in the syndication of leases and loans (whether the syndication is in the form of a participation agreement or an outright sale and assignment of a lease), successful attacks can and have been mounted on these disclaimers (at least on the summary judgment level) under the rubric of “fraud in the inducement.”

The case of Northwest Bank & Trust Company v. First Illinois National Bank, 221 F.Supp. 2d 1000 (S.D. Iowa 2002), rev'd, 354 F.3d 721 (8th Cir. 2003), involved a claim of fraud in the inducement for an obligor's tainted financial information, in connection with a loan participation agreement in which the buyer “clearly and unambiguously” had expressed that it was not relying on any information from the seller, and that the seller had made no warranty with regard to any information provided. In that case, the U.S. District Court initially held that “where two sophisticated lenders enter into a contract where one party specifically disclaims reliance upon a representation in a contract, that party cannot, in a subsequent action for fraud, assert it was fraudulently induced to enter into the contract by the very representation it has disclaimed.” Northwest Bank, 221 F. Supp. 2d at 1007-08 (emphasis added). However, on appeal, the Eighth Circuit Court of Appeals reversed the District Court's ruling, stating: “We find no language in [the case law] to support the district court's conclusion that the applicability of this rule [ie, fraud in the inducement] turns upon the sophistication of the contracting parties. Instead, the rule is premised on the principle that the fraudulent inducement precedes the formation of the contract, and that to give preclusive effect to language contained therein would allow a party to bind the defrauded party to the contract through the use of a boilerplate disclaimer.” Northwest Bank, 354 F.3d at 726 (emphasis added).