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Illinois Appellate Court Reaffirms Rulings That Nonreliance Clauses Bar Fraud Claims

Last month, in Greer v. Advanced Equities, Inc., 2012 WL 335869 (Jan. 31, 2012), the First District of the Appellate Court of Illinois squarely held that “a purchaser of securities [who] contractually agrees through a non-reliance clause that it is not relying on any oral representation made in connection with its purchase of the securities” is “barred as a matter of law from thereafter pleading in an action alleging common law fraud that it relied on oral statements when purchasing the securities.” In so holding, the Court clarified existing law and made clear that in Illinois, as in many other jurisdictions, written nonreliance clauses are enforceable against fraud claims based on oral representations.

In Greer, the plaintiffs had received a private placement memorandum (PPM) prior to purchasing the shares at issue and then signed a subscription agreement in order to consummate the stock purchase. The subscription agreement contained a nonreliance clause wherein the plaintiffs represented that they had received a copy of the PPM and that, in “evaluating the suitability of an investment” in the company at issue, plaintiffs had “relied solely upon the [PPM], documents and materials submitted therewith, and independent investigations made by [plaintiffs] in making the decision to purchase the Shares subscribed for herein, and acknowledge[d] that no representations or agreements (oral or written), other than those set forth in the [PPM], have been made to the [plaintiffs] with respect thereto.” Despite signing the subscription agreement, the plaintiffs alleged common law fraud based on alleged oral misrepresentations about the company in which they invested.

The legal question before the court was whether the plaintiffs could “claim to have justifiably relied on an oral representation while simultaneously disclaiming such reliance in the nonreliance clause of the written subscription agreement?” The Court answered that question in the negative, reaffirming and clarifying the holdings in three prior decisions regarding nonreliance clauses: Adler v. William Blair & Co., 271 Ill. App. 3d 117 (1995); Tirapelli v. Advanced Equities, Inc., 351 Ill. App. 3d 450 (2004); and Benson v. Stafford, 407 Ill. App. 3d 902 (2010). Specifically, the court held that:

[b]ased on Benson, Tirapelli, and Adler, the law on this point seems quite clear: if a purchaser signs an agreement containing a nonreliance clause that disclaims reliance on any oral representations by the seller, then the purchaser cannot thereafter maintain a cause of action for common-law fraudulent oral misrepresentation. This is a logical rule, given that it is hardly justifiable for someone to rely on something that they have agreed not to rely on, and without justifiable reliance there can be no fraud.

In so holding, the Court rejected the plaintiffs’ contention that the above rule — which the court referred to as the “Adler rule” — “only bars claims that are based on oral misrepresentations that contradict written representations such as those contained in the PPM.”

[O]ur decision in Adler did not depend on any contradiction between oral and written representations. Rather, the holding in Adler was grounded in the irreconcilable contradiction between the existence of the nonreliance clause, which disclaimed reliance on any information not contained in the PPM, and the plaintiffs’ claims that they had, in fact, relied on information outside of the PPM.

Thus, “the Adler rule applies even where there is no contradiction between oral and written representations.” The Court likewise rejected the plaintiffs’ contention that federal law should influence the interpretation or application of the Adler rule since it is “clear that Illinois state law as expressed in the Adler rule is distinct from federal treatment of the same issue.”

The Court did recognize, however, that there could be “circumstances in which a nonreliance clause might not be dispositive, for example if the clause merely disclaimed reliance on written representations but was silent as to oral representations.” As a result, a nonreliance clause might not be dispositive if the clause did not cover the representations allegedly forming the basis for the a common law fraud claim.

Drafters of subscription documents should be vigilant and include oral representations in nonreliance clauses to avoid this potential gap in coverage.

©2020 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume II, Number 72


About this Author

Michael Cedillos, Greenberg Traurig Law Firm, Chicago, Business and Banking Litigation Attorney

Michael R. Cedillos focuses her practice on commercial litigation, business disputes, banking litigation involving negotiable instruments under the Uniform Commercial Code and consumer credit cards, loan participations, and bankruptcy litigation. In addition, she represents brokerage firms and their management in various customer-initiated FINRA arbitration proceedings. As part of her national practice in state and federal courts, Michael also represents developers, lenders, and retailers in real estate and real estate financing litigation.


Steven Malina, Greenberg Traurig Law Firm, Chicago, Corporate and Finance Litigation Attorney

Steven M. Malina, formerly an enforcement attorney with the SEC, focuses his practice on a variety of litigation and regulatory matters with significant representations of financial services industry clients, as well as hedge fund matters and general commercial litigation. He has represented officers, directors, broker-dealers, investment advisors, commercial banks, investment banks, investment management firms, and public issuers in investigations and disciplinary proceedings initiated by the SEC, CFTC, FINRA, FDIC, NYSE, CBOE, CME, and state regulators. In addition, Steve represents clients in related investor class-action, derivative, and other litigation and arbitration. He has also conducted internal investigations on behalf of publicly traded companies and represented committees and executive officers in internal investigations. Steve has represented brokerage firms and their management in customer-initiated cases, and injunction and arbitration proceedings.

Prior to entering private practice, Steve served as First Vice President and Deputy Regional Counsel for a large financial corporation, and was a Senior Attorney in the Branch of Enforcement of the U.S. Securities and Exchange Commission.