A recent Court of Chancery decision acknowledged the “muddled” status (before this decision) of Delaware case law on the anti-bootstrapping doctrine, which has been covered in several decisions highlighted on these pages. The opinion in Levy Family Investors, LLC v. Oars + Alps, LLC, C.A. No. 2021-0129-JRS, Memo. Op. (Del. Ch. Jan. 27, 2022), provides a multi-part test to help practitioners understand Delaware jurisprudence on this subject. The court explained that:
The anti-bootstrapping law does not prevent parties from bringing a fraud claim if: (1) the plaintiff alleges the seller knowingly made false contractual representations; (2) damages for plaintiff’s fraud claim may be different from plaintiff’s breach of contract claim; (3) the conduct occurs prior to the execution of the contract and thus with the goal of inducing the plaintiff’s signature and willingness to close on the transaction; or (4) the breach of contract claim is not well-plead such that there is no breach claim on which to “bootstrap” the fraud claim. Id. at 18-22.
The Court further instructed that:
“In my view, the anti-bootstrapping rule bars a fraud claim where the plaintiff merely ‘adds the term’ ‘fraudulently induced’ to a complaint or alleges that the defendant never intended to comply with the agreement at issue at the time the parties entered into it, but it does not prevent a fraud claim against defendants who knew [contractual representations] were false, and yet made them anyway. A rule that would limit a plaintiff’s recovery for so-called ‘contractual fraud’ solely on the ground that the same conduct also constitutes a breach of contract would offend Delaware public policy and the now-settled Delaware law regarding contractual fraud that is animated, in part, by those policy concerns.”
The Court also clarified that “a plaintiff can also plead a fraud claim that is not the product of improper bootstrapping by alleging facts that support an inference that the defendant knowingly made false representations in a contract on which the plaintiff justifiably relied, and then breached that contract by violating the representations that were falsely made. That scenario, if well-plead, supports at least two viable claims–fraud and breach of contract.” Id.