October 19, 2018

Colorado Supreme Court: No Fraud Where Assignment Clause Made Clear that Buyers Could Assign Interests

The Colorado Supreme Court issued its opinion in Rocky Mountain Exploration, Inc. v. Davis, Graham & Stubbs, LLP on Monday, June 11, 2018.

Undisclosed Principals—Fraud—Breach of Fiduciary Duty—Restatement (Third) of Agency.

This case arose out of a sale of oil and gas assets by petitioners to a buyer who was acting as an agent for a third company. The third company was represented by respondents, but due to a prior, contentious business relationship between petitioners and the third company, neither the buyer, the third company, nor respondents disclosed to petitioners that the buyer was acting on behalf of the third company in the sale.

After the sale was complete, petitioners learned of the third company’s involvement and sued respondents, among others, for breach of fiduciary duty, fraud, and civil conspiracy. The district court ultimately granted summary judgment for respondents, and a division of the court of appeals affirmed.

The supreme court here decided whether (1) petitioners could avoid their sale agreement for fraud when the buyer and respondents purportedly created the false impression that the buyer was not acting on behalf of the third company; (2) an assignment clause in the transaction documents sufficiently notified petitioners that the buyer was acting on behalf of others, such that the third company would not be considered an undisclosed principal under the Restatement provision on which petitioners’ contract avoidance argument is exclusively premised; (3) petitioners stated a viable claim for fraud against respondents; and (4) prior agreements between petitioners and the third company negated any joint venture relationship or fiduciary obligations between them.

The court first concluded that the assignment clause in the pertinent transaction documents made clear that the buyer had partners in the transaction to whom it could assign a portion of its interests. As a result, the third company was not an undisclosed principal under the Restatement provision on which petitioners’ rely, and petitioners’ contract avoidance argument and the civil conspiracy claim that flows from it fail as a matter of law. The court further concluded that, even if the Restatement provision did apply, the record did not support a finding that either the buyer or respondents created a false impression that the buyer was not acting on behalf of an undisclosed principal. For this reason as well, petitioners’ civil conspiracy claim failed as a matter of law.

The court next concluded that, as a matter of law, petitioners did not demonstrate the requisite false representation or reasonable reliance to support a viable claim for fraud against respondents.

Finally, the court concluded that the controlling agreements between petitioners and the third company expressly disavowed any pre-existing joint ventures and fiduciary obligations between the parties, and therefore the district court properly granted summary judgment for respondents on petitioners’ claim for aiding and abetting a breach of fiduciary duty.

Accordingly, the court affirmed the court of appeals division’s judgment.

Summary provided courtesy of Colorado Lawyer.

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