Winding Back the Clock: Delaware Supreme Court Clarifies When Fraudulent Concealment Resets a Contractual Limitations Period
The Delaware Supreme Court recently clarified the circumstances when a fraudulent concealment claim will toll a contractual limitations period. In LGM Holdings, LLC v. Gideon Schurder, et al., the sellers of a pharmaceutical business moved to dismiss the buyers’ claims for breaches of the representations and warranties in the parties’ purchase agreement, arguing they were time-barred by a five-year survival period in the agreement’s indemnification provision. The buyers argued that this five-year period should be tolled under the fraudulent concealment doctrine, but the trial court disagreed, dismissing the claim after finding that fraudulent concealment did not toll the survival period because the buyers had learned of the potential claim within that five-year period. The Delaware Supreme Court reversed the dismissal, and in doing so, offered useful guidance for the pleadings requirements for a fraudulent concealment claim and when fraudulent concealment will apply to a contractual limitations period.
The buyers in LGM Holdings entered into their purchase agreement with the sellers in September 2017. The agreement included indemnification provisions relating to any breach of the representations and warranties in the agreement, including a representation by the seller that its business was in material compliance with all health care laws. The agreement also included a five-year survival period for indemnification claims, stating that after five years, the representations and warranties in the purchase agreement would terminate and have no further effect. The acquisition closed in November 2017.
The buyers of a pharmaceutical business allege that, less than a year after they acquired the business, a pair of government investigations commenced involving allegedly mislabeled product shipments by the acquired business. According to the buyers, as they learned more about the investigation, it became clear that the sellers had withheld emails from the government regulators prior to the sale, produced falsified documents, and otherwise concealed the mislabeling issue. After the buyers investigated these issues in January 2020, they concluded that the representations and warranties made by the sellers in the purchase agreement were false. The parties thereafter entered into a letter agreement relating to their understanding of their indemnification obligations under the purchase agreement, but did not otherwise modify the survival language in the agreement.
On September 1, 2023, the buyers filed a complaint in Delaware Superior Court for fraudulent inducement and indemnification. As to their indemnification claim, they argued that it was not time-barred because the sellers fraudulent concealment of their alleged breaches had tolled the five-year survival period agreed to in the purchase agreement. The buyers argued, however, that the five-year period should begin in 2020, when they learned of the alleged claims, and not in 2017, when the transaction closed.
The trial court granted dismissal of the claims. It rejected the argument that a contractual limitations period could be tolled by the fraudulent concealment doctrine. Relying on the Court of Chancery’s decision in Pilot Air Freight, LLC v. Manna Freight Systems, Inc., the trial court held that, because the buyers were indisputably on inquiry notice of the alleged breaches “well within the [five-year] limitations period,” it was not tolled.
The Delaware Supreme Court reversed the dismissal, holding that if a plaintiff “successfully proves fraudulent concealment in this context, then the survival period begins on the day the plaintiff was put on inquiry notice of the claim.” Although the sellers had questioned whether the fraudulent concealment doctrine could apply to a contractual limitations period, the Court made clear that “survival periods created by contract are not immune from tolling under the doctrine of fraudulent concealment.” The Court also found that Pilot Air did not apply to the facts presented in the case, as Pilot Air concerned an instance where the plaintiff had been inquiry notice of the claim at the time the parties agreed to the purchase agreement with the contractual limitations period. By contrast, the Court held that “[i]f the plaintiff successfully provides fraudulent concealment” that extends into the contractual survival period, “then the survival period begins on the day the plaintiff was put on inquiry notice of the claim.” The Court held that the buyers had made that showing and thus the survival period did not begin to run until 2020, making the 2023 lawsuit timely.
The Delaware Supreme Court’s ruling offers useful guidance to parties on two issues. First, it makes clear that, when pleading fraudulent concealment, a party must plead facts showing “an affirmative act of ‘actual artifice’ by the defendant that either prevented the plaintiff from gaining knowledge of material facts or led the plaintiff away from the truth.” Moreover, the party must demonstrate that, prior to the date it argued triggers the limitations period, it was not “objectively aware of the facts giving rise to the wrong.” Second, it clarifies that the fraudulent concealment doctrine is not limited to statutory limitation periods, but also applies to contractually-agreed limitation periods, even where the party learns of the potential claim within that period. The decision also serves as an important reminder for parties to carefully consider how they draft survival provisions and indemnification obligations, especially with respect to representations where potential breaches may not become evident until years after the transaction closes.
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