By Evan Flaschen

“Big boy” disclaimers are a staple of the debt syndication and trading marketplaces. While their enforceability vis-à-vis an SEC fraud investigation has always been suspect (due to public policy considerations), they are generally viewed as creating an enforceable contract between the syndicator/seller and the buyer themselves. The theory is that a sophisticated buyer — a “big boy” — understands the risks that it is taking when it acknowledges that the seller may be in possession of material non-public information (MNPI) that it is not disclosing to the buyer.The recent case of Harbinger Capital Partners Master Fund I, Ltd. v. Wachovia Capital Markets LLC, 27 Misc.3d 1236(A) (N.Y. Sup. May 10, 2010), involved extensive “big boy” disclaimers in a credit agreement with Le Nature’s that was syndicated by defendant and agented by defendant’s affiliate. Plaintiff purchased loan interests under the CA either directly from defendant or in the secondary market. Plaintiff subsequently alleged that defendant was not only in possession of MNPI but specifically knew that Le Nature’s was engaged in fraudulent activity that defendant actively helped to conceal.

The court agreed with the defendant’s assertion that “big boy” disclaimers are generally enforced as a matter of contract between sophisticated parties. In this case, the disclaimer language included the following:

Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative [Agent] or any other Lender, and based on such documents and information as it had deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Credit Parties and made its own decision to make its Loans hereunder and enter into this Credit Agreement.

The court agreed that this language was both specific and broad and would normally be enforced, but the court drew the line at situations where defendant “actively prevented any possibility that the lenders could have discovered [borrower’s] true financial condition” by participating in conduct that would conceal the fraud.

It is very important to note the procedural context — the court was only denying Defendant’s motion to dismiss. This means that the court was accepting plaintiff’s allegations as true for the purposes of the motion; it does not mean that the court found that defendant actually engaged in the alleged fraudulent conduct. In the words of the court, “it is not apparent at this early stage of the litigation that the true nature of the situation would have been revealed even upon inspection.”

The point, however, is very important. “Big boy” disclaimers, whether in a credit agreement or a trading confirm, are usually enforceable as a contract matter between sophisticated parties, but like any other contract, actual fraud can vitiate the agreement. In the court’s words (quoting in part from another NY decision), “[Under] the �special facts’ doctrine � a duty to disclose arises �where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.’”

In other words, Big Boys can get bigger, but Goliaths can still be knocked down.
Evan Flaschen ( is the chair of the Financial Restructuring Group at Bracewell & Giuliani LLP, in the firm’s Hartford, CT office. Reprinted with permission from