A couple who claimed an investment firm fraudulently induced them into settling litigation over an unsuccessful investment deal could subsequently sue the company for deceit and breach of fiduciary duty, even though they were represented by counsel at the time of the settlement, the Massachusetts Appeals Court has found.

The plaintiffs claimed the investment firm — which continued to hold all their assets — misrepresented the value of commercial property that was material to the settlement.

The defendant firm argued that it had no fiduciary obligation at the time of the settlement because the couple had their own lawyer. Additionally, the defendant contended, exculpatory provisions in the settlement barred the couple’s claims.

But the Appeals Court disagreed.

The court’s 2000 decision in Sound Techniques, Inc. v. Hoffman “reaffirmed the rule that intentional misconduct in the formation of a contract justifies judicial intrusion in order to prevent the fraudulent actor from securing contractual benefits procured by deceit,” Judge Janis M. Berry wrote.

Additionally, Berry said on behalf of the court, the plaintiffs showed that the defendant, despite the adversarial roles in the original litigation, had not fairly informed them that it disavowed any and all fiduciary obligations to them as limited partners.

The 18-page decision is Greenleaf Arms Realty Trust I, LLC, et al. v. New Boston Fund, Inc., et al.

Obligation of truth

Plaintiffs’ counsel Michael C. McLaughlin of Boston said the decision serves as a reminder that a fiduciary must truthfully represent the value of a potential investment, even if the principal has a lawyer.

“That’s especially true in this case, where the defendant was holding 100 percent of the plaintiffs’ retirement money,” McLaughlin said.

That means that even a sophisticated investor is under no obligation to perform due diligence of his own in such a scenario, he continued.

The defendant argued otherwise, McLaughlin said. “But the Appeals Court said, ‘Wait a minute. You’re a fiduciary here. If you get people to invest and do it with deceit, then any [exculpatory provisions] are not enforceable as a matter of public policy.’”

Mark A. Berthiaume of Greenberg Traurig in Boston, who represented the defendant investment firm, said the decision, should it stand, would “prove an obstacle” for parties trying to avoid litigation “by rendering it virtually impossible” for sophisticated business litigants, represented by counsel, to settle without fear that one of the parties could later challenge the settlement.

Stressing that the Appeals Court did not speak to the merits of what he called “wholly unfounded claims,” Berthiaume said his client is considering its next step.

Donald R. Pinto Jr., a business litigator at Rackemann, Sawyer & Brewster in Boston, said the ruling “shows the ongoing vitality and power of the fraud exception to the enforceability of merger clauses and similar exculpatory contract clauses.”

All those contractual protections “withered in the face of a few well-pleaded allegations of fraud,” said Pinto, who was not involved in the case.

Stanley V. Ragalevsky, who handles corporate transactions at K&L Gates in Boston, said the case sends an important message that those in a position of authority over the assets of others have to be acutely aware of the fiduciary aspects of anything they do.

“You won’t be able to rely strictly on the fact that there are two parties to the contract and both were of sound mind and have capacity to contract,” said Ragalevsky, who also was not involved in the case.

Two bad deals

In 2003, defendant New Boston Fund, Inc., an investment management firm, allegedly convinced plaintiffs Joseph and Faye Baglione to sell property in Quincy for $2.7 million and invest approximately half of it in real-estate funds set up by the defendant as a tax-free, like-kind exchange.

The property was the plaintiffs’ sole source of income.

The plan went awry, however, and the plaintiffs incurred more than $300,000 in tax liabilities and fees when the firm liquidated an asset in the portfolio. The plaintiffs sued.

After months of negotiation, the parties, who were represented by counsel, entered a settlement agreement under which the plaintiffs would receive a tenancy-in-common in two commercial properties owned by the defendant. Those property interests were intended to achieve the benefits not realized by the original investment.

The settlement agreement also had provisions under which the plaintiffs assumed all risks related to the transaction while acknowledging that they had not relied on any representations made by the defendant and that the defendant made no promises regarding the performance or value of properties.

At the time of the agreement, one of the new properties, in Westborough, was perilously close to default on its mortgage. The property value further dropped when its sole tenant declined to renew its lease. It was allegedly worthless approximately a year after the settlement.

The plaintiffs, who claim they were kept in the dark as to those events, lost their entire principal investment in the Westborough property. They said the defendant had led them to believe at the time of the settlement that the Westborough property was worth $15 million.

In 2009, the plaintiffs sued in Superior Court, alleging that the defendant had engaged in deceit to induce them into entering the settlement agreement. Additionally, the plaintiffs alleged, the defendant had breached fiduciary duties owed to them as limited partners by failing to make an honest disclosure of facts surrounding the transaction.

Judge Margaret R. Hinkle dismissed the complaint, ruling that the disclaimers in the settlement agreement barred the plaintiffs’ claims. The plaintiffs appealed.

Inapplicable provisions

The Appeals Court found that the exculpatory provisions did not bar the plaintiffs’ claims.

“‘In obedience to the demands of a larger public policy, the law long ago abandoned the position that a contract must be held sacred regardless of the fraud of one of the parties in procuring it,’” said Berry, quoting the Supreme Judicial Court’s 1941 ruling in Bates v. Southgate. “‘The same public policy that in general sanctions the avoidance of a promise obtained by deceit strikes down all attempts to circumvent that policy by means of contractual devices.’”

To refuse relief in a case like Greenleaf would open the door to “‘a multitude of frauds and in thwarting the general policy of the law,’” the judge continued, again quoting Bates.

The court also rejected the defendant’s argument that its representation of the value of the Westborough property was merely an opinion, not an actionable misrepresentation of fact.

“It suffices to say that New Boston’s representation that the Westborough property had a fair market value in excess of $15 million as of May, 2007, constituted an otherwise unguarded statement fairly suggesting that New Boston had knowledge of such information as to belief the statement to be a true fact,” Berry stated. “As such, it forms the basis of an actionable deceit claim, at this preliminary stage of the case.”

Finally, the court found that the plaintiffs sufficiently alleged that the defendant breached fiduciary duties to them.

Specifically, the Bagliones demonstrated that the defendant, despite the parties’ adversarial roles in the litigation at the time, had not fairly informed them that it had disavowed any and all fiduciary obligations to them as limited partners, Berry said.

“[T]he question whether the New Boston general partners owed fiduciary duties to their limited partners … in this unique context involving a settlement of pending litigation, is a mixed legal and fact-based question that must be addressed on a record in a much more advanced state than the one presently before us on appeal,” the judge wrote.

Parties to a fiduciary relationship can indeed agree to alter their fiduciary rights and obligations to a limited degree in a partnership agreement, bylaws, or other such charter or foundational instrument, the judge conceded.

But Greenleaf was not such a case, she said, adding that in documents that do not fit those categories, “the law will not abide” language in contracts that “eliminate or discard fiduciary obligations wholesale.”

Accordingly, the court reversed Hinkle’s dismissal of the plaintiffs’ claims and sent the case back to Superior Court for further proceedings.