Notch signaling is a conserved pathway that converts extracellular receptor-ligand interactions into changes in gene expression via a single transcription factor (CBF1/RBPJ in mammals; Su(H) in Drosophila). In humans, RBPJ variants have been linked to Adams-Oliver syndrome (AOS), a rare autosomal dominant disorder characterized by scalp, cranium, and limb defects. Here, we found that a previously described Drosophila Su(H) allele encodes a missense mutation that alters an analogous residue found in an AOS-associated RBPJ variant. Importantly, genetic studies support a model that heterozygous Drosophila with the AOS-like Su(H) allele behave in an opposing manner to heterozygous flies with a Su(H) null allele, due to a dominant activity of sequestering either the Notch co-activator or the antagonistic Hairless co-repressor. Consistent with this model, AOS-like Su(H) and Rbpj variants have decreased DNA binding activity compared to wild type proteins, but these variants do not significantly alter protein binding to the Notch co-activator or the fly and mammalian co-repressors, respectively. Taken together, these data suggest a cofactor sequestration mechanism underlies AOS phenotypes associated with RBPJ variants, whereby the AOS-associated RBPJ allele encodes a protein with compromised DNA binding activity that retains cofactor binding, resulting in Notch target gene dysregulation.