United States: "Big Boy" Provisions: New York Courts Uphold Validity Of Releases From Fiduciary Duties

Two recent court decisions have demonstrated that New York courts continue to dismiss complaints alleging fraud in connection with transactions between sophisticated parties where the parties previously agree to specific disclaimer and release provisions waiving their rights to bring claims based on misrepresentations or omissions by the other party in the course of negotiating the transaction. These disclaimer and release provisions are commonly known as "Big Boy" provisions because each party is acknowledging that it has made its own independent assessment of the risks involved in the transaction. However, often times these independent assessments fail to adequately protect a party from the deceitful actions of the other, and the "big boy" is left without recourse against the other party.

In November 2012, New York's highest court reversed an appellate court ruling allowing two real estate investors to sue their former partner for damages after he bought them out of their LLC interests in a company, whose sole asset was a lease, for $1.5 million only to sell the lease six months later to a third party for $17.5 million. Defendant offered to buy the plaintiffs out for $1 million and $500,000 for their shares, respectively, even though they had originally contributed only $50,000 and $20,000 into the holding company. In accepting the defendant's offer, plaintiffs represented that, as sellers, they had "performed [their] own due diligence in connection with [the] assignments. . . . engaged [their] own legal counsel, and [were] not relying on any representation by [defendant], or any of his agents or representatives, except as set forth in the assignments & other documents delivered to the undersigned Sellers today," and that "[defendant] has no fiduciary duty to the undersigned Sellers in connection with [the] assignments."

Six months after buying the plaintiffs' interests, the holding company, then solely owned by defendant, sold the lease to an affiliate of Extell Development Co. for $17.5 million. Plaintiffs then sued, alleging, among other things, breach of fiduciary duty, conversion, unjust enrichment, fraud and misrepresentation. In dismissing the plaintiffs' causes of action, the Court of Appeals stated that plaintiffs were "sophisticated businessmen represented by counsel" who should have known better than to sign away their shares in the company for a price that was substantially higher than their initial investment without investigating to see if defendant had another deal in the works. The Court stated that "[T]he need to use care to reach an independent assessment of the value of the lease should have been obvious to plaintiffs, given that [defendant] offered to buy their interests for 20 times what they had paid for them just a year earlier." Therefore, the Court concluded that by signing the "Big Boy" provision, the plaintiffs' claims that the defendant had breached his fiduciary duty to his former partners and unjustly enriched himself through fraud and misrepresentation were without merit.

Last month, the New York Supreme Court, New York County, reached a similar conclusion in dismissing a suit by a real estate developer who alleged that two co-developers induced him to cash out his investment in a hotel based on an appraisal that allegedly undervalued the property. In 2008, plaintiffs, companies and trusts affiliated with developer Marc Berson, sued Ziel Feldman and Kevin Maloney, alleging that they sold a hotel on the Upper West Side of Manhattan for $201 million after purchasing Berson's stake in the hotel by valuing the hotel at $125 million. Therefore, plaintiffs claimed that Feldman and Maloney breached their fiduciary duty to plaintiffs as co-owners and fraudulently undervalued the hotel to take control of Berson's interest.

Defendants moved for summary judgment dismissing the complaint based on a redemption agreement Benson signed when selling his stake that included a release and waiver of defendants arising from any claims relating to the hotel "whether known or unknown . . . from the beginning of the world to the closing date." In upholding the language of the release provision, the court concluded that the plaintiffs had waived their right to bring claims relating to the redemption agreement even though Berson was not aware of the alleged fraud before signing the agreement. The court added that the plaintiffs were sophisticated parties who were represented by sophisticated counsel, and therefore they could not "invalidate the release they signed by claiming ignorance of its meaning," as there were "no allegations to support the notion that plaintiffs were without the means to investigate the accuracy of the valuation."

These cases underscore the importance of independent due diligence and valuations when selling your interests to an insider, as well as the importance of a carefully worded release — courts have made clear that these releases mean what they say, and will treat you like the big boy you purport to be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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