United States: General Releases: A Cautionary Tale

In recent months, the Appellate Division, First Department, released several decisions relating to general releases which, separately and together, instruct a cautionary tale.

But first: a summary of the "generic" law applying to general releases, as recently enunciated by the Court of Appeals:

In Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V., 17 N.Y.3d 269 (2011), the Court of Appeals stated that:

Generally, "a valid release constitutes a complete bar to an action on a claim which is the subject of the release"...If "the language of a release is clear and unambiguous, the signing of a release is a 'jural act' binding on the parties"...A release "should never be converted into a starting point for litigation except under circumstances and under rules which would render any other result a grave injustice"...A release may be invalidated, however, for any of the "the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake"[.]

The burden of proof:

Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release "shifts the burden of going forward to the [plaintiff] to show that there has been fraud, duress or some other fact which will be sufficient to void the release"...A plaintiff seeking to invalidate a release due to fraudulent inducement must "establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury[.]"

Admonishing that:

[A] release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is "fairly and knowingly made"...As the Appellate Division majority explained below...a party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release...Were this not the case, no party could ever settle a fraud claim with any finality.

And, as to the general release in Centro, the Court of Appeals held:

As a preliminary matter, the parties here debate whether the Members Release encompasses unknown fraud claims.   We find that it does.   The broad language of the release reaches, "all manner of actions...whatsoever...whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members and/or arising out of...the ownership of membership interests in [Telmex Wireless]." The phrase "all manner of actions," in conjunction with the reference to "future" and "contingent" actions indicates an intent to release defendants from fraud claims, like this one, unknown at the time of contract[.]"

Back to the recent decisions by the First Department:

Long v. O'Neill, 126 AD3d 404 (March 3, 2015), unanimously affirmed Supreme Court's Order granting defendants' motion to dismiss the complaint.

The Court summarized the facts:

Defendants Patrick O'Neill and Fred Knoll were the sole members of KOM Capital Management LLC (KOM). Around December 2005, defendants became directors of a Cayman Islands investment fund, CMIA China Fund II Ltd. (the Fund). Defendants were responsible for preparing the Fund's operating documents, including the provisions containing the circumstances for discharging the manager that the Fund would appoint. At about the same time, the Fund appointed CMIA Capital Partners, PTE (CMIA Capital) as its investment manager and KOM as its investment subadvisor. As subadvisor, KOM was entitled to certain fees based on the Fund's profitability. Plaintiff is the principal of a financial planning firm; in exchange for procuring investors for the Fund, that firm was entitled to a portion of the performance fees that the Fund paid to KOM.

In July 2007, plaintiff became a director of the Fund, serving along with defendants and three other people. When the Fund's directors decided that circumstances warranted terminating CMIA Capital as the Fund's investment manager, they discovered that under the operating documents, they lacked direct express authority to do so, regardless of CMIA Capital's performance.

According to the parties, CMIA Capital breached its fiduciary duties, thereby depriving the Fund of somewhere between $50 million and $100 million. Thus, in May 2009, the Fund commenced an action in Singapore to remove CMIA Capital for its alleged misconduct. CMIA Capital asserted counterclaims in the Singapore action and also commenced a derivative action in New York, alleging that the Fund's directors had breached their fiduciary duties and committed corporate waste by commencing the Singapore action. On November 22, 2010, Supreme Court (Shirley Werner Kornreich, J.) granted the directors' motion to dismiss the derivative action for lack of standing.

Plaintiff alleges that in recognition of his efforts in connection with the lawsuit against CMIA Capital, defendants entered into an oral agreement to ensure that "plaintiff would be fairly compensated" for his efforts; the parties allegedly reaffirmed this oral agreement at various times during the lawsuits. Plaintiff also alleges that at some later date, the parties modified their agreement to provide that plaintiff would receive one-third of the performance fee that KOM received.

The subject settlement agreement:

In June 2011, the parties reached an agreement to settle all their disputes. Accordingly, plaintiff, defendants, KOM, and CMIA Capital entered into a settlement agreement, along with certain nonparties to this appeal. The recitals in the settlement agreement stated that disputes had arisen among the parties "relating to the management of the Fund and its investments" and that the settlement agreement was to resolve the disputes, including all claims brought in the lawsuits.

In addition to discontinuing the lawsuits, terminating CMIA Capital, and requiring certain payments among the parties, the settlement agreement provided for the liquidation of the Fund and the distribution of its assets. The parties agreed that upon the Fund's liquidation, KOM was to receive a $1,155,903.21 performance fee. Ultimately, a company wholly owned by defendant O'Neill received this fee; that company apparently transferred defendant Knoll's share to a company under Knoll's control.

The settlement agreement contained a release, which provided that the agreement was made in "full and final settlement of all matters arising out of or in connection with the facts, matters, claims, actions and allegations" made in the lawsuits. Further, the release provided that each party released "each other Party" from:

"all and/or any actions, claims, rights, demands, suits, charges, complaints, obligations, damages, costs (including attorney's fees and costs actually incurred), expenses, liabilities, losses, debts, set-offs, promises, contracts, agreements and controversies of any nature whatsoever...whether known or not now known...arising from or resulting from or in connection with any act or omission, event, transaction, occurrence, agreement, contract or relationshipconcerning [the Fund], its investments, business or affairs (including without limitation the matters alleged in the [lawsuits]" (italics in original).

The prior proceedings:

Plaintiff then commenced this action, asserting that he had played a significant role in resolution of the suit against CMIA Capital, and thus was entitled, under his oral agreement with O'Neill and Knoll, to $385,301 — one-third of the $1,155,903 settlement fee that CMIA had paid to KOM. In the complaint, plaintiff interposed causes of action for breach of contract, fraudulent inducement, unjust enrichment, and promissory estoppel.

Defendants moved separately to dismiss the complaint, contending, among other things, that the release barred plaintiff's claim for payment. In opposition, plaintiff asserted that because the settlement agreement was between two groups (the Fund, its directors, and KOM on one side, and CMIA Capital and its principal on the other), the settlement agreement did not contemplate releasing claims between parties on the same side, such as between him and defendants. Plaintiff further asserted that the release could not bar his claim because that claim had not yet ripened at the time of the settlement, and releases could only bar claims that were asserted or that could have been asserted at the time of the release.

The decision of Supreme Court:

The IAS court granted both defendants' motions to dismiss under CPLR 3211(a)(1). In so doing, the court observed that the meaning and coverage of a release "necessarily depends, as in the case of contracts generally, upon the controversy being settled and upon the purpose for which the release was actually given..." and held that the release barred plaintiff's claim. The court found that, although the recital in the settlement agreement stated that it was executed between two opposing sides, it defined "party" to include plaintiff and defendants; thus, the release made clear that it was meant to apply to more than the settlement of the lawsuits involving CMIA Capital. According to the court, the settlement agreement's inclusion of extensive lists of the entities who the release covered, as well as the broad sweeping language of the release, indicated that the parties "intended to leave no loose ends" regarding the Fund's affairs. Moreover, the court stated, the settlement agreement included detailed instructions for liquidation of the Fund and the disposition of its assets; therefore, had the parties intended to compensate plaintiff for his efforts in negotiating the liquidation, they should have so stated.

And the reasons for affirming dismissal of the complaint:

Plaintiff fairly and knowingly signed the release, and its terms now bind him. Indeed, plaintiff himself states that he played a significant role in helping all the parties come to terms to resolve disputes and enter into the settlement agreement; he cannot now be heard to say that he did not intend to release what the contract language says he is releasing.

Despite plaintiff's contention otherwise, there is no ambiguity as to the release's intended scope. The language in the release contains several phrases indicating its exceptional breadth — for example, the language stated that the agreement was made in full settlement "of all matters arising out of or in connection with the facts, matters, claims, actions and allegations" made in the lawsuits. This language is not "reasonably susceptible of more than one interpretation"...This conclusion holds particularly true given that the settlement agreement provided for liquidation of the Fund and winding up of its business, and thus, the end of the business relationships regarding the Fund. Accordingly, the language of the release makes clear that when the Fund ended as an entity, so did any of the claims or rights relating to it.

Moreover, even accepting as true (as we must on a motion to dismiss) plaintiff's argument that he believed his claims did not exist when he executed the settlement agreement, this argument would not change the outcome, as the release disposed of even unripe and contingent claims. According to the language of the agreement, the release broadly barred "all and/or any" claims "arising from" or "resulting from" or "in connection with" "any act [etc.] concerning [the Fund]." This Court has actually construed similar broad language to bar fraud claims relating to the subject matter where the signatories to the agreement did not specifically refer to, or even know about, those fraud claims before executing their release...Similarly, courts have given effect to releases even when the releasors are subjectively unaware of the precise claims they are releasing[.]

Plaintiff is no more persuasive with his argument that the settlement agreement did not contemplate releasing claims between parties on the same side, such as between him and defendants. The settlement agreement established defined terms for each group of adverse parties — for example, the Fund, KOM, defendants, plaintiff, and one nonparty to this appeal are defined collectively as the "CCF2 parties" while yet another group of signatories to the settlement agreement is referred to collectively as the "CMIA Parties." Nonetheless, the language in the release simply states that "each Party...irrevocably and fully releases and forever discharges each other Party." Had the parties wanted to release only specific individuals or entities, the agreement provided the language by which the parties could have done so. Thus, the release here at issue makes clear that each individual party released each other individual party regardless of the position in which those parties stood at the time they signed the release.

Schulbach v. Morris & McVeigh, LLP, 126 AD3d 416 (March 3, 2015), also summarily affirmed, as follows, an Order of Supreme Court that granted defendants' motion to dismiss the complaint:

The court properly dismissed the claims against the Kelley Drye defendants based on plaintiff's execution of a general release that clearly and unambiguously waived all claims against those defendants...Plaintiff's contention that this release was premised on mutual mistake is untenable. All of the facts giving rise to the instant malpractice claims were in existence at the time of the release and plaintiff does not assert that the Kelley Drye defendants in any way attempted to conceal them

...The claims against the remaining defendants were also properly dismissed, since plaintiff executed a separate release that discharged the claims that were the predicate for those claims. The court properly exercised its discretion in denying plaintiff's motion for leave to file a third amended complaint asserting claims that would be barred by the release.

In ePlus Group, Inc. v. Dentons US LLP, 126 AD3d 508 (March 12, 2015), the First Department, once again, summarily reversed an order granting defendant's motion to dismiss finding that:

Plaintiffs' claims against defendant's predecessor in interest were carved out from the release at issue; accordingly, those claims are not precluded [by the release] as a matter of law...The carve-out provision was intended to specifically anticipate the arguments raised by defendant by enforcing the carve-out provision, this Court is giving effect to the intent of the parties to the release[.]

And, in Silverstein v. Imperium Partners Group, LLC, 126 AD3d 593 (March 24, 2015), the Appellate Division summarily affirmed an order granting defendants' motion to dismiss, holding that:

Plaintiff may not invalidate his release of all claims against defendant Imperium Specialty Finance Fund, L.P. and its "officers, managers, directors, agents and employees" (i.e., defendants the Imperium entities and John Michaelson) on the ground that it was procured by fraud, since the same allegations of fraud were the subject of the release[.]

Supreme Court also regularly addresses issues concerning the scope and enforceability of a general release.

In Garriot v. O'Neill Condominium Assoc., 2015 NY Slip Op 31793(U) [September 23, 2015], defendant moved the Court "for an order dismissing the complaint and all cross-claims on the ground that they were [barred] by a release dated November 23, 2011[.]"

Justice Levy summarized the facts:

Each of the above plaintiffs resides in an apartment at 655 Avenue of the Americas in Manhattan (the property). Defendant O'Neill Condominium is the association charged with maintaining the property. Defendant NMC Property Management LLC (NMC Property) is the property management company hired by O'Neill Condominium to manage the property. Defendant Ladies Mile is the construction company that renovated the property from a department store into a residential condominium. Olympic Funding, LLC (Olympic) is the owner of the ground floor retail commercial space at the property.

Shortly after Ladies Mile turned over management of the building to O'Neill Condominium, a non-party, Rand Engineering & Architecture, P.C., was retained by O'Neill Condominium to put together a list of issues in connection with Ladies Mile's renovation of the property. A resulting construction defect lawsuit, commenced by O'Neill Condominium against Ladies Mile, was settled for the sum of $15,000.00. On November 23, 2011, as part of the settlement, Ladies Mile and O'Neill Condominium executed the subject release.

The pleadings:

These are all identically-pled causes of action by individual apartment owners to recover damages in tort to their apartments, as the result of a partial "collapse" suffered on December 25, 2012 at the ground floor retail space of the property. Each first cause of action is against O'Neill Condominium for failure to use reasonable care in maintaining the property and supervising the work performed by Ladies Mile. Each second cause of action is against NMC Property for failure to use reasonable care in maintaining the property and supervising the work performed by Ladies Mile. Each third cause of action is against Ladies Mile for failure to use reasonable care in planning the renovation and failure to use reasonable care in selecting subcontractors. Each fourth and final cause of action is against Olympic for failure to use reasonable care in maintaining the ground floor retail space.

The argument in support of the motion to dismiss:

In support of its motion s to dismiss, Ladies Mile argues that plaintiffs and defendants O'Neill Condominium and NMC Property are attempting to litigate claims that were previously released. In opposition to the motions, plaintiffs argue that the motions are premature, plaintiffs did not execute the release, and plaintiffs are not named as parties to the release. In opposition to the motions, O'Neill Condominium argues that it never intended the release to cover future potential claims. In opposition, NMC Property also argues that it did not sign the release.

The November 23, 2011 release provided, in relevant part:

The O'Neill Condominium, and all of its unit owners and each of their past or present, direct, or indirect, successors, heirs, executors, administrators, assigns, members, owners, grantees and representatives do hereby release and discharge (Ladies Mile)...from any and all claims...for, arising out of, or in connection with the Premises, other than the (mechanics lien issues). The foregoing includes, but is not limited to...any existing or potential claims, controversies, warranties or issues relating to the construction, improvement, installation and/or design of the subject building, the common areas and/or the individual units."

The applicable law:

"[A] valid release constitutes a complete bar to an action on a claim which is the subject of the release"...A defendant has the initial burden of establishing that it has been released from any claims... "A release is a contract, and its construction is governed by contract law"...and one "that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms"[.]

The burden of proof:

In support of its motion to dismiss, Ladies Mile proffers a prima facie case that the action should be barred on the ground of release. By presenting the November 23, 2011 release, Ladies Mile meets its initial burden of establishing a defense as a matter of law. Therefore, the burden shifts to plaintiffs, and codefendants O'Neill Condominium and NMC Property, to establish or plead an issue as to whether the release bars this action. In answering this question, obviously a distinction must be made between the signatory O'Neill Condominium, and the non-signatory parties, the individual plaintiffs, and NMC Property.

As described below, because the release disposed of even unripe and contingent claims, clearly O'Neill Condominium has the more difficult hurdle...The less difficult question for the Court at the pleading stage is whether the plaintiff individual apartment owners and defendant NMC Property, although clearly referred to in the release , are bound by a release that they did not sign.

And the factual issues raised that warranted denial of the motion to dismiss:

The court finds that there is an issue, sufficient to survive a CPLR 3211(a)(5) motion to dismiss, as to whether O'Neill Condominium, by signing the release effectively released either plaintiffs' claims, or defendant NMC Property's cross-claims...Whether O'Neill Condominium possessed authority to execute the release as both plaintiffs' and NMC Property's authorized representative is, at the pleading stage, unknown, and must be further litigated.

Lesson learned – "Caveat releasor": a garden-variety general release, that is not meticulously limited and does not contain any express carve-outs, also may release claims against the releasee of which the releasor is unaware.

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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