In settlement agreements, a valid release serves as a critical mechanism for resolving disputes between parties. By its terms, a release is intended to extinguish all claims, both those that are known and unknown to the parties at the time of execution of the agreement. When parties are represented by counsel and agree to a broad release, New York courts are reluctant to entertain later attempts to set aside a release based on second-guessing or alleged nondisclosure tied to the subject matter that the release was designed to end. A recent decision from Albany Commercial Division Justice Richard M. Platkin, underscores this principle.
Background:
In Crane v WP Strategic Holdings, LLC et al., the plaintiffs ("Plaintiffs") entered into discussions with defendants ("Defendants") to jointly pursue the acquisition of a Delaware based paper company (the "Paper Company"). Following these discussions, Plaintiffs contributed a total of $600,000 towards the acquisition of the Paper Company in exchange for 20% of the Paper Company's stock.
During the closing, Defendants allegedly informed Plaintiffs that in order to facilitate the purchase of the Paper Company, the stock purchase agreement would only show Defendants as the purchaser. Defendants allegedly promised Plaintiffs that the parties would later document that the Plaintiffs owned a collective 20% of the stock of the Paper Company. Relying on these statements, Plaintiffs authorized the release of the $600,000 toward the purchase price of the Paper Company.
Two months after the closing, Plaintiffs still had not received their stock certificates and documentation memorializing their 20% stock interest in the Paper Company. Meanwhile, unbeknownst to Plaintiffs, Defendants had entered into a letter of intent ("LOI") to sell the Paper Company for $9.75 million dollars. When Plaintiffs followed up about the status of their stock certificates, Defendants, without advising Plaintiffs of the LOI, offered to return Plaintiffs $600,000, plus an additional $60,000, on the condition that Plaintiffs enter into a settlement agreement with a mutual release (the "Release"). Following several rounds of revisions, the parties executed the Release.
Several months after the execution of the Release, Plaintiffs were provided with documents showing that Defendants negotiated to sell the Paper Company after Plaintiffs had become shareholders in the business. Plaintiffs ultimately filed an action against Defendants seeking damages, including on the basis that Defendants fraudulently induced Plaintiffs to enter into the Release, and that the Release therefore should be set aside as null and void. Defendants moved to dismiss under CPLR 3211(a)(1) and (5) on the grounds that the claims were barred by the Release.
Analysis:
The Court's analysis turned on well-established principles governing releases and their enforceability. First, the Court reiterated "CPLR 3211 (a) (5) authorizes dismissal where the movant establishes that [a] cause of action may not be maintained because of [a] . . . release."
Second, the Court stated that while a valid release constitutes a bar to an action asserting claims subject to the release, a release can be invalidated on the basis of "duress, illegality, fraud, and mutual mistake." Critically, the Court explained that "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."
Third, the Court acknowledged the breadth of case law providing that while a release may encompass unknown claims, including unknown fraud claims, a party "may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release."
Next, the Court turned to the breadth of the language of the Release, which expressly stated that Plaintiffs and Defendants released each other from "any and all claims, rights, causes of action . . . shares, stock, interests, sums of money . . . , and all liability and obligations for the same in law or in equity, whether contingent or fixed, known or unknown." The Court also acknowledged that the recitals mentioned that the parties had entered into the Release voluntarily, and that the Release was reviewed by the parties' respective counsel.
Addressing Plaintiffs' argument that Defendants' non-disclosure of the LOI and negotiations to sell the Paper Company constituted a fraud under the special-facts doctrine and/or as a separate actionable fraud, the Court found that Plaintiffs' fraud allegations were merely an extension of their core dispute, and that they lacked justifiable reliance given their sophistication as businesspeople and being represented by separate counsel. The Court therefore granted Defendants' motion based on the Release and dismissed Plaintiffs' case.
Takeaway:
The lesson from Crane is straightforward but also consequential for practitioners, in that a well-drafted release remains one of the most powerful litigation-ending tools in one's playbook at the dispositive motion stage. For practitioners counseling clients at the end of a litigation or dispute, Crane is a reminder that releases should be crafted expansively and that clients must be advised that once they sign, New York courts are likely to hold them to their bargain, no matter how the events later unfold.
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