As readers of this blog know, there is an abundance of litigation over the subject of releases of claims. I have chronicled the decisions, with their nuances and dogma, rolling through the winding road of fraud jurisprudence. See the Topic “Release.” There is enough support on both sides of the issues to argue the respective positions. The key is knowing the decisions and how to use them effectively. When in federal court, it is always helpful and strategic to cite and rely upon federal court decisions, even when substantive state law is applicable.
That brings us to a recent decision of the United States District Court for the Southern District of New York in Bur-Tex Hosiery, Inc. v. World Tech Toys, Inc., et al, 23 Civ. 3454 (LGS) (U.S.D.C. S.D.N.Y. Mar. 7, 2024). For those who wish to argue against the release of claims, this is a strong, well-reasoned decision that would provide helpful support for the party trying to assert the claims.
Bur-Tex Facts
In Bur-Tex, the case arose from a scenario all-too-common in the COVID-19 pandemic setting. Many cases have arisen due to fraudulent practices involving personal protective equipment (PPE) that was in high demand due to the pandemic where the supplier of PPE misrepresents the authenticity or true quality (or lack thereof) of the goods. See, e.g., my post. In Bur-Tex, plaintiff was a business involved primarily in making and selling hosiery. During the outset of the COVID-19 pandemic, plaintiff decided to get involved in selling genuine nitrile gloves to a corporate customer. The case involves plaintiff’s attempt to locate and purchase the required “100% nitrile gloves.” Ultimate defendants included the whole group of individuals and entities involved in supplying the gloves to plaintiff.
Two of the individual defendants involved in the sale process allegedly “repeatedly represented to Plaintiff that the gloves were 100% nitrile, including through a test report that purported to show the composition of the gloves and a specification sheet that labeled the gloves as nitrile.” While plaintiff did travel to the manufacturer’s warehouse to inspect the gloves itself, plaintiff was only permitted to see photographs of the gloves. Plaintiff then sent the photos to its buyer, which approved the purchase order. Plaintiff sent deposits to the middle-person seller of the gloves for this sale.
Of course, since the matter ultimately ended up in litigation, it is not surprising to hear that upon delivery of the gloves, plaintiff’s prospective buyer found that they were not 100% nitrile, and then cancelled the pending sales and returned the gloves already received, resulting in damages to plaintiff of over $2 million.
Plaintiff demanded its money back from the sellers, who then claimed that they already gave that money to the manufacturers, and refused to return any of the money. After plaintiff was told that the manufacturer owed money to a bank that was about to take possession of the undelivered gloves, plaintiff paid more money to get those gloves, even though they were non-conforming. Plaintiff was then presented with an agreement whereby plaintiff was promised its deposits back once the manufacturer “liquidated” certain gloves and repaid the money. In relevant part, the agreement contained the following provisions, as described by the Court:
The Agreement includes a mutual release (the “Release”), which states that [the seller] and Plaintiff release each other, “and all persons acting by, through, under, or in concert with” any of them, from any claims “arising from . . . the order, purchase, and sale of the Products . . . including without limitation the quality of the Products and the deposits referenced [above].” The Agreement also states that: (1) the Agreement constitutes the “entire agreement” of the parties and “supersedes all prior negotiations and/or agreements;” (2) the parties “represent and acknowledge that . . . they did not rely” on any representation or statement by the other party or its agents; (3) the Agreement “shall . . . remain[] in effect despite any alleged breach . . . or the discovery or existence of any new or additional fact, or any fact different from that which either Party now knows or believes to be true;”
To get plaintiff to sign this agreement, defendants informed plaintiff that if it signed the agreement immediately (i.e., within the hour), defendants had a buyer who would purchase the non-conforming gloves from plaintiff. However, plaintiff was told that if it didn’t sign the agreement, plaintiff would lose its business with another very large customer that had connections to defendants. After one of the individual defendants sent repeated text messages every few moments insisting that plaintiff sign the agreement and “presented an aggressive demeanor,” plaintiff signed the agreement. After the agreement was signed, plaintiff was informed that the buyer had changed its mind and would not purchase the non-conforming gloves. Plaintiff also lost the large customer a year later. Thus, the plaintiff got nothing, but did give the defendants a release of claims.
Upon further investigation, plaintiff ultimately confirmed that the gloves were not nitrile, were counterfeit, and learned that the selling defendant knew that.
Plaintiff sued the whole lot of defendants in federal court in California. Since the agreement contained a forum-selection clause requiring suit in New York, however, the California court transferred the case to the Southern District of New York, finding that while the agreement was being challenged, the forum clause could still be enforced, applying a separability approach.
Motion to Dismiss Based Upon the Release
Judge Schofield of the Southern District denied defendants’ motion to dismiss to the extent it was based upon the release in the agreement. The procedural twist here was that the release is typically an affirmative defense and on a motion to dismiss under Federal Rule of Civil Procedure (FRCP) 12(b)(6), the Court is to focus on the allegations of the complaint, but since the complaint did refer to the release, the Court decided to consider it.
Of course, the Court started its analysis and relied heavily upon the leading New York Court of Appeals decision in Centro Empresarial Cempresa S.A. v. Am. Móvil, S.A.B. de C.V., 952 N.E.2d 995, 1000 (N.Y. 2011), which I have written about plenty. Thus, Judge Schofield noted that while “‘a valid release constitutes a complete bar to an action on a claim which is the subject of the release’… ‘any of the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake,’ will invalidate a release.” (Quoting Centro.)
Judge Schofield then acknowledged that proving the elements of fraudulent inducement could void the release if the alleged fraud was separate from the subject of the release.
The Court found that the fraud plaintiff alleged was apart from what the release encompassed because the release covered fraud claims regarding the non-conforming gloves but not fraud in the procurement of the agreement containing the release. (I have often counselled to include specific language in releases encompassing any claims of fraud in the inducement of the release itself if that is intended.)
The Court then found that plaintiff had adequately alleged a misrepresentation of fact conveyed to it by the defendants in that plaintiff was told that if it signed the release agreement immediately defendants in fact had a buyer that would purchase the non-conforming gloves, which would thereby relieve plaintiff of its losses.
The Court rejected defendants’ argument that plaintiff acted unreasonably in just “blindly” relying on defendants’ statement that they had a buyer, asserting that such alleged reliance was unreasonable as a matter of law. Important to the Court were plaintiffs’ allegations that only defendants knew the true state of the purported buyer and plaintiff reasonably chose to avoid its loses because defendants had indicated plaintiff would lose the pending sale if it did not immediately sign the agreement (and release).
The Court also found plaintiff’s pleading to be specific enough under FRCP 9(b) as to the fraudulent conduct and that the so-called merger and disclaimers in the agreement were not specific enough:
A disclaimer is sufficiently specific to preclude a fraud claim “only where the clause specifically disclaims representations concerning the very matter to which the fraud claim relates.” Pike Co., Inc. v. Jersen Const. Grp., LLC, 47 N.Y.S.3d 579, 581 (4th Dep’t 2017); Laduzinski v. Alvarez & Marsal Taxand LLC, 16 N.Y.S.3d 229, 233 (1st Dep’t 2015) (concluding merger clause was “too general” because it made “no reference to the particular misrepresentations allegedly made”).
None of the provisions contains any reference to the particular misrepresentation alleged — that there was a third-party buyer. Defendant argues that the provisions read together as a whole establish a specific disclaimer of reliance on “any representation or alleged promise by any person.” However, combining the three general disclaimers together does not create a specific disclaimer. Together or alone, the contractual disclaimers are too general to bar Plaintiff’s claim of fraud in the inducement.
Commentary
There are certainly many fraud claims that have been dismissed by virtue of a release of claims. Nevertheless, support can be found on the opposite end of the issues, sustaining fraud and other claims in the face of a signed release based upon specific and viable allegations of fraudulent inducement of the release. Judge Schofield’s well-reasoned and thorough decision in Bur-Tex is a case in point. Add it to the case law inventory on releases.