Two recent decisions address, once again, attempts to avoid fully-executed written releases by claiming fraudulent inducement. Both decisions reversed the court below, with different results. The Appellate Division, First Department’s decision in Columbia Consultants, LLC v Danucht Entertainment, LLC, 2023 NY Slip Op 06439 (1st Dep’t Decided Dec. 14, 2023) rejected all efforts to rescind the release based upon the broad language of the release, including a disclaimer of reliance on alleged representations of the releasee. On the other hand, the Appellate Division, Second Department’s decision in Israel v Progressive Cas. Ins. Co., 2023 NY Slip Op 06357 (2d Dep’t Decided on Dec. 13, 2023) allowed a challenge to the release to go forward, rejecting a motion to dismiss.
For some background on these issues, I refer the reader to my post “Challenging Releases and Settlements Based on Fraudulent Inducement is a Challenge,” where I explain and update the basic principles. Also, the Topic Heading “Release” collects more of the relevant cases.
In Danucht, the First Department got right to the heart of the issue by reversing the Commercial Division’s decision to allow a fraud claim to proceed in the face of a release. The First Department found the more comprehensive standard language of the release to be sufficient to cover the claim of fraud, even though the release did not directly encompass claims of fraud as to the release itself:
Plaintiffs released their claim that they had been fraudulently induced to enter into the settlement agreement and release. The release covers all claims (with certain exceptions that are not relevant to this appeal), whether “known or unknown, foreseen or unforeseen, matured or unmatured, suspected or unsuspected, . . . arising out of or relating to” the purchase agreements, the businesses covered by the purchase agreements, and the dispute between the parties concerning their obligations thereunder. This is broad enough to cover plaintiffs’ fraud claim (see e.g. Centro Empresarial Cempresa S.A. v AmÉrica MÓvil, S.A.B. de C.V., 17 NY3d 269, 277 ; Sodhi v IAC/InterActive Corp., 201 AD3d 451 [1st Dept 2022]; Avnet, Inc. v Deloitte Consulting LLP, 187 AD3d 430, 431 [1st Dept 2020]).
The First Department further addressed the requirement imposed by the Court of Appeals in its leading decision in Centro that the release be “fairly and knowingly made,” referencing other standard language of the release:
The release was “fairly and knowingly made” (Centro, 17 NY3d at 276 [internal quotation marks omitted]). The settlement agreement and release was the subject of negotiations between counselled parties. Furthermore, section 1.3(b) provides that the release will remain in effect despite that each releasor “may later discover [c]laims or facts that may be different from . . . those that it . . . now knows or believes to exist regarding the subject matter of the release” and which “if known at the time of signing of [the] [a]greement, may have materially affected [the] [a]greement and such [p]arty’s decision to enter into it.”
Finally, the First Department noted that plaintiffs had not satisfied another requirement explained in Centro that the claimed fraud be separate from what was released in the release: “Plaintiffs also failed to identify ‘a separate fraud from the subject of the release’ (Centro, 17 NY3d at 276; see also Centro at 278; Pappas v Tzolis, 20 NY3d 228, 234 ; Sodhi, 201 AD3d at 451).”
Although the First Department found such language of the release (which is standard in releases) to be sufficient, it would be prudent for counsel representing releasees to include in the release “claims of fraud, including with respect to any inducement to enter into this release” or words to that effect to nail down and guard against later claims of fraud.
In the legal arena of civil fraud claims, the ultimate outcome of a case can turn either away depending on how the courts view the equities of any given case. Since the decisions go back and forth either way, it is important for counsel to be truly familiar with the full array of case law on any particular subject. The Second Department’s decision in Israel is a case in point.
The general subject addressed was the circumstance where a release written in English is signed by someone who does not read or understand the English language. Is that release binding?
Just recently, in my post “Alleged Inability to Read English Insufficient Ground to Avoid Executed Release” I wrote about another Second Department decision (Prete v Tamares Dev. 1, LLC, 2023 NY Slip Op 04783 (2d Dep’t Decided Sept. 27, 2023) ) that entirely rejected an attempt to avoid a release where plaintiff argued that his natural language was Italian, that he was not fluent in the English language, and that he signed the release without understanding the meaning and scope of the release. The defendant countered that the release clearly and unambiguously covered the claims in the complaint, and plaintiff had not established fraud, duress, illegality, or mutual mistake so as to avoid the signed release.
In Israel, the Second Department went the other way, reversing the court below and rejecting defendant’s motion to dismiss based upon the release. In Israel, in trying to avoid the release, plaintiff claimed that English was his second language, his ability to read English was limited and he had left his reading glasses in his vehicle when he signed the release.
Why the difference in results in Israel and Prete?
In my view, the key difference is based upon the elements of fraud. In Prete, the Second Department found that fraud was not alleged, while in Israel it was. The Second Department specifically noted in Prete that the “plaintiff did not allege that the defendant misrepresented the content of the release.” While in Israel, plaintiff “allegedly was told that the release was for property damage only, not for personal injuries.” The Second Department added that plaintiff also asserted that he made a “unilateral mistake” about the content of the release that was based on the misrepresentation by the releasor’s agent as to what the release provided.
One might observe that this is an extremely slender reed upon which to decide the respective fates of those who signed the releases. Indeed, in both cases, long-standing concepts could have warranted tossing out both attempts to avoid the releases, as the Court in Prete noted: “‘A person who does not understand the English language is not automatically excused from complying with the terms of a signed agreement, since such person must make a reasonable effort to have the agreement made clear to him or her’ (Ivasyuk v Raglan, 197 AD3d at 638; see Nerey v Greenpoint Mtge. Funding, Inc., 144 AD3d 646, 648 ).” Nevertheless, as the Court in Israel noted, when fraud is claimed, the plaintiff is permitted to proceed with trying to establish that claim at the pleadings stage of the case. Whether plaintiff would be able to prove his claim by clear and convincing evidence is a different story.
The factual circumstances of Israel also could have lead the Second Department to give plaintiff a chance at proving his case. There, the release concerned claims arising out of a car accident, and a month or so after the accident, an agent for the insurance carrier caused plaintiff to sign the release for $1,000 allegedly misrepresenting the scope of the release to someone who was not otherwise represented by counsel and who was not familiar with the language in which the release of written. Forewarning to insurance carriers: Document and attend to the circumstances of obtaining releases a bit more carefully and fairly.