Releases are contracts that are treated as such by the courts. That means, among other things, that the parties to the release are the masters of the agreement and can choose whatever language they wish to describe the intended deal. Oftentimes, however, parties use prefabricated forms of releases without carefully considering the scope and legal effect of the language. As I have often counseled, it is critical to be precise in describing the intended scope of the release and particularly the claims and parties that are to be encompassed.
Much litigation arises when the party who has released claims (the releasor) subsequently tries to sue the party who was released (the releasee), claiming that the release was fraudulently induced or that claims were unknown when the release was given and therefore were not actually released. As I have suggested, if a settlement is truly intended to resolve and extinguish any type of fraud claims as well as any claims that are not even known at the time the release is entered into, it would be prudent for the releasee to make sure the release explicitly states that it covers those claims. Thus, the release should state that among the claims to be released are “any and all claims of fraud, misrepresentation or the like, including but not limited to fraud or misrepresentation relating to the release itself,” as well as “known and unknown” claims. It would also be wise to include in the release an acknowledgement that it was “fairly and knowingly” entered into. If in fact the release is not intended to cover such claims, obviously, the releasor should resist any such language in the release. Intentions and leverage should dictate the content of the release relating to such claims, rather than assumptions.
When such language is not explicitly contained in the release, the releasor may have some wiggle room to create issues and potentially re-litigate or raise claims that were intended to be extinguished. In the new decision of the Appellate Division, First Department, in LMM Capital Partners, LLC v Mill Point Capital, LLC, 2024 NY Slip Op 00806 (1st Dep’t Decided Feb.15, 2024), both the Commercial Division and the First Department relied upon the broad terms of a release to reject claims attempted to be asserted, thereby granting and affirming, respectively, defendants’ motion to dismiss all claims.
Facts of Mill Pond
The defendants in Mill Pond did appear to have tried to pull a fast one, but they were savvy enough to obtain a broad release that checked all the right boxes in order to insulate themselves from future liability. The basic scenario: Plaintiff opened negotiations to acquire a business target, and entered into a letter of intent that contained a “break-up” fee if the transaction was not consummated. Plaintiff then sought investment partners for the acquisition and identified two private equity firms. One of the firms signed a non-circumvention agreement with plaintiff in which it agreed not to take over the acquisition itself and thereby circumvent plaintiff in the process. Lo and behold, however, that is precisely what happened thereafter.
The target subsequently advised plaintiff that two of its major vendors did not want private equity firms behind the business. Plaintiff urged the target to arrange for plaintiff to communicate with the vendors directly to convince them that the private equity firm that plaintiff identified was right for the deal, but the target refused. The target then terminated the negotiations, paid plaintiff a break-up fee, and sought and obtained a broad release from plaintiff in exchange. The target proceeded to do a deal directly with the very same private equity firm that signed the non-circumvention agreement with plaintiff. Plaintiff thereafter cried foul and sued them all—the target, its CEO who made the statements about the vendors, and the private equity firm who ultimately made the acquisition.
Plaintiff sought to assert claims of fraud, breach of the non-circumvention agreement and tortious interference. Defendants moved to dismiss all claims by relying on the release. Motion granted. Case dismissed.
The Broad Release
On appeal, the First Department observed that the case turned on the applicability and scope of the release, citing and relying upon the leading Court of Appeals decision in Centro Empresarial Cempresa S.A. v AmÉrica MÓvil, S.A.B. de C.V., 17 NY3d 269 (2011). (I have written often about Centro and the numerous decisions that have relied upon its principles.)
In its multitiered analysis, the First Department found that (1) the release encompassed the fraud claims asserted by plaintiff, (2) both the private equity firm and the target’s CEO were covered by the release, and (3) plaintiff had not adequately alleged justifiable reliance to establish that the release was fraudulently induced.
The First Department quoted the content of the release as follows:
“Company [E&M] and each of the Company Released Parties (as defined below), from and against any and all manner of actions, causes of action, suits, proceedings, claims, demands, damages, rights, liens, agreements, contracts, covenants, obligations, debts, dues, sums of money, costs, expenses, reasonable attorneys’ fees, judgements, orders, and liabilities (the foregoing are hereinafter collectively referred to as the “Damages”) of whatsoever kind and nature, whether based on tort (including, without limitation, acts of negligence), contract or any other theory of recovery, whether at law or in equity or otherwise, whether known or unknown, liquidated or unliquidated[*2], suspected or unsuspected and whether or not concealed or hidden, which LMM and/or LMM Released Parties had, now has, or hereafter may have against the Company and/or any or all of the Company Released Parties arising out of, relating to, connected with, or incidental to, the Letter of Intent or the transaction contemplated thereby.”
The Termination Agreement defined “Company Released Parties” as,
“(a) the Company’s past, present and future Affiliates (as defined below); (b) the Company’s and the Company’s Affiliates’ predecessors, successors, and assigns; and (c) the directors, officers, members, managers, shareholders, employee stock ownership plan, partners, financing and equity sources, trustees, supervisors, employees, agents, and representatives of each Party included within (a) and (b) immediately above.” Affiliates was defined as “with respect to a Party, an entity which, directly or indirectly, controls, is controlled by, or is under common control with such Party.”
The First Department then found that the language of the release did cover the precise claims plaintiff was seeking to assert:
Here, the broad release encompassed fraud claims, both known and unknown, suspected and unsuspected, which plaintiff had, now had or hereafter may have. Plaintiff alleges in the complaint that “E&M and Kelly [the target and its CEO] knowingly falsely stated to LMM [plaintiff] that Nestle and Froneri [the vendors] would never enter into a deal with a private equity firm or fund” and that they did so “with an intent to cause LMM to enter into the Termination Agreement under false pretenses and to stop pursuing the E&M deal. . .” These allegations arise out of, relate to, are connected with or incidental to the transaction contemplated by the LOI, claims which plaintiff explicitly released when it signed the Termination Agreement. Thus, the fraud described by plaintiff “falls squarely within the scope of the release” and is an attempt to convert the release into a starting point for litigation, which is impermissible (id.).
As to whether the release encompassed both the CEO and the private equity firm, once again, the strategic language covered those parties as well. The “future Affiliates” reference covered the private equity firm that later acquired the target. And the reference to “officers, members, managers,” of each of the covered entities encompassed the CEO. These are terms that are often used in releases, and the Mill Pond case shows how they can indeed come in handy.
No Fraud Claim Alleged
Finally, the First Department found that plaintiff’s attempt to allege a cause of action for fraudulent inducement was also flawed because plaintiff had “hints” that the target and its CEO were not being truthful to plaintiff when plaintiff was told the vendors did not want to deal with a private equity firm. Plaintiff was first told that the vendors did approve of the deal involving plaintiff’s use of the private equity firm. And plaintiff knew that one of the vendors had in fact sold its majority stake to a private equity firm. That was enough for the First Department to rule that plaintiff did not satisfactorily allege the element of reasonable reliance.
It is interesting that in response to plaintiff’s argument that reasonable reliance cannot be assessed at the pleadings stage, the First Department made a point to state that when a release is involved it is appropriate to dismiss a case based upon the lack of reasonable reliance. As I have pointed out on numerous occasions, cases have clearly been dismissed at the pleadings stage where reasonable reliance is not properly alleged, even without releases being involved. See, e.g., First Department Continues to Affirm Dismissal of Fraud Claims Based Upon Lack of Justifiable Reliance.
The First Department also rejected plaintiff’s argument that the “special facts doctrine” saved its fraud claim. Under that doctrine, if the party accused of the fraud had special knowledge of material facts that plaintiff could not have discovered itself, the plaintiff is given more liberal leeway in alleging the fraud claim. However, the First Department found that plaintiff could have simply inquired directly with the vendors to learn their true intentions.
Commentary
As shown by the Mill Pond decision, the precise language of releases is very important. For the releasee, getting the broadest protection possible within the parameters of the deal and leverage is critical. For the releasor, limiting the scope of the release to what is actually intended to be surrendered is equally important.