Drafting General Releases After Centro: How to Preclude or Preserve Future Claims of Fraud and Breach of Fiduciary Duty

Drafting General Releases After Centro: How to Preclude or Preserve Future Claims of Fraud and Breach of Fiduciary Duty

By Eric L. Goldberg, Thomas D. Kearns and Thomas J. Fleming

Court of Appeals decision in Centro.  A recent New York Court of Appeals decision highlights the shift in New York law towards the enforceability of general releases even in the context of fiduciaries. In Centro Empresarial Cempresa, S.A. v. America Movil, S.A.B., 2011 NY Slip Op 4720, 2011 N.Y. LEXIS 1383 (N.Y. July 7, 2011), the New York Court of Appeals unanimously affirmed the appellate court's dismissal of a $900 million lawsuit brought by former equity holders of a privately-held telecommunications company, America Movil SAB, on the grounds that a general release entered into by the parties barred the plaintiffs' claims. The Court held that "[a]s sophisticated entities, [the plaintiffs] negotiated and executed an extraordinarily broad release with their eyes wide open. They cannot now invalidate that release by claiming ignorance of the depth of their fiduciary's misconduct." Id. at 14. This decision by New York's highest court underscores the extent to which sophisticated fiduciaries in an arms-length transaction may contract away future fraud claims, even "fraud claims ... unknown at the time of contract." Id.  Non subscribers can access the free unenhanced version of the Centro Empresarial Cempresa, S.A. v. America Movil, S.A.B., 2011 NY Slip Op 4720, 2011 N.Y. LEXIS 1383 (N.Y. July 7, 2011) decision available from lexisONE Free Case law.

Background of Centro.  Pursuant to a purchase agreement entered into in 2003, the Centro plaintiffs sold their membership interests to defendants. Two releases were delivered by the plaintiffs in connection with the sale. In one, the plaintiffs executed the "Release for Agreement Among Members" ("Members Release"), which released defendants, their affiliates, shareholders, and agents from all present and future claims arising under or in connection with the operating agreement "and/or arising out of, based upon, attributable to or resulting from the ownership of membership interests." Id. at 5. The second release, the "Release for Master Agreement" ("Master Release"), released the defendants from claims arising under the parties' master agreement and related documents. This release employed "nearly identical language" to the Members Release, but added a proviso to exclude fraud from the release. In 2008, the plaintiffs commenced an action against the defendants alleging, among other things, breach of fiduciary duty, breach of contract, and fraud. The plaintiffs sought to prove that the "defendants failed to provide them with accurate tax and financial statements ... and were unwilling to negotiate in good faith for a share exchange." Id. at 6.

Eric L. Goldberg, a partner in the real estate department of Olshan Grundman Frome Rosenzweig & Wolosky LLP in New York City, concentrates his practice in the areas of real estate acquisitions, development, financings (including building loan, senior and mezzanine), joint ventures and restructurings. He has represented clients in connection with numerous high-profile transactions, including the purchases of the Citigroup Center Building in New York, New York; Desert Passage in Las Vegas, Nevada; The Sheffield in New York, New York; and purchase and development of high end residential condominium projects in New York City. Mr. Goldberg has been repeatedly selected as a Super Lawyer by the publisher of Law and Politics Magazine since 2007. Mr. Goldberg can be reached by phone at 212.451.2292 or by email at egoldberg@olshanlaw.com.

Thomas D. Kearns, a partner in the real estate department of Olshan Grundman Frome Rosenzweig & Wolosky LLP in New York City, specializes in representing owners, operators and developers in the acquisition, development, leasing and financing of office, residential and retail properties. He has extensive experience with joint venture, LLC, tenant-in-common and other agreements between co-venturers and with sophisticated condominium or other joint ownership arrangements of both real estate and non-real estate businesses. He is also an expert on the impact of federal and state securities laws on real estate. Mr. Kearns regularly represents professional athletes and sports executives and other high net worth individuals in their residential transactions in New York. Mr. Kearns has been repeatedly selected as a Super Lawyer by the publisher of Law and Politics Magazine since 2006. Mr. Kearns is an Associate Partner of the Partnership for New York City. Mr. Kearns has served as an instructor with the Continuing Legal Education program at Fordham Law School, teaching courses on Limited Liability Companies and Residential Real Estate and with the Stephen Newman Real Estate Institute of Baruch College, teaching a course on Real Estate Investment Trusts. Mr. Kearns has served in various leadership roles with the Real Property Section of the American Bar Association; most recently as a Book Editor for the Real Property Section. Mr. Kearns can be reached by phone at 212.451.2273 or by email at tkearns@olshanlaw.com.

Thomas J. Fleming, a partner in the litigation department of Olshan Grundman Frome Rosenzweig & Wolosky LLP in New York City, has extensive experience in commercial litigation in the state and federal courts of New York and around the country. He has served as lead counsel in over 30 trials and successfully argued numerous federal appeals. He has special expertise in contests for corporate control and has advised management and dissidents in over 30 such contests, many of which have resulted in proxy or tender offer litigation. He also maintains an active practice before the NASD and AAA. His clients have included major financial institutions including, Shenkman Capital Management, Steel Partners, LLP, Wheatley Partners, and many brokerage firms and other members of the securities industry. Mr. Fleming has been repeatedly selected as a Super Lawyer by the publisher of Law and Politics Magazine since 2007. Mr. Fleming can be reached by phone at 212.451.2213 or by email at tfleming@olshanlaw.com.

Valuable assistance was provided by summer associate, Marisa F. Lusthaus, who will graduate from Georgetown University Law School in 2012.

Lexis.com subscribers can access the complete commentary, Drafting General Releases After Centro: How to Preclude or Preserve Future Claims of Fraud and Breach of Fiduciary Duty.  Additional fees may be incurred. (approx. 7 pages)

If you do not have a lexis.com ID, you can purchase this commentary on the LexisNexis Store or you can access this commentary and additional Emerging Issues on this subject on the Store.

For more information about LexisNexis products and solutions connect with us through our corporate site.