New York Courts Continue to Enforce Broad General Releases, Even When Claims are Unforeseeable at the Time of Contract Execution

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In Chadha v. Wahedna, 2021 NY Slip Op. 50509(U) (Sup. Ct. N.Y. Cnty. 2021), Justice Ostrager of the New York County Commercial Division, dismissed Plaintiff Nilsa Chadha’s (“Plaintiff”) claims in their entirety due to Plaintiff’s execution of a general release.

In Chadha, Plaintiff was the co-founder, as well as former Chief Operating Officer, board member and shareholder of Defendant Wahed Inc. (the “Company”), a financial technology and services company that offers financial opportunities compliant with Islamic law. Defendant Junaid Wahedna was the Company’s controlling shareholder, director and CEO (“Wahedna” together with the Company, “Defendants”).

The Amended Complaint alleged that from October 2016 through March 2017, Defendants engaged in a fraudulent scheme to purchase Plaintiff’s shares in the Company at deeply discounted values by inducing Plaintiff to enter into a series of Common Stock Repurchase Agreements (“CSRAs”). Plaintiff claimed that Defendants fraudulently misrepresented to Plaintiff the value of his shares, and, in breach of fiduciary duties owed to him, failed to disclose higher share prices that were being negotiated with third-party investors in order to buy out Plaintiff’s shares in the Company at lower prices.

In June 2020, more than three (3) years after the sale of all his shares in the Company, Plaintiff filed this action seeking to rescind the CSRAs and recover damages from Defendants for their alleged “surreptitious purchase” of Plaintiff’s shares of the Company.

Defendants moved to dismiss the Amended Complaint on the basis that Plaintiff’s claims were barred by a release. Defendants argued that after the CSRAs were executed, Plaintiff entered into a Settlement Agreement and Release (the “Settlement Agreement”) that included a broad general release that provided Plaintiff agreed to “irrevocably release and forever discharge” Defendants from, among other things, “any and all actions” whether “known or unknown…” Defendants argued that this general release extinguished all of Plaintiff’s claims.

In granting the motion to dismiss, the Court initially noted how Plaintiff failed to allege a fraud separate from the subject of the release. Plaintiff’s allegations, including the crux of the Amended Complaint that Wahedna allegedly concealed the existence of a future investment by a third-party that would have been favorable to the Company, was not separate from the broad cover of the release, which encompassed “any and all claims.” The Court noted how this failure alone was sufficient to dismiss the Amended Complaint.

The Court then considered the controlling authority on whether a signed release bars claims in the face of an allegation that itself was fraudulently induced from the New York Court of Appeals. In Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V., 17 N.Y.3d 269 (2011), the New York Court of Appeals affirmed the Appellate Division’s dismissal of a case after finding that the general release plaintiffs granted to defendants encompassed both known and unknown claims and the agreement was “fairly and knowingly made.”

Given this authority, the Court in Chadha first considered whether the release language in the Settlement Agreement encompassed Plaintiff’s claims. The Court found that Defendants met their burden and there was “no dispute” that the above-quoted release language encompassed Plaintiff’s fraud claims.

The Court then shifted the burden to Plaintiff to establish that the release was not “fairly and knowingly made.” Plaintiff argued that he reasonably relied on his fiduciary relationship with Wahedna, which prevented dismissal of his fraud claims. The Court rejected this argument. The Court noted how generally a sophisticated principal is able to release its fiduciary from claims, especially where the principal understands the fiduciary is acting in its own interest and the release is knowingly entered into. The Court found that because Plaintiff signed the release after selling his shares in the Company, Wahedna no longer owed Plaintiff any fiduciary duties and the release was therefore a valid, arms-length transaction.

The Court further found that even if fiduciary duties somehow still applied, the outcome would be the same. Plaintiff, as COO of the Company at the time, had access to information relevant to the Company and did not exercise his own diligence to determine the value of his shares. Plaintiff failed to take these steps despite evidence in the Amended Complaint that demonstrated Plaintiff had a history of questioning Wahedna’s representations.

For all these reasons, the Court dismissed Plaintiff’s Amended Complaint with prejudice.

The Court’s holding in Chadha reinforces parties’ ability to enter into agreements with broad general releases that dismiss both known and unknown future claims, including, but not limited to, fraud and fiduciary duty claims. If parties want to ensure they are not waiving their right to bring certain and/or future claims, they should ensure they negotiate and include disclaimer language that carves out the subject matter of the claims to be preserved.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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