Commercial Division Blog

Posted: December 1, 2021 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Christopher R. Dyess, Joshua Wurtzel, Hillary S. Zilz / Category Fraud/Misrepresentation

Former Minority Shareholders Barred from Suing Where They Unknowingly Signed Release on the Eve of Profitable Asset Sale

On October 5, 2021, the First Department issued a decision in Silver Point Capital Fund, L.P. v. Riviera Resources, Inc., 2021 NY Slip Op 05312, unanimously affirming Justice Borrok’s decision granting defendant’s motion to dismiss the amended complaint. The Court rejected the claim of former minority shareholders of defendant that defendant fraudulently induced them to sell it all of their shares in the corporation just three weeks before it announced an asset sale of its most valuable properties, after which sale prices soared and defendant made a substantial distribution to shareholders. The Court explained:

Plaintiffs' fraud-based claims are barred by the release in the letter agreement dated August 6, 2019 (Letter Agreement)[FN1] executed by the parties. Information regarding a planned asset sale and distribution, clearly and unambiguously falls within the scope of this release.

The Letter Agreement sets forth the types of information that were potentially not being disclosed in sufficient detail to enable plaintiffs to make an informed decision as to whether or not to execute the release (see Oppenheimer Funds, Inc. v TD Bank, N.A., 2014 NY Slip Op 30379[U], *27-28 [Sup Ct, NY County 2014]; Harborview Master Fund, LP v LightPath Tech., Inc., 601 F Supp 2d 537, 546 [SD NY 2009]). Further, defendant did not make any misleading partial disclosures (see generally Basis Yield Alpha Fund [Master] v Goldman Sachs Group, Inc., 115 AD3d 128, 135 [1st Dept 2014]).

The "peculiar knowledge" doctrine does not apply; plaintiffs are sophisticated parties that were aware that they were not provided with full information but nonetheless agreed to go forward with a transaction without either demanding access to the omitted information or assurances in the form of representations and warranties (see Centro Empresarial Cempresa S.A. v AmÉrica MÓvil, S.A.B. de C.V., 17 NY3d 269, 278-279 [2011]; Rodas v Manitaras, 159 AD2d 341, 343 [1st Dept 1990]; Blink v Johnson, 2015 NY Slip Op 32975[U], *23-24 [Sup Ct, Westchester County 2015]; O.F.I. Imports Inc. v General Elec. Capital Corp., 2016 WL 5376208, *6, 2016 US Dist LEXIS 131565, *19-20 [SD NY Sept. 26, 2016]. For the same reason, the special facts doctrine also does not apply (see Greenman-Pedersen, Inc. v Berryman & Henigar, Inc., 130 AD3d 514, 516 [1st Dept 2015], lv denied 29 NY3d 913 [2017]).

Even if the parties are in a fiduciary relationship, this does not invalidate the release, which was negotiated in the context of an arm's-length business transaction (see Centro, 17 NY3d at 278; Kafa Invs., LLC v 2170-2178 Broadway LLC, 114 AD3d 433 [1st Dept 2014], lv denied 24 NY3d 902 [2014]). Plaintiffs' fraudulent inducement claim fails because plaintiffs did not allege a "separate fraud from the subject of the release" and because they could not have justifiably relied on the alleged oral misrepresentation in view of the express no-additional-representations clause in the Letter Agreement (see Avnet, Inc. v Deloitte Consulting LLP, 187 AD3d 430, 431-432 [1st Dept 2020]).

Plaintiffs cite no authority for their [*2]suggestion that the contractual release at issue is against public policy. It is irrelevant that New York recognizes a criminal offense for false pretenses larceny, in which a defendant omits to tell his counterparty that he is wrongfully trading on the basis of insider information (see People v Napolitano, 282 AD2d 49, 56 [1st Dept 2001], lv denied 96 NY2d 866 [2001]); defendant informed plaintiffs that it might have access to material, nonpublic information, and plaintiffs waived their right to disclosure thereof.

We recommend that counsel should be retained before signing a release. Please contact the Commercial Division Blog editors at commercialdivisionblog@schlamstone.com if you or a client have questions concerning your rights before or after signing a release.