Court Sustains Claim That Defendants Breached the Terms of A Broad Release

• Posted on: Jul 28 2021

When a person releases another from claims or the threat of claims, he/she is giving up the right to sue the other in connection with the subject of the release. Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 N.Y.3d 269, 276 (2011) (“Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release.”). A release effectively eliminates all claims against another that are possessed by the party giving the release. It does not matter whether the releasor knew of the claims at the time that he/she gave the release. 

A release is generally ineffective as a bar against a claim that arises after the date the release is given. However, a plaintiff will not be barred from bringing a claim that falls within the scope of a release when he/she can demonstrate that the release was procured by fraud, duress or some other wrongdoing. Centro Empresarial Cempresa, 17 N.Y.3d at 276; Fleming v. Ponziani, 24 N.Y.2d 105, 111 (1969). Where a party “releases a fraud claim”, he/she “may later challenge that release as fraudulently induced only if [he/she] can identify a separate fraud from the subject of the release.” Centro Empresarial Cempresa, 17 N.Y.3d at 276 (citing Bellefonte Re Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523 (2d Cir. 1985)). 

The foregoing principles were highlighted in Schorsch v. Luxor Capital Partners, LP, 2021 N.Y. Slip Op. 50698(U) (Sup. Ct., N.Y. County July 26, 2021) (here).

Schorsch involved a transaction pursuant to which Apollo Global Management LLC (“Apollo”) agreed to purchase the wholesale distribution business of RCS Capital Corporation (“RCAP”) and take a majority stake in AR Capital, LLC (“AR Capital”). At the time, RCAP needed an infusion of capital to meet its obligations. It formed a special committee to address RCAP’s capital needs (the “Special Committee”).

While the transaction was being negotiated, Centerbridge Capital Partners II, LP (“Centerbridge”) proposed its own transaction. That proposal involved: (i) a potential $300-$350 million investment in convertible stock; and (ii) a reworking of RCAP’s management arrangement because RCAP was managed by RCS Capital Management, LLC, which was controlled by plaintiff Nicholas S. Schorsch (“Schorsch”), and (iii) a surrender of Schorsch’s Voting B shares (the “Centerbridge Transaction”). The Centerbridge Transaction also contemplated that the Series B preferred stock issued by defendant Luxor Capital Partners, LP (“Luxor”) would be repaid and the Series C convertible preferred stock, also held by Luxor, would be converted into common stock. 

At some point, the Special Committee elected to end negotiations with Apollo. However, the Special Committee continued to explore potential deals with Apollo. 

Although the Special Committee was generally of the view that the deal with Centerbridge was superior, it involved the surrender of control by Schorsch, who indicated that he was not willing to relinquish such control. Schorsch also believed that the Centerbridge Transaction was dilutive to existing shareholders. 

Ultimately, RCAP decided to consummate a modified transaction with Apollo — i.e., without Apollo acquiring an interest in AR Capital. In connection with the transaction, the parties executed a number of documents (e.g., the agreement between Apollo and AR Capital, the agreement between Apollo and the ARC principals, and the agreement between Apollo and RCAP (the “Transaction Documents”)), which included a broad release of claims (the “Release”). Pursuant to the Release, the releasing parties agreed to release each other from all claims arising out of or related to the transactions contemplated by the Transaction Documents.

Following the Apollo Transaction, RCAP went bankrupt, and the creditor trust brought a claim in Delaware against Schorsch and his affiliates alleging, among other things, claims for breach of fiduciary duty (the “Delaware Action”). The factual allegations that form the basis for the claim in the Delaware Action concerned, among other things, RCAP’s negotiation with Apollo to the exclusion of Centerbridge.

Although the Delaware court did not reach the issue of whether the claims asserted therein were barred by the Release, the Motion Court concluded that “the bringing of the Delaware lawsuit state[d] a claim for breach of the Release” because it concerned a released claim. Slip Op. at *3. 

The Motion Court rejected defendants’ contention that plaintiffs waived their rights under the Release, stating that there was nothing in the record before it to support the claim of a knowing or voluntary waiver.  Similarly, the Court found that defendants did not “in any way” rely on, and were not “otherwise prejudiced by”, “any conduct of the plaintiffs with respect to the Release.” Id.  Finally, the Court found that the creditor trust did not in any way change its position or discontinue the lawsuit when the plaintiffs asserted the Release in the Delaware Action. Thus, concluded the Court, plaintiffs stated a viable claim for breach of the Release. 

Takeaway

A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” Schuman v. Gallet, Dreyer & Berkey, L.L.P., 180 Misc. 2d 485, 487 (N.Y. Co. 1999), aff’d, 280 A.D.2d 310 (1st Dept. 2001). Therefore, in the absence of duress, illegality, fraud, or mutual mistake, a release will not be set aside. Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc., 34 A.D.3d 228, 229 (1st Dept. 2006).

In Schorsch, the parties broadly released all claims as against the other concerning: “(i) the Transaction Documents and the transactions contemplated by the Transaction Documents, (ii) any breach, non-performance, action or failure to act under any of the Transaction Documents, (iii) the Amended Purchase Agreement and the transactions contemplated thereby, (iv) the events leading to the termination of the Transaction Agreement and the Guaranty Agreement and the execution of the Amended Purchase Agreement, (v) any deliberations or negotiations in connection with the Transaction Documents, and (vi) any SEC filings, public filings, periodic reports, press releases, proxy statements or other statements issued, made available or filed relating, directly or indirectly, to the transactions contemplated by the Transaction Documents.” The release language was expansive and released “any and all … claims” whether “known or unknown” against any of the released parties. Such language was, as the Court noted, broad enough to cover the breach of the Release claim that plaintiffs asserted.