First Department Holds Letter Agreement with Releases, Disclaimers and Waivers of Information Bars Fraud-Based ClaimsPrint Article
- Posted on: Oct 6 2021
By: Jeffrey M. Haber
In prior articles, we discussed the impact a disclaimer clause in a contract can have on a fraud claim. See, e,g., here. Namely, a disclaimer clause can preclude a fraud claim when (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party.1
Disclaimer clauses often are worded as “no reliance” clauses. In a such a clause, the parties represent that they are not relying on any extra-contractual representations.
Disclaimer clauses may also include a release of claims. Generally, “a valid release constitutes a complete bar to an action on a claim which is the subject of the release.”2 If “the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties.”3 A release may be invalidated when the traditional bases for setting aside written agreements exist, namely, duress, illegality, fraud, or mutual mistake.4
Often releases are broad in scope and “may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is fairly made.”5 When that occurs, a “party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release.”6 As the New York Court of Appeals noted, “Were this not the case, no party could ever settle a fraud claim with any finality.”7
A plaintiff seeking to invalidate a release due to fraudulent inducement must “establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.”8
In addition to disclaimer (or no reliance) clauses, contracts can include waiver of information provisions. These provisions are used by parties who consider themselves fully aware of the risks involved in the transaction they are about to enter. The provision waives any claim one party may have against the other, if the other knows of material information about the transaction but does not disclose it.
Waiver of information provisions are often found in securities transactions, as in Silver Point Capital Fund, L.P. v Riviera Resources, Inc., 2021 N.Y. Slip Op. 05312 (1st Dept. Oct. 5, 2021) (here), the case we examine in this article. Typically, the transaction concerns (a) a sophisticated investor – i.e., the buyer, (b) who acknowledges that the seller may possess material, non-public information that will not be disclosed to the buyer, and (c) agrees to waive any claim he/she may have if the transaction blows up. Sophisticated parties often agree to these provisions because of their desire to do the deal.
With the foregoing principles in mind, we examine Silver Point Capital Fund, L.P. v Riviera Resources, Inc.
Silver Point involved the sale of Silver Point’s shares to Riviera.9 Pursuant to the Stock Repurchase Agreement (the “Repurchase Agreement”) the parties signed, Silver Point agreed to sell all of its shares to Riviera for $10.50 per share (totaling $18,680,875.50), which was a discount of approximately 7% to the then-prevailing market price. In connection with the transaction, the parties entered into a separate letter agreement (the “Letter Agreement”), which was annexed to the Repurchase Agreement as an exhibit.
The Letter Agreement included a waiver of information provision that provided, in pertinent part:
The Seller hereby acknowledges that it is aware that the Buyer may have access to certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects (the “Information”). Any such Information may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.
* * *
The Seller acknowledges that the Buyer is relying upon this letter in engaging in the Purchase and would not engage in the Purchase in the absence of this letter.
Notwithstanding the Buyer’s possession of the Information and the absence of disclosure thereof to the Seller, the Seller wishes to enter into the proposed transaction.
The Letter Agreement also contained a broad release that, in pertinent part, released all claims “(including, but not limited to, any and all claims alleging violations of federal or state securities laws, common-law fraud or deceit, breach of fiduciary duty, negligence or otherwise) … against the Buyer or any of its affiliates, … which are based upon or arise from the existence or substance of the Information and the fact that the Information has not been disclosed to the Seller.”10
Silver Point alleged that it signed the Letter Agreement at Riviera’s behest because Riviera was about to announce its earnings. Silver Point claimed that it did not release Riviera from any claims because the definition of Information did not include the sale of the Hugoton Basin properties – one of Riviera’s major assets.
Silver Point maintained that during the negotiation and execution of the Repurchase Agreement, Riviera was secretly receiving bids on a “blockbuster $295 million asset sale of its Hugoton Basin properties, which represented approximately 45% of the Company’s market capitalization (the “$295 Million Transaction”).” Silver Point claimed that no public disclosures as to the $295 Million Transaction were made prior to its announcement, when Riviera publicly revealed that the proceeds of the transaction would be distributed to shareholders on a tax-free basis by way of a $260 million distribution (i.e., $4.25 per share). Shortly after the announcement of the $295 Million Transaction, Riviera’s stock price surged approximately 30% to $13.50 per share.
Because of the materiality of the Hugoton Basin properties to Riviera, Silver Point contended that it could not have been the type of property or information that was included in the waiver of information clause. If it were, Silver Point alleged that it would never have entered into the Repurchase Agreement or signed the Letter Agreement.
Silver Point brought suit, asserting causes of action for (i) common law fraud, (ii) fraudulent inducement, (iii) fraudulent concealment, and (iv) unjust enrichment. Riviera moved to dismiss. The motion court granted the motion.
The motion court held that Silver Point’s claims were barred by the express terms of the Letter Agreement.
First, the court found that the release was broad enough, and specific enough, to cover the fraud claims alleged by Silver Point.
Second, the court found that the waiver of information provision directly addressed Silver Point’s claims: the “Letter expressly acknowledged that Riviera may have material nonpublic information regarding its properties, plans and prospects and that ‘such Information may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.’” The motion court explained that contrary to Silver Point’s argument, the definition of “Information” “clearly include[d] ‘properties’ and nothing in the … Letter carve[d] out major sales of Riviera’s properties.” The motion court observed that “[i]f the parties intended to carve-out major sales of properties, they could have negotiated for that exclusion.” They did not. Thus, “[h]aving failed to do so, they cannot ask this court to rewrite their agreement.”
The motion court also rejected Silver Point’s argument that the Letter Agreement was induced by fraud “because Riviera allegedly said the letter was needed only because of its earnings call.” The motion court said that “this is not a ‘separate fraud from the subject of the release’ because the … Letter [Agreement] expressly disclaim[ed] any such limitations and, indeed, expressly contemplate[d] the fact that Riviera may have ‘material, nonpublic information regarding [the Company’s] … properties, assets, … projections … plans and prospects.’” “In other words,” concluded the court, “the fraud described in the Amended Complaint, that Riviera withheld information relevant to the Stock Purchase transaction, ‘falls squarely within the scope of the release,’ and is, thus, barred by its express terms.”11
The motion court also rejected Silver Point’s argument that the disclaimer was “not sufficiently specific to the particular misrepresentation or omission alleged” in the amended complaint, “and because Riviera’s alleged misrepresentation or omission concerned facts peculiarly within Riviera’s knowledge. The motion court reasoned that the Letter Agreement “expressly indicated that claims based on Information were barred and the definition of Information included Riviera’s properties.”
With regard to Silver Point’s fraud, fraudulent inducement and fraudulent concealment claims – which were based on the fact that Riviera did not disclose that it was in the process of negotiating the sale of its Hugoton Basin properties, which resulted in the $295 Million Transaction and the resulting $260 million distribution – the motion court noted that even if they were not barred by the Letter Agreement, they would still fail. The motion court held that Silver Point could not show that it justifiably relied on any omission by Riviera in its alleged failure to disclose the sale of the Hugoton Properties.
“Moreover,” said the motion court, “contrary to Silver Point’s arguments, … there was neither a fiduciary duty to provide such material non-public information …, nor does the special facts doctrine apply.”
As to the former, the motion court found that the lack of an alleged breach of fiduciary was “telling”. Under New York law, when sophisticated investors negotiate against a fiduciary and understand that a fiduciary is acting in its own interest, they cannot reasonably rely on the fiduciary to disclose every material fact.12
The motion court explained:
Silver Point is a sophisticated group of investors, represented by counsel, selling stock worth millions of dollars. It is simply not credible to believe — and nor does it allege — that it believed that Riviera was acting in Silver Point’s interest (and not its own) when it reached out to Silver Point to propose the stock repurchase. Any reliance on such a representation, even if made, would be wholly unreasonable. The parties negotiated an arms length transaction. No fiduciary duty attached.
As to the latter, because there was no fiduciary duty between the parties, the special facts doctrine did not apply,13 unless Silver Point could show that Riviera possessed superior knowledge about the transaction.14
To show superior knowledge, the aggrieved party must allege that: (1) the information was “peculiarly within the knowledge” of the defendant; and (2) the information could not have been discovered “through the exercise of ordinary intelligence”.15 In other words, “if the other party has the means available to him of knowing … he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentation.”16 At a minimum, a party has a “duty to inquire”. The motion court held that it did “not appear that Silver Point did so here.”17
On appeal, the Appellate Division, First Department unanimously affirmed.
The Court held that “Plaintiffs’ fraud-based claims [were] barred by the release in the [Letter Agreement].18 The Court found that “[i]nformation regarding a planned asset sale and distribution, clearly and unambiguously [fell] within the scope of th[e] release.”19
The Court also held that the waiver of information provision in the Letter Agreement barred Silver Point’s claims: “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.”20
The Court further held that “Plaintiffs’ fraudulent inducement claim fail[ed] 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.”21
Finally, the Court held that the special facts doctrine and the “peculiar knowledge” doctrine did not apply.22 The Court explained that plaintiffs were “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.”23
Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
- Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris, 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419 (1st Dept. 2011).
- Global Mins. & Metals Corp. v. Holme, 35 A.D.3d 93, 98 (1st Dept. 2006).
- Centro Empresarial Cempresa S.A. v. AmÉrica MÓvil, S.A.B. de C.V., 17 N.Y.3d 269, 276 (2011) (quotation and citations omitted).
- Id. See also Avnet, Inc. v. Deloitte Consulting LLP, 187 A.D.3d 430 (1st Dept. 2020).
- Centro, 17 N.Y.3d at 276.
- Global Mins., 35 A.D.3d at 98.
- Riviera is a publicly traded corporation. Silver Point Capital Fund, L.P. and Silver Point Capital Offshore Master Fund, L.P. (together, “Silver Point”) are hedge funds that collectively held 1,779,131 shares of Riviera common stock.
- The Letter Agreement defined Information as material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects.
- Quoting Centro, 17 N.Y.3d at 277.
- Pappas v. Tzolis, 20 N.Y.3d 228, 232 (2012) (“[w]here a principal and a fiduciary are sophisticated entities and their relationship is not one of trust, the principal cannot reasonably rely on the fiduciary without making additional inquiry”); Centro, 17 N.Y.3d at 278.
- Jana L. v. West 129th Street Realty Corp., 22 A.D.3d 274, 277 (1st Dept. 2005).
- Swersky v. Dreyer and Traub, 219 A.D.2d 321 (1st Dept. 1996).
- Jana L., 22 A.D.3d at 278 (quotation marks omitted).
- Schumaker v. Mather, 133 N.Y. 590, 596 (1892).
- Jana L., supra.
- Slip Op. at *1.
- Id. (citing Avnet, 187 A.D.3d at 431-432).
- Id. (citations omitted).