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Update: Brown v. Cerebus Capital Management, L.P. General Releases, Fraud and The Difference Between Pleading Fraud Under the CPLR and The Federal Rules of Civil Procedure

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  • Posted on: Jun 14 2019

On November 18, 2018, this Blog wrote about Brown v. Cerebus Capital Management, LP, 2018 N.Y. Slip Op. 32782 (Sup. Ct., N.Y. County Oct. 30, 2018) (here). Brown involved the grant of employment compensation that plaintiffs claimed, among other things, was part of a fraudulent scheme to deprive them of their benefits. The gravamen of the article pertained to the difference between the standards for pleading fraud with particularity under the Civil Practice Law and Rules (“CPLR) and federal law (e.g., the Federal Rules of Civil Procedure and the securities laws) and the estoppel effect dismissal of a fraud claim under the latter has on a fraud claim brought pursuant to the former.

On June 13, 2019, the Appellate Division, First Department, 2019 N.Y. Slip Op. 04772 (1st Dept. June 13, 2019) (here), affirmed the motion court’s decision on this point, holding that the claims arising from the dismissal of plaintiffs’ prior federal action were not collaterally estopped due to the differences between pleading fraud under the CPLR, on the one hand, and the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, on the other hand:

The claims that require scienter are not barred by collateral estoppel arising from the dismissal of plaintiffs’ prior federal action, because the standard for pleading scienter for federal securities fraud claims is more stringent than the standard for pleading scienter in New York state court (see Williams v Citigroup, Inc., 104 AD3d 521, 522 [1st Dept 2013]).

Slip Op. at *1.

The First Department also addressed the motion court’s holding that Brown’s claims were barred by a general release in the Repurchase Agreement. [This Blog recently wrote an article concerning the application of a general release (here).] That document contained a provision in which Brown allegedly released all claims “arising from, on account of, related to or in connection with” defendants or her Profits Interests. The motion court held that Brown “completely, clearly, and unambiguously discharged all of the claims Brown … purport[ed] to assert against defendants.”

The First Department reversed, holding that the release was not effective since defendants had not signed the agreement (as modified by Brown) in which the release was contained:

Contrary to defendants’ contention, Brown did not release her claims. The purported release appears in a Repurchase Agreement that defendants Covis Pharmaceuticals, Inc. (CPI), Covis Management Investors US LLC (Management Investors US), and Covis US Holdings, LLC (Covis US) sent Brown. These defendants had not yet signed it when they sent it to her. Brown signed it but made a handwritten change. Hence, the document that she returned was a counteroffer and a rejection of the offer made by these defendants. None of the defendants signed the Repurchase Agreement as modified by Brown, so it was not a binding contract.

Id. (citation omitted).

The Court affirmed the motion court’s denial of defendants’ motion to dismiss the fraud claims. Slip Op. at *2. The Court noted that the claims were not based on a mere failure to perform under the agreements but, rather, were predicated on “specific misrepresentations of fact.” Id. at *1.

Moreover, the Court rejected the argument that the merger clause barred the fraud claims. The Court found that the clause at issue was mere “boilerplate” and, therefore, not sufficiently specific to preclude a claim of fraudulent inducement. Id. citing Laduzinski v Alvarez & Marsal Taxand LLC, 132 A.D.3d 164, 169 (1st Dept. 2015). [This Blog previously wrote about merger clauses here and here.]

Brown v. Cerebus Capital Management, L.P., 2018 N.Y. Slip Op. 32782 (Sup. Ct., N.Y. County Oct. 30, 2018), can be found here.

General Release, Contract, Fraud, Fraudulent Inducement, Merger Clause, Pleading Fraud with Particularity, CPLR, Federal Rules of Civil Procedure, Commercial Litigation, Business Litigation

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