Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 N.Y.3d 270 (2011)
A general release bars claims of fraudulent inducement unless the plaintiff can identify a separate fraud from the subject of the release itself, and the plaintiff’s reliance on the alleged misrepresentations was justifiable.
Summary
Centro Empresarial Cempresa S.A. and Conecel Holding Limited sued Telmex México and its affiliates, alleging fraudulent inducement to sell their ownership interests in Conecel. The plaintiffs claimed the defendants provided false financial information, leading them to sell their shares at a lower value. The New York Court of Appeals held that the releases signed by the plaintiffs barred their claims because the alleged fraud fell within the scope of the release, and the plaintiffs, as sophisticated parties, failed to exercise due diligence to ascertain the true value of their shares. The court emphasized that a release is a complete bar to an action unless invalidated by fraud or other traditional defenses, and that the plaintiffs could not claim ignorance of the depth of the fiduciary’s misconduct.
Facts
Centro and CHL owned shares of Conecel. In 1999, they approached Slim about Telmex investing in Conecel. In March 2000, Telmex acquired a 60% indirect interest in Conecel through a Master Agreement, with plaintiffs retaining minority interests. Telmex managed accounting and provided quarterly financial statements. An “Agreement Among Members” allowed plaintiffs to negotiate an exchange of their shares under certain conditions. A “Put Agreement” gave plaintiffs the right to require Telmex to purchase their shares at a set price during specified periods. Plaintiffs alleged that Slim’s son-in-law, Hajj, falsely represented Conecel’s financial weakness, leading them to exercise a put option and later sell their remaining units at the floor price, based on allegedly false financial information. Releases were executed in connection with the sale.
Procedural History
In 2008, plaintiffs sued, alleging breach of contract, breach of fiduciary duty, fraud, and unjust enrichment. The Supreme Court denied the defendants’ motion to dismiss. The Appellate Division reversed, granting the motion, finding the claims barred by the general release. Two justices dissented, arguing fraudulent inducement. The plaintiffs appealed to the New York Court of Appeals.
Issue(s)
1. Whether the Members Release encompasses unknown fraud claims related to the valuation of the plaintiffs’ ownership interests.
2. Whether the Members Release was fraudulently induced by the defendants, precluding its enforcement.
3. Whether the plaintiffs justifiably relied on the defendants’ fraudulent statements in executing the release, given the fiduciary relationship between the parties and the plaintiffs’ knowledge of potential issues.
Holding
1. Yes, because the broad language of the release encompasses “all manner of actions…whatsoever…whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members and/or arising out of…the ownership of membership interests in [TWE].”
2. No, because the fraud described in the complaint falls squarely within the scope of the release; the plaintiffs failed to identify a separate fraud that induced the release itself.
3. No, because the plaintiffs knew that the defendants had not supplied them with necessary financial information, and they chose to cash out their interests without demanding access to the information or assurances as to its accuracy.
Court’s Reasoning
The Court of Appeals reasoned that a valid release constitutes a complete bar to an action on a claim which is the subject of the release. The court stated that a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is “fairly and knowingly made.” The court emphasized that 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. Here, the plaintiffs’ claim of fraudulent inducement was based on the same misrepresentations covered by the release. The court also found that, as sophisticated parties advised by counsel, the plaintiffs could not reasonably rely on the defendants’ assertions without conducting due diligence, especially given their awareness of potential issues and the adversarial nature of the relationship. The court quoted DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d 147, 154 (2010), stating that “if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means.” The court distinguished its holding from cases that suggested a stricter standard for releasing fiduciaries, clarifying that a sophisticated principal can release a fiduciary from claims when the principal understands the fiduciary is acting in its own interest and the release is knowingly entered into. The order of the Appellate Division was affirmed.