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Why You Should Be Careful Signing a Release of Claims

by | Insights

When parties are ending a business arrangement, it is common for one side to be asked to sign a release of all present and future claims against the other party. Such releases are contracts and challenging them is always an uphill battle, even where a party is asserting fraud in the inducement, breach of fiduciary duty or that the defendant had been “like a brother” to the plaintiff, among other claims.

A good example of the difficulties in challenging a release of claims is in the recent case of Chadha v. Wahedna, Index No. 652818/2020, 71 Misc. 3d 1227(A) (Sup. Ct. N.Y. Cty. 2021). The plaintiff, Nilish Chadha, brought an action for fraud related to a repurchase of his stock by co-defendant Wahed Invest Inc. (the “Company”). The plaintiff is the co-founder and former COO, board member and shareholder of the Company. Co-Defendant Junaid Wahedna (the “CEO”) is the controlling shareholder, a director and CEO of the Company.

The plaintiff alleges that back in late 2016 through early 2017, the defendants, in breach of their fiduciary duties to the plaintiff, engaged in a fraudulent scheme to purchase the plaintiff’s shares in the Company at deeply discounted values through a series of repurchases of all of his stock. The plaintiff alleges that defendants misrepresented the value of his shares by concealing the existence of a future investment by a third party that would have increased the value of the plaintiff’s stock.  

The plaintiff brought this action on behalf of himself, and since he sought to void the stock repurchases, also on behalf of the company to which he still claimed an interest.

The key issue for the Court involved the effect of a Settlement Agreement and Release that  the plaintiff and the Company entered into after the stock repurchases. . The agreement released any and all claims at law or at equity, known or unknown that the plaintiff ever had, now have, or may have against the defendants.

The plaintiff made several arguments as to why the Release should not preclude his claims, all of which were rejected by the Court. . As noted by the Court, the burden is on the plaintiff to establish that the release should be voided by the “traditional contract defenses such as duress, illegality, fraud, or mutual mistake.” . Further, “to invalidate a release for fraud, … plaintiff must identify a separate fraud from the subject of the release. If the fraud described in the complaint falls squarely within the scope of the release, then that fraud cannot nullify the release. Were this not the case, no party could ever release a fraud claim with any finality.”. In a case like this, where the Release covers “any and all claims,” coming up with something “separate” is nigh impossible.

The Court also determined that allegations of a fiduciary relationship between the parties did not overcome the Release either. First, at the time of the Release, the plaintiff owned no shares of the company (since he had just sold them back), so there were no duties owed through that relationship. Further, the Court found the plaintiff, despite being only 26, to be a sophisticated, educated businessman who knew — or should have known — that the defendants were acting in their own interest during the negotiation and execution of the Settlement Agreement and Release. Moreover, if by exercise of ordinary intelligence, he was able to perform due diligence to find out the truth of the defendants’ alleged misrepresentations, he could not argue that he was induced by those misrepresentations. As COO, the plaintiff also had the means at hand to learn for himself the value of his shares. 

The takeaway for the plaintiff and other parties in this situation is  beware signing a release, even when the buyer “had been like a brother.” Get experienced legal advice before you enter into a contract.





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