Release of Claims “Known or Unknown” Bars Unknown Fraud Claims

Jay S. Auslander, Julie Cilia and Natalie Shkolnik

March 4, 2013

A New York court recently held that a general release releasing claims “whether known or unknown” covered fraud claims of which the plaintiffs were unaware when they entered into the release.  In Kafa Investments, LLC v. 2170-2178 Broadway, LLC, 958 N.Y.S.2d 577 (Sup. Ct., N.Y. Cty. Jan. 22, 2013), former members of a limited liability company (“LLC”) sued for breach of fiduciary duty, breach of the duty of good faith and loyalty, fraudulent inducement, intentional misrepresentation, and unjust enrichment.  The plaintiffs alleged that they had agreed to take $5.2 million in exchange for their interests based on the defendants’ representation that the LLC was worth $125 million; according to the plaintiffs, the defendants knew that a hotel owned by the LLC was actually worth much more.

The defendants moved for summary judgment, arguing that a release entered into in connection with the redemption of the plaintiffs’ interests barred their claims.  In opposition, the plaintiffs argued that the release did not apply because they were unaware of any potential fraud claims when they entered into the release and because they had a fiduciary relationship with the defendants at the time.

The Court ruled in favor of the defendants.  Citing cases including Serbin v. Rodman Principal Investments, LLC, 87 A.D.3d 870, 929 N.Y.S.2d 136 (1st Dep’t 2011), in which Wilk Auslander LLP represented the prevailing parties, the Court noted that it was obligated to interpret the release’s language according to its terms.  The Court went on to hold that the release barred the plaintiffs’ claims, stating that “the fraud described in the Complaint falls squarely within the scope of the release and there are no allegations that a separate fraud was perpetrated to induce the signing of the release.”  Nor could the plaintiffs – sophisticated parties represented by sophisticated counsel – invalidate the release based on the parties’ fiduciary relationship, the Court held.

The plaintiffs filed a notice of appeal on February 20, 2013.