Minority Shareholders Could Not Claim Fraudulent Inducement Due To Letter Release

On October 5, 2021, the First Department issued a decision in Silver Point Capital Fund, L.P. v. Riviera Resources, Inc., 2021 NY Slip Op 05312, affirming an order of Justice Andrew Borrok, granting defendant’s motion to dismiss an amended complaint. The Plaintiffs, former minority shareholders of the defendant, claimed that defendant fraudulent induced them to sell it all of their shares just three weeks before the announcement of an asset sale that caused share prices to rise and allowed defendant to make a substantial distribution to shareholders. In affirming the dismissal, the Court explained:

Plaintiffs' fraud-based claims are barred by the release in the letter agreement dated August 6, 2019 (Letter Agreement) executed by the parties. Information regarding a planned asset sale and distribution, clearly and unambiguously falls within the scope of this release.

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 (see OppenheimerFunds, Inc. v TD Bank, N.A. 2014 NY Slip Op30379[U], *27-28 [Sup Ct, NY County 2014]; Harborview Master Fund, LP v LightPathTech., Inc., 601 F Supp 2d 537, 546 [SDNY 2009]). Further, defendant did not make any misleading partial disclosures (see generally Basis Yield Alpha Fund [Master] v GoldmanSachs Group, Inc., 115 AD3d 128 , 135 [1st Dept 2014]).

The "peculiar knowledge" doctrine does not apply; plaintiffs are 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 (see Centro Empresarial CempresaS.A. v AmÉrica MÓvil, S.A.B. de C.V., 17 NY3d 269, 278-279 [2011]; Rodas v Manitaras, 159 AD2d 341, 343 [1st Dept 1990]; Blink v Johnson, 2015 NY Slip Op 32975[U], *23-24[Sup Ct, Westchester County 2015]; O.F.I. Imports Inc. v General Elec. Capital Corp., 2016WL 5376208, *6, 2016 US Dist LEXIS 131565, *19-20 [SDNY Sept. 26, 2016]. For the same reason, the special facts doctrine also does not apply (see Greenman-Pedersen, Inc. v Berryman & Henigar, Inc., 130 AD3d 514, 516 [1st Dept 2015], lv denied 29 NY3d 913[2017]).

Even if the parties are in a fiduciary relationship, this does not invalidate the release, which was negotiated in the context of an arm's-length business transaction (see Centro, 17NY3d at 278; Kafa Invs., LLC v 2170-2178 Broadway LLC, 114 AD3d 433 [1st Dept 2014], lv denied 24 NY3d 902 [2014]).

Plaintiffs' fraudulent inducement claim fails 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 (see Avnet, Inc. v Deloitte Consulting LLP, 187 AD3d 430, 431-432[1st Dept 2020]).

(footnote omitted)

The attorneys at Schlam Stone & Dolan frequently litigate shareholder disputes.

Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding a shareholder dispute.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.