A few weeks ago, I blogged about the Arco Acquisitions, LLC, v Tiffany Plaza LLC et al. decision, in which Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson held that the plaintiff’s fraud claims were barred by the specific disclaimer provisions contained in the parties’ agreement to purchase commercial real property.
A recent decision from the First Department appears to follow suit, as it recently affirmed New York County Justice Andrew Borrok’s decision in Silver Point Capital Fund, L.P. v Riviera Resources, Inc., in which he also dismissed plaintiffs’ fraud claims because they were barred by the express language of the agreement between the parties.
In Silver Point, plaintiffs, highly sophisticated former minority shareholders (“Plaintiffs” or “Sellers”) of defendant Riviera Resources, Inc. (“Defendant” or “Buyer”) entered into a Stock Repurchase Agreement (“Repurchase Agreement”) with Buyer under which they agreed to sell their shares to Buyer at a discount. In connection with the Repurchase Agreement, the parties entered into a “big boy” letter (the “Letter Agreement”), which contained a number of disclaimer provisions.
For example, the Letter Agreement contained the following language:
The Seller hereby acknowledges that it is aware that the Buyer may have access to certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects (the “Information”). Any such Information may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.
The Seller acknowledges that the Buyer is relying upon this letter in engaging in the Purchase and would not engage in the Purchase in the absence of this letter.
Notwithstanding the Buyer’s possession of the Information and the absence of disclosure thereof to the Seller, the Seller wishes to enter into the proposed transaction. The Seller, to the extent that it is acting as an agent and not as a principal, has fully advised its principal of the foregoing and the risks involved in participating in the proposed transaction.
The Letter Agreement also contained the following disclaimer provision “[n]otwithstanding anything that may be expressed or implied in this letter, the Seller covenants, agrees and acknowledges that it shall have no recourse hereunder or under any documents or instruments delivered in connection herewith . . .”
In addition, the Seller waived
“all warranties, express or implied, arising by law, equity or otherwise, with respect to its sale of the Common Stock, and hereby forever releases, discharges and dismisses any and all claims, rights, causes of action, suits, obligations, debts, demands, liabilities, controversies, costs, expenses, fees, or damages of any kind . . . against the Buyer or any of its affiliates . . . which are based upon or arise from the existence or substance of the Information and the fact that the Information has not been disclosed to the Seller.”
Finally, and most pertinently, the Letter Agreement also contained the following disclaimer provision:
“Each of the Seller and the Buyer acknowledges and represents and warrants that (a) neither such party, nor any party acting on its behalf, has made any representation or warranty, whether express or implied, of any kind or character, regarding the sale and purchase of the Common Stock, except as expressly set forth in this letter; and (b) the assignment and transfer of the Common Stock by the Seller to the Buyer is irrevocable.”
In the case before Justice Borrok, Sellers alleged that Buyer fraudulently induced them to sell all of their shares in the corporation three weeks before it announced “an asset sale of its most valuable properties, after which share prices soared and defendant made a substantial distribution to shareholders.” Sellers further alleged that it would not have entered into the Repurchase Agreement or signed the Letter Agreement had it known that Buyer was negotiating the sale of the property, which resulted in the $295 million transaction and the resulting $260 million shareholder distribution at issue in the case.
In its defense, Buyer relied on the express release language contained in the Letter Agreement in which Sellers acknowledged that Buyer may have material nonpublic information regarding its properties and that such information “may be indicative of a value of the Common Stock that is substantially different than the purchase price reflected in the Purchase.”
Justice Borrok rejected Sellers’ argument, concluding that, Sellers’ claims were barred by the express terms of the Letter Agreement in which Seller acknowledged that the Buyer may have material nonpublic information concerning the properties, which included the subject property.
The court also rejected Buyers’ contention that the underlying real-estate transaction was not contemplated within the definition “Information” because “Information,” as defined in the Letter Agreement, expressly included “certain material, nonpublic information regarding the Buyer, its financial condition, results of operations, businesses, properties, assets, liabilities, management, projections, appraisals, plans and prospects.” The court therefore determined that the definition of “Information” clearly encompassed the underlying transaction, and that nothing in the Letter Agreement served to carve out any sales of Defendant’s properties.
The court also reasoned that if the parties intended to include a carve-out exception for major sales of properties, they would have negotiated that exclusion. Justice Borrok ultimately held that Sellers cannot now, ask the court after the fact to rewrite the parties’ agreement.
The First Department agreed and held that the Letter Agreement clearly, and in sufficient detail, set forth the type of information that may not have be disclosed in the course of the share repurchase to enable the parties to make an informed decision as to whether or not to execute the Repurchase Agreement.
The holdings in the Arco Acquisitions and in Silver Point both bring home the recently emphasized rule that release language in contracts may bar certain claims.