The Business Divorce Law Report
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In a business divorce case alleging the fraudulent acquisition of shares, once the defendant established the existence of a release, plaintiff must prove it is invalid.
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A claim of a fiduciary relationship does not relieve plaintiff of proving that he did not release a claim that he was the victim of fraud in the purchase of shares of a closely held business.
Nilish Chadha, Individually, and Derivatively on Behalf of Wahed Inc. f/k/a Wahed Invest Inc., Plaintiff, against Junaid Wahedna, and Wahed Inc. f/k/a Wahed Invest Inc., Defendants.
Plaintiff Nilish Chadha is the co-founder of Defendant Wahed Inc. (“the Company”), a financial technology and services company that offers investment opportunities compliant with Islamic law. (Am. Compl. ¶ 10, NYSCEF Doc. No. 19.) Plaintiff is the former Chief Operating Officer (“COO”) of Wahed and is also a former board member and shareholder of the Company. (Id. ¶¶ 4, 9.) Defendant Junaid Wahedna is and was at all relevant times the controlling shareholder, a director and CEO of Wahed Inc. Defendant Wahed Inc. was formerly known as Wahed Invest Inc. and is a Delaware corporation which was formed in June 2015, under the laws of the State of Delaware, and was duly authorized to conduct business in the State of New York.
The Amended Complaint alleges that starting on or about October 2016 through March 2017, Defendants engaged in a fraudulent scheme to purchase Plaintiff’s shares in the Company at deeply discounted values by inducing Plaintiff to enter into a series of Common Stock Repurchase Agreements (“CSRAs”), by allegedly fraudulently misrepresenting to Plaintiff the value of his shares, and in breach of fiduciary duties owed to him, by failing to disclose higher share prices that were being negotiated with third-party investors at the time, in order to buy out Plaintiff’s shares in the Company at lower prices.
Specifically, on October 14, 2016, Plaintiff entered into an agreement to sell Wahed 38 shares of common stock, for $49,400; on November 2, 2016, Plaintiff entered into a further agreement to sell another 300 shares to Wahed, for $399,900; on January 16, 2017, Plaintiff entered into a third and final agreement to sell Wahed his last 192 shares, for $200,000. (Am. Compl. ¶¶ 16-18).
Because Plaintiff Chadha seeks to rescind the CSRAs, Plaintiff alleges that he remains a shareholder of the Company and is alternatively suing Defendant Wahed Inc. derivatively, as a shareholder on behalf of Wahed Inc., because Defendants’ purchases of Plaintiff Chadha’s 530 shares are allegedly null and void.
The controlling authority on whether a signed release bars claims in the face of an allegation that the release itself was fraudulently induced is Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 952 N.E.2d 995 (NY 2011). Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release. Additionally, a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is “fairly and knowingly made.” Id at 1000.
As a preliminary matter, there can be no dispute here that the above-quoted release encompasses unknown fraud claims as it refers to “any and all actions” “whatsoever” “known or unknown.” See id at 1000 (finding “the phrase ‘all manner of actions,’ in conjunction with the reference to ‘future’ and ‘contingent’ actions, indicates an intent to release defendants from fraud claims, like this one, unknown at the time of contract.”). Thus, the inquiry is whether the release was fairly and knowingly made.
Once a defendant meets the initial burden of providing an executed release, the burden shifts to the plaintiff to establish that the release is invalid because of traditional contract defenses such as duress, illegality, fraud, or mutual mistake. Id. To invalidate a release for fraud, however, plaintiff must “identify a separate fraud from the subject of the release.” Id (emphasis added). If “[t]he 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.” Id at 1001.
The Centro Court also held that the existence of a fiduciary relationship does not alter this analysis. Id. “A sophisticated principal is able to release its fiduciary from claims — at least where … the fiduciary relationship is no longer one of unquestioning trust — so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into.” Id. However, Centro does not go so far as to hold that a relationship of unquestioning trust prevents a party from being able to release fraud claims. Indeed, nothing in Centro (or its progeny Pappas v. Tzolis, 20 NY3d 228 (2012)) requires that the parties have prior business disputes to be able to release fraud claims. See Silver Point Capital Fund, L.P. v. Riviera Res., Inc., 69 Misc 3d 1213(A) (Sup. Ct. NY Cty. 2020); Kafa Investments, LLC v. 2170-2178 Broadway, LLC, 39 Misc 3d 385 (Sup. Ct. NY Cty. 2013), aff’d, 114 AD3d 433 (1st Dep’t 2014) (rejecting plaintiffs’ attempt to distinguish Centro on the grounds that “their relationship of trust with the defendants was fully intact during contract negotiations”).
The Centro Court further held that “[w]here a principal and fiduciary are sophisticated parties engaged in negotiations to terminate their relationship, [ ] the principal cannot blindly trust the fiduciary’s assertions.” Centro 17 NY3d at 1002. “The test, in essence, is whether, given the nature of the parties’ relationship at the time of release, the principal is aware of information about the fiduciary that would make reliance on the fiduciary unreasonable.” Pappas 20 NY3d at 579. The requirement that “the principal is aware of information about the fiduciary that would make reliance on the fiduciary unreasonable” means not only subjectively or actually aware but also whether plaintiff should have learned of such information by exercise of ordinary intelligence. 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, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations” Centro 17 NY3d at 1001 (emphasis added).