New York Business Divorce : New York Business Dissolution Lawyer & Attorney : Farrell Fritz Law Firm : Buy-outs, Shareholder Disputes : New York, NY

When the case was argued before the Court of Appeals last month (read about it here), a number of the judges' questions suggested discomfort with the First Department's status-based rationale for promoter liability, while others suggested an approach to the fiduciary question not tied to promoter status but instead based on the more traditional approach keyed to the defendants' control and domination over the pre-formation enterprise.

Those hoping for a big showdown on the status-based rationale adopted by the First Department will be disappointed to read the Court of Appeals' decision. Stating that a fiduciary relationship exists "when confidence is reposed on one side and there is resulting superiority and influence on the other," the Court holds that the plaintiffs' complaint adequately alleges that "defendants planned the business venture, organized the limited liability companies, solicited their involvement and exercised control over the invested funds." The Court explains further:

We agree with plaintiffs that the promoters of a limited liability company are in the best position to disclose material facts to investors and can reveal those facts more efficiently than individual investors, who would otherwise incur expense investigating what the promoters already know. In addition, the complaint alleges that the promoter defendants represented to the foreign investors that they had "particular experience and expertise" in the New York real estate market. Although the promoter defendants describe plaintiffs as "sophisticated prospective investors," the complaint paints a different picture, stating that they were "overseas investors who had little or limited knowledge of New York real estate or United States laws, customs or business practices with respect to real estate or investments." Moreover, plaintiffs contend that the promoter defendants assumed a position of trust and confidence, in part, by "playing upon the cultural identities and friendship" of plaintiffs. Accepting the totality of these allegations to be true, as we must at this early stage of the litigation, the complaint adequately pleads a fiduciary relationship.

Trust and confidence? Playing upon the friendship of plaintiffs? Didn't the First Department hold that the complaint failed to plead a fiduciary relationship on those bases? The Court of Appeals makes no mention of it, nor does it acknowledge the defendants' argument that the Court of Appeals lacks jurisdiction on an interlocutory appeal to upset the First Department's holding on those points.

And what of the First Department's holding based on promoter status? The Court essentially punts the question whether a promoter as such owes a fiduciary duty, writing in a footnote that "[b]ased on the foregoing analysis, we need not decide the question of whether the promoter defendants' status as organizers of the limited liability companies, standing alone, was sufficient to allege a fiduciary relationship."

The late Professor Ribstein, who filed an amicus brief in the case supporting defendants' position, commented in one of his last blog posts that "the Court of Appeals, without saying so directly, effectively rejected the lower court’s determination that the complaint had not alleged a fiduciary relationship. The Court did so in order to avoid a holding in favor of promoter liability that would, I argued, 'make a mess out of NY LLC law.'" Professor Ribstein also took satisfaction from another footnote in the Court of Appeals' decision:

In its opinion, the Court recognized (n. 1) that “[c]ertainly, there are differences between limited liability companies and traditional corporations, but the distinctions are not relevant to the allegations in this case.” They were not relevant because the Court strained to accept the alternative basis for a fiduciary duty the lower court had rejected. In short, I invited the Court not to wreck NY LLC law by imposing open-ended pre-formation promoter liability. The Court accepted my invitation although this forced it to weave a circuitous course around the lower court’s opinion.

Doubtless there's some future plaintiff out there who, undeterred by the Court of Appeals' inconclusive handling of the issue, will bring another LLC promoter liability case based solely on promoter status. And when that happens, we shall see if Professor Ribstein's assessment proves correct. 

Update January 6, 2012:  Read here Doug Batey's take on the Roni decision.

Centro, the more important of the two decisions, involves a Delaware LLC that owned an Ecuadorian telecommunications company known as Conecel.  A company called Telmex, owned by Mexican billionaire Carlos Slim, held a 60% controlling interest in Conecel.  In 2000, the plaintiffs, who held the other 40%, entered into various agreements with Telmex, among other things, giving plaintiffs the right to put their stake to Telmex at a fixed price based on a 1999 valuation.

Plaintiffs alleged that Telmex subsequently dodged their requests for financial information and otherwise falsely painted a bleak picture of Conecel's finances, causing plaintiffs in 2002 to exercise put rights for half their stake for $64 million.  In 2003, after Telmex allegedly continued to obfuscate and provide misleading financial  disclosure, Telmex offered to purchase plaintiffs' remaining stake for another $64 million.  Plaintiffs accepted.  The 2003 purchase agreement included a broad general release in Telmex's favor of all claims relating to plaintiffs' membership interests in Conecel.

In 2008, after a government audit allegedly disclosed that Conecel's financial condition in 2001-03 was significantly better than represented by Telmex, the plaintiffs sued Mr. Slim and his companies for breach of fiduciary duty and fraudulent inducement, claiming that had they known Conecel's true condition, instead of selling their shares they would have exercised certain exchange rights that would have given them shares in a roll-up entity worth over $1 billion in 2008.

The trial court denied defendants' motion to dismiss the suit based on the general release.  Defendants appealed to the Appellate Division, First Department which, by 3-2 vote in a June 2010 decision, reversed the lower court and dismissed the complaint.  (Read here my post about the First Department's ruling.)  Plaintiffs then appealed to the New York Court of Appeals. 

Following oral argument last April (watch it here), the Court of Appeals last week unanimously affirmed the First Department majority's ruling.  In a unanimous decision written by Judge Carmen Ciparick, the court starts its analysis by stating the general rule, that a valid release constitutes a complete bar to an action on a claim which is the subject of the release, and that "a party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release."  The alleged fraudulent conduct in Centro, the court finds,

falls squarely within the scope of the release: plaintiffs allege that defendants supplied them with false financial information regarding the value of [Conecel] and that, based on this false information, plaintiffs sold their interests in [Conecel] and released defendants from claims in connection with that sale.  Thus, as the Appellate Division observed: "plaintiffs seek to convert the 2003 release into a starting point for new . . . litigation, essentially asking to be relieved of the release on the ground that they did not realize the true value of the claims they were giving up."

The court then addresses the core issue: does the defendants' status as a fiduciary, standing alone, change the equation?  Prior decisions of the First Department, exemplified most famously by Littman v. Magee, 54 AD3d 14 (2008), and Blue Chip Emerald v. Allied Partners, Inc., 299 AD2d 278 (2002), strongly suggested a "yes" answer, seemingly holding that the controlling owner involved in a transaction with another owner owes a non-releaseable fiduciary duty to disclose to the co-owner all material information bearing on the transaction.  (Read here my post on Littman.)  The Court of Appeals gives a definitive "no" answer, albeit with certain caveats, and in so doing explicitly disagrees with Littman et al.  States the court:

A sophisticated principal is able to release its fiduciary from claims — at least where, as here, 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 (see Alleghany Corp., 333 F2d at 333 ["There is no prerequisite to the settlement of a fraud case that the (fiduciary) defendant must come forward and confess to all his wrongful acts in connection with the subject matter"]; Consorcio Prodipe, S.A. de C.V., 544 F Supp 2d at 191). To the extent that Appellate Division decisions such as Littman v Magee (54 AD3d 14, 17 [1st Dept 2008], Blue Chip Emerald v Allied Partners Inc. (299 AD2d 278, 279-280 [1st Dept 2002]), and Collections v Kolber, 256 AD2d 240, 241 [1st Dept 1998]) suggest otherwise, they misapprehend our case law. Plaintiffs here are large corporations engaged in complex transactions in which they were advised by counsel. As sophisticated entities, they negotiated and executed an extraordinarily broad release with their eyes wide open. They cannot now invalidate that release by claiming ignorance of the depth of their fiduciary's misconduct.

The court also emphasizes the plaintiffs' failure adequately to allege justifiable reliance on the defendants' fraudulent statements in executing the release:

Here, according to the facts alleged in the complaint, plaintiffs knew that defendants had not supplied them with the financial information necessary to properly value [Conecel], and that they were entitled to that information. Yet they chose to cash out their interests and release defendants from fraud claims without demanding either access to the information or assurances as to its accuracy in the form of representations and warranties. . .. 

In certain circumstances, a fiduciary's disclosure obligations might effectively operate like a written representation that no material facts are undisclosed, and this might satisfy a principal's obligation to investigate further. Where a principal and fiduciary are sophisticated parties engaged in negotiations to terminate their relationship, however, the principal cannot blindly trust the fiduciary's assertions. This is particularly true where, as alleged here, the principal has actual knowledge that its fiduciary is not being entirely forthright . . ..

Plaintiffs repeatedly and unsuccessfully attempted to hold defendants to their disclosure obligations for years before negotiating and executing the sale of their shares and the accompanying releases. Moreover, the complaint alleges that plaintiffs were driven to sell because they were "wary of the threat that defendants would never negotiate in good faith and would never distribute the Conecel profits." Plaintiffs therefore cannot be said to have reasonably relied on defendants' assertions regarding Conecel's performance in executing the releases.

The 2003 release, the court concludes, "was intended to bar the very claims that plaintiffs now bring."  The plaintiffs, who released defendants "without conducting even minimal dilgence to determine the true value of what they were selling," also "fail to allege that the release was induced by fraud beyond that contemplated by the release."

I won't linger on the court's brief, unsigned opinion in Arfa v. Zamir in which the plaintiffs sued a co-member of a realty holding company for fraudulent inducement concerning an agreement that gave the defendant co-equal management authority, notwithstanding the agreement's inclusion of a broad general release.  The court affirms the First Department's decision enforcing the release and dismissing the case, finding that the plaintiffs failed to allege that the release was induced by a separate fraud or that plaintiffs justifiably relied on defendant's fraudulent misstatements in executing the release.  In addition,

[b]y their own admission, plaintiffs, who are sophisticated parties, had ample indication prior to June 2005 that defendant was not trustworthy, yet they elected to release him from the very claims they now bring without investigating the extent of his alleged misconduct.

(For more background on Arfa and the lower courts' decisions, read here my prior post and watch here the oral argument before the Court of Appeals.)

In my post three years ago I queried whether, after Littman, "business owners [can] pursue and exploit the profitable sale of their business or its assets without risk of liability to a former partner whose interest was acquired at a 'cheaper' price."  With its explicit repudiation of the analysis used in Littman, the Court of Appeals in Centro and Arfa has reinvigorated the purpose and efficacy of negotiated releases in buy-outs and other agreements between co-owners/fiduciaries of closely held companies.  The onus rests on the selling party to perform adequate diligence prior to completing the transaction, or otherwise bargaining for consideration commensurate with its chosen level of diligence.  Be mindful, however, that Centro and Arfa both involved sophisticated business owners on both sides of the transactions with prior histories of strife and mistrust.  Take away those elements and it still may be possible for a business owner to overcome a release given in connection with a buy-out or other agreement based on alleged failure by a fiduciary to disclose material information. 

The plaintiffs allege that in late 2004, Zamir recommended that the parties acquire Academy Street based on various income and expense projections, and that in reliance on Zamir's recommendation and presentations they approved the deal which closed in April 2005.  Plaintiffs allege that in the summer of 2005, they learned of serious problems with the building's physical condition which allegedly were known to Zamir and withheld from plaintiffs at the time Zamir solicited their approval.

Meanwhile, plaintiffs and Zamir entered into a Governance Agreement dated June 9, 2005, which was intended to resolve growing frictions between them over management and control of the entire real estate portfolio.  The plaintiffs allege that they "reluctantly agreed" to Zamir's "demand" that they enter into the Governance Agreement "to appease Zamir and prevent him from destroying the value of the real estate portfolio . . .."  Mutual veto power over management decisions appears to be the main thrust of the Governance Agreement.  The Governance Agreement also contains a mutual general release in which the parties release one another from "any and all claims . . . known or unknown" arising from events that pre-date the Governance Agreement.

Zamir moved to dismiss the plaintiffs' Fifth Cause of Action for fraudulent inducement, arguing that it was barred by the release contained in the Governance Agreement.  Justice Ramos's December 2008 decision denied the motion, holding that under the First Department's decision in Littman v. Magee, 54 AD3d 14 (1st Dept 2008),

to the extent that Zamir owed Plaintiffs a fiduciary duty by virtue of being co-managers, he may not rely upon the Release to insulate himself from liability where he intentionally concealed from Plaintiffs the physical condition of the Academy Street Property, and which misrepresentation was an inducement to enter into the release from the outset.

Zamir appealed.  On July 13, 2010, the First Department handed down its decision, reported at 2010 NY Slip Op 06070, reversing Justice Ramos's ruling and dismissing the fraudulent inducement claim.  The court's unanimous decision was authored by Associate Justice David Friedman who also wrote the majority opinion in the First Department's 3-2 ruling in the Centro case discussed in last week's post.

Justice Friedman's Arfa opinion emphasizes factors closely tracking those found critical in Centro.  He notes that the fraudulent inducement claim:

• "falls squarely within the scope of the general release";
• that the Governance Agreement "was the result of rigorous, arm's-length negotiations between the highly sophisticated parties";
• that "by the time the parties began negotiating the Governance Agreement, they had already developed an adversarial, even hostile relationship";
• that given the plaintiffs' own allegations of Zamir's dishonesty, they had a "heightened" affirmative duty to protect themselves from misrepresentations by investigating all of the circumstances and details surrounding the Governance Agreement;
• that had the plaintiffs performed the requisite due diligence, the matters concerning the Academy Street Building's physical condition, about which Zamir allegedly made misrepresentations, "presumably would have been revealed"; and
• that the plaintiffs could not establish reasonable reliance on Zamir's alleged misrepresentations when they failed to make "any use of the means available to them to ascertain the truth of the alleged misrepresentations at issue before they entered into the Governance Agreement."

Justice Friedman, quoting from his Centro opinion, also rejects what he calls the "implication" of the plaintiffs' position, i.e., that "a fiduciary can never obtain a valid release without first making a full confession of its sins to the releasor," and then goes on to distinguish Littman v. Magee, writing: 

In Littman, a general release in the agreement for the sale of the plaintiff's interest in a closely-held business was held not to bar a fraud action against a former fiduciary at the pleading stage because the complaint was deemed to allege that the defendant fiduciary had told the plaintiff that no further documentation bearing on the valuation of the enterprise existed. While Littman reaffirmed that even a fraud claim against a fiduciary must establish justifiable reliance on the alleged misstatement, the case held that the alleged misrepresentation concerning the availability of information relevant to the transaction raised an issue as to whether plaintiff justifiably relied on the defendant's statements without making further investigative efforts (54 AD3d at 19). Here, by contrast, Arfa/Shpigel do not allege that Zamir did or said anything to impede their ability to investigate the truth and completeness of his representations concerning the Academy Street building. On the contrary, assuming the truth of the complaint, Arfa/Shpigel never asked Zamir for even a page of documentation of the condition of the building.

So there you have it.  Two First Department decisions, Centro and Arfa, both of which limit Littman to its specific facts and implicitly reject Littman's broader pronouncements suggesting that a release given to a fiduciary does not protect against a nondisclosure-based, fraudulent inducement claim.  As noted last week, the Centro plaintiffs filed a notice of appeal as of right to the Court of Appeals, which will have the last word, so stay tuned. 

Update October 12, 2010:  Today the Appellate Division, First Department, granted a motion by Arfa/Shpigel for leave to appeal to the New York Court of Appeals, where it will join the already pending Centro appeal.   

Update May 2, 2011:  The oral argument of the appeal in Arfa to the Court of Appeals was heard on April 27, 2011.  Click here to watch the video. 

Promoter liability cases such as Dickerman faded away in the aftermath of federal securities laws and state blue sky legislation mandating comprehensive disclosure to investors.  Or so I thought, until I read a surprising decision handed down by a Manhattan appeals court earlier this month, in Roni LLC v. Arfa, 2010 NY Slip Op 04700 (1st Dept June 3, 2010), in which the court held that the organizer of a New York limited liability company

is a fiduciary of the investors it solicits to become members.  The fiduciary duty includes the obligation to disclose fully any interests of the promoter that might affect the company and its members, including profits that the promoter makes from organizing the company.  [Citations omitted.]  

The decision affirmed a lower court ruling dated April 17, 2009, by New York County Commercial Division Justice Charles E. Ramos.  The ruling stems from a hydra-headed litigation (read here my prior post concerning a related suit) between a group of Israeli investors and several New York based real estate developers who solicited them to invest in a series of LLCs formed to acquire, renovate, manage and ultimately resell two dozen or so residential apartment buildings located in upper Manhattan and the Bronx.  The plaintiff investors claimed fraud and breach of fiduciary duty based on the defendants' alleged failure to disclose, prior to the formation of the LLCs and before plaintiffs acquired their membership interests, that the defendants stood to gain over $6.5 million in "commissions" paid by the property sellers and mortgage brokers.   

The defendants moved to dismiss the amended complaint (read here) for failure to state valid claims, among other grounds.  The lower court denied the motion as to the fiduciary breach claim on two, separate bases.  First, it held that the plaintiffs alleged facts sufficiently showing a "relationship of trust, confidence or superior knowledge or control" between the plaintiff investors and the defendant "promoters," coupled with allegations of false representations by defendants.  Second, it held that the defendants' mere status as LLC "promoters" imposed on them a fiduciary duty to disclose and be accountable for "secret profits derived from" the LLC's organization.

The appellate court disagreed with the first basis, concluding that the alleged personal relationships and disparity in real estate expertise were not sufficient to establish a fiduciary duty.  "However," the court went on in upholding the second basis,

plaintiffs' allegations that the promoter defendants planned the business venture, organized the LLCs, and solicited plaintiffs to invest in them are sufficient to establish a fiduciary relationship.

The appellate court, as did the lower court, rested this first-of-its-kind holding on three ancient case authorities involving corporations, including the above-mentioned Dickerman, an even older New York state court decision, Brewster v. Hatch, 122 NY 349 (1890), and a 1920 U.S. Second Circuit decision, Gates v. Megargel, 266 F. 811 (2d Cir.), cert. denied, 254 U.S. 639 (1920).  The appellate court also cited section 203(a)(iii) of the New York LLC Law which provides:

One or more persons may act as an organizer or organizers to form a limited liability company by . . . (iii) filing such articles, entitled "Articles of organization of ... (name of limited liability company) under section two hundred three of the Limited Liability Company Law," in accordance  with section two hundred nine of this article.

Law Professor Larry Ribstein, who co-authors the leading LLC treatise and has been a vocal critic of New York LLC jurisprudence, writing for the Truth on the Market blog, called the Roni court's reliance on LLC Law section 203 "questionable," noting that it "merely provides for formation of the LLC, not for any duties of the organizers."  His broader critique of the Roni decision is worth quoting at length:

There is no reason to think that the old corporate promoter cases were a better source of law on this issue than uncorporation law (see generally, Rise of the Uncorporation as to the uncorporate nature of LLCs). Indeed, it’s not even clear the old corporate cases are still good law for corporations. The uncertainties resulting from stretching the duty to disclose to the pre-formation period have now been replaced by federal disclosure law under Securities Act of 1933, which also applies to at least some LLCs.  

The case may have been correctly decided because it’s possible the complaint alleged a misrepresentation which would be actionable without implying a fiduciary duty. But the court’s reasoning using hoary old corporate promoter cases to create a pre-formation fiduciary duty to disclose in LLC cases promises to make a mess out of NY LLC law. It also creates significant problems for business people who now have a fiduciary duty, with uncertain disclosure duties, imposed on what the court itself recognized is basically an arms’ length market relationship. It’s not even clear how parties can contract out of this duty, since the whole problem is that they do not yet have a contract.

It seems the only way NY business people involved in business formation can avoid this problem is simply to avoid New York.

Roni also raises serious issues of judicial deference to legislative prerogative in the policy arena.  New York's LLC Law essentially assigns an LLC "organizer" -- the term "promoter" does not appear in the statute -- the ministerial task to form the entity by filing with the Department of State bare-bones articles of organization stating the LLC's name, the county in which it does business, and designating an agent for service of process.  Under section 203(b), the organizer need not even be a member of the LLC.  Unlike a corporation's certificate of incorporation, the LLC articles do not establish number of shares or par value.  Rather, the LLC's capitalization and all other organizational provisions are left to the written operating agreement required by Section 417 of the LLC Law.  Under section 417(c), the operating agreement may be entered into even before the LLC is formed, and "shall" set forth all provisions concerning the LLC's business, the conduct of its affairs, and the "rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents, as the case may be."  Under the same section, the operating agreement may eliminate or limit the liability of managers and members "for any breach of duty in such capacity," subject, however, to the manager's mandatory duties of good faith and due care under section 409.

Given this fairly comprehensive legislative scheme, the question Roni poses, apart from the doctrinal and practical problems identified by Professor Ribstein, is whether (1) a court should use its common law authority to impose a status-based fiduciary duty on a class of persons, called "promoters," that the statute does not acknowledge, (2) in favor of a class of persons also not acknowledged by the statute, i.e., potential members of the LLC, (3) to expand protection beyond that already provided by common law remedies for fraud and the "special knowledge" branch of fiduciary law, (4) in order to create a new remedy arguably at odds with the intent of the LLC Law to require parties via the operating agreement to contractually allocate risk and reward as between those who manage the LLC and those who don't. 

These are weighty issues, deserving of review by New York's highest court, the Court of Appeals. 

Update October 30, 2011:  The First Department granted the defendants' application for leave to appeal to the Court of Appeals. The appeal will be argued on November 15, 2011. Professor Ribstein has filed a friend-of-the-court brief in support of the defendants' appeal. 

Arfa is a convoluted, multi-layered litigation among the controlling members of a series of real estate holding companies organized as LLCs, outside investors who intervened in the case, and a court-appointed temporary receiver.  The case is assigned to New York County Commercial Division Justice Charles E. Ramos who wrote a helpful summary of the factual background in an earlier decision dated September 8, 2008 (21 Misc3d 1101(A)).

The plaintiffs, Rachel Arfa and her husband, Alexander Shpigel, filed a 54-page Second Amended Complaint which includes a Fifth Cause of Action for fraud against defendant Gadi Zamir relating to one of the realty venture's acquisitions known as Academy Street.  The plaintiffs allege that in late 2004, Zamir recommended that the parties acquire Academy Street based on various income and expense projections, and that in reliance on Zamir's recommendation and presentations they approved the deal which closed in April 2005.  Plaintiffs allege that in the summer of 2005, they learned of serious problems with the building's physical condition which allegedly were known to Zamir and withheld from plaintiffs at the time Zamir solicited their approval.

Meanwhile, plaintiffs and Zamir entered into a Governance Agreement dated June 9, 2005, which was intended to resolve growing frictions between them over management and control of the entire real estate portfolio.  The plaintiffs allege that they "reluctantly agreed" to Zamir's "demand" that they enter into the Governance Agreement "to appease Zamir and prevent him from destroying the value of the real estate portfolio . . .."  Mutual veto power over management decisions appears to be the main thrust of the Governance Agreement.  The Governance Agreement also contains a mutual general release in which the parties release one another from "any and all claims . . . known or unknown" arising from events that pre-date the Governance Agreement.

Zamir moved to dismiss the fraud claim based on the release.  As summarized in Justice Ramos's decision denying the motion dated December 8, 2008 (2008 NY Slip Op 33348(U)), the plaintiffs argued that 

to the extent that Zamir owed Plaintiffs a fiduciary duty by virtue of being co-managers, he may not rely upon the Release to insulate himself from liability where he intentionally concealed from Plaintiffs the physical condition of the Academy Street Property, and which misrepresentation was an inducement to enter into the release from the outset.

Justice Ramos agreed with plaintiffs, citing Littman for the proposition that "a fiduciary cannot, by a general release, insulate itself of its fiduciary obligation of full disclosure by wrongfully withholding the very information that a party requires to make a reasoned judgment on whether to agree to the general release at the outset."  The decision continues:

As a fiduciary, Zamir was under an affirmative duty to disclose any information that could reasonably bear on Plaintiffs' consideration to enter into the general release (Littman, 54 AD3d at 18).  Accepting the [Second Amended Complaint's] allegations as true, as the Court must do at this stage, Zamir failed to disclose to Plaintiffs vital material facts in order to permit them to make a reasoned judgment as to whether to agree to the terms of the Release.  In addition to failing to disclose to Plaintiffs, it is alleged that Zamir intentionally concealed from Plaintiffs material facts, including the engineering reports' findings concerning the structural defects in the property, and the Violations Undertaking.

I don't know whether the plaintiffs were facing potential claims by Zamir when they executed the Governance Agreement with mutual general releases.  In any event, I have to assume that Zamir bargained for the release as part of the consideration for whatever concessions he made in the Governance Agreement.  Had he understood that the release would not shield him from future claims based on alleged nondisclosures concerning Academy Street or any of their other real estate projects, would he have entered into the Governance Agreement?  Obviously I can't  answer the question or speculate whether it would have induced him to make additional disclosures that may or may not have soured the deal.  The broader question, which I'll also leave for others to answer, is whether it makes sense, and at what cost to public policy favoring out-of-court settlement, to expand the fiduciary exception to enforcement of general releases based on an intrinsically amorphous duty of disclosure.

Update July 19, 2010:  The First Department handed down two decisions in June and July 2010 significantly pruning Littman's broad pronouncements.  One of those decisions reverses the lower court's Arfa ruling discussed above.  Read here the first of two posts on the subject, highlighting the First Department's decision last month in the Centro Empresarial case.

Update July 29, 2010:  Read here the second post discussing the First Department's July 13, 2010, decision reversing Justice Ramos's above-discussed ruling in Arfa.