Eyes Wide Open: New York Court of Appeals Upholds Broad Release of Claims in Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V.

In Centro Empresarial Cempresa S.A. v America Movil, S.A.B. de C.V., 2011 NY Slip Op 4720, 1 (N.Y. June 7, 2011), the court upheld the dismissal of Plaintiffs’ complaint alleging fraud, breach of contract, and breach of fiduciary duty arising out of the sale of their interests in Telmex Wireless Ecuador (Telmex México) to defendant América Móvil, holding that the claims were barred by the broad general release signed at the time of the transaction. 

Plaintiffs, two Ecuadorian holding companies, and Telmex México, a Mexican telecommunications holding company, formed Telmex Wireless Ecuador LLC (TWE) to acquire interests in Consorcio Ecuatoriano de Telecomunicaciones S.A. Conecel (Conecel), an Ecuadorian telecommunications company.  Plaintiffs received a minority stake in TWE.

In forming TWE, the three companies signed a number of agreements, including the “Agreement Among Members,” which gave Plaintiffs the right, in the event of a rollup of TWE into another entity, to obtain reasonable financial, accounting, and legal information, and to exchange their TWE shares for shares in the new entity.  In addition, the “Put Agreement” gave Plaintiffs the right to sell their TWE shares to TelMex at a floor price during certain windows between March 2002 and March 2006.

In September 2000, Telmex México rolled TWE into a new entity, América Móvil, S.A.B. de C.V. (América Móvil).  Plaintiffs alleged that they then repeatedly requested financial information and reports in order to negotiate a share exchange under the “Agreement Among Members,” but never received this information.  Further, Plaintiffs alleged that América Móvil falsely represented Conecel’s financial position in order to avoid distributing profits.  As a result, Plaintiffs exercised their March 2002 put option and sold 50% of their TWE shares to TelMex.

In July 2003, Plaintiffs agreed to sell the remainder of their TWE shares to Telmex at the floor price.  As part of this agreement, Plaintiffs signed two releases.  The “Members Release” released Telmex from “all manner of actions…past, present, or future” arising out of the agreement or out of ownership of interests in TWE.  The “Master Release” contained similar language, but included a clause excluding releases of claims involving fraud.

In 2008, Plaintiffs brought an action against Defendants in New York Supreme Court alleging fraud, breach of fiduciary duty, and breach of contract arising from Defendants’ failure to provide financial information and negotiate a share exchange in good faith. The trial court denied Defendants’ motion to dismiss on grounds that the action was barred by release.  On appeal, Plaintiffs argued that the “Members Release” did not encompass fraud claims, and that even if it did, it was fraudulently induced.  The Court of Appeals rejected this argument, reasoning that a release may encompass unknown fraud claims and may only be challenged as fraudulently induced if the challenge identifies deception distinct from the subject of the release.  Because Plaintiffs did not allege such a distinct instance of deception, the claim of fraudulent inducement failed.  Finally, the court declined to read the fraud claim exclusion of the “Master Release” into the “Members Release,” holding that it was the latter that governed Plaintiffs’ claims.

The court also rejected Plaintiffs’ arguments that they reasonably relied upon América Móvil’s representations as a fiduciary, concluding that Plaintiffs were sophisticated principals with “eyes wide open” to Defendants’ alleged propensity for fraud, yet failed to protect themselves properly when agreeing to the “Members Release.”

Because the “Members Release” that governed Plaintiffs’ claims was broad enough to encompass fraud, and was not induced by a fraud separate from that alleged in the claims, the court affirmed the Appellate Division’s dismissal of the case under CPLR 3211 [a] [5] (“Motion to dismiss cause of action” on grounds of release) and awarded court costs to Defendants.

The primary materials for this case may be found on the DU Corporate Governance website.