Sillam v. Labaton Sucharow LLP

Background

Gerard Sillam and Aldric Saulnier sued Labaton Sucharow LLP, Christopher J. Keller, and Lawrence A. Sucharow over a referral arrangement. Under a series of 2009 settlement agreements, Labaton allegedly gave the plaintiffs an ongoing limited interest in certain future litigation fees and agreed to verify whether it represented referred clients.

The plaintiffs alleged that defendants submitted false declarations over a five-year period, stating that Labaton was not representing referred clients. In 2015, the parties entered into a Universal Settlement Agreement that ended their relationship and included a broad release of claims connected to the 2009 settlements and any other claims against Labaton and its partners, agents, or representatives. The plaintiffs alleged that they did not know about defendants’ supposed misrepresentations when they signed the agreement and would not have signed it had they known the declarations were false.

The court had previously denied in part and granted in part defendants’ motion to dismiss. Defendants then moved for reconsideration of the portion allowing the plaintiffs’ fraudulent-inducement claim to proceed.

Defendants’ Argument

Defendants argued that the fraudulent-inducement claim was barred by the Universal Settlement Agreement’s release. Relying on New York law, they contended that a party cannot challenge a release of fraud claims unless the party identifies a separate fraud from the subject of the release. They asked the court to dismiss the fraudulent-inducement claim.

Court’s Analysis

The court explained that reconsideration is an exceptional remedy available for an intervening change in controlling law, newly available evidence, or the need to correct a clear error or prevent serious injustice. It generally is not available merely to reargue an issue already decided.

The court acknowledged that the original decision had not specifically discussed defendants’ separate-fraud argument. It nevertheless concluded that the motion mainly attempted to relitigate an issue defendants had already presented and on which the court had previously been unpersuaded.

The court recognized that the release’s broad language indicated an intent to cover unknown fraud claims. But under the New York authorities discussed in the opinion, an unknown fraud claim is released only if the parties intended that result and the agreement was made fairly and knowingly. Those questions are fact-specific. At the motion-to-dismiss stage, the court considered the complaint’s well-pleaded allegations and the materials that could properly be considered with it.

The court concluded that the allegations did not establish that the Universal Settlement Agreement was fairly and knowingly made. The plaintiffs alleged that Labaton breached the 2009 agreements, that a partner repeatedly made false declarations about the firm’s representation of referred clients, and that defendants then sought a new settlement containing a broad release. According to the complaint, the information showing that the declarations were false was within defendants’ knowledge and unknown to the plaintiffs.

The court distinguished the leading New York case discussed by the parties because, in that case, the plaintiffs allegedly knew they had incomplete information and nevertheless entered into a release after choosing one transaction over another. Here, by contrast, the plaintiffs alleged that defendants’ undisclosed and separate misrepresentations caused them to enter the release itself.

The court also relied on decisions holding that a plaintiff who plausibly alleges fraudulent inducement may be entitled to rescission or non-enforcement of a release. It found that the plaintiffs had plausibly alleged they were unaware of defendants’ fraud when they signed the agreement and would not have released their claims had they known the declarations were false.

Ruling

Judge Colleen McMahon denied defendants’ motion for reconsideration. The court affirmed its earlier holding that the plaintiffs sufficiently pleaded fraudulent inducement and concluded that the release could be avoided as fraudulently induced. The clerk was directed to close the motion at Docket Number 29.