DELAWARE CHANCERY COURT DISMISSES CLAIMS DUE TO A PRIOR BROAD SETTLEMENT RELEASE
By Scott Waxman and Thomas Meyer
In Geier v. Mozido, LLC, C.A. No. 10931-VCS (Del. Ch. Sept. 29, 2016) (Slights, V.C.), the Delaware Court of Chancery granted the motion of Mozido LLC (“LLC”) and Mozido, Inc., a subsidiary of LLC (“Inc.” and together with LLC, “Defendants”), to dismiss claims relating to incentive options promised, but not delivered, to a former director of LLC (“Plaintiff”).
Plaintiff alleged that he was promised incentive options to acquire membership units in LLC (the “Options”) in exchange for his service on LLC’s board of directors. Plaintiff had countersigned a letter from LLC inviting Plaintiff to join LLC’s board in exchange for the Options and proceeded to serve on the board. Later, in response to LLC’s need to quickly raise cash, Plaintiff caused an irrevocable trust, of which Plaintiff was a trustee, and a limited liability company, of which Plaintiff was Chairman (together, the “Plaintiff Entities”) to loan $3 million to an affiliate of LLC’s majority investor (the “Investor”) pursuant to a promissory note. The note was personally guaranteed by the Investor and another member of LLC (the “Member”).
After a default on the Note, the Plaintiff Entities commenced an action to enforce the note. The Investor and the Member executed a confession of judgment in favor of the Plaintiff Entities. The Member paid the judgment and sought reimbursement from the Investor and LLC. The Member executed a settlement with the Investor and LLC releasing claims relating to the LLC (the “Member Release”). Investor and LLC then sought to obtain a release from Plaintiff and the Plaintiff Entities for any claims against the LLC. The Plaintiff Entities entered into such a release (the “Plaintiff Release”), but the release did not list Plaintiff individually as a releasor. It also did not specifically include a carve-out for any claim Plaintiff might have against LLC, including any claim relating to the Options.
Because Plaintiff never received the Options, he brought claims against the Defendants for breach of contract, unjust enrichment and, as to Inc., tortious interference. Defendants moved to dismiss Plaintiff’s claims under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted. In particular, Defendant argued that (i) Plaintiff’s complaint failed to plead the existence of a contract that could be breached, (ii) Plaintiff could not plead unjust enrichment because he pleaded that his rights to the Options arose from contract, and (iii) Plaintiff released any claims he had to the Options (“the Option Claims”) when the Plaintiff Entities executed the Plaintiff Release.
With respect to Defendant’s third argument, Plaintiff argued that he was not a releasor under the Plaintiff Release. Plaintiff also contended that the Plaintiff Release was a component part of the Member Release, such that the Plaintiff Release must be read in conjunction with certain Member Release documents that reflected that the Plaintiff Release was intended to release only claims relating to the $3 million loan and not the Option Claims.
Initially, the Court addressed tenets of contract construction. The Plaintiff Release was governed by New York law. Under New York law, when the language of a release is clear and unambiguous, and particularly when the parties are sophisticated and represented by counsel, a court will give effect to the intention of the parties as evidenced by the language within the four corners of the document. In cases involving less sophisticated parties, the court might look at the context of the settlement and other surrounding circumstances in order to discern intent. Additionally, a general release is construed most strongly against the releasor, and any limit to the release must be expressly stated.
The Court determined that the Plaintiff Release was between sophisticated parties represented by competent counsel and thus declined to turn to the Member Release documents or earlier drafts of the Plaintiff Release to construe the agreement or to “create ambiguity” about whether the Option Claims were intended to be excluded from the Plaintiff Release. The Court noted that New York law holds that contracts should be read separately unless their “history and subject matter show them to be unified.” Even though the Plaintiff Release was referenced in and attached to the Member Release documents, nothing within the four corners of the Plaintiff Release indicated that it was contingent upon or related to the Member Release. The Plaintiff Release and the Member Release were executed separately, and among different parties.
The Court also disagreed with Plaintiff’s argument that the terms of the Plaintiff Release revealed that he was not an intended releasor. The Plaintiff Release identified the Plaintiff Entities as releasors. It did not specifically identity Plaintiff, but it did release any claims of the releasors’ affiliates. Plaintiff argued that the term “affiliate” was ambiguous. In contrast, the Court referenced standard dictionary definitions of affiliate and concluded that the only reasonable interpretation of the term was that it included Plaintiff in his individual capacity. Plaintiff’s complaint indicated that he was in control of the Plaintiff Entities. Even if Plaintiff were not in control, Plaintiff has an “indisputably” close connection and association with the Plaintiff Entities. The Court added that since the Plaintiff Release was meant to be broad, it would be appropriate to interpret the term affiliate broadly as well. Plaintiff also argued that the term affiliate could apply only to an entity and not an individual, but the Court found no principled basis to draw that distinction.
Finally, the Court found that Plaintiff released the Option Claims against both Defendants. Even though Inc. was not explicitly named in the Plaintiff Release, the broad release defined releasees to include subsidiaries of LLC.
Accepting all well-pleaded facts in the complaint as true and drawing all reasonable inferences in Plaintiffs’ favor, as is required with a motion to dismiss, the Court granted Defendants’ motion to dismiss, finding that all of the Option Claims were released as part of the Plaintiff Release. Because the Plaintiff Release extended to Plaintiff in his individual capacity and released his claims against LLC and Inc., the Court did not need not address Plaintiff’s other claims.