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Centro Empresarial Cempresa S.A. v. AMÉRICA MÓVIL

June 3, 2010

CENTRO EMPRESARIAL CEMPRESA S.A., ET AL., PLAINTIFFS-RESPONDENTS,
v.
AMÉRICA MÓVIL, S.A.B. DE C.., ET AL., DEFENDANTS-APPELLANTS.



Defendants appeal from an order of the Supreme Court, New York County (Richard B. Lowe III, J.), entered December 10, 2008, which denied their motion to dismiss the complaint.

The opinion of the court was delivered by: Friedman, J.P.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

David Friedman, J.P., John W. Sweeny, Jr., James M. Catterson, Dianne T. Renwick and Helen E. Freedman, JJ.

650164/08

Plaintiffs allege that they were induced to sell out their indirect minority interest in an Ecuadorian mobile telephone company by misrepresentations made to them by defendants (the owner of the majority interest and its affiliates) concerning the value of the underlying enterprise. We hold that plaintiffs' various causes of action for fraud and breach of contract are barred by the general release they granted defendants in connection with the sale of their interest, which release covered any and all claims, "whether past, present or future, actual or contingent," arising from the parties' association as co-investors in this enterprise.

Plaintiffs Centro Empresarial Cempresa S.A. and Conecel Holding Limited are British Virgin Islands entities that, as of 1999, held a combined majority interest in defendant Consorcio Ecuatoriano de Telecommunicaciones S.A. Conecel (Conecel), the Ecuadorian mobile telephone company. As alleged in the complaint, in 1999, plaintiffs were seeking an outside investor to infuse additional capital into Conecel. To that end, they approached defendant Carlos Slim HelÚ (Slim), the chairman of defendant TelÉfonos de MÉxico, S.A. de C.V. (Telmex), a Mexican telecommunications company with operations (through subsidiaries) throughout Latin America. Slim expressed interest in acquiring 100% of Conecel, but plaintiffs insisted on retaining a minority interest in the company and on participating in any "upside" that might result from a future public offering of its shares.

After several months of negotiation, the parties entered into a number of related agreements, dated as of March 8, 2000, under which Telmex invested $185 million in Conecel and acquired a 60% indirect interest in the company, with plaintiffs (together with a third investor not participating in this lawsuit) retaining a combined 40% indirect interest. As a result of the transaction, the parties held their interests in Conecel through defendant Telmex Wireless Ecuador LLC (TWE), a newly formed Delaware limited liability company*fn1. Telmex held its interest in TWE through a subsidiary, defendant Telmex Wireless LLC (Telmex LLC), which, under the TWE limited liability company agreement, was given the responsibility to "oversee [TWE's] accounting, tax and recordkeeping matters."*fn2

One of the contracts made in connection with Telmex's investment in Conecel was the Agreement Among Members, dated March 8, 2000. Section 3.09 of the Agreement Among Members provided that, in the event Telmex sought to consolidate its Latin American telecommunications interests into one entity "for purposes of selling the equity securities of such entity in international capital markets" (a transaction the complaint refers to as a "roll-up"), plaintiffs would have the right to "negotiate in good faith (for a period not to exceed 20 days)" to exchange their units in TWE for equity shares of the new entity "at a mutually satisfactory rate of exchange."*fn3

Another contract made in connection with the transaction was the Put Agreement, dated March 8, 2000, which granted plaintiffs the right to require Telmex LLC to purchase, at a pre-set price, up to 95% of plaintiffs' TWE units in increments during three six-month windows of time over a period of 61/2 years. The price set by the Put Agreement (referred to in the complaint as the "Floor Price") was based on Conecel's value at the end of 1999, at which time (plaintiffs allege) Ecaudor's economy was in crisis and, as a result, Conecel's value was depressed. The Put Agreement entitled plaintiffs to "put" up to 50% of their TWE units to Telmex LLC during the 180 days following March 8, 2002; up to 75% of their units during the 180 days following March 8, 2004; and up to 95% of their units during the 180 days following March 8, 2006.

In September 2000, Telmex formed defendant AmÉrica MÓvil, S.A.B. de C.V. (AmÉrica MÓvil), a spin-off company which became the holding company for a number of Telmex's telecommunications interests, including TWE (and thus Conecel). The complaint alleges that plaintiffs did not learn of the formation of AmÉrica MÓvil until December 2000, when the latter filed a registration statement with the United States Securities and Exchange Commission setting forth the trading markets on which its shares were listed, including the New York Stock Exchange and Nasdaq. The complaint further alleges that "[t]he AmÉrica MÓvil spin-off constituted a roll-up as covered by Section 3.09 of the Agreement Among Members," triggering plaintiffs' right to a 20-day negotiation for an exchange, "at a mutually satisfactory rate," of their TWE units for AmÉrica MÓvil shares.

The complaint alleges that, beginning in March 2001, plaintiffs sought to enter into negotiations with defendants concerning an exchange of their TWE units for AmÉrica MÓvil shares and, to that end, requested that defendants provide them with Conecel's and TWE's internal "financial information" and business plans. The complaint further alleges that defendants failed to provide plaintiff with the requested information, in violation of various contractual obligations to do so, and instead consistently brushed off plaintiffs' requests for information, failing to return phone calls and directing plaintiffs from one executive to another. Plaintiffs also allege that, to the extent defendants provided them with any information about the value of Conecel and TWE, such information, whether conveyed orally or in written documents (such as balance sheets), was to the effect that Conecel was "financially distressed with uncertain prospects," consistent with the company's public filings. Plaintiffs allege that the bleak picture of Conecel's financial condition thus portrayed to them (and to investors generally through public filings) was materially false and misleading. In fact, plaintiffs allege, Conecel was performing much better than reflected in defendants' oral and written representations and public filings.

It is further alleged that plaintiffs, having been led by defendants to believe that Conecel was in financial difficulty, disposed of their interest in Conecel in two stages. First, in March 2002, plaintiffs exercised their right under the Put Agreement to sell 50% of their TWE units to Telmex LLC at the pre-set "Floor Price," which amounted to $64 million. In this regard, plaintiffs allege: "Deprived by [d]efendants of complete and accurate financial information regarding Conecel in public filings [sic], [plaintiffs] were deprived of having an informed negotiation for the exchange [pursuant to section 3.09 of the Agreement Among Members] and were wary of the threat that [d]efendants would never negotiate in good faith and would never distribute the Conecel profits through TWE LLC as agreed by them. Consequently, [plaintiffs] were left with no practical alternative but to dispose of the portion of their interest in . . . TWE LLC that could be sold through the exercise of the First Put [under the Put Agreement]."

The complaint alleges that defendants' obfuscation and misrepresentation of Conecel's true financial condition continued for more than a year after plaintiffs' exercise of their first option under the Put Agreement. Ultimately, in 2003, Telmex LLC offered to purchase all of plaintiffs' TWE units at the "Floor Price" set by the Put Agreement, but in advance of the schedule set by that agreement. Plaintiffs accepted the offer, allegedly "in reliance on [defendants'] misrepresentations," and the parties entered into a Purchase Agreement, dated July 29, 2003, pursuant to which plaintiffs sold their remaining TWE units to Telmex LLC at the "Floor Price," which amounted to another $64 million. It is undisputed that the Purchase Agreement was the product of rigorous, arm's length negotiations between sophisticated parties, all of whom were advised by their own expert legal counsel.

Pursuant to the Purchase Agreement, the parties executed and exchanged a broadly drafted mutual release (the 2003 release), under which, in pertinent part, plaintiffs "fully release[d] [defendants] of and from all manner of actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands, liability [sic], whatsoever, in law or equity, whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members and/or arising out of, based upon, attributable to or resulting from the ownership of membership interests in [TWE] or having taken or failed to take any action in any capacity on behalf of [TWE] or in connection with the business of [TWE]."

The complaint further alleges that, years after the buy-out of plaintiffs' interest, defendants' alleged dishonesty was exposed as a result of an audit of Conecel conducted by the Ecuadorian tax authority. The findings of the tax audit allegedly revealed that "the true financial results of Conecel in 2001-2003 were considerably better than represented by [d]efendants to [p]laintiffs when [d]efendants offered to purchase [p]laintiffs' Units [in TWE]." As a result, plaintiffs commenced this action for fraud and breach of contract in 2008. Plaintiffs allege that, had defendants honored their right to negotiate an exchange of their TWE units for AmÉrica MÓvil shares, plaintiffs would have owned AmÉrica MÓvil shares worth more than $1 billion as of May 30, 2008 (the date of the complaint). By contrast, plaintiffs complain, defendants induced them to sell their TWE units in the 2002 and 2003 transactions for aggregate consideration of less than $130 million.

Based on the allegations of the complaint itself, this action is barred in its entirety, as a matter of law, by the 2003 release that plaintiffs granted defendants in connection with the sale of all of their remaining interest in TWE to Telmex LLC for $64 million, years in advance of their right to require Telmex LLC to purchase nearly all of that interest under the Put Agreement. Indeed, plaintiffs do not deny that their claims fall squarely within the scope of the plain terms of the 2003 release which, to reiterate, extinguishes defendants' liability in "all manner of actions . . . whatsoever, in law or equity, whether past, present or future, actual or contingent, arising under or in connection with the Agreement Among Members [of TWE] and/or arising out of, based upon, attributable to or resulting from the ownership of membership interests in [TWE] or having taken or failed to take any action in any capacity on behalf of [TWE] or in connection with the business of [TWE]."

Notwithstanding that the 2003 release, by its terms, encompasses any kind of claim arising from the parties' holding of interests in TWE, plaintiffs argue that the allegations of the complaint, if true, make out a case for voiding the 2003 release on the ground of fraudulent inducement. In this regard, plaintiffs point to their allegations that, during the period from 2001 through the buy-out of their interest in TWE in 2003, defendants were (as plaintiffs claim) misrepresenting to them that Conecel (which was owned by TWE) was "financially distressed with uncertain prospects," consistent with the company's public filings. According to the complaint, defendants never corrected these alleged misrepresentations at any time before the execution of the 2003 release. As a result, plaintiffs allege, they were induced to sell their interest in TWE to defendants in July 2003 (foregoing the negotiated exchange to which they were entitled) and, as part of that transaction, to grant defendants the 2003 release. It is plaintiffs' contention that these allegations, if proven at trial, would establish that the 2003 release was the product of fraudulent inducement and, as such, voidable.

In our view, plaintiffs have not alleged any basis for voiding the release they granted to defendants. As the Court of Appeals has explained: "[A] release may [not] be treated lightly. It is a jural act of high significance without which the settlement of disputes would be rendered all but impossible. It should never be converted into a starting point for renewed litigation except under circumstances and under rules which would render any other result a grave injustice" (Mangini v McClurg, 24 NY2d 556, 563 [1969]).*fn4 In this case, plaintiffs seek to convert the 2003 release into a starting point for new (rather than renewed) 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, namely, their claims for the value of their interests in TWE. In other words, as defendants point out, plaintiffs are arguing that a release may be invalidated by its own effectiveness. We find this contention to be self-refuting.

It is clear from the allegations of the complaint that the issue in contention between the parties when they negotiated the July 2003 sale of plaintiffs' interests in TWE to defendants was the value of Conecel, TWE's sole asset. The parties agreed on a purchase price of $64 million, which plaintiffs received immediately, thereby avoiding waiting years for the exercise dates of their second and third options under the Put Agreement (2004 and 2006, respectively). The parties further agreed that plaintiffs would grant defendants a broad release of any and all claims, "whether past, present or future, actual or contingent," arising from "the ownership of membership interests in [TWE] or having taken or failed to take any action in any capacity on behalf of [TWE] or in connection with the business of [TWE]." On its face, this language clearly includes any claim possibly to be discovered in the future that defendants had misrepresented the value of Conecel (and, thus, of TWE), the issue at the heart of the entire deal.

Whether or not plaintiffs had reason to suspect that defendants were misrepresenting the value of Conecel in the negotiation of the 2003 transaction, they cannot reasonably contend that they did not intend to release possible fraud claims as to that matter of which they were unaware. Whatever subjective intent they may have harbored, the objective meaning of the release they signed was that any such fraud claims they might subsequently discover were being extinguished. A party cannot overturn the settlement of a dispute as to a particular matter (here, the value of Conecel) on the ground that "it reasonably relied on a representation by [its adversary], in . . . [the] settlement negotiations, as to that exact point" (Eastbrook Caribe, A.V.V. v Fresh Del Monte Produce, Inc., 11 AD3d 296, 297 [2004], lv denied in part, dismissed in part 4 NY3d 844 [2005])*fn5. In other words, "[w]hen a party releases a claim for fraud, it can later challenge that release for fraudulent inducement only by identifying a separate and distinct fraud from that contemplated by the agreement" (DIRECTV Group, Inc. v Darlene Invs., LLC, 2006 WL 2773024, *4, 2006 US Dist LEXIS 69129, *11 [SD NY 2006]). In this case, plaintiffs have not alleged that the 2003 release granted in connection with the buy-out transaction was induced by a fraud as to any matter "separate and distinct" from the issue settled by that very transaction, namely, the value of Conecel.*fn6

Contrary to plaintiffs' contentions, a claim for fraud within the scope of a release can be released even if it is unknown to the releasor, and notwithstanding that the releasee did not make full disclosure of its wrongdoing before the release was granted (see Bellefonte Re Ins. Co. v Argonaut Ins. Co., 757 F2d 523, 527-528 [2d Cir 1985]; Alleghany Corp. v Kirby, 333 F2d 327, 333 [2d Cir 1964], adhered to on reh 340 F2d 311 [1965] [en banc], cert dismissed 384 US 28 [1966]; Consorcio Prodipe, S.A. de C.V. v Vinci, S.A., 544 F Supp 2d 178, 190-192 [SD NY 2008]). As stated in the last cited case, "[a] general release executed even without knowledge of a specific fraud effectively bars a claim or defense based on that fraud'" (id. at 191, quoting Sotheby's, Inc. v Dumba, 1992 WL 27043, *7, 1992 US Dist LEXIS 965, *21 [SD NY 1992])*fn7. Further, a release that, by its terms, extinguishes liability on any and all claims arising in connection with specified matters is deemed to encompass claims of fraud relating to those matters, even if the release does not specifically refer to fraud and was not granted in settlement of an actually asserted fraud claim (see Consorcio, 544 Supp 2d at 192 [where "language of remarkable breadth makes clear the parties' intent to release all claims, including those of fraudulent inducement," court held that "(e)ven if no semblance of fraud had come to light before the releases were executed, it is clear that the parties intended to settle fraud claims"] [citations, internal quotation marks, ellipses and brackets omitted]).*fn8

While Telmex LLC, as the holder of the majority interest in TWE (and, through TWE, Conecel) owed plaintiffs certain fiduciary duties, the foregoing principles apply (at least among sophisticated parties advised by counsel) even where the releasee is a fiduciary (see Alleghany Corp., 333 F2d at 328 [enforcing release granted to defendant Kirby by corporation of which he had been an "officer() and director()"]; Consorcio, 544 F Supp 2d at 191 [" the policy underlying Alleghany and Bellefonte applies with equal force to fiduciaries'"] [brackets omitted], quoting Tyson v Cayton, 784 F Supp 69, 75 [SD NY 1992] [enforcing boxer's release of his former manager]; Gaetjens v Gaetjens, Berger & Wirth, 151 F Supp 701, 704 [SD NY 1957] [counterclaim against former corporate officer for conversion of corporate funds was barred by release, notwithstanding that corporation did not know of the conversion when release was signed]). If Telmex LLC's fiduciary status alone sufficed to prevent it from obtaining the dismissal of this action based on the 2003 release, the implication would be that a fiduciary can never obtain a valid release without first making a full confession of its sins to the releasor, regardless of the releasor's sophistication and the arm's length nature of the negotiations from which the release emerged. This is not the law (see Alleghany Corp., 333 F2d at 333 [it was "no prerequisite" to the effectiveness of a release of a fiduciary defendant that he "come forward and confess to all his wrongful acts" before the granting of the ...


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