Published by Benjamin S. Thompson - January 20, 2014 - Business & Corporate

The New York Court of Appeals recently upheld a 2011 decision allowing a sophisticated principal to release its fiduciary from claims, to the extent that the relationship is no longer one of “unquestioning trust.”  Pappas v. Tzolis arose from a three-member limited liability company (“LLC”) that had formed for the sole purpose of entering into a long-term lease on a Manhattan building.  The members of the LLC had many disputes, primarily stemming from, plaintiffs alleged, Tzolis’s obstinacy in improving and marketing the property for sale or lease.

Tzolis took sole possession of the property through a sublease of the LLC.  He then bought the other two members’ interest in the LLC for $1.5 million.  At the closing, all members signed a certificate stating that they had each performed due diligence on the sale, they were each represented by counsel, that the sellers were not relying on any representations made by Tzolis, and that Tzolis had no fiduciary duty to the sellers in connection with the assignment of their interests.

Eight months later, Tzolis assigned the lease to a subsidiary of Extell Development Company for $17,500,000.  In April 2009, Pappas and Ifantopoulos, the former LLC members, commenced an action alleging that Tzolis had surreptitiously negotiated the assignment without disclosing it to them.  The complaint claimed breach of fiduciary duty, conversion, fraud and misrepresentation, and unjust enrichment, among others, most of which did not survive dismissal.

The Court of Appeals dismissed them all.  This was no surprise considering their 2011 ruling in Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V.  The Pappas court said, “it is clear that plaintiffs were in a position to make a reasoned judgment about whether to agree to the sale of their interests to Tzolis.  The need to use care to reach an independent assessment of the value of the lease should have been obvious to  plaintiffs, given that Tzolis offered to buy their interests for 20 times what they had paid for them just a year earlier.”  Relying on the certificate the plaintiffs had signed when they sold their interest, the court bound the plaintiffs to their agreement—they had not relied on Tzolis’s representations when selling their interest, and agreed that he owed them no fiduciary duties.

Of course, this rule would not extend to fraudulent inducement that occurred apart from that which was released in the agreement.  This holding is a rule of common sense.  Plaintiffs willingly signed away their claims in exchange for the assignment consideration.  Their business experience in conjunction with their own representations precluded their remedies, costing them a windfall.

If you have questions about corporate matters, please contact Benjamin S. Thompson or any member of the Thompson Bukher Business & Corporate Practice at (212) 920-6050.

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