Centro Empresarial Cempresa S.A. v. Amrica Mvil, S.A.B. de C.V.

Citations: 76 A.D.2d 310; 901 N.Y.S.2d 618

Court: Appellate Division of the Supreme Court of the State of New York; June 3, 2010; New York; State Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Plaintiffs Centro Empresarial Cempresa S.A. and Conecel Holding Limited, British Virgin Islands entities, allege they were misled into selling their minority interest in Ecuadorian mobile telephone company Conecel due to misrepresentations about its value by the majority owner, Teléfonos de México, S.A. de C.V. (Telmex), and its affiliates. The court ruled that the plaintiffs' claims for fraud and breach of contract are barred by a general release they signed, which encompasses all potential claims arising from their investment relationship. In 1999, plaintiffs sought additional investment for Conecel, leading to a negotiation with Carlos Slim Helú of Telmex, resulting in a March 2000 agreement where Telmex invested $185 million for a 60% indirect interest, while plaintiffs retained a 40% indirect interest through Telmex Wireless Ecuador LLC (TWE).

Key agreements included the Agreement Among Members, which allowed plaintiffs to negotiate for equity shares in case of a consolidation of Telmex's Latin American interests, and the Put Agreement, granting them the right to sell up to 95% of their TWE units at predetermined prices over several years. The 'Floor Price' for these units was linked to Conecel's value at the end of 1999, during a period of economic crisis in Ecuador. Subsequently, in September 2000, Telmex created América Móvil, which became the holding company for its telecommunications assets, including Conecel.

Plaintiffs claim they were unaware of América Móvil's formation until December 2000, following its SEC registration statement, which disclosed its stock listings. They argue that the spin-off constituted a roll-up under Section 3.09 of the Agreement Among Members, giving them a right to negotiate an exchange of their TWE units for América Móvil shares within 20 days. From March 2001, plaintiffs sought negotiations and requested internal financial information and business plans from the defendants, who allegedly failed to provide this information and neglected their requests.

Plaintiffs contend that any information received suggested Conecel was "financially distressed" and had poor prospects, a portrayal they assert was materially false and misleading. In reality, plaintiffs allege Conecel was performing significantly better than indicated. Misled by defendants about Conecel's financial state, plaintiffs sold 50% of their TWE units to Telmex LLC in March 2002 at a preset 'Floor Price' of $64 million, feeling pressured due to incomplete financial disclosures and concerns over defendants' good faith.

Defendants' misrepresentation allegedly persisted for over a year after the initial transaction. In 2003, Telmex LLC offered to buy the remaining TWE units at the Floor Price ahead of schedule. Plaintiffs accepted this offer based on the defendants' misrepresentations, culminating in a Purchase Agreement on July 29, 2003, which was the result of thorough negotiations among informed parties assisted by legal counsel.

The Purchase Agreement led to the execution of a mutual release (the 2003 release), wherein the plaintiffs fully released the defendants from all potential legal claims related to their ownership of membership interests in TWE. The plaintiffs later alleged that, following an audit by the Ecuadorian tax authority, it was revealed that Conecel's financial performance from 2001-2003 was significantly better than what defendants had represented during the buyout of the plaintiffs' interests. Consequently, the plaintiffs initiated a lawsuit in 2008 for fraud and breach of contract, claiming that had the defendants honored their negotiation rights for an exchange of TWE units for América Móvil shares, the plaintiffs would have possessed shares valued over $1 billion instead of the less than $130 million they received.

The 2003 release, which arose from the sale of the plaintiffs' remaining interest in TWE for $64 million, legally precludes the current action as it covers all claims related to the Agreement Among Members and ownership of TWE interests. The plaintiffs acknowledged that their claims fall within the release's scope but argue that the release should be voided due to fraudulent inducement. They allege that the defendants misrepresented Conecel's financial status, leading them to sell their interests and grant the release without correction of those misrepresentations. However, it is suggested that the plaintiffs have not sufficiently established a basis for voiding the release.

A release is a significant legal act that should not be easily overturned, as it is crucial for settling disputes. In this case, plaintiffs are attempting to invalidate a 2003 release, claiming they did not understand the true value of their claims related to TWE. However, the court finds this argument contradictory, noting that the plaintiffs negotiated the sale of their interests in TWE, agreeing on a $64 million purchase price and granting a broad release of claims regarding their ownership interests. The language of the release explicitly covers any future claims related to misrepresentations about the value of Conecel, TWE’s sole asset. The court emphasizes that plaintiffs cannot argue they did not intend to release potential fraud claims simply because they were unaware of them at the time. Claims for fraud can be released even if the releasor does not know of the fraud, and the release cannot be challenged based on reliance on representations made during negotiations. Additionally, plaintiffs failed to assert that the release was induced by fraud that was separate from the claim settled by the release, reinforcing the binding nature of the release even in the absence of full disclosure of wrongdoing.

A release that broadly extinguishes liability for all claims related to specified matters includes claims of fraud, even without explicit mention of fraud or a prior assertion of such claims. This principle applies to sophisticated parties advised by counsel, including fiduciaries like Telmex LLC. Legal precedents indicate that a fiduciary does not need to confess wrongful acts before a release can be effective. The notion that a fiduciary must disclose all misconduct would undermine the validity of releases and violate public policy favoring settlement of disputes. The plaintiffs were aware they did not have access to Conecel's internal financial records during the 2003 transaction. If they intended to preserve the right to pursue fraud claims based on future discoveries, they should have sought access to those records or conditioned the release on the accuracy of the financial information provided by the defendants. The excerpt references multiple legal cases to support these conclusions, emphasizing the obligation of sophisticated parties to protect their interests in contractual agreements.

Plaintiffs, by entering into the 2003 sale of their interests based on unverified representations about Conecel's financial condition, assumed the business risk of potential misrepresentation. Their relationship with the defendants was adversarial during the relevant period (2001-2003), which undermines any claim that they relied on the defendants for an objective assessment of their investment's value. Although the defendants acted as fiduciaries in managing TWE, this does not exempt the plaintiffs from the release they signed. The case of Blue Chip Emerald v Allied Partners is distinguished, as the plaintiffs there lacked means to verify the fiduciary's claims, unlike the plaintiffs here who were aware of Conecel's value but chose not to verify the representations before cashing out. Additionally, Blue Chip involved disclaimers rather than a formal release, further differentiating it from the current case. Consequently, the action is barred by the 2003 release, and the court denies the need for a trial, as plaintiffs cannot prevail based on their allegations. The court reverses the lower court's denial of the defendants' motion to dismiss the complaint. A dissenting opinion argues that the majority misinterprets the implications of previous case law regarding releases.

Plaintiffs did not foresee the potential for significant fraud when signing the release, which the Court indicated could be invalidated if circumstances render enforcing it unjust. The opinion argues that allowing defendants to benefit from a release obtained through their own misconduct constitutes a grave injustice, particularly as it permits them to evade accountability for alleged contractual violations. The majority opinion incorrectly suggests that invalidating the release would undermine its effectiveness, overlooking the principle that releases must be knowingly and voluntarily executed. The argument that plaintiffs should have independently verified the defendants’ claims regarding the value of their ownership interest is deemed inappropriate at this stage, as the motion to dismiss requires accepting all allegations as true and drawing reasonable inferences in favor of the plaintiffs. The appeal centers on whether the plaintiffs sufficiently allege fraudulent inducement to challenge the release. The court must also consider that the defendants had a fiduciary duty to the plaintiffs. Consequently, the motion court correctly ruled that the plaintiffs' claims were not conclusively barred by the release at this stage of the proceedings.

The plaintiffs, Centro Empresarial Cempresa S.A. and Conecel Holding Limited, were joint owners of a controlling stake in the Ecuadorian telecommunications company Conecel prior to March 2000. The defendants include Conecel, América Móvil, Teléfonos de México, and two Delaware LLCs, along with individual defendants Slim and Hajj. The plaintiffs claim that in March 2000, they entered into several agreements with Telmex and its subsidiary, Telmex LLC, following negotiations that began in 1999. The discussions were initiated by Simon Parra, representing the plaintiffs, and Slim, the chairman of Telmex, who expressed interest in acquiring Conecel but was informed that the plaintiffs were not looking to sell the entire company. Slim proposed investing in Conecel only if Telmex could secure a majority interest, assuring the plaintiffs of protections for their minority stake.

In January 2000, a letter of intent was signed, allowing the plaintiffs to exchange their Conecel shares for shares in a new holding company if a roll-up transaction occurred. On March 8, 2000, several agreements were finalized: an Agreement Among Members, Put Agreement, LLC Agreement, Purchase Agreement, and Master Agreement. Under these, the plaintiffs contributed their Conecel stock to TWE LLC, receiving approximately 37% interest in TWE, while Telmex invested $150 million and paid off $35 million in Conecel debt for a 60% stake in TWE. TWE subsequently became the sole owner of Conecel.

The LLC Agreement stipulated that Telmex LLC would manage accounting and tax matters for TWE LLC, with members allowed to review tax documents before filing and receive quarterly financial statements. The Put Agreement granted the plaintiffs options to sell portions of their TWE Units back to Telmex LLC in specified timeframes between 2002 and 2006, with a "floor price" determined by Conecel's value at the end of 1999. The Agreement Among Members contained additional clauses regarding the potential roll-up transaction.

Section 3.06 mandates Telmex LLC, TWE, and the Cempresa Parties to provide the Cempresa Representative with requested financial, accounting, and legal information regarding Conecel and TWE before an initial public offering or the transaction outlined in Section 3.09. Section 3.09 requires Telmex LLC and the Cempresa Parties to negotiate in good faith for up to 20 days to exchange Units for equity securities if they consolidate investments in the telecommunications sector, including TWE or Conecel. Following Telmex's spinoff of América Móvil in September 2000, the plaintiffs contended that this constituted a transaction under Section 3.09, thereby activating their right to negotiate an exchange of their TWE Units for equity securities.

In March 2001, a plaintiffs’ representative requested financial information from defendant Hajj to facilitate negotiations, but the defendants refused to provide the information or engage in good faith discussions. Attempts by the plaintiffs to contact América Móvil personnel were unsuccessful. The plaintiffs assert that the defendants led Conecel to publish misleading financial data, undermining their negotiating position by portraying a lower value for América Móvil shares. They allege that the defendants never intended to fulfill their contractual obligations.

In 2002, the plaintiffs, recognizing their limited alternatives as minority shareholders, sold 50% of their TWE Units to Telmex LLC at the minimum price, totaling approximately $64 million. From 2002 to 2003, they continued to seek negotiations for their remaining Units under Section 3.09. However, they were met with claims of Conecel's financial troubles, supported by false evidence, and were informed that no price discussions would occur. In 2003, Telmex LLC offered to buy the remaining units at the floor price, contingent upon the plaintiffs signing a release of claims, which was outside the active put periods.

The release aimed to absolve the defendants from all potential legal claims related to the Agreement Among Members and the ownership of TWE shares. In July 2003, plaintiffs sold their remaining TWE shares to Telmex LLC for $64 million. Following audits by Ecuador’s tax authority from 2000 to 2006, plaintiffs claimed they were defrauded due to defendants concealing Conecel's financial status, which they argued would have entitled them to at least 7 million American Depository Shares (ADSs) of América Móvil, valued at $1 billion at the time of the complaint filed on May 30, 2008. The complaint included 12 causes of action, such as breach of contract and fraud, invoking jurisdiction under New York's long-arm statute.

Defendants moved to dismiss the complaint based on documentary evidence, the release, and other grounds. The court denied the motion, affirming that the claims were valid under New York law and that the release did not preclude allegations of fraudulent actions. The court allowed discovery to proceed but modified the ruling to dismiss the unjust enrichment claim against Telmex LLC while allowing claims against individual defendants to continue. It established that a valid release can bar claims but may be invalidated by fraudulent inducement or similar defenses. The plaintiffs must demonstrate justifiable reliance on any misrepresentations; if they had knowledge that negated reasonable reliance, their claims could be undermined.

Defendants contend that plaintiffs were aware of potential fraud as early as 2001 and had sufficient information to initiate legal action, yet failed to further investigate or refrain from signing a release for valuable consideration. They assert that plaintiffs had a contractual right to negotiate in good faith, which plaintiffs acknowledged was lacking following América Móvil's spin-off. The defendants argue that plaintiffs’ failure to inquire further or file suit reflects unjustifiable reliance on the defendants' actions.

However, plaintiffs argue that the defendants’ representatives did not respond to communications and delayed negotiations by withholding financial information, which they claim does not equate to knowledge of fraud. They assert that although some information was provided, it supported misrepresentations and remained undiscovered as false until revealed by a government tax audit. 

Defendants’ claim that plaintiffs could have investigated or litigated for the information is dismissed by plaintiffs, who argue that no inquiry would have yielded accurate information. They highlight that statements made by Hajj regarding Conecel's financial status were based on allegedly fraudulent tax filings. 

As minority shareholders in a limited liability corporation, plaintiffs argue that defendants owed them a fiduciary duty to disclose pertinent information impacting their decision to sign the release. The reliance on the case of Global Minerals is deemed inappropriate by the plaintiffs, as that case involved different circumstances, including having undergone discovery and being warned of potential malfeasance prior to signing a release.

The plaintiffs assert that the release should be invalidated due to fraudulent inducement, supported by favorable inferences from Littman v. Capital Funding Partners. The majority's distinction between Littman and the current case, based on the lack of documentation provided to the plaintiff in Littman, is rejected. The plaintiffs were not required to suspect fraudulent activity by the defendants merely because public documents were available. The defendants' argument that the plaintiffs must identify a separate fraud distinct from the release is also refuted; the release did not reference fraud, thus making such a distinction unnecessary. The plaintiffs' claims of fraud, conspiracy to defraud, and fraudulent inducement are deemed appropriately pleaded and not duplicative of the breach of contract claim. The breach of contract allegations are directed only at specific defendants, while the fraud claims encompass all defendants. Furthermore, it is established that a fraud claim can exist alongside a breach of contract claim if it involves a breach of a separate duty.

The test for determining if a claim is actionable as a breach of contract or as a tort revolves around the existence of a distinct legal duty outside of the contract, as established in Rich v New York Central Hudson River Railroad Co. If a defendant's actions go beyond mere inactivity to include "misfeasance," the potential for tort recovery increases. In Albemarle Theatre v Bayberry Realty Corp., the court recognized both breach of contract and fraud, noting that the defendants not only failed to fulfill their contractual obligations but also intentionally undermined the value of the facility.

In the current case, the plaintiffs allege that the defendants not only failed to negotiate in good faith but also created fraudulent financial statements, which misled the plaintiffs into foregoing their negotiation rights under the Agreement Among Members. This alleged misconduct could be viewed as a tortious act rather than a mere breach of contract. The Rich Court’s observation applies here, asserting that breaches can be so intertwined with fraudulent intent that they transform into tortious actions.

The plaintiffs’ fifth cause of action for promissory fraud is adequately pleaded, as they assert they were induced to enter the agreement based on promises from the defendants concerning benefits for minority stockholders. The complaint indicates that negotiations proceeded only after the defendants assured the plaintiffs of protections and potential advantages for minority interests.

Additionally, the motion court's denial of the dismissal of the breach of fiduciary duty claim against Telmex LLC was appropriate. A breach of fiduciary duty claim cannot simply duplicate a breach of contract claim; however, actions that breach both contractual obligations and fiduciary duties can coexist if the duties arise independently of the contract. The relationship in this case extends beyond the contractual agreements, indicating that the breach of fiduciary duty claim stands.

A fiduciary relationship was established between Telmex and Cempresa through the Master Agreement, which designated TWE LLC as the sole shareholder of Conecel shares, while Telmex LLC held a 60% majority interest and the plaintiffs were minority shareholders. The defendants had a contractual obligation to provide reasonably requested information and a fiduciary duty to share financial information crucial for the plaintiffs' decision-making on share exchanges. The plaintiffs' claim for breach of the implied covenant of good faith and fair dealing was well pleaded, and distinct from breach of contract claims against Telmex LLC and TWE, allowing alternative pleading under CPLR 3014. The plaintiffs contended that the defendants' actions, although not expressly prohibited, deprived them of contractual benefits.

The unjust enrichment claim against defendants other than Telmex LLC was not duplicative of breach of contract claims, but the claim against Telmex LLC lacked separate factual allegations from the breach of contract claim, leading to its dismissal. The plaintiffs' fraud claims remained viable, as they sought punitive damages in addition to compensatory damages, which are permissible in cases of gross or willful fraud. The court indicated that discovery would be necessary to assess the viability of the punitive damages claim.

The court rejects the defendants' argument that the plaintiffs' breach of contract claims, including the breach of the implied covenant of good faith and fair dealing, are time-barred by the six-year statute of limitations. Equitable estoppel may prevent defendants from using the statute of limitations as a defense if the plaintiffs were reasonably misled by the defendants. Although the plaintiffs have not yet proven their entitlement to equitable estoppel, they have shown sufficient basis to potentially establish facts supporting their claim with further discovery. The determination of whether defendants should be equitably estopped is a factual question.

The breach of contract claim related to section 3.09 of the Agreement did not accrue until negotiations for share exchanges were permanently halted by the 2003 sale of remaining shares. For section 7.4 of the LLC Agreement concerning quarterly tax statements, the statute of limitations began when the plaintiffs became entitled to those statements in 2000, but actions for failure to provide statements in subsequent years are not necessarily barred. The precise basis of the plaintiffs' cause of action—whether for the lack of statements or false financial statements—requires further discovery to ascertain the timeliness of the claims.

Regarding the fraud claims, the statute of limitations is six years from the fraud or two years from discovery. The defendants argue that the plaintiffs were on notice of potential fraud early on due to their refusal to provide financial data; however, the plaintiffs were not aware of the fraud until the Ecuadorian investigation revealed that false tax statements were filed. Consequently, plaintiffs' fraud claims are deemed timely as they lacked the necessary information to allege fraud prior to the investigation's conclusion.

Finally, the defendants acknowledged personal jurisdiction in New York courts by signing the relevant agreements, thus consenting to the jurisdiction.

Teléfonos de México, S.A. de C.V. and Consorcio Ecuatoriano de Telecommunicaciones S.A. Conecel consented to jurisdiction by signing the Master Agreement, which required their execution of the Agreement Among Members. América Móvil, S.A.B. de C.V. is under long-arm jurisdiction due to its securities being listed on the New York Stock Exchange. Allegations against individual defendants Slim and Hajj, based on their numerous communications and negotiations in New York, warrant further discovery regarding their involvement in New York business transactions and jurisdiction. The Supreme Court of New York reversed a lower court's decision, dismissing the complaint against the defendants. 

Section 3.09 of the Agreement Among Members stipulates that if Telmex LLC or its affiliates consolidate telecommunications investments in Central and South America, they must negotiate in good faith for an exchange of equity securities with plaintiffs, provided plaintiffs' ownership percentage is at least 5%. The dissent's reliance on a previous case, Mangini, is countered by the assertion that the current claims arise from transactions contemplated at the time the release was granted, thus not supporting the dissent's position. The release extinguished all claims related to the Agreement Among Members and the business of TWE, and the plaintiffs, being sophisticated entities, cannot claim injustice regarding the release, which was part of a $64 million deal. The dissent also attempts to differentiate a relevant case on the grounds of alleged fraud, which is not applicable here.

The decision clarifies that the rejection of the plaintiffs' attempt to invalidate the settlement on grounds of fraudulent inducement was not due to the existence of fraud claims from prior litigation, but rather the nature of the settled dispute itself, which undermined the claim of misrepresentation regarding the same issue (the true value of Conecel). The plaintiffs' distinction between alleged fraud occurring in 2002 and the 2003 buyout inducement was deemed ineffective since both involved the same misrepresented facts. The court rejected the plaintiffs’ assertion that a broad release does not cover unknown claims unless explicitly stated; referencing a federal appellate ruling, it concluded that a release encompassing "any and all claims, past, present, or future" must be enforced to include both known and unknown claims. The case of Consorcio was cited to support this, as it determined that even without a direct reference to fraud, a release could cover fraudulent inducement if related to the project specified in the release. By contrast, the Littman case was distinguished, as it involved a claim of specific misrepresentation and coercion not present in the current case. The complaint includes two causes of action for breach of contract against Telmex LLC and TWE, but the defendants' argument regarding the timing of the claim's accrual was rejected, as the relevant provision suggested that negotiations should have been completed within 20 days, which had not occurred.