Fraudulent Inducement Claims Rejected by Court In Shareholder Buyout Dispute

The broad release language contained in a buyout agreement is enforced, despite claims of fraudulent inducement, affirms the Appellate Division of Superior Court in Marino v. Twin Rivers Podiatry, P.A., Docket No. A-5630-10T1 (May 19, 2012).

This short opinion is a straightforward reminder that the deals that are made in connection with the organization of a business are likely to be enforced.  In this case, the issue was the enforcement of a buyout agreement in which one of the principals agreed to sell part of his interest.

This short opinion is a straightforward reminder that the deals that are made in connection with the organization of a business are likely to be enforced. Chiropractic surgeon John Marino bought a five percent state in Twin River Podiatry, P.A. and Twin Rivers Podiatric Surgery Center LLC (the opinion is not clear whether the interest was in one or both entities) comprised of 500 membership units for $500,000. Two years later he sold 300 of the units back for $300,000.

Marino Seeks to Deter Enforcement of Buyout Agreement

The opinion is short on details, but Marino sought to avoid enforcement of his buyout deal, claiming that he was fraudulently induced to invest in the first place, that the defendants had “slipped” broad release language into the buyout agreement and that the defendants had promised to buy all 500 units, with the first purchase being only the first installment.  Marino also claimed that he was an oppressed minority shareholder under N.J.S.A. 14A:12-7.

His claims, however, ran into the broad language of the release that was included in the Buyout Agreement.

It is the intent of [Marino] that this be a full and complete release of all such actions, causes of action, etc., including but not limited to such actions, causes of action etc. that are discovered after the date of this Agreement, existing on or prior to the date of this Agreement . . .

The trial court granted summary judgment against Marino and the Appellate Division affirmed.

The Buyout Agreement is clear and unambiguous on its face, supersedes all other prior agreements and resolves all allegations of prior wrongful conduct.  Absent ambiguity, fraud or other compelling circumstances, the Buyout Agreement, when entered into freely, should be enforced as it is written.

It is not particularly unusual, in my experience, that parties will execute agreements related to a business only to later discover that the “default” provisions of the applicable statute might have given them a better deal.  Although there isn’t enough detail in this opinion to determine whether something similar was involved in this litigation, it appeared that the plaintiff might have secured a better deal for himself (return of his entire investment rather than just a portion) if he had relied on remedies of the statute.

We see this often in provisions providing for book value of an enterprise in the event that there is a withdrawal of one of the owners.  Book value is invariably lower than the going concern value of a business and the departing owners often would like to secure the statutory “fair value” of the enterprise – including good will.  These efforts are rarely successful.  Agreements between owners of a business seems to be one area in which courts are inclined to enforce agreements as they are written.