Decided May 9, 2006.
McElroy, Deutsch, Mulvaney Carpenter, LLP, New York, New York, (Richard Mills and Adam R. Schwartz of counsel), for Plaintiffs.
Heller, Horowitz Feit, P.C., New York, New York, (Stuart A. Blander of counsel), for Defendants.
Before me is a motion to dismiss the Complaint by Defendants based on a release of liability signed by Plaintiffs in a different litigation. Plaintiffs contend that the release does not bind the parties to the present lawsuit, largely based on arguments about unilateral mistake, unconscionability, mutual mistake, and lack of consideration. The parties have submitted affidavits and other documents in support of their arguments. For the reasons that follow, I conclude that Plaintiffs' arguments as to unilateral mistake and unconscionability must be rejected as a matter of law. As to its remaining arguments, I will treat Defendants' motion to dismiss as a motion for summary judgment, pursuant to C.P.L.R. § 3211[c], and the parties may submit additional evidence.
This action arises in connection with a series of indemnification agreements, payment and/or performance bonds, and supplemental agreements made between and among Defendants Trataros Construction, Inc. ("TCI"), NPS Realty Inc., Costas N. Trataros, Joanne Trataros, Nicos Trataros and Plaintiffs Travelers Casualty and Surety Company of America and Travelers Casualty and Surety Company, on behalf of themselves and as assignees, and successors in interest to all rights to collateral and indemnity in the name of Reliance Insurance Company, and Seaboard Surety Company (collectively "Travelers"), between 1992 and 2002. These agreements provide that TCI will reimburse and indemnify Travelers if it pays out monies under various bonds issued by Plaintiffs and non-party Reliance Insurance Company for the benefit of owners of construction projects undertaken by TCI.
The Complaint alleges that TCI defaulted (or was declared to be defaulted by various obligees and owners) on a series of contracts bonded by Travelers because TCI failed to adequately perform certain work, or pay certain subcontractors and/or materials and equipment suppliers. Travelers claims that as a result of TCI's defaults, it was obligated to complete (or arrange for completion of) work to be performed under the contracts. Travelers brought this action on May 11, 2005 seeking indemnification of over $38 million based on contractual obligations and common law, a declaratory judgment that Defendants are obligated to indemnify Travelers, attorneys' fees, and specific performance under certain indemnification and supplemental agreements.
In the early 2000s, Travelers and TCI were joint defendants in a Connecticut lawsuit entitled Waterbury Masonry Foundation, Inc. v. Trataros Construction Inc., No. CV-02-0517660-S [Conn. Super. Ct.], brought by Waterbury Masonry and Foundation, Inc. In Waterbury, the plaintiff sued TCI and its payment bond surety, Travelers, for breach of contract in connection with two construction projects.
On January 14, 2004, Travelers and TCI executed a Mutual Release ("Release") with the plaintiff in settlement of the Waterbury litigation. The Release provides, in relevant part, that the parties:
release each other of and from any and all manner of action and actions, cause and causes of action, suits, debts, accounts, promises, warranties, damages, attorneys' fees, claims and demands, liabilities of every kind and character, direct and indirect, known and unknown, of whatever kind or nature, in law or in equity, arising under any provisions of law of the United States, the State of Connecticut, or any other states, that the Parties now have, claim to have, may have or have at any time had or claimed to have or had, to this date, against each other including, but not limited to, any claims arising out of or relating in any way to the facts and circumstances underlying [the Waterbury action], as to law or facts or both, asserted or not yet asserted, and the Parties hereby acknowledge that all such claims that they now have, could have or claim to have from the beginning of the world to the end of time against each other including, but not limited to, any claims relating in any way to the [ Waterbury action], are fully and completely released and discharged.
(Release, Blander Aff., Ex. B.)
The Release further contains a merger clause providing that it contains the entire agreement between the parties. It also states:
The Parties represent that they are executing this Mutual Release with full power and authority to do so; that they have read the terms of this Mutual Release; that they have had the opportunity to be and have been assisted and advised by counsel with respect to this Mutual Release; that the terms of this Mutual Release are fully understood by them and that they have executed this Mutual Release and with full knowledge of the effect thereof.
( Id.) TCI and Travelers were represented by the same attorney in the Waterbury litigation. She negotiated the settlement on their behalf and drafted the Release.
Since the Release is, according to its terms and in the opinion of both parties to this action, governed by Connecticut law, I will apply Connecticut law to this matter. See Restatement (Second) of Conflict of Laws § 187.
Defendants' Motion to Dismiss
Defendants have moved to dismiss the Complaint: (i) due to a mutual release, (C.P.L.R. § 3211[a]); and (ii) as against certain defendants who were not parties to the indemnification and supplemental agreements upon which Travelers relies, (C.P.L.R. § 3211[a]). In the alternative, Defendants seek to stay this action, (C.P.L.R. § 2201), pending the outcome of other actions commenced by Travelers, with TCI as subrogee, against certain of the owners, to recover sums due to TCI under the same contracts.
Travelers challenges the validity of the Release and seeks its rescission or reformation on several bases under Connecticut law: (1) unilateral mistake; (2) unconscionability; (3) mutual mistake; and (4) lack of consideration. A. Unilateral Mistake
Travelers also argues that the Release does not preclude this action as to the individual defendants. Because the Release extends to the "affiliates, subsidiaries, managers, directors, officers, employees, servants, agents, attorneys, successors and assigns, and all others acting in concert with" TCI, however, it is evident as a matter of law that the Release extends to the individual Defendants in this action, inasmuch as it extends to TCI.
Travelers relies on section 153 of the Restatement (Second) of Contracts to assert that its unilateral mistake renders the Release voidable. Section 153 states:
Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake.
Restatement (Second) of Contracts § 153 [emphasis added]. According to section 154 of the Restatement (Second) of Contracts, "[a] party bears the risk of a mistake when . . . the risk is allocated to him by agreement of the parties."
Travelers claims that it did not bear the risk of a mistake when it executed the Release. The Release itself, however, states that Travelers has "read the terms of this Mutual Release; that they have had the opportunity to be and have been assisted and advised by counsel with respect to this Mutual Release; that the terms of this Mutual Release are fully understood by them and that they have executed this Mutual Release and with full knowledge of the effect thereof." (Release, Blander Aff., Ex. B.) Thus, the Release explicitly allocates the risk of mistake to the signatory parties.
"Unilateral mistake, while never a ground for reformation, may under certain circumstances justify the rescission of a contract." Milford Yacht Realty Co. v. Milford Yacht Club, 72 A.2d 482, 485 [Conn. 1950]. Recission based upon the doctrine of unilateral mistake, however, requires not only the mistake of one party, but actual or constructive fraud, or inequitable conduct on the part of the other party. Traggis v. Shawmut Bank Conn., N.A., 805 A.2d 105, 112 [Conn. App. Ct. 2002], cert. denied, 810 A.2d 270 [Conn. 2002]. Here, where counsel for both TCI and Travelers drafted the Release, and both TCI and Travelers confirm that TCI had nothing else to do with the negotiation or drafting of the Release, it is impossible to ascribe fraud or inequitable conduct to TCI in the drafting of the Release. Therefore, as a matter of law, I reject Plaintiffs' argument that the Release should be rescinded based on unilateral mistake.
Travelers also argues that enforcing the Release upon its own terms would be unconscionable. There is no bright line rule for determining whether a release is unconscionable. Connecticut has adopted Official Comment 1 to § 2-302 of the Uniform Commercial Code, however, which describes the question as "whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances. . . ." Emlee Equip. Leasing Corp. v. Waterbury Transmission, Inc., 626 A.2d 307, 312 [Conn. App. Ct. 1993] [emphasis added]; see Conn. Gen. Stat. § 42a-2-302. "Unconscionability generally requires a demonstration of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party." Emlee, 626 A.2d at 312 [citations and internal quotation marks omitted].
The Release was drafted and executed by sophisticated business entities. See Hottle v. BDO Seidman LLP, 846 A.2d 862, 879 [Conn. 2004]. Travelers, whose counsel drafted the Release, cannot claim that it lacked a realistic choice as to its terms. Moreover, considering Travelers' business experience, and the assertions of both parties that TCI did not even negotiate the Release, I cannot conclude that Travelers lacked bargaining power with respect to TCI in drafting the Release. See Edart Truck Rental Corp. v. B. Swirsky Co., 579 A.2d 133 [Conn. App. Ct. 1990].
Moreover, the purpose of the doctrine of unconscionability is to prevent oppression and unfair surprise. Edart, 579 A.2d at 133. While Travelers may have made a mistake in drafting and executing the Release, there is no allegation that it was oppressed or unfairly surprised, nor any allegation that the terms of the Release were one-sided. Monetary Funding Group, Inc. v. Pluchino, 867 A.2d 841, 848-849 [Conn. App. Ct. 2005].
Travelers' remaining arguments regarding unconscionability are unconvincing. For instance, Travelers relies upon Syncsort, Inc. v. Indata Services, 541 A.2d 543 [Conn. App. Ct. 1988], cert denied, 548 A.2d 443 [Conn. 1988], and General Electric Credit Corp. v. McManus, 381 A.2d 1071 [Conn. Ct. Com. Pl. 1977], both of which deal with the public policy against liquidated damages and usurious interest rates and have nothing to do with the instant matter. Travelers also relies upon Rametta v. Stella, 572 A.2d 978 [Conn. 1990], which focuses on application of the collateral source rule to insurance proceeds; this set of facts, however, is not analogous to the situation here.
For the foregoing reasons, I reject Plaintiffs' argument that enforcement of the Release is unconscionable as a matter of law.
C. Mutual Mistake and Connecticut's "Intent Rule"
Plaintiffs also contend that the Release should be reformed to comport with the intent of the parties who negotiated the settlement and release in the Waterbury litigation, because both of those parties made a mutual mistake in drafting the Release in a way that did not comport with their intent.
Connecticut has adopted the modern "intent rule" to construe general releases. Sims v. Honda Motor Co., 623 A.2d 995, 1001-02 [Conn. 1993]; Addison v. Velez, 805 A.2d 762, 764 [Conn. Super. Ct. 2002]. Pursuant to the "intent rule," a "trial court may consider extrinsic evidence of the parties' intent regarding the scope of the release regardless of whether the court determines that the language of the release is ambiguous." Sims, 623 A.2d at 1004.
In Sims, a tortfeasor sought to be discharged from liability by virtue of a release agreement, containing a merger clause, executed by the injured party, which stated that, in addition to the named parties, he released "any and all other persons, firms and corporations" of "any and all" liability for "any and all . . . injuries" resulting from his accident. Id. at 997 n. 6. Despite this unambiguous and broad language, the Court held that such a general release "discharges only those joint tortfeasors whom the contracting parties actually intended to be released." Id. at 998. The Court found that only a "trial [would] afford a full opportunity for evidence to be heard that a general release was precisely what the settling tortfeasor intended." Id. at 1004.
The Court in Sims also found that this "intent rule" "comports with equity" and best furthers the statutory purpose of Conn. Gen. Stat. § 52-572e, which governs the release of a joint tortfeasor. Sims, 623 A.2d at 1002, 1004. Section 52-572e provides that "[a] release by the injured person, or his legal representative, of one joint tortfeasor does not discharge the other tortfeasors unless, and only to the extent, the release so provides." Although Sims addressed the release of joint tortfeasors based on an interpretation of § 52-572e, the Court indicated that it intended by its broad holding to adopt the "intent" approach in general to interpret general releases. Id. at 1003.
The Court in Addison extended Sims's application of the "intent rule" to construe a general release that specifically named the defendant. In Addison, the Appellate Court found that the trial court had erroneously granted summary judgment to the defendant based on a general release, where written submissions "demonstrated the existence of a question of material fact with regard to the intent of the parties at the time the release at issue was executed." Addison, 805 A.2d at 765.
Applying the intent rule to the present dispute: as in Sims, here the language of the release is not ambiguous. Moreover, Defendant Costas Trataros, who executed the Release as President of Defendant TCI, has averred that he "clearly understood" that the Release was not limited to the Waterbury action, and he understood specifically that Travelers was giving up all claims against TCI and other Defendants. (Costas Trataros Reply Aff. ¶ 3.) This affidavit is not conclusive, however, because Travelers has submitted several affidavits that raise questions of fact as to the intent of the parties in drafting and executing the release. While the statements in the affidavits submitted by Travelers may in some instances be self-serving, they are no more self-serving than the contrary statements in the affidavits submitted by Defendants.
The first question arises from the fact that TCI and Travelers were represented by the same law firm during the litigation, negotiation and settlement of the Waterbury action. TCI and Travelers did not plead any cross-claims against one another. (Scarpellino Aff. ¶ 11.) TCI and Travelers evidently saw their interests as identical in that litigation. If TCI and Travelers had intended to release claims against each other at that time, presumably they would have been represented by separate counsel.
Second, the only two counsel involved in settling the Waterbury dispute and in drafting the Release were the plaintiff's counsel and Gwen Weisberg, Esq., acting as counsel for both Travelers and TCI. Both counsel have affirmed that the only claims they intended to settle in that litigation were those raised by the plaintiff against TCI and Travelers, and these were the only claims that they intended the Release to include. (Weisberg Aff. ¶¶ 3-4, 6, 8; Yamin Aff. ¶¶ 3, 5, 7.) Weisberg has averred that she realized her drafting mistake in March 2004 months before the present action was filed, and she then sent to TCI a proposed Addendum to the Release. The Addendum would have affirmed that the Release did not alter the rights and obligations between Travelers and TCI. (Costas Reply Aff. ¶ 4.) The attorney for TCI, to whom Weisberg sent the Proposed Addendum, did not indicate that he believed the contrary about the intended scope of the Release. (Weisberg Supp. Aff. ¶ 10.) Costas Trataros, however, did not sign the Addendum.
Third, the affidavits of Weisberg and John Scarpellino, bond claim manager for Travelers, indicate that TCI itself did not actively participate in the defense of the Waterbury litigation. While TCI initially retained Weisberg's law firm to defend both itself and Travelers in the action, after TCI failed to pay the legal bills, Travelers took over paying the legal bills itself. (Scarpellino Aff. ¶ 11.) Not only did TCI not pay its own attorney, but TCI did not share in the settlement costs of the Waterbury action; Travelers paid the entire settlement sum of $180,000. (Yamin Aff. ¶ 6; Weisberg Aff. ¶ 7.) The fact that TCI did not participate in the Waterbury litigation casts doubt on its claim that it intended in that litigation to pursue or obtain the release of its alleged lender liability claims against Travelers.
This documentary evidence presents open questions as to whether TCI and Travelers intended to release claims against one another at the time they executed the release. If the release of claims as between Travelers and TCI does not express the real agreement of the parties at the time the release was executed, then reformation of the agreement would be appropriate on the ground of mutual mistake. Harlach v. Metropolitan Prop. Liab. Ins. Co., 602 A.2d 1007, 1009-10 [Conn. 1992].
D. Lack of Consideration
Travelers also maintains that the Release is not enforceable against Travelers by TCI because TCI provided no consideration for its execution. Defendants claim in their reply papers, supported by the Reply Affidavit of Costas Trataros, that the consideration TCI offered in exchange for Travelers' release was its "potential lender liability claims" against Travelers. (Costas Trataros Reply Aff. ¶ 6.) Travelers has countered that the lenders' liability claims are without merit, and that, in any event, TCI expressly released Travelers from any such claims in a prior agreement. (June 18, 2002 Agt., attached as Ex. D. to Blander Aff. Ex. A, at 3-4.)
Past consideration, or no consideration at all, cannot support the imposition of a new obligation. Van Dyck Printing Co. v. DiNicola, 648 A.2d 898 [Conn. Super. Ct. 1993] [citing Dick v. Dick, 355 A.2d 110 [Conn. 1974]. A release or waiver of rights is not supported by good consideration unless the plaintiff receives something more than he or she was rightfully entitled to. See Gorman v. Earmark, Inc., 968 F. Supp. 58, 62 [D. Conn. 1997] [applying Connecticut law]. Travelers has introduced an issue of fact as to whether the consideration alleged by Defendants is valid.
Moreover, while the Release states that it was given "in consideration of the promises contained herein and for other good valuable consideration, the receipt of which is hereby acknowledged," a "recitation of consideration received does not prevent proof that there was no such consideration" in fact. TIE Communs., Inc. v. Kopp, 589 A.2d 329, 334 [Conn. 1991]. The "parol evidence rule pertains to contract terms, not assertions of fact." Id. While an "integrated agreement may have the effect of discharging a prior promise, conveyance or discharge; it does not establish fictitious events.'" Id. [quoting 2 Restatement (Second) Contracts § 218, cmt. a].
Therefore, the recital of consideration received in the Release is simply prima facie evidence that consideration was received, shifting the burden of proof to Travelers, the party disputing the consideration. Id. Because Travelers has introduced a question of fact as to whether the consideration alleged by Defendants is valid, this lawsuit cannot be dismissed based on the recital of consideration in the Release without further factual inquiry.
Furthermore, such a recital presumes that the consideration was exchanged between the parties whose claims against each other were being released. As discussed, however, Travelers has also introduced a factual question as to whether Travelers and TCI intended to release any claims with respect to each other in the Release. Consequently, even if the consideration alleged by Defendants could have been valid, there is a question as to whether TCI intended to provide any such consideration to Travelers in the Release.
In addition, any lack of consideration for the release of claims with respect to Travelers would also be evidence that the parties did not intend to release claims with respect to each other in executing the Release.
As discussed above, and for the foregoing reasons, I reject Plaintiffs' alternative theories regarding unilateral mistake, unconscionability, and whether the Release covers the individual defendants as a matter of law.
As to the remaining issues, however, I will treat Defendants' motion to dismiss as a motion for summary judgment, pursuant to C.P.L.R. § 3211[c], and the parties may submit additional evidence as to two questions: (1) whether Plaintiffs and Defendants intended to release any claims with respect to each other on and around the time that they executed the Mutual Release in connection with the settlement of Waterbury Masonry Foundation, Inc. v. Trataros Construction Inc., No. CV-02-0517660-S [Conn. Super. Ct.] on January 14, 2004; and (2) what consideration, if any, was exchanged between Plaintiffs and Defendants in connection with their purported release of any claims with respect to each other in the Mutual Release executed on January 14, 2004. Defendants' request to stay the action pursuant to C.P.L.R. § 2201 is denied.
A conference shall take place in 60 Centre Street, Room 540, at 12:00 p.m. on May 24, 2006 to discuss the schedule for the submission of further evidence.Accordingly, it is hereby ORDERED that Defendants' motion to dismiss shall be converted into a motion for summary judgment, pursuant to C.P.L.R. § 3211[c], and neither granted nor denied, pending the submission of further evidence.