Barry M. Klayman and Mark E. Felger

A recent opinion by Vice Chancellor Tamika Montgomery-Reeves illustrates the pitfalls in not specifically addressing the scope of “mutual general releases” when agreeing to settle litigation. The case, Emerging Europe Growth Fund v. Figlus, (Del. Ch. Dec. 10, 2018), concerned the interpretation of “mutual general release” language in a settlement agreement. The issue before the vice chancellor was whether the parties intended to release their Ukrainian divorce proceedings, including an ongoing case the ex-wife filed regarding unpaid alimony, when they settled their actions in the Delaware Court of Chancery.

The parties agreed that they had  reached an enforceable settlement agreement resolving two pending cases between them in Delaware. They also agreed on the essential terms of the agreement: the payment of money, the transfer of partnership interests and a “mutual general release.” They disagreed only on the scope of the mutual general release that was included in the settlement.

The operative document that reflected the settlement consisted of various emails between the parties. The key language was in the first of the emails, which offered a “mutual general release, which would include, without limitation, any claims/defenses that relate to or otherwise arise out of the loans, notes, or security agreements between [the parties].”

After the parties agreed that they had reached an enforceable settlement agreement which included mutual general releases, they attempted to flesh out the settlement with a more formal agreement. One side, which included the ex-wife, Natalie Jaresko, proposed more expansive language that purported to release claims “that arise out of, relate to, or are connected in any manner, directly or indirectly with the Delaware actions, this settlement agreement or the underlying events.” The ex-husband, Ihor Figlus, responded with a revised draft settlement agreement, which included a carve out from the release for liabilities arising out of a past or future divorce decree. The proposed carve out was rejected by Jaresko. There the matter stood when the parties returned to the Chancery and filed cross-motions to enforce the settlement.

Figlus argued that the language, “any claims/defenses that relate to or otherwise arise out of the loans, notes or security agreements between [the parties],” on its face, did not include the Ukrainian divorce proceedings, and that it was never his intent to settle the actively ongoing divorce proceedings, which addressed alimony, distribution of marital assets, and custody, in such a passive, indirect manner. The vice chancellor found this interpretation to be reasonable, since if the parties intended to include the divorce proceedings they would have done so expressly.

Jaresko, contended that the parties intended to release all claims between them through the operative language, “a mutual general release, which would include, without limitation.”  She also argued that even if the “mutual general release” were somehow limited to claims or defenses that “relate or otherwise arise out of the loans, notes, or security agreements between [the parties],” the release still included the divorce proceedings, because those loans and agreements figured in the divorce proceedings. The vice chancellor found her argument to also be a reasonable interpretation of the release language.

Faced with these two reasonable interpretations of the release language, the vice chancellor held that the agreement was ambiguous, because it was reasonably susceptible of different interpretations or may have two or more meanings. As a result, she looked to extrinsic evidence to clarify the meaning of the terms.

The vice chancellor considered two items of extrinsic evidence. First, the draft agreement that Jaresko's attorney had prepared had extensively defined what the release would cover, including more than 240 words defining “claims,” but it did not mention anything about the ongoing divorce proceedings. The absence of any specific reference to the divorce proceedings left the vice chancellor unconvinced that Jaresko intended the release to terminate those proceedings.

Second, the vice chancellor considered Jaresko's behavior in the divorce proceedings before, during, and after the negotiations, which the vice chancellor found to be consistent with an understanding that the divorce proceedings were not intended to be released. Among other actions, Jaresko continued to file papers to pursue the divorce proceedings after negotiating and reaching the settlement with Figlus. This behavior was not consistent with a belief that Jaresko had released the claims in the divorce proceedings.

In light of this extrinsic evidence, the vice chancellor held that only one meaning was objectively reasonable in light of the circumstances of the negotiation, and it was that the “mutual general release” did not extend to the divorce proceedings.

It is not unusual to see general release language stated the way it was expressed in the emails between the parties. A general release is followed by language that reiterates that the release “includes, but is not limited to” more specific claims that are being released. The release may then go on to specifically exclude certain claims by way of a carve out. The general principle, acknowledged by the vice chancellor, is that a general release is not limited to the sum of the individual items which the parties specifically and affirmatively intend to include with it. That suggests that Jaresko's emphasis on the operative language, “mutual, general release,” should have carried the day. Jaresko's rejection of an express carve out for the divorce proceedings would seem to buttress her position. However, her subsequent behavior, in continuing to file papers in the divorce proceedings, undercut her contention that she intended  the release to extend to the divorce proceedings, and had a significant impact on the court's decision. As the vice chancellor explained, in construing a general release, the intent of the parties as to its scope and effect are controlling. The lesson here is to stick with the broadest, all-encompassing language when drafting a general release, without reiterative inclusive language, or, better, follow the all-encompassing language with an inclusive list of all known litigation and claims between the parties without exception.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.