Carefully Consider the Scope of Releases When Settling Claims between Family-Business Owners

As the old saying goes....

“Never do business with family.”

Although many refuse to believe this “myth,” there are plenty of cases that demonstrate this is not something to ignore and hence it turns out to be true. Litigation among family-business owners is certainly the last resort; the threat of it can drive wedges between families for decades and potentially forever. Nevertheless, litigation often ends with a negotiated settlement agreement instead of a trial and entry of judgment on the merits of one party’s claims.

Through a settlement, the parties have the flexibility to agree upon any applicable business terms, including any payment to be made to the claimant, any exchange of agreed upon responsibilities, and the scope of any release to be provided in exchange for the payment or service, etc. However, settling parties should document any settlement agreement clearly so they know what rights, if any, are being released and, what rights, if any, they can continue to assert against each other after the settlement is finalized.

A United States District Court in Florida recently issued a decision in Veltheim v. International Bodytalk Association, Inc. which highlights the importance of careful drafting in settlement agreements in order to clearly define the scope of a release of claims and the effect such a release may have on later claims. The Court began its decision by noting: “For the second time, a son has sued his father, his former stepmother, and the family company in the context of corporate litigation regarding a family business.” In this matter, a son, who had issues with his father and stepfather, each with high-ranking positions of ownership in the company and fired the son. Consistently, the son claimed that as of the date of his termination, he held a 20% ownership interest in the company and was entitled to an equity payout.

The son filed an unfair dismissal claim against the company and the familial owners. The parties later settled that claim through a settlement agreement in which the parties agreed to the son’s dismissal of an employment termination lawsuit in exchange for certain monetary payments to the son to evidence the waiver of claims. As a condition to the settlement, the son also signed a release agreement, through which he released “all Claims which may arise out of his Employment or the termination of his Employment.” The release contained a separate provision through which the son “acknowledge[d] and agree[d] that he is releasing the releasees (the owners) from any and all Claims which may include, but are not limited to, Claims in Australia and the United States . . . whether arising under statute . . ., contract (express or implied), tort, constitutional provision, common law, public policy or otherwise, from the beginning of time through the date [of] the release agreement.” In essence, the son had no claims in other jurisdictions, which completely wipe out opportunities for future recourse against the Company. Nevertheless, the compensation in lieu of claims is the ultimate arbiter of fairness here – at least that is the goal. With a release, the Company is free from being sued in the future and has all the protection it needs for these matters.

Nine months after signing the release agreement, the son sued the company, and the owners, which included the parents and stepparents in a Florida court, alleging mismanagement and waste of corporate assets and seeking damages, an accounting, and an order of dissolution of the company. The Company and its owners filed a summary judgment motion, arguing that the earlier release agreement barred the son from asserting these new claims. The Court agreed, holding that, while the release agreement originally arose in the context of the son’s unfair dismissal lawsuit, “a plain reading of the Release Agreement show[ed] that the parties intended to effect a global settlement of all pending matters.” To that end, the Court noted that the parties defined the released “Claims” broadly so as to include all complaints or causes of action that the son could have asserted. The Court also noted that the time period for the released “Claims” was “from the beginning of time” until the date of the release. Finally, the Court commented that, had the parties wanted to limit the nature of the “Claims” being released or the time period applicable to such “Claims,” they could have done so; but they did not.

After reviewing the scope of the release, the Court rejected the son’s argument that the release only addressed his employment-related claims. The Court also noted that the son signed the release in his attorney’s presence, had the benefit of legal representation, and understood that he was giving up certain legal rights. The Court thus concluded that the new claims the son asserted fell within the scope of the release, both in terms of subject matter and timing. Based on the language of the release agreement, the Court ruled in favor of the Company and owners.

As a result of this case, there are some takeaways for good customary business practice by family-owned businesses and business owns:

First, even where a release explicitly covers certain categories of claims, a released party may still face a later claim that falls within the scope of the release.

The released party thus will need to defend against such claims by invoking the release terms. In addition to carefully drafting the release language to bar future claims, a party receiving a release may want to consider including a provision for the award of attorney’s fees in the event of a successful defense of a released claim, as further discouragement to a claimant’s later assertion of a released claim.

Second, from the releasing party’s perspective, that party should fully understand the scope of the claims being released.

If he or she wishes to limit the scope of the subject matter or time period of the released claims, the best time to push for such limitations is usually during settlement negotiations and not in the context of later arguments to a court for a favorable interpretation of a finalized and signed agreement. Eliminate the ambiguities up front and ahead of time to avoid the dispute that can arise later over the true meaning of the terms. Don’t leave the language to chance of multiple interpretations and losing on that ground of accuracy.

Third, if there already has been one dispute between owners of a family-business, such as an employment dispute or a claim of mismanagement, there are likely to be grounds (real or imagined) for other later disputes and litigation.

Thus, once one dispute arises among family-business owners, it may be worthwhile to try to reach distinct and separate settlement agreements that separates each claim and against a specific owner that is separate from the business entirely, Such an agreement could better position the owners for a global resolution of all potential claims between them and avoid claims coming back and eating up a company’s resources to defend it.