On December 15, 2015, Judge Brendan L. Shannon of the Delaware Bankruptcy Court granted the motion of Hormel Foods (the “Defendant”) to dismiss a complaint filed by JLL Consultants, the Liquidating Trustee (the “Trustee”) in the AgFeed bankruptcy. The “Opinion” is available here.
Judge Shannon’s opinion, and the dismissal of the complaint, arises entirely because of a previous settlement reached between Hormel and AgFeed. Because the Trustee was the successor to AgFeed’s litigation rights vis-à-vis Hormel, any releases granted by AgFeed are considered to have been granted by the successor. In this instance, AgFeed and Hormel had reached a settlement as a result of prior litigation that provided “for a complete and final settlement of all matters including all disputes between the parties accruing prior to the Effective Time of the settlement agreement. Opinion at *8. The settlement agreement also included a “Mutual Covenant Not to Sue”, wherein the parties “promised never to file a lawsuit asserting any claims that were released in Section 1 of the Settlement Agreement.” Id.
Notably, the causes of action alleged in the complaint dismissed here arose prior to the settlement, as is apparent by the Trustee’s reliance upon a letter created by Hormel in 2010, almost three years prior to the execution of the settlement agreement. As Judge Shannon noted, the Settlement Agreement “contains intentionally broad and extensive language” and was “negotiated by sophisticated and experienced parties who were represented by counsel.” Opinion at *13-14. Both of these facts led the Court to determine that litigation based on prior acts of the parties was broadly released, and all of the causes of action alleged were contemplated by the Settlement Agreement. Opinion at *15-16. He then ruled that the Settlement Agreement barred the causes of action alleged in the complaint, and granted the motion for dismissal.
A broad release of “all known and unknown” causes of action may seem like a good idea, but parties should keep in mind that it really will be upheld by a court. This creates a situation akin to insider trading – a party will know what it is being protected from, but it can’t ever be certain what causes of action it may be giving up. So if you are considering entering a contract with this broad a release, make sure you have done your due diligence – not just of the company, but of its principals. At the end of the day, it is their integrity that will determine the true cost of this type of release.