What is a Discharge Agreement?
A discharge agreement is a legal instrument that has considerable application in the employment law, healthcare law and business law contexts. It is a contractual document that formally documents an agreement between parties whereby one party (e.g., an employer or company) provides certain consideration to the other party (e.g., employee or a buyer company) in exchange for the other party’s waiver, release and/or non-assertion of particular rights, liabilities and/or claims against the former party.
For example, in the employment law context, an employee may agree to execute a discharge agreement with his or her employer, in which the employer, in exchange for a certain severance package, may obtain the employee’s release of certain discrimination and/or employment-related claims – even if general release of employment claims is restricted under federal, state law and/or ERISA . That is because many courts have held that the employer may require the employee to release specific discrimination claims that could not otherwise be waived in exchange for additional severance. These discharge agreements may also include a stated confidentiality agreement, business protection clauses and other provisions that may be enforceable in certain contexts.
The purpose and value of a discharge agreement is dependent on the context in which it is used. For employers, properly crafted discharge agreements can reduce the risk of future employee claims in discrimination and ERISA/SEPP Plans contexts – i.e., to minimize exposure to lawsuits arising from specific circumstances. In many states, they can also help the employer obtain a partial waiver of the employer’s obligations under federal, state and local laws. In the corporate context, discharge agreements are also common at the time of merger and acquisition transactions whereby the selling company issues its obligation to indemnify and hold harmless the buying company.
Types of Discharge Agreements
Discharge Agreements are generally mutually executed, meaning that two or more parties agree to provide releases to one another, for the purposes of resolving a disputed claim. These mutual releases may be comprehensive or limited, depending on the nature of the agreement being reached, and the parties’ respective goals. Sometimes the discharges may be unilateral, meaning that only one side is providing the release to release the other party’s claims. Below are some of the common discharge agreements used in Colorado and the types of agreements and situations where each would be appropriate:
Release of Claims There are two commonly used types of Releases of Claims: General Release A General Release is a mutual release whereby all parties (including one or more releasing and one or more released parties) release the claims of each against the other (i.e. the claims released or discharged in exchange for the discharges are not limited to the dispute(s) that gave rise the agreement). This also encompasses the release or discharge of unfair or deceptive trade practices or actions brought pursuant to Colorado Revised Statute 6-1-101 et seq. or other analogous state statutes. A General Release is the most common type of release used in settlements in that the General Release does not limit the claims excluded from the general release.
Specific Release A Specific Release is a mutual release whereby only certain claims are released. Specifically the terms of a Specific Release would indicate what claims were to be released. A Specific Release is limited in that the parties will only be releasing those claims.
Unilateral Release A Unilateral Release is one where only one party is providing the release. Unilateral Releases are common in settlements with employees and/or independent contractors wherein an employer or contractor is seeking a release from an employee or independent contractor in exchange for a compensation package. A unilateral release is sometimes used in settlements with debtors. For example, a bank may require a debtor to sign a unilateral release of claims in exchange for debt forgiveness.
Liens and Subrogation Rights Liens and subrogation rights can become relevant in discharge agreements in the context of real estate disputes where mechanics and materialmen’s liens, securing obligations relating to materials and labor, are involved. Here the discharge of such liens must be closely looked at, as a discharge of such liens can result in the discharge of subrogation rights by the party who provided the materials or labor, and defeat the right of recovery from a secured party or insurer. In these contexts this language can be closely negotiated among the parties.
Elements of a Discharge Agreement
Key Legal Components of a Discharge Agreement
While discharge agreements can vary greatly in complexity and detail, they all must contain some essential legal components including agreement or consent to the discharge, terms of the discharge and any obligations assumed by the debtor.
Agreement or consent to the discharge
The discharge agreement must include a specific agreement or consent to the discharge. If a debtor is forced into bankruptcy or discharge against his or her will through involuntary means such as garnishments or forfeiture, then all agreements in the discharge must be viewed by the court with a skeptical eye. Any coercive actions made by the creditor will be viewed in a critical manner and can be invalidated by the court.
Terms of the discharge
A discharge agreement must contain all of the terms of the discharge. Six specific terms should be clearly stated in a discharge agreement including:
Obligations
Finally, a discharge agreement must contain any obligations on the part of the debtor. An obligation is simply an act for which someone is liable or legally bound to do. Not every discharge agreement will contain a specific obligation on the part of the debtor such as a promise to pay a certain amount over time, but if there is such an obligation it must be made clear and specific in the agreement. The ambiguity of an unclear obligation will not be interpreted to the debtor’s benefit.
Advantages and Disadvantages of a Discharge Agreement
To summarize briefly, there are various advantages to both parties for entering into a discharge agreement. First, it will spell out the amount of rent that the tenant owes. Secondly, it will set forth the agreement of the landlord (i.e., owner of the building) to waiver any and all additional claims (monetary or otherwise) against the tenant. In other words, the owner has now agreed that the rent is all he/it is owed and that he/it will not be further pursue additional claims, such as late fees, amount for breakage, cleaning costs, etc. If the owner felt that the lease contemplates the tenant paying all costs, attorneys’ fees, and clean-up costs, the owner has waived his/its right to make any such claim against the tenant, because the lease may very well expire within the next one to six months (or the owner may have an even worse result at trial).
In a way, this is a good result, not only for the tenant, but for the landlord. The tenant saves substantially on the outstanding rent (clearly a benefit to the tenant), the landlord gets his/her money and saves substantial time and costs in any legal proceeding, and the tenant has the benefit of negotiating a settlement with litigation, essentially a settlement that the parties have worked out amongst themselves.
There is, however, a slight downside to the tenant if he enters into such an agreement. If the tenant desires to retain some rights under the lease or agreement, such rights under the agreement will be waived. So, for example, if the tenant has a right to store certain goods in the basement and is not paying rent for such a right, the tenant may want to ensure that such right is specifically included in the agreement to be retained. Likewise, any rights to repair mechanisms under the lease may be waived by signing such a discharge agreement. Therefore, if tenant desires to take over the property and make repairs, such provisions should be omitted from the discharge agreement.
Nevertheless, a tenant will almost always prefer to know what the precise number of the outstanding rent is (as opposed to having a landlord just notice it after being in default) and certainly it will be beneficial to know that once the discharge is signed, in exchange for the tenant’s deposit, the landlord will not be able to come back with any other claims against the tenant.
How to Create a Discharge Agreement
A discharge agreement is a contract like any other contract. That means it has to be complete and otherwise pass muster for anyone to enforce it. When I began drafting these agreements some 25 years ago, I started from scratch each time and drafted them from a blank screen. But in recent years, a discharge agreement of virtually any kind has become so common that very competent lawyers (many of my partners among them) have created templates. Even if you can’t get a good template (free or otherwise), an outline of the important parts of a typical agreement should work in a pinch to get these documents started. At the beginning of a discharge agreement, there should be some recitation of the past events leading to the agreement. In the case of a bankruptcy discharge agreement, there might have been a jury verdict that led to the bankruptcy filing. Or there might have been a judgment confirmed by an appellate court despite a motion for new trial or judgment notwithstanding the verdict. There might even be a document resulting from a bankruptcy court proceeding that forced the creditor to accept payment in full, or else. Regardless of the facts leading into the case at hand, it is wise to write a paragraph about it near the beginning of the agreement. Doing so will show that the facts are part of the underlying reason to enter into the discharge agreement . This can help prevent a later challenge to the agreement on grounds of mistake or other failure of contract. A complete discharge agreement should indicate the dollar amount being paid. A clause giving the parties freedom to make change could hurt you if the other party cashes your check but refuses to sign a release. Without a release clause, the amount is uncertain. What happens if during the time it takes to get signatures and deposit the check, the creditor hobbles off and dies? (It seems I have seen this happen.) For this reason, there should be a clause indicating that the dollar amount is full and final satisfaction whether identified in a schedule or paid without any other recitation or reference. Then there should be a definition of the discharge agreement, including disclaimers of prior communications and reference to any lawsuits or appeals that are being terminated. There should also be a statement about what remedies each party has if the agreement is broken (such as no force or effect or non-default interest). It is also good to renounce the viability of any other agreements by stating that there are no other agreements save only the one being entered into. If there are amendments or restatements of agreements in the past, it is good to specifically state that the current agreement is a restatement and that all prior agreements are void.
Examples and Case Studies
Case 1: Confidential Separation and Settlement
In a commercial real estate company with multi-state locations, an employee filed a lawsuit against the employer alleging unpaid wages and wrongful termination. The company, which denied the allegations, paid the employee $100,000 under a confidential discharge agreement. The agreement released the former employee from "any and all claims arising out of or related to Employee’s employment" with the company while specifically reserving and protecting the rights of the employer to pursue "non-cash remedies," including seeking injunctive and equitable relief to prevent the former employee from competing in violation of his employment agreement. This was an effective use of a discharge agreement both to protect the company from future damage and to provide a substantial but confidential settlement for the former employee.
Case 2: Confidential Release and Settlement
In a national chain of retail stores, an employee filed a complaint with a state agency alleging violations of equal employment opportunity laws. The company, after an investigation determined that no violation occurred, entered into a $10,000 confidential discharge agreement with the former employee, which included a release of the company from all claims and employment practices liability charges filed with or investigated by any local, state or federal agency alleging wrongful conduct or damages, and reimbursement of $10,000 in attorney’s fees paid to the employee. This is an example of a fair settlement that avoided the burden and costs of defending an administrative complaint or lawsuit. It also avoided the perception that the company was treating the former employee unfairly.
Case Study 3: No-Compete Agreement
In a consulting company, an employee left to go work with a competitor. The company sent the former employee a demand letter alleging breach of the non-compete agreement, seeking to enforce the restrictive covenant and obtain monetary damages. The employee declined to return the company’s calls to discuss the issue. Because this type of claim is one that can be settled without admitting liability by entering into a discharge agreement, the company did so and entered into a confidential agreement for a modest amount of money without further dispute or harm.
Common Questions about Discharge Agreements
Q: Is a discharge agreement always a bad idea?
A: No. Sometimes they are necessary to resolve a dispute. Both parties, however, should understand that the agreement also means that nothing else can be done about the dispute. In particular, if there is an underlying debt, the debtor cannot go back and try to have the debt handled in a bankruptcy case. The discharge agreement itself will bar that action.
Q: Is a discharge agreement similar to a covenant not to sue?
A: No. A covenant not to sue is an agreement that prevents one party from filing suit against the other in a particular case. But a discharge agreement prevents a creditor from suing at all for an underlying debt.
Q: Why would an applicant sign a discharge agreement?
A: He may be persuaded by the creditor to do so. Or he might feel it is necessary to do so in order to settle a pending dispute. The main thing to remember is that both sides should do their utmost to understand what the full implications of the agreement will be before signing it. This could prevent the applicant from being tagged with a debt or liability he thought was settled.
Q: How are discharge agreements handled in a Chapter 7 case?
A: Under 11 U.S.C. §524(a)(3), a discharge agreement does not give rise to any new liabilities and therefore has no effect on the debtor’s bankruptcy estate. The claims that would be covered, however, would be discharged under a Chapter 7 case anyway.
Q: How are discharge agreements handled in a Chapter 13 case?
A: Under 11 U.S.C. §1328(f) , the unpaid portion of a discharged debt that was the subject of a discharge agreement does still count as part of the bankruptcy estate and can be used to pay creditors in the Chapter 13 plan.
Q: Aren’t discharge agreements a form of fraud?
A: Not unless there was some intent to deceive a plaintiff in the midst of litigation. However, a discharge agreement is notice to the world of the substance of the agreement, and if such an agreement were used to attempt to "sink" another case, then it definitely could be fraudulent.
Q: Are there circumstances in which a discharge agreement has a different meaning than ordinary?
A: Yes. For example, a March v. Pegalis & Wise, P.C., deal in 18 N.Y.S.3d 224, the plaintiff provided a discharge agreement to his former employer in connection with a sexual harassment settlement agreement. The discharge granted a release of all claims up to the date that Mr. Buyer signed the agreement. However, later in 2007, the employer divulged information to an investigative journal, which raised questions about whether the plaintiff’s medical expense deduction as part of his bankruptcy was excessive. The court held that the discharge agreement could not be construed so broadly as to release any claims against the employer that arose during the course of a bankruptcy. As such, even though the discharge agreement is typically a "forever" document, its effect may be limited in bankruptcy.