On February 28, 2019, the Corporations Committee of the Business Law Section of the California Lawyers Association published an e-bulletin that I authored. The text of the e-bulletin, as submitted for publication, follows.
With SB 1431 (chapter 157, statutes of 2018), the legislature tweaked two Civil Code section relating to releases.
The terms “creditor” and “debtor,” used in Civil Code sections 1541 and 1542, connote claims for money borrowed, but case law makes it clear that the claims covered by a general release are not so limited. This is generally well understood by lawyers, but, according to the sponsor of SB 1431, it is not understood by self-represented parties who expect “creditor” and “debtor” to apply only to cases where money is owed and not to their own cases that do not involve a monetary debt (such as an employment-law or family-law case).
To avoid this potential confusion, the amendment adds to the terms “creditor” and “debtor” the more general terms “releasing party” and “released party,” respectively. A red-lined version of § 1542, marked to show the changes from prior law, follows:
A general release does not extend to claims
which that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release , which and that, if known by him or her must, would have materially affected his or her settlement with the debtor or released party.
Corresponding amendments were made to Civil Code § 1541.
The amendment states that these changes are declaratory of existing law.
Although nothing in the statute requires a general release intending to waive § 1542 to set forth the text of § 1542, it is common practice for lawyers representing a released party who wish § 1542 to be waived to include the text of the statute in the release instrument. Therefore lawyers who follow that practice should update their forms to set forth the current version of the statute.
The statute does not by its terms authorize a waiver of § 1542. Even if the statute is not waivable, however, the expression of the intent to do so might encourage a court to find that the unknown or unsuspected claim was not something that “would have materially affected” the settlement.
The statute by its terms applies to a general release, not to a release of a specific claim or set of claims. The amendment does not change this.