Brokers, Finders, FINRA, Securities Law
You may have had a friend try to introduce you to a company looking for investors for a private offering or a PIPE transaction (private investment in public equity). Maybe you were even the person doing the introducing. If so, the issuer might have promised to pay you a commission. What happens when your prospect invests and the company does not pay? Based on the way New York courts have interpreted the law, the company could be entirely in the right, and you could be subject to a claim of violation of the securities laws.
A person acting as a “broker” must be with the Financial Industry Regulatory Authority (“FINRA”). While somewhat underutilized defense, FLLC and other security litigators have successfully defended issuers against claims for commissions because the plaintiff acted as an unregistered “broker.” A person acting as a “finder,” however, does not act as a “broker” and need not be registered. While also infrequently litigated, FLLC and other lawyers have succeeded in getting clients paid because they fell under the “finder’s exemption.”
The Securities Exchange Act of 1934 (the “Exchange Act”) is part of an extensive series of legislation designed “to protect investors … through regulation of transactions upon securities exchanges and in over-the-counter markets.” Section 15 of the Exchange Actspecifically prohibits an unregistered person from acting as a “broker,” while section 29(b) of the Exchange Act makes void any contract that violates the Exchange Act. The question then is “who is a broker?” The Exchange Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the accounts of others.” Unhelpfully, the Exchange Act does not define either “effecting transactions” or “engaged in the business.” Knowing whether you are engaged in the business of effecting transactions is incredibly important, because if you are instead acting as a “finder,” you may be entitled to payment. Courts have held that distinguishing between a broker and finder “involves an evaluation of the quality and quantity of services rendered.” A finder “is required to introduce and bring the parties together, without any obligation or power to negotiate the transaction, in order to earn the finder’s fee.” A broker, on the other hand, will perform that same introduction, but “ordinarily also bring the parties to an agreement.”
Courts have generally agreed that “merely bringing together the parties to transactions, even those involving the purchase and sale of securities, is not enough” to find a person acted as a broker. Rather, the person must have been involved at “key points in the chain of distribution,” such as participating in the negotiation, analyzing the issuer’s financial needs, discussing the details of the transaction and recommending an investment. A finder generally has far less involvement in the ultimate transaction quantitatively and qualitatively than a broker. Each case is different and courts in New York and elsewhere will take an in-depth look at the facts to determine whether a person was a broker or a finder. Beyond the scope here, but further complicating matters, each state has its own “Blue Sky Law” regulating securities that could come into play.
Unfortunately, the Exchange Act’s vague definitions create fact issues and uncertainty for finders, brokers and issuers alike. While the safest course is registration for a broker, the cost and administrative burden makes registration untenable for most. If you have questions about the broker/finder distinction or the right to payment for broker/finder services, please do not hesitate to contact us.
Breach of Contract, Brokers, Commissions, Implied Contracts, Real Estate Litigation
This post has musings from recent briefing we did representing a broker seeking a commission for a real estate transaction. In New York, the default rule for real estate brokers is that they earn their commission when they produce a buyer who is “ready, willing and able” to purchase at the terms set by the seller. This is a default rule because the seller (or lessor) and broker can, and often do, agree on different terms concerning a commission. Perhaps most common, the seller and broker agree that a commission is only due if and when the seller actually closes on the sale of the property to the buyer produced by the broker – with the broker getting paid at the closing table out of the sale proceeds.
As with many other commercial transactions, disputes arise when the parties do not reach clear, express agreement of terms, preferably in writing. Assume there is no agreement, the broker markets the property and finds a willing buyer, but the seller changes his mind and does not sell. A broker can successfully sue for its commission if it proves the broker was the “procuring cause” of the transaction. One appellate court (in a case we litigated) set the standard for procuring cause, holding the broker’s efforts “must be a direct and proximate link, as distinguished from one that is indirect and remote,” between the introduction of the property and the consummation of the deal. In other words, a broker must do more than merely introduce a buyer to a property, but the broker does not necessarily have to negotiate the deal’s final terms or attend the closing.
Ordinarily, a buyer that does not retain the broker is not responsible for a seller’s commission. Where a buyer or lessee retains a broker for a property search or other services relating to the deal, even where the same broker represents the seller, the buyer may have liability concerning the commission. In many transactions, the broker representing a buyer or lessee will get compensated by the seller or lessor upon the closing of a transaction. Most times, the seller pays and there is no dispute. When the broker does not get paid, whether because the purchaser does not protect the broker by ensuring a provision for payment of commission in the contract or decides not to purchase, a dispute can arise. In addition to the possibly relevant issue of whether the broker was the “procuring cause” of the deal, a court might also examine the purchaser’s conduct. In cases without an express agreement between a buyer and its broker, New York courts have held that a buyer can still have an enforceable “implied” contract with its broker.
Over fifty years ago in Duross Co. v. Evans, 22 A.D.2d 573, 257 N.Y.S.2d 674 (1st Dep’t 1965), the court recognized an implied contract claim. The broker found the buyer a suitable parcel, and the buyer authorized the broker to submit an offer that the seller accepted. The seller issued a contract of sale providing for the seller to pay the commission upon closing, but the buyer refused to sign the contract. The Court held the broker stated a valid claim that the buyer had an implied agreement to purchase, thus allowing the broker to get paid a commission, and the buyer breached by refusing to enter into the contract. Another cautionary tale about the importance of a purchaser having a clear written agreement with its broker is found in Williams Real Estate Co. v. Viking Penguin, Inc., 228 A.D.2d 233, 644 N.Y.S.2d 19 (1st Dep’t 1996), the court recognized a broker’s claim that it had an oral exclusive brokerage agreement by which the lessee agreed to protect the broker. The court upheld a claim that the lessee breached the oral agreement by entering into the lease with a different broker.
Employment Law, Non-Compete, Restrictive Covenants
What happens to an employee’s non-compete covenant if the employer and its top executives are convicted of assorted felonies – like stealing $180 million? We have previously written that New York Courts will not enforce a non-compete covenant against an employee terminated without cause. Viewed in this light, does an employer’s felony conviction, on its own, “constructively terminate” its employees and invalidate their restrictive covenants? According to a recent New York Federal Court decision, the answer appears to be no – the restrictive covenants remain enforceable.
In Devos Ltd. v. Bradhold, 2017 WL 3447911 (E.D.N.Y. Aug. 11, 2017), plaintiff’s business involved warehousing pharmaceuticals for medical providers and, upon expiration, returning the drug products to their manufacturer for refunds. Plaintiff would then pay most of the refunds to the providers while keeping a commission. Earlier this year, plaintiff, its CEO and CFO were convicted of stealing more than $180 million in refunds owed to providers. Following the convictions, the three individual defendants resigned from plaintiff and began working for a direct competitor. Plaintiff sued the former employees and their new employer to enforce the employees’ non-compete and non-solicitation covenants and restrain the employees from competing until the lawsuit was resolved. Defendants argued the convictions “effectively forced” defendants to resign because a substantial portion of plaintiff’s customers simply refused to do business with an entity convicted of fraud and plaintiff could no longer continue to operate. Thus, defendants claimed, they were involuntarily terminated and New York law barred enforcement of their restrictive covenants.
At first blush, defendants appeared to have a leg to stand on. In Morris v. Schroder Capital Mgmt. Int’l, 481 F.3d 86 (2d Cir. 2007), the United States Court of Appeals for the Second Circuit (the top appellate court for Federal Courts in New York, Connecticut and Vermont) held that an employee’s constructive termination can invalidate an otherwise enforceable restrictive covenant. As set forth in Morris, defendants in Devos Ltd. would need to prove that plaintiff’s conviction “deliberately made working conditions so intolerable” that the individual defendants were forced to involuntarily resign. The Devos Ltd. Court, however, rejected defendants’ argument. The Court held that defendants offered no evidence beyond self-serving accounts that the convictions “effectively forced” the individual defendants to resign. The Court held that plaintiff showed it was a going concern and at least 30 other employees did not believe it was “financially impossible” to continue working for plaintiff. The Court further held that the individual defendants had been using the convictions to disparage plaintiff in attempts to poach plaintiff’s customers for the competitor defendant. As a result, the Court granted plaintiff’s request and barred the individual defendants from working for the competitor defendant (or any other competitor) and soliciting plaintiff’s customers pending a final determination of the lawsuit.
While Devos Ltd. v. Bradhold did not set a bright line rule regarding the effect of corporate convictions on restrictive covenants, it did show that your boss’s theft of $180 million, on its own, might not create intolerable working conditions sufficient to invalidate your non-compete provision. If you are an employer or an employee with any questions about non-competes and other types of restrictive covenants, please do not hesitate to contact us.
Construction Defects, Frydman LLC, Nuisance, Real Estate Litigation, Trespass
Frydman LLC recently won a motion for summary judgment dismissing a complaint that raised significant allegations and sought relief that could have cost our clients millions of dollars. One Frydman LLC’s areas of practice concentration is real estate litigation, and this case involved serious allegations of construction defects and related claims. In an eighteen page decision, the Court dismissed the claims as meritless and time barred. The dismissal allows our client to avoid trial and removed claims that, if successful, could have led to millions of dollars of construction costs and damages.
Our clients purchased a five story townhouse in New York City and performed a stunningly beautiful gut renovation. The demolition left little more than the front façade and floor joists and the home is now modernized and stylish. Several years after completion of the renovation, their neighbor brought a lawsuit alleging that the work was defective, impermissibly used the party wall between the buildings and undermined the structural integrity of the adjacent building. The claims included nuisance, trespass, property damage, construction defect and Building Code and Zoning violations. The relief demanded would have required demolishing and rebuilding much of the home and also unspecified monetary damages.
Obtaining the complete dismissal of all claims necessitated two dispositive motions. The first tranche of the dismissal occurred on the appeal of our pre-answer motion to dismiss the complaint, which the First Department Appellate Division granted in large part. The appellate court rendered a written decision upholding a Statutes of Limitations defense and finding many of the claims failed to state a valid cause of action.
We then proceeded with fact discovery in which six subpoenas were served on construction professionals and others, nearly 10,000 pages of documents were exchanged and eight depositions were conducted, including of all parties and the main professionals on the project – the project architect, project engineer, inspecting engineer and general contractor’s project manager. Frydman LLC successfully obtained an order compelling plaintiff to produce the electronic files of contemporaneous digital photographs plaintiff took of the renovation work, with crucial metadata that provided the dates the photographs were taken. We successfully defended plaintiff’s barrage of motions – eleven in total, including two motions to the Appellate Division. Frydman LLC also successfully obtained Court orders repeatedly sanctioning plaintiff for discovery failures and frivolous conduct in the litigation. .
At the close of discovery, we moved for summary judgment dismissing the remaining claims. Our motion was supported by eight affidavits, including affidavits from two expert witnesses, extensive deposition testimony and over thirty record exhibits, including the metadata from plaintiff’s own photographs. Following extensive oral argument, the Court issued its eighteen page decision granting our motion in its entirety and dismissing the complaint with prejudice. The Court held that we supported our motion with sufficient evidence of a lack of construction defects, a lack of infringement of plaintiff’s rights in the party wall, a lack of code violations and affirmative proof that many of the claims were also time barred. We are very pleased to secure a total victory for our clients, allowing them piece of mind in their home and vindicating their position all along that the project was 100% compliant and of sound construction.
Breach of Contract, Oral Agreements, Statute of Frauds, UCC
In the middle of the 48th anniversary of the Woodstock music festival, we pause to remember legendary guitarist Jimi Hendrix – and a recent lawsuit involving a dispute over ownership of two of Jimi’s guitars. The outcome of the suit is a reminder that when you loan out $400,000 worth of Jimi Hendrix guitars, you really should have a written agreement.
In Aleem v. Experience Hendrix, L.L.C., 16 cv 9206, 2017 WL 3105870 (S.D.N.Y. Jul. 20, 2017), plaintiffs alleged that, in Fall 1968, Jimi Hendrix gifted two guitars to the twin Aleem brothers, who occasionally performed and recorded with Hendrix. By 1995, the Aleem brothers needed money and agreed to sell one of the guitars, valued at $200,000, at auction. The Estate of Jimi Hendrix became aware of the potential sale and approached the Aleem brothers about allowing the Estate to display the guitars at the Rock and Roll Hall of Fame. The parties allegedly orally agreed that in exchange for $30,000, the Aleem brothers would license both guitars to the Estate for public display and upon repayment of the $30,000, the Estate would return the guitars to plaintiffs. In 2015, the Aleem brothers said they would repay the $30,000 and demanded the Estate return the guitars. The Estate never responded and plaintiffs filed suit.
The Estate asked the Federal Court sitting in Manhattan to dismiss the lawsuit, arguing that the New York Uniform Commercial Code (“UCC”), which governs many commercial transactions, barred enforcement of the alleged oral agreement, regardless of whether it was a license agreement or an agreement for the sale of goods. Under the UCC, both a license agreement for personal property worth $5,000 or more and an agreement to actually sell goods worth $500 or more require a signed writing indicating that the parties agreed to a contract. UCC section 1-207 also requires that a license agreement state the price and define the subject matter, while UCC section 2-201 requires that a sale agreement specify the quantity of goods. The Court agreed with the Estate and dismissed the suit, holding that plaintiffs did not allege the Estate signed a writing indicating the parties agreed to a contract.
Whatever their reasons, the Aleem brothers neglected to get a signed writing from the Estate memorializing their agreement. Now, instead of jointly owning one Jimi Hendrix guitar and splitting the potential $200,000 proceeds from the auction of the other guitar, the Aleem brothers are left with no guitars and a brief mention of their names on a Rock and Roll Hall of Fame plaque.
If you have any questions about an oral or partially documented agreement, please do not hesitate to contact us.
