Carbon Crest LLC v. Tencue Productions, LLC

Background

Carbon Crest, a Delaware limited liability company founded and managed by Paul Lewis, alleged that Tencue Productions and Jeffrey D. Wilk hired it to advise Tencue in connection with a possible sale. Carbon Crest and Tencue signed a Sale Process Advisory Agreement on July 31, 2017. The agreement required Carbon Crest to provide services including negotiating and maximizing Tencue’s sale value, managing the sale process, and evaluating potential buyers.

The agreement provided contingent compensation based on Tencue’s enterprise value at a completed sale. If Opus Agency acquired Tencue, Carbon Crest would receive seven percent of the enterprise value up to $25 million and 30 percent of the value above $25 million. If another buyer acquired Tencue, Carbon Crest would receive ten percent of the enterprise value up to $25 million and 30 percent of the value above $25 million.

Carbon Crest alleged that it helped market Tencue, worked with an investment banking service to prepare a confidential information memorandum, negotiated a $40 million purchase price with another interested party, and assisted with the sales process. According to the complaint, Wilk declined that offer, sought to end Carbon Crest’s role, offered Carbon Crest $1 million to release Tencue from the agreement, and threatened to wait for the agreement to expire if Carbon Crest rejected the offer. Opus Agency later announced its acquisition of Tencue, but Carbon Crest alleged that it remained unpaid.

Motion and governing law

The defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. The court accepted well-pleaded factual allegations as true and viewed the complaint in Carbon Crest’s favor for purposes of the motion.

The agreement contains a Delaware choice-of-law provision. Because Carbon Crest relied on the agreement and its validity, the court applied Delaware law to the contract issues at the pleading stage. Federal law governed procedural requirements.

Breach of contract

The court held that Carbon Crest adequately alleged the three required components of a breach-of-contract claim: an existing contract, a breach of a contractual obligation, and resulting damages. Carbon Crest supplied the written agreement and alleged that it performed its obligations, that Tencue failed to pay after the acquisition, and that the defendants’ conduct breached the agreement. The motion to dismiss this claim was DENIED.

Implied covenant of good faith and fair dealing

The implied covenant requires parties not to act arbitrarily or unreasonably in a way that frustrates the benefits reasonably expected from a contract. The court found that Carbon Crest adequately alleged a contract and alleged that Tencue and Wilk acted unreasonably by offering a buyout, withholding information about the sale, and frustrating Carbon Crest’s ability to receive the compensation it expected. The motion to dismiss this claim was DENIED.

Quasi-contract claims

Carbon Crest pleaded its quasi-contract claims in the alternative. In other words, it could assert them in case the written agreement was found invalid or unenforceable.

Unjust enrichment. The court found that Carbon Crest adequately alleged that Tencue was enriched, Carbon Crest was impoverished, the two were related, and the enrichment lacked justification. Carbon Crest also alleged that it would have no legal remedy if the written agreement were found unenforceable. The motion to dismiss the unjust-enrichment claim was DENIED.

Quantum meruit. Quantum meruit permits recovery of the reasonable value of services when services were performed with an expectation of payment. The court found that Carbon Crest adequately alleged that it provided advisory and sales-related services with the expectation that Tencue and Wilk would pay upon a completed sale, and that the defendants knew of that expectation. The motion to dismiss the quantum-meruit claim was DENIED.

Promissory estoppel. Promissory estoppel can apply when a promise induces reasonable reliance and enforcement is necessary to avoid injustice. The court found that Carbon Crest adequately alleged a promise of compensation, reliance on that promise, detrimental action through its work on the sale, and a basis for treating the promise as binding. The motion to dismiss the promissory-estoppel claim was DENIED.

Unresolved enforceability issue

The court stated that a fair issue remained as to whether the agreement was enforceable under Section 144 of the Delaware General Corporation Law because Lewis was a board member and therefore was, by default, an interested person in the agreement. The court also referenced Section 310 of the California Corporations Code. It stated that this issue should be addressed after discovery and through a possible summary-judgment motion, or otherwise at trial.

Disposition

The court DENIED the motion to dismiss. The ruling determined only that the complaint adequately stated the claims at the pleading stage; it did not finally resolve whether the agreement was enforceable or whether Carbon Crest was entitled to compensation.