Carbon Crest LLC v. Tencue Productions, LLC

Background

Carbon Crest brought this diversity action seeking payment under the Sales Process Advisory Agreement. Carbon Crest was owned by Paul Lewis, who had served as a financial advisor and director of Tencue. Tencue and Jeffrey D. Wilk signed the agreement on July 31, 2017, without a formal vote by Tencue’s board or shareholders.

The agreement required Carbon Crest to assist with a potential sale of Tencue, including evaluating buyers, negotiating price and other terms, managing the sale process, and helping with post-sale arrangements. It provided for compensation based on the enterprise value of a completed transaction. Tencue later terminated the agreement, reopened discussions with Opus Agency, and sold Tencue to Opus in August 2019. Carbon Crest received nothing.

Contract and licensing issues

The court first found that the Sales Process Advisory Agreement had sufficient consideration. Lewis’s obligations under that agreement concerned selling Tencue, while his earlier Business Advisory Agreement did not require him to assist with a sale of Tencue.

The court applied California law despite the agreement’s Delaware choice-of-law provision. California was the place of contracting and the location of Tencue, the subject of the agreement. The court also found that California had a materially greater interest in applying its licensing requirements because those requirements protect the public from unlicensed practitioners.

Under California’s licensing statute, a person who negotiates the sale of a business opportunity for compensation must be licensed as a real estate broker. The court found that the sale of Tencue’s stock was a sale of a business opportunity. It also found that Carbon Crest was a broker, rather than merely a finder, because the agreement gave it duties to negotiate sale terms and Lewis actually participated in negotiations. Neither Carbon Crest nor Lewis had a broker’s license in California or any other state.

The court therefore held that the Sales Process Advisory Agreement was void and unenforceable. The court also held that the agreement could not be severed because its single object was the sale of Tencue, and the agreement’s duties were tied to that unlawful object.

Interested-director transaction

The court separately held that the agreement was void as an interested-director transaction. Lewis, a Tencue director, owned Carbon Crest and therefore had a material financial interest in the agreement. Tencue’s directors and shareholders never held an affirmative vote approving the transaction. The court rejected Carbon Crest’s argument that Wilk’s practice of making major decisions without formal votes could substitute for the approval required by California law.

Equitable recovery

Although the contract itself could not be enforced, the court allowed recovery under quasi-contract, an equitable remedy requiring payment for services when retaining their benefit without payment would be unjust. The court found that Lewis’s work significantly benefited Tencue. His efforts included rejecting lower initial offers, introducing Nth Degree, arranging a banking partner, improving Tencue’s financial reporting, preparing information memoranda, arranging cultural-fit meetings, preparing company representatives for buyer meetings, and managing the sale process.

The court found that this was a compelling case for equitable relief. It concluded that payment would not undermine the purpose of California’s licensing law because the evidence showed Lewis was competent and trustworthy, and because denying all compensation would allow Tencue to retain the benefit of his work without payment. The court also concluded that equitable considerations allowed recovery despite the lack of formal approval of the interested-director transaction.

The court treated Carbon Crest’s unjust-enrichment theory as a request for restitution and quantum meruit, meaning payment of the reasonable value of services provided. It awarded $1.5 million. The court used two benchmarks: four percent of the $42 million sale value, or $1.68 million, and five percent of the $22 million value added through Carbon Crest’s work, or $1.1 million.

Counterclaims and disposition

The court found that Lewis breached his fiduciary duty of loyalty because the agreement’s compensation structure was excessive and unfair to Tencue compared with normal broker fees. But defendants did not prove damages caused by that breach, so they could not recover on their fiduciary-duty counterclaim.

The court rejected defendants’ professional-negligence counterclaim. Defendants argued that Lewis failed to perform adequate due diligence regarding cultural fit with potential buyers, but the court found that Lewis had done an excellent job managing cultural-fit issues and the other aspects of the sale process.

The court’s conclusion states that Carbon Crest shall recover one and one-half million dollars from defendants, and that defendants shall not recover.