In 2021, when Houston-based Contractors Building Supply Company sold itself to Herc Rentals for $190 million, they decided against paying a $4 million “advisory completion fee” to the company they had originally employed to help them.
Business obligations don’t work that way, especially when they are spelled out in a contract, the U.S. Court Appeals for the Fifth Circuit explained to CBS in a 13-page opinion released Thursday.
A three-judge panel ordered that Denver-based Catalyst Strategic Advisors be paid its commission — exactly as a Houston federal judge had already decided — remanding the case back to the trial court solely to determine the issue of attorney’s fees.
In 2017, CBS decided to explore an “enterprise-wide” sale of itself. Catalyst, a company that advises on mergers, acquisitions and such, was enlisted by CBS to help them find suitors in a potential deal.
The company dropped the effort in 2018, but decided to resume their exploration a year later, at which time they executed a new arrangement with Catalyst. The resulting engagement letter authorized quarterly payments of $25,000, as well as a separately calculated “advisory completion fee” should a sale be closed “for any transaction…during the period from the date of this [engagement letter] until eighteen months after the date of termination of this engagement.”
Catalyst contacted several buyers, including Herc Rentals, with whom discussions took place for several months before Herc ultimately declined. And with the onset of the Covid-19 pandemic in March 2020, CBS terminated their agreement Catalyst, effective May 30, 2020, noting that Catalyst had “done a great job representing the interests of CBS.”
When the economy began to recover, so did Herc’s interest in CBS, and a $190.3 million sale of the company closed on Aug. 30, 2021, only 15 months after the CBS termination of the Catalyst engagement. But when Catalyst claimed their commission, they were rebuffed by CBS. Catalyst sued, and when both sides sought summary judgment the trial court ruled in Catalyst’s favor.
CBS, now known as Three Diamond Capital SBC, asked that the trial court reconsider, citing the “procuring-cause doctrine,” which tests entitlement to a commission based on procurement of the sale rather than its actual execution. The trial court did reconsider, but again ruled in favor of Catalyst.
CBS appealed to the U.S. Fifth Circuit and the case reached oral arguments in October before a panel that included judges Corey Wilson, Carl Stewart and James Dennis.
CBS maintained to the court that a “non-exclusive” clause in the contract, which allowed Catalyst to take on other clients, also allowed CBS to negotiate on their own — without an advisor and without having to pay Catalyst the otherwise contractually required closing fee. Moreover, CBS argued that paying the fee would amount to an unearned “windfall” obviated by the $150,000 already paid Catalyst in the form of their quarterly fees.
“I understand that’s not $4 million; but that’s not nothing, that’s not chump-change,” Winstead shareholder Rusty Sewell, argued to the court.
Writing on behalf of the unanimous panel, Judge Wilson outlined the three questions that dictate the application of the procuring-cause doctrine: 1. Was it the kind of contract to which the doctrine would apply? 2. If so, was it displaced by the actual wording of the agreement? 3. If the agreement does apply, to what extent does it impose specific liability?
“Texas strongly favors parties’ freedom of contract,” Wilson observed, perhaps unnecessarily. Under Texas law the doctrine is a default to be applied only if the contractual terms were not sufficiently addressed. But in this case CBS and Catalyst spelled out very specifically the terms of the deal. Thus, any argument for application of the procuring-cause doctrine was lost with Question No. 2, Wilson said.
“The Engagement Letter contains a robust accounting of Catalyst’s fees, including provisions for interim fees, various gradations of completion fees, and the conditions under which those fees might be earned,” Wilson wrote. “The parties also articulated their own terms for whether Catalyst could collect an advisory completion fee after the contract was terminated.”
As for the “windfall” issue, the court said there was none. CBS signed the contract. Catalyst did the work and did “a great job” in doing so. The 18-month tail period was no surprise to either party. And the resulting $3,839,693 fee was reasonably proportional to the $190.3 million deal.
“Contracts between sophisticated parties do not become less binding or inequitable simply because they involve the negotiated payment of large sums. When a court enforces the terms of such a contract, as here, it promotes certainty and fairness, not windfalls.”
Catalyst was represented by partner Michael Mazzone, associate Julia Peebles and associate Ryan Pitts from Haynes Boone, as well as associate Matthew Thomas of Greenberg Traurig. Pitts argued the case before the court.
Besides Sewell, CBS/Three Diamond was represented by Winstead shareholder Kyle Watson and associate Nicholas Stevens.
The case is Catalyst Strategic Advisors, L.L.C. v. Three Diamond Capital SBC, formerly known as Contractors Building Supply Company, L.L.C. No. 23-20030.