New York Law Review

Tag: Finder’s Fee

  • Northeast General Corp. v. Wellington Advertising, Inc., 82 N.Y.2d 158 (1993): Finder’s Fee and Duty to Disclose

    82 N.Y.2d 158 (1993)

    Absent a specific agreement establishing a relationship of trust, a finder has no fiduciary duty to disclose adverse information about a potential business transaction partner to their client.

    Summary

    Northeast General Corporation, a finder, sued Wellington Advertising for a finder’s fee after introducing them to a purchaser, Sternau, who ultimately rendered Wellington insolvent. Wellington refused to pay, arguing Northeast failed to disclose negative information about Sternau’s reputation. The lower courts ruled in favor of Wellington, imposing a fiduciary-like duty on the finder to disclose adverse information. The Court of Appeals reversed, holding that absent an explicit agreement creating a relationship of trust, a finder has no inherent fiduciary duty to disclose such information. The court emphasized that parties in commercial transactions are generally governed by marketplace mores unless they explicitly agree to a higher standard of care.

    Facts

    Northeast, acting as a finder, entered into an agreement with Wellington to identify potential purchasers. The agreement designated Northeast as a non-exclusive, independent investment banker and business consultant for finding candidates. Northeast introduced Sternau to Wellington. Prior to the introduction, Northeast’s president learned of Sternau’s reputation for acquiring companies, extracting assets, and leaving minority investors in financial distress. Northeast did not disclose this information to Wellington. After the merger agreement but before the closing, Northeast offered further assistance, which Wellington declined. Sternau’s company acquired Wellington, leaving Wellington’s principals as minority investors. Wellington became insolvent, resulting in financial losses for Wellington’s principals.

    Procedural History

    Northeast sued Wellington for the finder’s fee. The jury found in favor of Northeast. The Supreme Court set aside the verdict, ruling that Northeast had a fiduciary-like duty to disclose the adverse information. The Appellate Division affirmed, adopting the Supreme Court’s reasoning. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a finder, under a standard finder’s fee agreement, has a fiduciary-like duty to disclose adverse information about a potential purchaser to the client.

    Holding

    No, because the agreement between Northeast and Wellington did not establish a relationship of trust imposing such a duty, and absent such an agreement, the parties are governed by the normal mores of the marketplace.

    Court’s Reasoning

    The Court of Appeals reasoned that imposing a fiduciary duty requires a clear indication that the parties intended to create a relationship of trust. The court emphasized that the written agreement defined Northeast’s role solely as a finder, tasked with introducing potential purchasers. The court distinguished finders from brokers, who typically have a fiduciary duty due to their greater involvement in negotiating the transaction. The court noted that “the dispositive issue of fiduciary-like duty or no such duty is determined not by the nomenclature ‘finder’ or ‘broker’ or even ‘agent,’ but instead by the services agreed to under the contract between the parties.” The court refused to impose a duty retroactively that was not contemplated in the agreement. The court also acknowledged that Wellington declined further assistance from Northeast after the initial introduction, indicating that Wellington did not rely on Northeast for ongoing guidance. The court quoted Cardozo, stating some relationships in life impose a duty to act in accordance with the customary morality and nothing more and that those are the standards for the judge. A dissenting opinion argued that the finder had a duty to disclose the negative information based on the confidential information shared and the inherent reliance in the relationship. It emphasized that Dunton knew Arpadi’s business plans and that the merger was the very type of transaction Arpadi feared.

  • Freedman v. Chemical Constr. Corp., 43 N.Y.2d 260 (1977): Enforceability of Finder’s Fee Agreements Under the Statute of Frauds

    Freedman v. Chemical Constr. Corp., 43 N.Y.2d 260 (1977)

    Under New York’s Statute of Frauds, specifically General Obligations Law § 5-701(a)(10), any agreement to pay a finder’s fee must be in writing and subscribed to be enforceable, and this requirement is not waived merely by admitting discussions of potential compensation.

    Summary

    Freedman sued Chemical Construction Corp. seeking a finder’s fee for assisting in negotiating a business opportunity. The New York Court of Appeals held that her claim was barred by the Statute of Frauds because the agreement was not in writing as required by General Obligations Law § 5-701(a)(10). The court rejected Freedman’s arguments that Chemical Construction waived the Statute of Frauds by admitting to discussing “special compensation” and that she was a “co-finder” in a joint venture with her former employer. The court affirmed the summary judgment granted to Chemical Construction Corp.

    Facts

    Freedman, an employee of Chemical Construction Corp., claimed she was entitled to a finder’s fee for her assistance in negotiating a business opportunity for the company. There was no written agreement for this fee. Chemical Construction Corp. admitted to discussing the possibility of “special compensation” with Freedman. Freedman argued that she was a “co-finder” with her employer, thus circumventing the need for a written agreement.

    Procedural History

    The trial court granted summary judgment to Chemical Construction Corp., dismissing Freedman’s claim. Freedman appealed. The Appellate Division affirmed the trial court’s decision. Freedman then appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether a claim for a finder’s fee is enforceable if it is not based on a writing duly subscribed, as required by General Obligations Law § 5-701(a)(10)?

    2. Whether a defendant waives the protection of the Statute of Frauds by admitting that it discussed the possibility of “special compensation” with the plaintiff?

    3. Whether the “co-finder” exception to the Statute of Frauds applies when there is no evidence of a joint venture?

    Holding

    1. Yes, because General Obligations Law § 5-701(a)(10) expressly requires that any claim for a finder’s fee be based upon a writing duly subscribed.

    2. No, because an admission of discussing “special compensation” does not necessarily indicate an agreement to pay a finder’s fee and is not inconsistent with relying on the Statute of Frauds.

    3. No, because the “co-finder” exception applies only to business enterprises closely akin to a joint venture, and Freedman presented no evidence of such an enterprise.

    Court’s Reasoning

    The court based its decision on the express terms of General Obligations Law § 5-701(a)(10), which mandates a written agreement for finder’s fees. The court reasoned that admitting to discussing potential “special compensation” for an employee did not constitute a waiver of the Statute of Frauds. It stated, “Such an admission at most bespeaks an intention to give an employee a special award for her services and can in no way be viewed as inconsistent with defendant’s reliance upon the Statute of Frauds to protect it from plaintiff’s claim that it had entered into an independent agreement to accept plaintiff’s services as a ‘finder’.” The court also distinguished the case from Dura v. Walker, Hart & Co., 27 N.Y.2d 346 (1970), noting that the “co-finder” exception to the Statute of Frauds applies only to joint ventures, which were not evident in this case. The court emphasized that Freedman presented no “evidentiary facts which indicate the existence of any enterprise even remotely resembling a joint venture.” Therefore, the Statute of Frauds barred her claim. This decision reinforces the importance of written agreements, particularly in the context of finder’s fees, to avoid disputes and ensure enforceability. The court’s strict interpretation of the Statute of Frauds serves to provide businesses with a clear standard for when they may be liable for such fees, even in the absence of a formal written contract. The court did not address whether an oral admission during judicial proceedings would take a case out of the Statute of Frauds because the facts of the case did not require such a determination.

  • Bradkin v. Leverton, 26 N.Y.2d 192 (1970): Recovery in Quasi-Contract Despite Lack of Direct Agreement

    Bradkin v. Leverton, 26 N.Y.2d 192 (1970)

    A party who knowingly benefits from the services of another under circumstances where it would be unjust to retain such benefit without compensation may be liable in quasi-contract, even in the absence of a direct agreement.

    Summary

    Bradkin sued Leverton, seeking compensation for Leverton’s profits from financing Mauchly, a company Bradkin had originally introduced to Leverton’s company, Federman. Bradkin had a written agreement with Federman to receive a percentage of profits from any Mauchly financing. Leverton, leveraging the relationship created by Bradkin, personally financed Mauchly. The court held that Leverton was liable to Bradkin in quasi-contract because Leverton knowingly benefited from Bradkin’s services, making it unjust for Leverton to retain the profits without compensating Bradkin, despite the lack of a direct agreement. The Statute of Frauds was not applicable because the action was not between a finder and his employer.

    Facts

    Bradkin, an employee of H.L. Federman & Co., introduced Mauchly Associates to Federman for financing.
    Bradkin had a written agreement with Federman to receive $10,000 for arranging the initial financing and 10% of the net profit from any subsequent financing of Mauchly in 1967.
    Leverton, an officer, director, and nonvoting stockholder of Federman, became acquainted with Mauchly through Bradkin’s introduction.
    Leverton, without Bradkin’s knowledge, arranged private financing transactions with Mauchly, profiting personally.
    Bradkin sought 10% of Leverton’s net profit from the Mauchly financing, claiming an implied promise to pay, but Leverton refused.

    Procedural History

    Bradkin filed suit against Leverton to recover a percentage of profits and an accounting.
    The trial court (Special Term) granted Leverton’s motion to dismiss the complaint, citing the Statute of Frauds.
    The Appellate Division affirmed the dismissal without opinion.
    Two justices dissented at the Appellate Division, arguing that the complaint stated a cause of action in tort.
    The New York Court of Appeals reversed the lower courts’ decisions.

    Issue(s)

    Whether Leverton, who profited from a financing opportunity initially procured by Bradkin for Leverton’s company, is liable to Bradkin in quasi-contract despite the absence of a direct agreement between Bradkin and Leverton.
    Whether the Statute of Frauds bars Bradkin’s claim against Leverton where Bradkin had a written agreement with Leverton’s company, but no written agreement with Leverton personally.

    Holding

    Yes, because Leverton knowingly benefited from Bradkin’s services under circumstances where it would be unjust for Leverton to retain the benefit without compensation. The obligation is imposed by law to ensure a just and equitable result.
    No, because the Statute of Frauds applies to contracts between a finder and his employer, not between a finder and a third party who benefits from the finder’s services.

    Court’s Reasoning

    The court reasoned that quasi-contracts are obligations imposed by law to prevent unjust enrichment, regardless of the parties’ intentions. The court quoted Miller v. Schloss, stating that “a person shall not be allowed to enrich himself unjustly at the expense of another.” Bradkin’s introduction of Mauchly to Federman created the opportunity from which Leverton profited. Leverton, by using his corporate position to benefit personally from the Mauchly financing, obtained the benefit of Bradkin’s labors. The court emphasized that “when the defendant took over the corporation’s financing arrangements, he assumed its obligation to the plaintiff for commissions.” The Statute of Frauds was deemed inapplicable because it is intended to protect against fraudulent claims between a finder and their employer, not between a finder and a third party. The court stated, “Quite manifestly, the purpose of the statute is to protect against fraudulent dealings between the finder and his employer, not between the finder and a third party.” The dissent in the Appellate Division agreed that the complaint should be upheld. The court concluded that it would be against good conscience for Leverton to retain the benefits of the contract made with his corporation without compensating Bradkin for his services. The court also noted that because there was no fiduciary relationship between Bradkin and Leverton, Bradkin was not entitled to an accounting.

  • Morris Cohon & Co. v. Russell, 23 N.Y.2d 569 (1969): Satisfying the Statute of Frauds for Finder’s Fee Claims

    Morris Cohon & Co. v. Russell, 23 N.Y.2d 569 (1969)

    A memorandum satisfies the Statute of Frauds for a finder’s fee claim in quantum meruit if it acknowledges the plaintiff’s employment, identifies the parties and subject matter, and establishes the plaintiff’s performance, even if it doesn’t specify the compensation rate.

    Summary

    Morris Cohon & Co. sued Sidney Russell to recover a finder’s fee for services rendered in Russell’s sale of stock. The lower courts dismissed the claim based on the Statute of Frauds. The Court of Appeals reversed, holding that a clause in the sale contract, representing that Cohon was the only broker involved, sufficiently evidenced Cohon’s employment and performance, thus satisfying the Statute of Frauds for a quantum meruit claim. The court emphasized that the Statute of Frauds should not be used to evade just obligations when the writing identifies the key elements of the agreement.

    Facts

    Morris Cohon & Co. (plaintiff) claimed to have acted as a broker in connection with the sale by Sidney A. Russell (defendant) of his 50% stock interest in Russell and Russell, Inc.
    The contract of sale between the buyer, Atheneum House, Inc., and the sellers, including Russell, contained a clause stating the sellers had dealt with no one other than Morris Cohon & Co. as broker or finder and would indemnify the buyer against any brokerage claims.
    After the lawsuit commenced, Harry Magdoff, another seller, provided a letter and affidavit stating he procured Cohon’s services for himself and Russell, with Russell’s authorization.

    Procedural History

    The Supreme Court, New York County, denied Russell’s motion for summary judgment.
    The Appellate Division, First Department, reversed and granted summary judgment, finding the action barred by the Statute of Frauds.
    The Court of Appeals reversed the Appellate Division’s order.

    Issue(s)

    Whether a clause in a contract of sale, representing that a specific broker was the only one involved in the transaction, is sufficient to satisfy the Statute of Frauds requirement of a written memorandum for a claim of compensation for services rendered by the broker.

    Holding

    Yes, because the clause, by reasonable construction, acknowledges that the plaintiff performed services and that an obligation to the plaintiff actually existed, satisfying the Statute of Frauds for a claim in quantum meruit.

    Court’s Reasoning

    The Court of Appeals found the Appellate Division’s view of the memorandum too narrow in light of the Statute of Frauds’ purpose: to prevent perjury and fraudulent claims, not to allow evasion of just obligations.
    The court noted that the peril of perjury was largely absent because the writing identified the parties, the subject matter, and established that the plaintiff performed. The court reasoned that the clause, stating the sellers dealt with “no person…other than Morris Cohon & Co. as broker or finder,” was an affirmation that the defendant dealt only with Cohon.
    “Standing alone, the contract clause constitutes an admission by the defendant that plaintiff performed services and that an obligation to plaintiff actually existed.”
    The court distinguished this situation from cases where no memorandum existed at all. The court emphasized that, for a quantum meruit claim, the memorandum only needs to evidence the fact of the plaintiff’s employment and performance.
    “In an action in quantum meruit…a sufficient memorandum need only evidence the fact of plaintiff’s employment by defendant to render the alleged services. The obligation of the defendant to pay reasonable compensation for the services is then implied.”
    The court found the memorandum sufficient because it identified the buyer and seller, established the plaintiff’s employment as a broker, identified the transaction’s subject matter, and acknowledged the plaintiff’s performance in bringing about the sale.