In a decision arising from intersection of contract law and federal securities regulation, the Massachusetts Business Litigation Session recently held that an unregistered broker could not recover a claimed $20 million “success fee” arising from a transaction that took a publicly traded real estate investment trust private.

In Redimere Advisors, LLC v. Plymouth Industrial REIT, Inc.,¹ Justice Kenneth W. Salinger dismissed every claim asserted by the plaintiff, concluding that a written engagement letter did not cover the transaction at issue and that any separate agreement to compensate the broker was unenforceable because the plaintiff acted as an unregistered broker in violation of the Securities Exchange Act. The court’s dismissalincluded the plaintiff’s Chapter 93A, Section 11 claim.

The dispute arose after Plymouth Industrial REIT retained Redimere Advisors and its alleged affiliate, Hollister Associates, under a written engagement letter to assist with raising capital through an “Equity Financing.” The agreement included a 2% “success fee” on the closing of any defined Equity Financing transaction. According to the complaint, however, Plymouth later shifted its strategic direction and asked Redimere to locate a buyer interested in acquiring the company’s stock to take it private through a merger transaction. Redimere alleged that Plymouth orally agreed to pay the same 2% success fee if Redimere sourced a purchaser and successfully completed such a transaction. After Redimere allegedly introduced the eventual buyers, negotiated pricing, coordinated diligence, and helped close a take-private transaction, Plymouth allegedly refused to pay the requested fee of approximately $20 million. Redimere, as the only plaintiff, sued and brought various contract and equitable claims to recover the fee and a Chapter 93A claim to recover up to $60 million. The defendants (the formerly publicly traded entity and the private entity surviving after the transaction) moved to dismiss the complaint in its entirety and opposed Redimere’s motion to file an amended pleading naming Hollister as a co-plaintiff.

The court first addressed whether the written engagement letter itself entitled Redimere to compensation. Applying familiar Massachusetts principles of contract interpretation, the court concluded that it did not. The court likewise rejected Redimere’s claim for breach of the implied covenant of good faith and fair dealing, which can sometimes trigger Chapter 93A liability. Though every Massachusetts contract includes an implied covenant requiring parties to refrain from depriving one another of the benefits of their bargain, the court held that the covenant cannot create contractual rights that the parties themselves never negotiated. Because the engagement letter imposed no obligation to pay a fee in connection with a merger transaction, the court ruled that Plymouth’s alleged refusal to do so could not constitute a breach of the implied covenant.

The decision demonstrates that federal securities law may impact common law and Chapter 93A claims. Even assuming Plymouth separately promised to compensate Redimere for arranging the take-private transaction, the court concluded that such an agreement was unenforceable because Redimere alleged conduct in its own pleading that allowed the court to conclude that Redimere had performed the work of a securities broker under the Securities Exchange Act of 1934. Because Redimere admittedly was not registered as a broker-dealer with the U.S. Securities and Exchange Commission, the court noted its alleged performance violated the Exchange Act. That rendered the parties’ alleged contract voidable. Although voidability ordinarily constitutes an affirmative defense, the court concluded that dismissal under Rule 12(b)(6) was appropriate because Redimere’s own detailed factual allegations established every element necessary for the defendants to invoke that defense. Having determined that the alleged agreement was unenforceable under the Exchange Act, the court disposed of Redimere’s alternative theories of recovery, including its Chapter 93A, Section 11 claim. Put simply, the Chapter 93A was derivative of the failed contract claim, and a party could not obtain under Chapter 93A what was barred by federal securities law. Ultimately, the court did not allow an unregistered broker to repackage unenforceable contract claims as claims for Chapter 93A violations.

1 Greenberg Traurig attorneys and Massachusetts Chapter 93A Insights blog editors David Thomas and Angela Bunnell represented the defendants in this matter.