Company Must Pay Business Sale Broker

In this contract dispute related to plaintiff SEJ Enterprises’ sale of SCIA LLC to defendant Centra Technology Inc., SEJ wins summary judgment against Centra on a claim arising under SEJ’s prior agreement with a company SEJ hired to assist with the sale of SCIA; the Alexandria U.S. District Court grants summary judgment and says SEJ is entitled to the remaining amount due under the promissory note ($76,500) and 5 percent interest on the original $350,000 withheld, plus fees and costs.

Plaintiff SEJ Enterprises Earl Industries (Sellers) and SCIA hired Enterprise Research Group (ERG) to assist with the sale of SCIA LLC. Under their agreement, ERG would be compensated for closing a sales transaction relating to certain identified parties, including Centra. However, Sellers terminated the ERG agreement less than a month after signing it, due to ERG’s alleged performance failures.

Three months later, Sellers sold all their rights in SCIA to Centra and SCIA became Centra’s wholly owned subsidiary. Pursuant to the Purchase Agreement, Centra executed a non-negotiable promissory note to SEJ, dated Dec. 31, 2010, for $1 million, with a one-year maturity date. Prior to closing on the sale to Centra, ERG sent a letter to Earl asserting it was owed not less than $250,000 as a transaction fee for the sale to Centra. SEJ responded and offered to settle the claim for $5,540 – one month’s retainer fees and online data room charges, but ERG rejected the offer.

SEJ argues that Centra inappropriately withheld amounts due under the promissory note and breached the note. Centra counters that the note entitled Centra to withhold the value of the potential ERG claim and any related fees associated with that claim.

A contract is intended to be read as a whole. Transposing the relevant sections of the promissory note and the purchase agreement into a holistic assimilation of the relevant portions, the court is left with the following guiding provision: Centra shall have no right to withhold, and/or offset any amounts due hereunder, except any amounts owed by the Sellers, from and after closing, including “losses” that may be suffered or incurred arising from any claim a brokerage or similar fee not deducted from the Purchase Price which Buyer, in its sole discretion, shall have the right to offset against.

SEJ takes the position that Centra’s right to offset is not triggered unless a loss is actual, rather than only potential, at the date of maturity. Centra believes it should have been permitted to offset the balance due under the note by any outstanding contingent future claims that existed at the date of the note’s maturity.

Centra’s position is untenable for a variety of reasons. First, the Purchase Agreement specifically defines the types of losses the Buyer has the right to offset and the list does not include potential losses, foreseeable damages or anticipated litigation fees.

Second, although the phrase “may be suffered or incurred” is future oriented, read in context, the future orientation relates to the time period following the execution of the Purchase Agreement, not to the mere possibility of some loss at any point in the future. The contract permits offset only for losses that may be suffered or incurred, and this provision clearly refers to events that may take place after the promissory note is executed but that have occurred by the time setoff is permitted. Finally, the Purchase Agreement only permits the Buyer to deduct “amounts owed” under the Indemnification Obligation Provision.

The court grants summary judgment to SEJ on count 1 of its complaint and on count 2, as it finds that SEJ diligently and promptly prosecuted the ERG claim. Centra breached the Purchase Agreement by filing the third-party claim in the present cause of action, after having tendered notice to SEJ seeking indemnification.

SEJ Enterprises v. Centra Technology Inc. (O’Grady) No. 1:12cv43, Aug. 10, 2012; USDC at Alexandria, Va. VLW 012-3-399, 13 pp.