Plaintiff functioned as a broker to arrange for the sale of a business in exchange for a broker fee. Defendant Merrill Lynch (and Merrill Lynch Global Private Equity Inc.), purchaser, told Plaintiff that the deal could only go through financially if Plaintiff took a fee of $1.5 million rather than the $7.15 million that it would get under the existing broker fee agreement. Merrill Lynch allegedly represented that everyone getting fees in connection with the transaction was receiving a proportional haircut on their fees.
Only after the deal closed, Plaintiff alleges that it found out that Merrill Lynch’s statements were false, that others (including Merrill Lynch) had not taken a haircut on their fees and that, in fact, earlier anticipated fees totaling $23.5 million had grown to $24.27 by the time of closing.
The U.S. District Court, D. Minn. (Doty, J.), held that the fraud claim failed for failure to allege damages. That is, the trial court held that the brokerage fee had been a contingent fee and, as such, could not form the basis for a fraud claim. “According to the district court, without showing that the deal would have been consummated in the absence of the fee reduction, Northstar could not show damages.”
The Eighth Circuit has now rejected this reading of Minnesota law, finding that, “The district court’s rule would produce the result that a party could defraud others in negotiations for contingent contracts without liability or consequence, when Minnesota law holds otherwise.”
The scenario in this case may have arisen in many multi-party deals in the challenging economic climate and, with this decision, brokers may see a road to recovery to foregone fees.