GunBroker.com v. Tenor Capital Partners, LLC

• Decision Date: 03 November 2021
• Docket Number: Civil Action 1:20-CV-613-TWT
• Parties: GUNBROKER.COM, LLC, Plaintiff, v. TENOR CAPITAL PARTNERS, LLC Defendant.
• Court: U.S. District Court — Northern District of Georgia

GUNBROKER.COM, LLC, Plaintiff, v. TENOR CAPITAL PARTNERS, LLC Defendant.

Civil Action No. 1:20-CV-613-TWT

United States District Court, N.D. Georgia, Atlanta Division

November 3, 2021

OPINION AND ORDER

THOMAS W. THRASH, JR. United States District Judge

This is a financing deal gone bad. It is before the Court on the Defendant's Motion for Partial Summary Judgment [Doc. 75] and the Plaintiff's Motion for Partial Summary Judgment [Doc. 87]. For the reasons set forth below, the Defendant's Motion for Partial Summary Judgment [Doc. 75] is GRANTED in part and DENIED in part, and the Plaintiff's Motion for Partial Summary Judgment [Doc. 87] is GRANTED in part and DENIED in part.

I. Background

This action arises from the Plaintiff GunBroker.com, LLC's (“GunBroker” or “Company”) efforts to create an employee stock ownership plan (“ESOP”) a transaction in which Steve Urvan (“Urvan”), the founder, chief executive officer, and sole shareholder of GunBroker, would sell his Company stock to the ESOP trust at a negotiated price. GunBroker runs an online marketplace called GunBroker.com where people can purchase and sell firearms and firearm accessories. (Def.'s SUMF ¶ 3.) In 2018, GunBroker engaged the Defendant Tenor Capital Partners, LLC (“Tenor”) to provide financial advisory services in connection with GunBroker's potential installation of an ESOP and the financing thereof. (Id. ¶ 12.) Tenor describes itself as a boutique investment bank that specializes in advising corporations, shareholders, and lenders regarding ESOP transactions. Its principals are Todd Butler (“Butler”), an attorney and active member in good standing of the Georgia Bar, and Andre Schnabl (“Schnabl”), an accountant. (Id. ¶¶ 1-2; Def.'s Resp. to Pl.'s SUMF ¶ 15; Pl.'s SUMF ¶¶ 17, 21.)

On October 15, 2018, Urvan, Butler, and Schnabl met to discuss the proposed GunBroker ESOP. (Pl.'s SUMF ¶ 36.) Following the meeting, on October 16, 2018, Butler forwarded Urvan an engagement agreement (“Letter Agreement” or “Agreement”) detailing the ESOP advisory services that Tenor would provide to GunBroker and Urvan. (Id. ¶ 38.) The draft Agreement contained the following fee arrangement, known as a tail provision:

The term of this engagement shall extend from the date hereof through the earlier of (i) twelve months from the date hereof or (ii) as such time either party terminates this Agreement by giving the other party at least 10 business days' prior written notice. To protect Tenor's intellectual property and to provide adequate considering [sic] for the performance of its services hereunder, if the Company, or any subsidiary or affiliate thereof, within twelve (12) months of the termination of this engagement, closes any transaction involving the sale of shares to an ESOP or a financing transaction with any lender introduced to the Company or its shareholders by Tenor, the Company will be obligated to pay the TCP Success Fee calculated under Section 3(b) of the Agreement.

(Id. ¶ 46.) On October 22, 2018, Urvan expressed concern with the tail provision, writing to Butler in an email, “We need to talk about this because I do not like a tail.” (Id. ¶ 48.) Thereafter, the Letter Agreement, including the tail provision, underwent a series of revisions until the Parties agreed on final terms. (Butler Dep., Exs. 95, 96.)^[1]

On November 11, 2018, Urvan forwarded Butler the final, executed version of the Letter Agreement. (Pl.'s SUMF ¶ 53.) Pursuant to the Agreement, Tenor would provide “limited financial advisory services . . . to the Company and its shareholders in connection with the Company's . . . potential installation of an [ESOP] and the financing thereof[.]” (Butler Dep., Ex. 22 at GB_ 000004.) Tenor's services were to be performed in three sequential stages, as authorized and instructed by GunBroker: (1) Analysis and Structuring Stage; (2) Financing Raise Stage; and (3) Closing Stage. (Id. at GB_000004- 05.) At Stage 1, Tenor agreed to perform the following services:

(a) assist the Company and shareholders to identify strategic objectives;

(b) collect data, financial and otherwise from the Company;

(c) conduct a high-level assessment of the tax issues relevant to the Transaction;

(d) perform a preliminary, oral valuation of the Company;

(e) design transaction alternatives to address strategic objectives;

(f) consider the financial and tax implications of alternative transaction structures to the Company and the selling shareholders; and

(g) develop an explanatory analysis of the Transaction which will include a ten-year transaction financial model providing the cash flows resulting from the Transaction and comparison(s) of alternative transactions.

(Id.) The Agreement calls for advance payment of a $12, 500 “Structuring Stage Fee” to compensate Tenor for its Stage 1 analysis. (Id. at GB_000009.)

If GunBroker elected to proceed to Stages 2 and 3 of the Letter Agreement, Tenor would perform the following additional services:

(a) review the Company's financial statements in order to evaluate financing options for the Transaction;

(b) prepare a descriptive financing memorandum, to be used in discussions with lenders (including institutions with whom the Company currently has relationships);

(c) contact banks and financial institutions regarding financing the transaction, arrange lender meetings, solicit proposals, assist in negotiating the final terms of the lending agreements and Transaction, and assist in closing the Transaction;

(d) provide other financial advisory services as needed and requested as necessary to assist the Company in obtaining financing for the Transaction;

(e) assemble the team responsible to execute the Transaction and administer the ESOP after closing, including, ESOT (employee stock ownership trust) trustee, plan administrator, valuation firm and other professionals critical to a successful conclusion to the transaction and ongoing compliance;

(f) populate a data room, as requested, with necessary documents for pre-closing due diligence;

(g) coordinate with the valuation firm to establish all financial terms of the transaction, including without limitation, the purchase price for the shares to be sold to the ESOT; and

(h) assist the Company, its legal professionals and other business professionals to bring the Transaction to a successful conclusion.

(Id. at GB_000005.) Upon the closing of an ESOP transaction, Paragraphs 3(b) and 3(c) set forth various formulas pursuant to which Tenor could earn a “TCP Success Fee” (“success fee”) for its work at Stages 2 and 3. (Id. at GB_000006.) The applicable formula depends on whether the ESOP transaction requires a financing raise, and whether in the event of a financing raise, the lender is a prior relationship of GunBroker rather than Tenor. (Id.)

Paragraph 15 of the Letter Agreement contains the revised tail provision, which states:

The term of this engagement shall extend from the date hereof through the earlier of (i) twelve months from the date hereof or (ii) as such time either party terminates this Agreement by giving the other party at least 10 business days' prior written notice. To protect Tenor's intellectual property and to provide adequate consideration for the performance of its services hereunder, if the Company, or any subsidiary or affiliate thereof, within twelve (12) months of the termination of this engagement, closes any transaction involving the sale of shares to an ESOP or a financing transaction with any lender introduced to the Company or its shareholders by Tenor, the Company will be obligated to pay the TCP Success Fee calculated under Section 3(b) or, if TCP is not required by the Company to perform a financing raise, 3(c) of this Agreement. If for any reason the enterprise valuation of the Company as determined by the ESOP trustee is less than $165 million dollars and the Company determines not to close an ESOP transaction at such lower valuation, TCP shall have no right to payment under this paragraph. If TCP is required by the Company to perform a financing raise and the most favorable terms obtained provide maximum available financing of less than $70 million dollars or if the annual interest expense exceeds 9.03% (i.e., current 1-year LIBOR plus 600 basis points), and the Company determines not to proceed with a closing of such financing, Tenor's maximum fee payable under this paragraph shall be $650, 000 (i.e., the maximum payment payable to Tenor as if it did not conduct a debt raise).

(Id. at GB_000009.)

In December 2018, Urvan, on behalf of GB Investments, Inc. (“GB Investments”), ^[2] also signed an engagement letter with the law firm Smith Lynch, LLC (“Smith Lynch”) to serve as special counsel to the Company “in connection with legal issues pertaining to the feasibility, analysis, structuring, installation and financing of an [ESOP] . . . and related matters[.]” (Def.'s SUMF ¶ 33.) Butler had organized Smith Lynch in 2016 and owned a 95-percent stake in the firm until December 31, 2018, after which he assigned all of his interest to Randolph Smith. (Pl.'s SUMF ¶ 24; Def.'s Resp. to Pl.'s SUMF ¶ 25.) According to Tenor, Butler informed Urvan that he had an individual interest in Smith Lynch before GB Investments engaged the firm. (Def.'s SUMF ¶ 34.) However, GunBroker disputes this assertion, emphasizing that the Smith Lynch engagement letter did not disclose the firm's affiliation with Tenor or Butler and did not seek a waiver of any associated conflicts of interest. (Pl.'s Resp. to Def.'s SUMF ¶ 34; Pl.'s SUMF ¶¶ 67-68.)

Following execution of the Letter Agreement, Tenor performed the financial and structuring analysis outlined in Stage 1 and presented its analysis to GunBroker, via email and orally, in a PowerPoint document dated November 19,...