Catalyst Strategic is a consulting firm that advises companies regarding mergers, acquisitions, and similar. Three Diamond Capital is an equipment rental company based in Houston. Three Diamond engaged Catalyst to help with a sale of its company, and executed a contract accordingly. But in October 2018, Three Diamond decided to stop pursuing a sale and ended the agreement.
Still, the two companies continued a working relationship. And in 2019, Three Diamond again sought a buyer and executed another engagement agreement with Catalyst. That agreement stated that Three Diamond would pay Catalyst $25k per calendar quarter, plus a commission upon the sale of Three Diamond. The commission was payable if the deal was concluded from the date of the agreement through the 18th month following the date of termination of the agreement.
Due to the onset of COVID-19, Three Diamond terminated its contract with Catalyst in March 2020.
The rental industry recovered, so the CEO of Three Diamond contacted the CEO of Herc Rentals. Herc had initially been sourced through the efforts of Catalyst during the term of the agreement. This time Herc agreed to purchase Three Diamond for $190 million; the deal closed in August 2021.
Three Diamond refused to pay Catalyst the separate fee, even though the transaction took place within 18 months after Three Diamond terminated the contract with Catalyst. So Catalyst sued Three Diamond for breach of contract.
The trial court determined that Catalyst substantially performed its obligations, and granted judgment for Catalyst. Three Diamond filed a motion for reconsideration, premised on the ‘procuring cause’ doctrine in Texas. The trial court, unmoved by Three Diamond’s request, awarded Catalyst close to $4 million, plus interest.
Three Diamond appealed.
The Appellate Court reminded us that the procuring cause doctrine is a ‘settled and plain’ rule in Texas, as announced in a Texas Supreme Court case of 2022. Its function is to credit a broker or agent for a commission-generating sale when a buyer is produced through the efforts of a broker or agent. As a consequence, the commission entitlement vests at the moment of procurement, not when the deal closes.
The theory of ‘procuring cause’ is only operational when there is no contract that governs how to handle post-termination commissions. Contractual silence, however, leaves the procuring cause doctrine intact.
In this situation, the Catalyst contract contained a ‘robust accounting’ of fees, interim fees, completion fees, and post-termination commissions; there is no claim that the agreement was silent on these points.
So, although the procuring cause doctrine is indeed still very much a thing, at least in Texas, it is inapplicable here as the contract is crystal clear.
Catalyst must win; Three Diamond will lose. See Catalyst Strategic Advisors LLC v Three Diamond Capital SBC LLC; US 5th Circuit Court of Appeals No. 23-20030; February 22, 2024: https://casetext.com/case/catalyst-strategic-advisors-llc-v-three-diamond-capital-sbc-llc.
Questions / Issues:
1. Be careful. Although the ‘procuring cause’ doctrine may be alive and well, there are statutes that supplant it. As just one example, it is not enough for a real estate broker or sales agent to be the procuring cause of a deal in many States; strict licensure and other requirements must be met before the agent or broker may assert a lawful claim for commission entitlement.
2. Further, and although not addressed in this Opinion because there was no need to do so, most States have adopted statutes of fraud that generally preclude oral agreements above a minimum threshold amount, like $500. Do not make the mistake of concluding that a solid argument for a ‘procuring cause’ entitlement means that a written contract is not needed.
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
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