Vero Group v. ISS-International Service System

Citation: Not availableDocket: 91-2752

Court: Court of Appeals for the Fifth Circuit; September 15, 1992; Federal Appellate Court

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The United States Court of Appeals for the Fifth Circuit affirmed the jury verdict favoring The Vero Group (Vero) in its breach of contract claim against International Service System, Inc. (ISS) and its subsidiary ISS–USA. The court found no clear error in the jury's factual determinations and determined that the district court did not make reversible errors in its conclusions. Specifically, the court upheld that Vero was entitled to compensation under its referral agreement with ISS and ISS–USA for the acquisition of Mediclean, and that such compensation was not barred by Texas securities laws.

The case stems from a referral agreement established between Vero, a Texas partnership specializing in company acquisitions, and ISS, a Danish corporation with numerous subsidiaries, including ISS–USA and ISS–England. Vero initially facilitated ISS's acquisition of ADT Maintenance, for which it received a fee of $905,000. Following this, Vero introduced ISS to Mediclean, a U.K. business, which ISS subsequently acquired through its subsidiary ISS–England. Vero sought compensation for this introduction, but ISS refused. Vero's lawsuit included claims for unpaid compensation regarding both the ADT Maintenance acquisition and the Mediclean acquisition, leading to the current appeal.

The district court ruled based on a jury's findings that Vero and ISS had a valid agreement, with ISS owing Vero $550,716 for referring Mediclean, plus $2,703 in expenses and $200,000 in attorney fees. Additional fees of $35,000 were contingent on an appeal lost by ISS, and $10,000 more was specified if there was a Supreme Court appeal. ISS appealed the judgment. 

In reviewing the case, the court applies the Boeing standard, which states a jury verdict should only be overturned if the evidence overwhelmingly favors one party. The court also reviews legal determinations de novo. The parties had agreed pre-trial that Vero was owed $18,015 regarding ADT Maintenance.

ISS raised five arguments on appeal, including a claim that the district court erred in not granting their motion for judgment n.o.v. The court found no inconsistency between the jury's verdict and the district court's judgment. ISS failed to move for a directed verdict prior to jury submission, which required them to show inconsistencies to challenge the judgment. ISS argued that the jury did not consider the relationship between ISS and ISS-England, yet the court found that the jury's finding of Vero’s referral to ISS was sufficient, and it was established that ISS-England, a subsidiary of ISS, purchased all Mediclean stock. Thus, the court upheld the judgment against both ISS and ISS-USA for Vero's compensation.

ISS's argument overlooks the circuit's deemed waiver rule, which applies to factual questions not specified in the jury's special verdict form. When such a waiver occurs, and the trial court does not make explicit findings on the omitted issues, it is assumed that all necessary factual findings to support the judgment have been made. In this case, although the district court did not explicitly address the corporate relationships among ISS entities, it is presumed to have found those relationships to be supportive of its judgment. This situation arose from a lawsuit involving a finder's contract between a Danish parent corporation and its U.S. subsidiary, concerning compensation related to a business acquisition.

ISS's challenge to the denial of its judgment notwithstanding the verdict (j.n.o.v.) motion primarily contests the sufficiency of evidence regarding whether ISS-England's stock purchase constituted an acquisition of Mediclean, as per the referral agreement with Vero. The district court noted that ISS had not moved for a directed verdict at appropriate times, and although ISS claims a motion was made, no record supports this. The court determined that ISS's j.n.o.v. motion improperly attempted to challenge the jury's verdict on sufficiency grounds rather than on the basis of inconsistency with the special verdict.

ISS raises two factual challenges to the trial court's findings: (1) that Vero did not provide a written referral for Mediclean, and (2) that the attorney's fees awarded were excessive. The court found that there was sufficient evidence to support the jury's conclusions on both counts. Specifically, the jury determined that a letter sent by Vero to ISS on November 23, 1988, which mentioned Mediclean, constituted a written referral under the referral agreement. The court concluded that the jury's findings were reasonable and upheld the trial court's decision.

The jury awarded $200,000 in attorney's fees, which ISS claims is unreasonable given the case's duration of just over two years, stipulated damages, minimal pre-trial depositions, and limited trial witnesses. ISS argues that the fees do not correlate with the $568,000 in controversy or the case's complexity. An expert witness for Vero testified that a reasonable fee for the work done would be $283,000, but the jury's award was lower at $200,000. The court found this award acceptable. Additionally, if ISS and ISS–USA appeal unsuccessfully, Vero is entitled to a liquidated sum of $35,000 in attorney's fees. 

Regarding corporate relationships, ISS contends that the district court overlooked the independent existence of its U.K. subsidiary, ISS–England, when holding ISS and ISS–USA liable to Vero. ISS claims the court erred by allowing recovery without proof of actual fraud, essential for an alter ego claim under Texas law. However, the district court recognized ISS as the obligor under the referral agreement with Vero, thus holding it accountable, irrespective of the subsidiary's involvement in the transaction. The court determined that the situation did not fit the alter ego paradigm, where a parent company uses a shell corporation to avoid liability. Instead, ISS directly contracted with Vero and later had its subsidiary take title to the Mediclean stock after benefiting from Vero's services, indicating ISS's direct responsibility for the obligation incurred.

ISS seeks court approval to absolve itself of financial obligations to Vero for referral services, claiming the need to demonstrate 'actual fraud' under Texas law to pierce the corporate veil of ISS–England. However, Vero's actions indicate a clear sequence: it initiated contact to secure a contract for referral services, entered into a referral agreement with ISS and ISS–USA, and rendered services related to the acquisition of Mediclean. Vero was excluded from crucial negotiations and financial transactions involving Mediclean, which ISS undertook independently, directly engaging with ADT executives without involving ISS–England. The acquisition was effectively managed by ISS, which provided funding through an informal loan to ISS–England, contradicting ISS's claims of separation. The evidence suggests that ISS fully owns and controls ISS–England, functioning as if it were a division rather than a distinct entity. Therefore, Vero does not need to pierce the corporate veil to hold ISS liable for compensation due to its direct acquisition of Mediclean, negating the requirement to prove actual fraud. The characterization of the transaction remains an ISS acquisition despite the title being held by ISS–England. Additionally, the inquiry into Vero's entitlement to recovery is complicated by provisions in the Texas Securities Act.

ISS argues that Vero should not be permitted to collect compensation in federal court for the Mediclean stock acquisition, as Vero was not a licensed dealer under Texas securities law. According to ISS, for Vero to receive payment as a finder in the transaction, it must have been registered as a securities dealer. ISS acknowledges that when it acquired ADT Maintenance following Vero's referral, the transaction was an asset purchase, which did not invoke the Texas Securities Act (TSA). However, ISS contends that the stock purchase of Mediclean directly implicates the TSA, which prohibits unregistered individuals from bringing actions to recover commissions on securities transactions. Under Article 581–34 of the TSA, individuals must prove they were duly licensed and that the securities were registered at the time the cause of action arose. 

Citing the case of Star Supply Co. v. Jones, ISS highlights that a Texas appeals court ruled a finder who was not a registered dealer could collect a commission despite the transaction being completed via a stock transfer. In that case, the finder had a contract to connect sellers with potential buyers, and the court, applying the 'economic reality' test, determined that the stock transfer was merely a means to transfer ownership of the business rather than a sale of securities under the TSA. Thus, the court concluded that the finder did not need to be a licensed broker to collect a fee. Ultimately, ISS maintains that due to the nature of the Mediclean acquisition, Vero is barred from recovering compensation under Texas law.

Rogers v. Ellsworth established a clear distinction between finders and stockbrokers regarding dealer registration in Texas. In this case, a finder who facilitated a business acquisition was denied a commission by the seller, who argued the finder was not a registered securities dealer under article 581–34. The court defined a finder as an intermediary who connects parties without engaging in the transaction itself, allowing finders to recover fees despite lacking broker licenses. The court's ruling indicated that statutory licensing requirements for brokers do not preclude finders from claiming fees.

In applying the principles from Ellsworth and Star Supply to the current case involving Vero, it was concluded that Vero does not need to be a licensed securities dealer to receive compensation for a referral. ISS contended that the U.S. Supreme Court's ruling in Landreth Timber Co. v. Landreth altered this precedent, suggesting that Texas courts would now require a finder to be licensed even for a complete stock acquisition. However, this argument was rejected. Landreth addressed whether the sale of all stock in a company constituted a securities transaction under federal anti-fraud provisions rather than the legitimacy of a finder's fee. The case's focus was on the registration of securities, which differed from the contractual relationship between finders and transaction parties in Ellsworth and Star Supply. Consequently, the anti-fraud concerns central to Landreth do not apply to the current case regarding finder's fees.

The court addressed whether the anti-fraud provisions intended to protect consumers should apply to the sale of 100% of a business's stock. It evaluated whether a stock purchaser could reasonably assume that federal securities laws applied, regardless of the stock percentage. The court found the rationale for applying federal securities laws irrelevant to negotiations involving finders assisting in business acquisitions. Citing four state court cases that adopted the Landreth decision, the court deemed them unhelpful, noting they involved situations similar to Landreth but did not pertain to finder commissions, which were central to the current case. The court expressed skepticism that Texas courts would apply Landreth to finder-related transactions, emphasizing that any such shift would need explicit legislative or judicial backing. It concluded that article 581–34 did not apply, as the services provided by Vero (the finder) were too remote from the actual stock transaction to establish a necessary connection. The district court's ruling found ISS and ISS–USA liable to Vero for compensation related to the acquisition of Mediclean, affirming Vero's entitlement to a finder's fee and the awarded attorney's fees of $200,000 for trial services and $35,000 for appeal services. The judgment of the district court was fully affirmed.