Unpublished Disposition, 869 F.2d 1497 (9th Cir. 1989)

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US Court of Appeals for the Ninth Circuit - 869 F.2d 1497 (9th Cir. 1989)

HUGGINS FINANCIAL SERVICES, INC., Plaintiff-Appellee,v.MECHANICAL INSURANCE ASSOCIATES; Alfred P. Kues, Defendants-AppellantsandJohn D. Walker, Defendant.

No. 87-6702.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 13, 1989.Decided Feb. 28, 1989.



Mechanical Insurance Associates and Alfred P. Kues appeal the district court's award of a commission to Huggins Financial Services. We reverse.


Mechanical Insurance Associates ("MIA") is a California corporation engaged in the business of administering service contracts for automobiles. Before MIA was sold in February 1986, two-thirds of its stock was owned by Alfred P. Kues ("Kues"), and the rest was owned by John D. Walker ("Walker"). Huggins Financial Services, Inc. ("Huggins") is a Philadelphia-based firm engaged in the financial consulting business and experienced in, among other things, valuing and selling businesses. Huggins does not have a California real estate broker's license.

In the summer of 1984, Kues and Walker decided to explore the possibility of selling MIA, in order that the two might retire. Harry Miller ("Miller"), an attorney who had represented MIA, suggested that Kues discuss the matter with Brian Saffer ("Saffer"), a merger and acquisitions specialist with Huggins. Saffer subsequently held meetings with Kues, Miller and Walker. After some negotiating, a letter agreement ("Agreement") was signed. The Agreement in pertinent part provided:

This letter will confirm the discussions that we have had concerning the services Huggins ... proposes to render.... Initially you will continue to meet with us, our attorneys and accountants with respect to making an investigation of our current and proposed business operations and preparing a memorandum to be used in selling our Company and structuring several forms of proposed transactions. You will also prepare a list of potential purchasers and investors, contact such potential purchasers and participate in the negotiations leading to the sale of the Company.

For a six-month period after receipt of a copy of this letter signed by you, [Huggins] shall be authorized as the sole and exclusive agent of the Company and its stockholders to attempt to find a purchaser for the Company on terms acceptable to us. This exclusive arrangement will be automatically renewable for additional three month periods unless terminated 15 days prior to the expiration of each such period.

In the event of the sale of the Company, then upon consummation of sale, and only in such event, [Huggins] will receive as compensation ... as a finder's fee and as full compensation for its services, a total fee equal to the following percentages of the total consideration received by the Company and/or its stockholders:

5% of the first $1,000,000 received;

4% of the second $1,000,000 received;

3% of the third $1,000,000 received;

2% of the fourth $1,000,000 received;

1% of the balance.

.... The term "sale" ... includes ... a sale ... of the stock of the Company....

[Huggins] shall be entitled to no compensation if the sale of the Company is not consummated....

Any fee shall be reduced by the amount of the retainer fee provided for herein....

If within 24 months after termination of this Agreement as extended, the Company is sold ... to a purchaser which was solicited or worked on during the term of the Agreement, [Huggins] will be entitled to receive a full finder's fee for its services as provided herein, provided [Huggins] performs the services described herein if and when requested to do so. Upon termination of this Agreement [Huggins] shall deliver to Company a list of all potential purchasers and investors solicited or worked on during the term hereof.

To cover the initial investigatory services and analysis of the Company, [Huggins] will require a retainer fee in the amount of $12,000.00 payable $2,000.00 per month....

[Huggins] represents and warrants to Company and its stockholders that there will be no claim against any of them for brokerage commissions, finder's fees, or compensation for services rendered in connection with this letter agreement ... resulting from any action taken by it without the prior written consent of Company and its Stockholders....

[Huggins] shall keep the identity of the Company and its Stockholders confidential and disclose no information about the Company unless the name of the person to whom it is to be disclosed is first submitted to and approved by the Company....

Before signing the Agreement Kues stated that MIA already was discussing sale with one potential buyer, Robert Courtney, and that MIA did not wish this preexisting negotiation to be subject to the Agreement. Thus a special compensation arrangement (the "Courtney letter"), applicable if MIA's shares were sold to Courtney, was signed. It provided:

In connection with [Huggins'] contract to represent MIA it is agreed that the following terms shall apply if MIA is sold to the Robert Courtney group:

1. If the Courtney group purchases MIA and [Huggins] has no purchaser, the fee shall be $100,000.00.

2. If the Courtney group equals or tops an offer received under the contract, [Huggins] shall receive a full fee.

Soon thereafter Huggins began the process of obtaining information and analyzing MIA's operations and financial condition. Within months, however, MIA fell upon hard times. Walker was removed as president, and it became apparent that MIA faced serious operational and financial problems. Kues informed Saffer of MIA's problems, at which time Huggins' preliminary work under the Agreement was suspended.

In the fall of 1985, West Capital Holding Company ("WCHC") first discussed with Kues the possibility that Kues sell MIA or its stock to WCHC. This negotiation led to the eventual sale of both Kues' and Walker's stock to WCHC in February 1986. Kues received $3.25 million from the sale; Walker was to receive $1.5 million.

Neither Kues nor Walker nor any representative of MIA ever asked Huggins to solicit or negotiate with WCHC, nor to solicit or to negotiate with any other potential buyer, nor gave Huggins the approval or permission to do so. Huggins did not solicit WCHC or any potential buyer. Huggins did not participate in the negotiations leading to the sale to WCHC.

Huggins brought suit to recover a commission under the Agreement against MIA, Kues and Walker. After a bench trial, the district court found in Huggins' favor, holding MIA, Kues and Walker jointly and severally liable for a net amount of $137,900.00 plus interest and costs. MIA and Kues now appeal.1 

Jurisdiction in the district court was based on the parties' diversity of citizenship and the amount in controversy, which is in excess of $10,000.00. 28 U.S.C. § 1332 (1982). This court's jurisdiction over this appeal from the district court's final order is proper pursuant to 28 U.S.C. § 1291. Notice of appeal was timely filed. Fed. R. App. P. 4(a) (1).


MIA and Kues raise three arguments on appeal: (1) that the district court incorrectly concluded that the parties intended a commission to be paid under the circumstances as they occurred--i.e., even where Huggins did not actually find the buyer; (2) that the district court erred in finding that MIA had not terminated the Agreement; and (3) that the Agreement is unenforceable under various provisions of the California Business and Professions Code. Because we hold the Agreement unenforceable under California Business and Professions Code Sec. 10136, we do not address the other arguments raised by MIA and Kues.

We review the district court's construction and application of state law de novo. Churchill v. F/V Fjord (In re McLinn), 739 F.2d 1395 (9th Cir. 1984) (en banc). The substantive law of California governs this case. See Fiorito Bros. v. Fruehauf Corp., 747 F.2d 1309, 1312 (9th Cir. 1984). "Our independent determination of state law should be based upon recognized sources that are available to the parties and that may be argued and contested before the district court as well as before the appellate court." Id. (quoting In re McLinn, 739 F.2d at 1400). We are bound by the law announced by the state's highest court. In the absence of such express guidance, we must interpret and apply the law as we predict the state's highest court would interpret and apply it. Fiorito Bros., 747 F.2d at 1314.

MIA contends that section 10136 of the California Business and Professions Code renders the Agreement unenforceable. Section 10136 reads:

No person engaged in the business or acting in the capacity of a real estate broker or a real estate salesman within this State shall bring or maintain any action in the courts of this State for the collection of compensation for the performance of any of the acts mentioned in this article without alleging and proving that he was a duly licensed real estate broker or real estate salesman at the time the alleged cause of action arose.

California Business and Professions Code Sec. 10131 defines the term "real estate broker" as:

... a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to do one or more of the following acts for another or others:

(a) Sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity....

MIA contends that the Agreement calls for Huggins to negotiate the sale of MIA, thereby requiring Huggins to act as a real estate broker. Thus the Agreement, MIA argues, is unenforceable under section 10136. We agree.

Although the district court made no determination of whether the Agreement was one for brokers' services, it is clear from the language of the Agreement itself that this was a contract for brokers' services. The Agreement calls for Huggins to "participate in negotiations leading to the sale of" MIA, and the Courtney letter refers to the Agreement as a "contract to represent MIA." Such participation in negotiations is the touchstone of a broker's contract. California Business and Professions Code Sec. 10131. Moreover, it is the authority to participate in negotiations that distinguishes brokers' services, which are covered by section 10136, from finders' services, which are exempted from the licensing requirement. Tyrone v. Kelley, 9 Cal. 3d 1, 12-13, 106 Cal. Rptr. 761, 768, 507 P.2d 65, 72 (1973).

Because the contract calls for brokers' services, it is unenforceable. In re Guardianship of the Estate of Prieto, 243 Cal. App. 2d 79, 86, 52 Cal. Rptr. 80, 84 (1966); Weber v. Tonini, 151 Cal. App. 2d 168, 171, 311 P.2d 132, 134 (1957). See also Consul Ltd. v. Solide Enterprises, Inc., 802 F.2d 1143, 1149 (9th Cir. 1986) (if parties contemplate performance of broker's services, the agreement is unenforceable). Huggins has neither alleged nor proved that it was a duly licensed real estate broker at the time the cause of action arose. Thus, under California law, Huggins cannot sue to collect a commission under the Agreement. California Business and Professions Code Sec. 10136.

REVERSED and REMANDED to the district court with instructions to vacate the existing judgment and to enter judgment in favor of Mechanical Insurance Associates and Alfred P. Kues.


This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3


Walker has since settled and is no longer a party to this action