Editor’s note: This is the first in a series of posts in which Denver-area real estate attorney Frederick Skillern provides summaries of case law pertinent to real estate practitioners. These updates originally appeared as materials for the 32nd Annual Real Estate Symposium in July 2014.
CapitalValue Advisors, LLC v. K2D, Inc.
Colorado Court of Appeals, August 15, 2013
2013 COA 125
K2D was a business that required new capital, and it contracted with CapitalValue Advisors for a number of different tasks. CapitalValue entered into an engagement agreement whereby it agreed to either help sell K2D (either a majority or minority interest) or to assist K2D in obtaining debt financing. The rub is that CapitalValue does not have a real estate broker license or a securities license. That is required in order to market the sale of K2D as an entity, as one asset of the company was a leasehold interest in property, or to market its stock under state and federal securities laws.
During the course of its engagement, K2D terminated Capital Value and engaged another company for help. That company obtained a bank loan for K2D — an action which, of itself, does not require a specific license. Since the loan was obtained during the carryover period under the CapitalValue engagement agreement, CapitalValue sued for a 4.5% commission under the terms of its agreement.
The engagement agreement provided:
In executing this Agreement, [CapitalValue] is committing its resources to provide you the best possible representation in the sale of your business, and in turn, you are granting [CapitalValue] the sole, exclusive, and irrevocable right to procure parties (“Buyer(s)”) to purchase, exchange, lease, invest in, loan to, contract for the services of, or otherwise obtain an interest in the Client’s business, its corporate stock, business assets, right and properties or any portion thereof of Client or Client’s affiliates.
In addition, the Agreement set forth that CapitalValue would earn 4.5% of the total amount secured for “debt financing.”
The district court dismissed all claims on summary judgment, holding that the entire engagement agreement was an illegal contract. CapitalValue does not contest that it lacked either license, and does not appeal the trial court’s finding that two parts of the contract are void under these theories. However, it argues that other contractual obligations in the agreement are lawful, and that those provisions are severable from the “void” agreements, even in the absence of an express contract provision allowing the obligations to be severed. The district court dismissed the complaint on summary judgment, finding that the agreement had no severability clause, so the entire contract was unenforceable.
The court of appeals reverses the summary judgment order, finding that the lack of a severability clause is not determinative as to whether portions of the contract can be enforced.
Where a contract contains multiple provisions, some of which cannot be legally performed, the remaining provisions are not necessarily unenforceable. Rather, “[w]here an agreement founded on a legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which can be separated, or the promise, so far as it can be separated, from the illegality, may be valid.” Reilly v. Korholz, 320 P.2d 756, 760 (Colo. 1958).
The court distinguishes Broughall v. Black Forest Development Co., 196 Colo. 503, 593 P.2d 314 (1978), the leading case on the requirement for a real estate license to sell a business owning real property. That case involved a single agreement — to find a buyer to purchase a business, including its real estate interest. The broker there argued that, although he was not a licensed real estate broker, his commission could be “based on that part of the sale price which did not involve real estate.” The court there ruled that “severing” the contract by simply discounting Broughall’s fee “would allow finders and business brokers to disregard completely the licensing requirement to the detriment of the public whom the statute is designed to protect.”
In contrast, the court here finds that the CapitalValue agreement contains multiple agreements, each of which could be a separate contract. The Agreement provides that CapitalValue would earn (1) 4.5% for a sale of less than a majority interest in K2D, Inc.; (2) 4.0% for a sale of more than a majority interest in K2D, Inc.; or (3) 4.5% for helping K2D obtain debt financing. CapitalValue does not appeal the district court’s rulings that the first and second provisions violate federal and state securities licensing requirements. However, because the Agreement also contains a third provision for payment for securing debt financing that the parties do not contend violates either set of licensing laws, the district court erred in concluding as a matter of law that the Agreement could not be severed. The case is remanded for further proceedings to determine an issue of fact — whether the parties intended the provisions of the contract to be severable.