Lender Held Liable For Payment of US$679,800.00 in Fees to Financial Intermediary After Acknowledging Authorization and Direction Signed By Borrower

Introduction

The decision of the Ontario Superior Court of Justice in Kemeny v. Callidus Capital Corporation contains important lessons for both lenders and financial intermediaries who broker financing arrangements between lenders and borrowers.  The case deals with a written authorization and direction regarding the payment of fees to a financial intermediary as compensation for his efforts to bring the lender and borrower together and facilitate negotiations.  The authorization and direction was signed by the borrower and acknowledged by the lender.  Before any fees were paid to the broker, the borrower was placed into insolvency.  The Court held that the lender was required to pay the fees owing to the broker based on the lender’s signed acknowledgment of the authorization and direction.

Parties

The plaintiff, George Kemeny, had been the Chief Financial Officer of Esco Marine Inc. (“Esco”) until 2010.  Kemeny was an independent professional financial advisor and consultant at the time of the events giving rise to his claim.  Esco was a company incorporated in Texas, U.S.A. In April of 2014, Kemeny was engaged by Esco to assist in its efforts to obtain alternate financing for its operations.  The defendant, Callidus Capital Corporation (“Callidus”), is a company incorporated in Ontario providing lending solutions to businesses that could not obtain financing from more traditional funding sources.

Facts

As a result of Kemeny’s past discussions with Mark Wilk, Vice-President of Callidus, Kemeny believed that Esco’s financing needs were of the type suitable to be addressed by Callidus.  Kemeny contacted Wilk to arrange for Callidus to consider providing funding to Esco.  Kemeny devoted his time to these arrangements and travelled to Texas to pursue them.  The negotiations between Esco and Callidus initiated by Kemeny progressed quicky and appeared destined to result in a loan agreement. 

An irrevocable direction was prepared to govern payment of Kemeny’s compensation for his efforts in bringing the parties together and facilitating negotiations.  The irrevocable direction regarding the credit facility to be granted by Callidus to Esco was addressed to Callidus and Kemeny and provided, in part, that,

…The undersigned Borrower hereby irrevocably directs the Lender to pay to the Consultant, upon the closing of the Facility directly from the Proceeds of the first drawdown made by the Borrower in connection with the Facility (and without further authorization from the Borrower) the sum of two per cent (2%) of the authorized amount of the Facility (regardless of whether a lesser amount is actually drawn down on closing or not), and such amount shall be held in trust for, and the property of, the Consultant…

The irrevocable direction also contained a lender acknowledgement which said “[a]cknowledged by this [l]ender” on the date of signature. The irrevocable direction was signed by Richard Jaross, the Chairman of Esco, on May 1, 2014 and the lender acknowledgement was subsequently signed by Wilk, the Vice-President of Callidus.

On June 20, 2014, an email was sent from Kemeny’s lawyer to Wilk attaching a letter regarding the irrevocable direction and requesting that the funds payable to Kemeny pursuant to the irrevocable direction be wired to him to be placed into his law firm’s trust account.

On June 27, 2014, emails were exchanged between Wilk and Esco regarding a purported insufficient “availability” to pay Kemeny pursuant to the irrevocable direction.  On the same date, emails were exchanged between Esco and Kemeny regarding Kemeny’s fee and advising that Callidus was taking the position that Kemeny’s demand for his fee presented a threat to the provision of any loan funds to Esco.  Further emails were then exchanged between Wilk, Esco and Kemeny in which Callidus asserted that the irrevocable direction was not binding upon it.

On June 27 and 28, 2014, additional emails were exchanged between Esco and Wilk in an effort to achieve a downward adjustment of what fee was to be paid to Kemeny pursuant to the irrevocable direction.

On June 30, 2014, Kemeny sent an email to Callidus attaching an acknowledgement prepared by Kemeny’s lawyer as had been requested by Callidus and Esco.  The acknowledgement reflected Kemeny’s willingness to accept a reduced fee (US$400,000) on certain terms and conditions contained therein.  Neither Callidus nor Esco signed the acknowledgment.

On June 30, 2014, Callidus and Esco executed their loan agreement with respect to the provision by Callidus of a credit facility to Esco in the amount of approximately US$33,990,000.00.  Callidus then made a series of loan advances to Esco in the amount of approximately US$22,000,000.00.

Despite these advances and the discussions and correspondence that had preceded them, Callidus informed Kemeny once again by email that there was no “availability” to fund the fee payable to him.  No funds were paid to Kemeny by Callidus or Esco after June 30, 2014.  Soon after the loan agreement advances were made by Callidus, Esco was placed into insolvency in the Courts of Texas.  As a result, Kemeny commenced an action directly against Callidus for payment.

The Decision

The Court found that the irrevocable direction was not just an agreement between Kemeny and Esco with respect to Kemeny’s fees, but also an agreement requiring Callidus to ensure that payment of those fees was made directly to Kemeny by it.  The Court concluded that Callidus breached its obligations pursuant to the irrevocable direction and its obligations to Kemeny, and failed to make payment pursuant to the terms of the irrevocable direction.  The Court also found that pursuant to the terms of the irrevocable direction Callidus was a trustee for Kemeny with respect to the authorized amount of the facility, that this amount was Kemeny’s property and that Calidus was obligated to ensure that the funds were paid to and received by him.

The Court awarded Kemeny judgment against Callidus for the full amount of his fee for consulting services as contained in the irrevocable direction, being 2% of the authorized amount of the loan facility, US$679,800.00.

Conclusion

The decision in the Kemeny case contains useful and important lessons for lenders and financial intermediaries.  An authorization and direction for the payment of a financial intermediary’s fees can be a contract between not just the borrower and the financial intermediary, but also between a lender and the financial intermediary.  Whether a contract exists between the financial intermediary and the lender will likely depend on whether the lender acknowledges the terms of the authorization and direction.  In this case, the Court imposed liability on Callidus because the authorization and direction was signed by its Vice-President, who held himself out as having authority to enter into a binding agreement on behalf of Callidus.  If the authorization and direction had not been signed by Callidus, the result of the case may well have been different.  The main lesson for financial intermediaries is to ensure that an authorization and direction with respect to the payment of their fees is properly drafted and acknowledged by the lender.  The key takeaway for lenders is that by acknowledging an authorization and direction with respect to the payment of fees to a financial intermediary, a lender could be held liable for the payment of those fees.  Lenders should seek legal advice and consider the risks associated with signing an authorization and direction relating to the payment of the fees of a financial intermediary before doing so.