In GunBroker.com, LLC v. Tenor Capital Partners, LLC, (N.D. Ga.), an online firearms marketplace sued a financial advisory firm claiming that it provided an inaccurate enterprise valuation. The plaintiff was in the process of creating an employee stock ownership plan (ESOP) and sought the valuation from the defendant. The complaint included allegations of breach of contract, breach of fiduciary duty, fraud, and unjust enrichment.

In early November 2021, a Georgia federal judge granted partial summary judgment, to each party, on different counts in the case. In his order, U.S. District Judge Thomas W. Thrash Jr. referred to the case as a “financing deal gone bad.”

GunBroker.com LLC (“Gunbroker”) entered into an agreement with Tenor Capital Partners LLC (“Tenor”) in 2018 to receive financial advisory services as GunBroker was in the process of implementing an employee stock ownership plan.

Tenor conducted a financial and structural analysis of GunBroker and found that “preliminary valuation work indicates [GunBroker] has a current enterprise value of at least $180 million.”

After this analysis, GunBroker chose an ESOP trustee but dismissed Tenor from participating in the transaction because of a disputed fee and because Tenor was not registered with the U.S. Securities and Exchange Commission (“SEC”).

GunBroker continued to formulate its ESOP without Tenor’s services but later halted the process, contending that the ESOP trustee never offered more than $120 million for the available stock, which was less than Tenor had valued.

GunBroker sued Tenor in February 2020, claiming that Tenor’s failure to be registered with the SEC made their agreement void and that Tenor’s actions had violated the Investment Advisers Act, the Securities Exchange Act, and the Georgia Uniform Securities Act. GunBroker also alleged Tenor breached the contract when it abandoned the agreement a year earlier.

Tenor asserted counterclaims against GunBroker, and the latter then moved for summary judgment to rescind the agreement because of Tenor’s failure to register as an investment adviser. Tenor moved for summary judgment on the same claims, declaring that it does not meet the definition of an investment adviser under either the Investment Advisers Act or the Georgia Securities Act. Tenor further alleged that GunBroker had failed to provide notice of rescission and n “offer of tender,” which is an offer to return all benefits received under that contract.

Judge Thrash found that Tenor was entitled to summary judgment, on the damage issue, related to the Investment Advisers Act, since “no provision of the Investment Advisers Act creates a private cause of action for damages or other monetary relief.”

Judge Thrash, regarding the claims of fraudulent inducement, also found Tenor negligent of misrepresentation and breach of fiduciary duty. The court agreed with Tenor that GunBroker failed to present evidence of a false statement by Tenor, or justifiable reliance by GunBroker. According to the order, the disputed agreement stated that “Tenor will act … as an independent contractor with the duties solely to the company. Nothing in this agreement … shall be deemed to create a fiduciary or agency relationship between Tenor and the company.”

Tenor also prevailed on its motion for summary judgment regarding the claim that it had violated the Georgia Securities Act. However, the judge did find that Tenor met all the legal elements to be deemed an investment adviser based on the meaning of the Investment Advisers Act.

In turn, Judge Thrash found that GunBroker was entitled to summary judgment on its claim for rescission, stating that the “common law rules of tender-back and ratification do not apply to suits under the Investment Advisers Act.” In effect, the judge said that GunBroker was not required to provide notice to Tenor and return any benefits received under the disputed agreement, before filing the lawsuit.

Because Judge Thrash granted summary judgment to GunBroker on its claim for rescission, there was no cause of action regarding the company’s other claims of breach of contract, recoupment, and Tenor’s counterclaim for breach of contract.

Judge Thrash did find that GunBroker was entitled to summary judgment on Tenor’s other claims for attorney fees and punitive damages since he granted summary judgment to GunBroker for the breach of contract and fraud counterclaims.