Recovery Denied on an Illegal Contract

Recovery Denied on an Illegal Contract

      In a recent decision from the Kentucky Court of Appeals, it refused to grant any relief to the plaintiff for recovery under an illegal contract. Varner v. Kingfish Capital Partners I, LP, No. 2016-CA-001415-MR, 2017 WL 5952867 (Ky. App. Dec. 1, 2017).

       Varner, resident in Kentucky, entered into an oral agreement with Kingfish Capital Partners I, L.P. (a hedge fund) to solicit persons and companies to invest therein. In connection with the funds invested, Varner claimed agreement that he would be paid a placement fee of 8.5% of the amount subscribed for. Varner ultimately invested $25,000 of his own money and Kingfish, and raised additional investments of $700,000. Ultimately, Varner was not paid by Kingfish, and he filed an action seeking payment. In response, Kingfish moved for summary judgment on the basis that the contract between itself and Varner was illegal and unenforceable.

      Under Kentucky Securities (Blue sky) law, subject to certain exceptions, a person must be licensed as a broker or agent with the Kentucky Division of Securities in order to be paid a commission on the sale of securities. Varner was not licensed. His efforts to argue he fell within certain exceptions were unsuccessful in that he did not meet the terms thereof. This doomed his claim for enforcing the oral agreement, the court writing:

In sum, under the facts alleged by Varner, i.e., that he acted as Kingfish’s agent in the sale of Kingfish’s securities and contracted for an 8.5% commission in connection with those sales, Varner is not exempt from the registration requirements of either the Kentucky or the federal securities laws. As a result, and as a matter of law, Varner violated those laws under his sworn factual allegations in this case.

       On the basis of a provision of the Securities Exchange Act of 1934 in voiding any contract made in contravention of its terms, and as the alleged agreement between Varner and Kingfish violated its terms, the agreement was unenforceable. A similar determination was made well under Kentucky law.

        Pivoting, Varner then claimed that, even if the contract is not enforceable, he should have a claim under a theory of unjust enrichment. This the court rejected on the basis that equitable relief would not be granted in connection with an unenforceable promise.