Claim for Fraud in the Sale of a Business Requires Proof of Both Reasonable and Justifiable Reliance on a Misrepresentation - Walid v. Irene Couture
A couple who bought a retail business in New Jersey filed suit for fraud, alleging that the seller materially misrepresented the business’ revenues. After a bench trial, the lower court ruled for the defendants in Walid v. Yolanda for Irene Couture, Inc., holding that the plaintiffs did not demonstrate by clear and convincing evidence that their reliance on the defendants’ misrepresentations was justified. The New Jersey Superior Court, Appellate Division vacated the judgment, finding the defendants liable for fraud, remanding the case, and instructing the trial court to apportion liability among the defendants.
Anwar and Donna Walid, saw an online listing for the sale of a retail business, Irene’s Bridal Shop. They contacted the listing broker, who gave them a “fact sheet” from the owner, Yolanda for Irene Couture, Inc. (YIC). The fact sheet stated that the business had annual sales exceeding $500,000 and profits of almost $300,000. The listed sales price was $700,000. The Walids agreed to a purchase price of $700,000, subject to “proof of sales” and review by an attorney and an accountant. They retained an attorney, but Mr. Walid decided, against the attorney’s advice, to examine the financial reports himself rather than hire an accountant. YIC’s financial information showed annual income from 2003 through early 2006 well in excess of $500,000. The Walids obtained bank financing, and the sale closed in May 2006.
The business failed, and the Walids filed suit against YIC, its owner, and the accountant who prepared the financial reports Mr. Walid had reviewed prior to the sale. They amended the complaint to include Yolanda Couture, Inc. (YC), a New York company owned by YIC’s owner. They alleged that YC’s revenues were deposited into YIC’s bank accounts in order to inflate YIC’s earnings.
At trial, the judge found that YIC and YC’s owner had fraudulently misrepresented YIC’s income, and that she did so to induce the Walids to purchase the business for $700,000. The judge also found, however, that Mr. Walid’s independent investigation of YIC’s financial data negated the “reasonable reliance” element of the fraud claim. The court noted that an expert hired by the plaintiffs prepared a report stating that the sales revenues claimed by YIC were “unbelievable.” The court therefore held that the plaintiffs knew or should have known of the fraud prior to the sale, and dismissed their claims with prejudice.
The Walids appealed the dismissal to the Appellate Division. The appellate court vacated the judgment and remanded the case. It noted that, even if the Walids had retained a licensed accountant to review the financial information, this would not have revealed the alleged fraud because the documents were themselves allegedly falsified. Although the sales contract contained a clause stating that the buyer was relying on its own investigation, the court held that a party providing allegedly false information cannot create an absolute defense to fraud via a clause in a contract. The Walids’ reliance on YIC’s alleged false information was both reasonable and justified under the circumstances.
The business litigation attorneys at DiTommaso Lubin represent business owners and professionals throughout the Chicagoland area including Cook, DuPage, Lake, Kane, McHenry and Will Counties and in the Mid-West region including Indiana, Wisconsin and Iowa. To schedule a confidential consultation with one of our attorneys, please contact us online, at (630) 333-0000, or at (877) 990-4990.
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