Allegations of Fraud in the Sale of a Business Cause Court to Deny Summary Judgment for Seller in Suit to Enforce Promissory Note – Bu v. Sunset Park Deli of NY

After the seller of a business sued the buyer to enforce a promissory note, signed as part of the sale, the buyer asserted a defense of fraudulent inducement in Bu v. Sunset Deli Park of NY Corp, et al. The buyer alleged that the seller misrepresented the weekly income of the business prior to the sale. The New York Supreme Court in Brooklyn denied the plaintiff’s motion for summary judgment, finding that the defendants had raised sufficient issues of fact as to their fraud defense.

The plaintiff, Su Nam Bu, sold her deli business to defendant In Suk Cho for $220,000 in September 2010. The stock purchase agreement executed by the parties stated that Cho would pay Bu $1,000 upon signing the agreement, and $49,000 at closing. Cho signed a promissory note on September 27, 2010 for the remaining $170,000, in which she would pay thirty-six monthly installments beginning in March 2011, plus a lump sum payment of $50,000 by September 15, 2012. A security agreement, or “chattel mortgage,” signed by the parties pledged the deli’s property, inventory, accounts receivable, equipment, and fixtures as collateral for the promissory note.

Cho made six payments on the note, but the seventh and eighth payments allegdly bounced. Bu filed suit to enforce the note. Cho answered with a fraudulent inducement defense, claiming that Bu represented the deli’s weekly income as $15,000 to $17,000 prior to the sale, but Cho found it to be an average of $11,000 to $12,000 upon taking over its operations.

Bu filed a motion for summary judgment, arguing that she had established her right to foreclose on the promissory note. The court agreed that she made a prima facie case for judgment as a matter of law on the note, which shifted the burden of proof to the defendant to provide evidence of an issue of fact. The court held that Cho met this burden, and therefore denied summary judgment.

Bu offered evidence to challenge Cho’s claims of fraudulent inducement, specifically the lower weekly revenues after the sale. Bu claimed that Cho did not voice any complaint about the alleged misrepresentations for about a year after closing the sale. She presented an affidavit from a deli employee saying that Cho’s husband fired him and two other employees shortly after taking over the business, that they rehired him two weeks later, and that Cho’s husband tended to drive away customers by arguing with them.

Cho denied Bu’s assertion regarding when she first brought up the alleged misrepresentation, saying she approached Bu in July 2011 about rescinding the sale of the business. She also denied the employee’s allegations. The court noted that the sales contract between Bu and Cho did not bar a fraudulent inducement claim, that Bu had offered no evidence of the deli’s pre-sale revenues other than her own “conclusory assertions,” and that Cho and her husband “do not appear to be sophisticated business people.” The court ruled that Cho had raised enough issues of fact regarding possible fraud in the sale of the business to defeat summary judgment.

The business litigation attorneys at Lubin Austermuehle 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) 333-0333.

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