$2,930,000 Jury Verdict on Intentional Misrepresentation – Reported by Verdicts & Settlements

INTENTIONAL TORTS – Intentional Misrepresentation – Contracts – Breach of Contract

Sellers provided fraudulent statements, buyers claimed

Verdict:  $2,930,000 plus attorneys fees and costs

Court:  Superior Court of Orange County, Santa Ana

Judge:  Frederick P. Aguirre

Business Litigation & Trial Attorney Gregory G. Brown

Plaintiff Attorney:  Gregory G. Brown, Brown & Charbonneau, LLP, Irvine, CA

Defense Attorney:  William B. Hanley, Law Offices of William B. Hanley, Newport Beach, CA

Facts & Allegations

Plaintiff  entered into a contract to purchase a restaurant. The purchase price was $325,000 based upon representations of $1,062,000 in gross revenues and $227,000 in net profits for prior year, and of $1,011,000 in gross revenues and $212,000 in net profits for the year before that. After the sale, plaintiff learned that the business had brought in gross revenues of approximately $650,000 to $750,000 in prior years and that he had allegedly been given fraudulent Profit & Loss Statements.

Shortly after taking over the business, plaintiff demanded that the sellers buy the restaurant back.  His demand was ignored.

Thus, the plaintiff sued the sellers of the restaurant, the Chief Executive Officer and major shareholder and the President, Chief Financial Officer and shareholder of the company and alleged that the defendants’ actions constituted a breach of contract, intentional misrepresentation, and fraudulent concealment.

Plaintiffs’ counsel argued that the defendants had obtained a second set of financial records as well as other records that were not disclosed in due diligence. Counsel contended that these financial records showed that the business had actually lost money in prior years and that due to the losses each year, plaintiff was forced to sell the restaurant in for the transaction costs of $10,000.

Defense counsel contended that the defendants did not ignore the request to buy back the restaurant and that they actually offered to buy the restaurant back, but that the plaintiff refused. In addition, defense counsel maintained that the business was generating over $1 million in gross revenues.

In response, plaintiffs’ counsel introduced extensive evidence proving that the defendant was not being truthful. The evidence included U.S. Securities and Exchange Commission filings, which allegedly showed the gross revenues total $662,058 and allegedly showing that the business lost $68,000.

Injuries/Damages

The plaintiffs’ accounting expert calculated the difference in price paid versus the actual value as being $233,000. The expert also calculated the losses during ownership and lost profits up to the time of trial as being $1,025,000. In addition, the expert calculated the money invested into the business by Izawa as being $19,058 and calculated the lost future profits based upon Izawa’s expectancy as being $372,942.

Thus, the plaintiff sought recovery of damages based upon the calculated amounts.

Result

At trial, the jury found that the actions of the defendant constituted intentional misrepresentation and fraudulent concealment. It also found that the CEO and Chief Financial Officer were acting on behalf of both corporations when the wrongful conduct occurred. As a result, the jury found that the compensatory damages of the plaintiff totaled $1.65 million. The jury also found that each of the four defendants’ acts of intentional misrepresentation and fraudulent concealment were committed with malice, oppression and/or fraud, which supported an awarding of punitive damages.

At the conclusion of the punitive damages phase of trial, the jury awarded the plaintiff $1.28 million in punitive damages, including $500,000 in punitive damages against the corporation, $750,000 in punitive damages against the CEO, $25,000 in punitive damages against the chief financial officer, and $5,000 in punitive damages against the restaurant.

Thus, the plaintiffs’ recovery totaled $2.93 million plus Plaintiff’s demand for attorneys fees and costs.

Demand

$1,900,000 for compensatory damages plus attorney fees, expert fees, and costs (before punitive damage phase)

Offer

$325,000 to buy the restaurant back (the restaurant had already been sold) and $100,000

Trial Details

Trial Length: 3 weeks

Plaintiff Expert(s)

Barbara C. Luna, Ph.D., accounting, Sherman Oaks, CA

Defense Expert(s)

None reported

Post-Trial

The plaintiffs are entitled to recovery of all attorney fees, expert fees, and costs under the contract. Post-trial motions to be filed.

Editor’s Note

This report is based on information that was provided by plaintiffs’ and defense counsel.

-Priya Idiculla