Explore a case study where a buyer sued a seller’s owner for fraud in an asset business deal. Learn about the legal elements, court’s decision, and valuable takeaways for buyers in similar situations.
January 20, 2020
Introduction:
“Things gained through unjust fraud are never secure.” – Sophocles
The Deal:
The seller’s owner ran a business that assisted clients in getting wholesale automobile dealership licenses in Missouri. This business helped with setting up dealerships, offering office space, logistical support, and licensing help.
The buyer signed a deal on May 1, 2018, to buy assets from the seller and a related company for $1.25 million, mostly in cash.
During negotiations, the seller’s owner assured the buyer’s owner that the business was operational and had customers. In the agreement, the seller stated that no legal actions were pending or threatened against the assets.
The Lawsuit:
Unknown to the buyer, there were regulatory issues against the seller’s clients in Missouri before the agreement. The Missouri Department of Revenue had denied licenses due to issues with the seller’s services not meeting licensing criteria.
The seller’s owner knew about ongoing litigation but didn’t disclose it. Legal action by the clients challenged the licensing denials. The lawsuits failed, resulting in the seller’s inability to operate in Missouri.
The buyer sued the seller’s owner for fraud in a Chicago court, citing financial losses due to the undisclosed licensing problems.
Legal Elements:
Under Indiana law, fraud involves a false material representation by the seller’s owner, made with knowledge of falsity and intent to deceive the buyer, and causing buyer’s reliance and harm.
Court’s Decision:
The court dismissed the fraud claim, stating that the buyer didn’t allege intent to deceive. However, the claim could proceed with amendments.
Takeaway:
To prevent such issues, buyers could use an escrow of the purchase price or a personal guarantee by the seller’s owner for obligations. Due diligence could include checking for litigation and licensing problems in relevant agencies.
Case Reference:
This case is referred to as US Dealer License, LLC v. US Dealer Licensing LLC., No. 19 C 3471, United States District Court, N.D. Illinois, Eastern Division (December 23, 2019).
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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