E-Alert Case Updates
Fast Food Fraud: Fourth Circuit Finds that Plaintiffs Presented Sufficient Evidence of Damages from Fraud in the Sale of Several Fast Food Restaurants
Jatinder Sharma v. USA Intíl, LLC
In Sharma v. USA Int’l, LLC, No. 15-2188 (4th Cir. Mar. 17, 2017), the Fourth Circuit vacated Virginia’s District Court’s grant of summary judgment, finding that the plaintiffs, Jatinder Sharma and his company, Haymarket Fast Foods, Inc., presented sufficient evidence to allow a finder of fact to determine damages resulting from fraud in the sale of a Checkers and Auntie Anne’s franchise.
USA International, LLC (“USA International”) previously owned and operated a Checkers and Auntie Anne’s restaurant. Through the entity’s accountant, Sharma learned that the USA International’s partners were interested in selling the restaurants. He was particularly interested because the restaurants had apparently been generating high sales figures. In their negotiations, based on financial documents stating that monthly sales were approximately $75,000 per month, the parties entered into a conditional purchase agreement with a price of $720,000.
After a meeting with Checkers’ corporate officials, in which the officials advised Sharma of the inappropriateness of the high purchase price, the parties renegotiated and arrived at a lower sale price of $600,000. In preparation for the closing, Sharma formed Haymarket Fast Foods, Inc. to obtain a loan. In its loan application, based on USA International’s financials, it listed an average monthly gross sales figure of $67,083.62 for the eight months prior to the closing, which took place on October 14, 2013.
Shortly after the closing, Sharma noticed a red flag. The sales figures for the restaurants appeared to be only 60% of the figures provided by USA International. Investigating the matter, Sharma learned from vendors and employees that the restaurants’ current purchases of food supplies were consistent with previous purchases, leading to the conclusion that the restaurants could not possibly have previously generated the stated monthly revenue. Additionally, Sharma reviewed the registers’ transaction history and noticed several occasions where one of USA International’s partners had entered numerous high dollar sales in quick succession. Employees reported that they were instructed to not prepare meals based on the receipts when this had occurred. Finally, Sharma checked the restaurants’ bank deposit transaction history and found that the figures were substantially lower than represented in the sales records.
In December 2013, the Plaintiffs brought forth a claim for fraud and conspiracy to commit fraud, seeking compensatory and punitive damages. The claim asserted that the partners of USA International fraudulently induced Sharma to purchase the restaurants by inflating sales figures.
On Defendants’ motion for summary judgment, the District Court found that, while Plaintiffs had presented sufficient evidence to show that the Defendants made false representations of material fact with the intent to mislead, Plaintiffs had not submitted sufficient evidence to allow a fact finder to estimate with reasonable certainty the amount of damages plaintiffs sustained.
Plaintiffs appealed this grant to the Fourth Circuit, alleging that they had in fact presented sufficient evidence to support a fraud claim under Virginia law. Under Virginia law, plaintiffs must prove by “clear and convincing evidence: (1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled.” Evaluation Research Corp. v. Alequin, 439 S.E.2d 387, 290 (Va. 1994). The Fourth Circuit found it necessary to only focus on element six.
The Court first explained that a plaintiff must provide sufficient evidence for a fact finder to make “an intelligent and probable estimate of the amount of the loss sustained.” Holz v. Coates Motor Co., 147 S.E.2d 152, 155 (Va. 1966). The proper measure of damages is “the difference between actual value of the property at the time the contract was made and [the bargained-for value].” Prospect Dev. Co. v. Bershader, 515 S.E.2d 291, 300 (Va. 1999). The Court used the parties’ sales price of $600,000 as the bargained-for value here because the parties had negotiated this figure at arms’ length based on the purportedly misrepresented sales data.
When looking at Sharma’s calculation of the actual value of the restaurants at the time of the sale, the Court noted the Defendants’ contention, that the valuation method used here did not conform to the standard three types of valuation methods: income based, market based, and asset based. Disagreeing with this argument, however, the Court explained that it was apparent the parties’ negotiations presumed that the appropriate, industry-standard multiple for valuing the business during negotiations was 36 times weekly sales.
To further this as an acceptable method for calculation, the Court noted the following: (1) monthly sales figures served as the basis for the originally set price; (2) the purchase agreement had originally been conditioned on the restaurants achieving a certain level of monthly sales prior to closing; and (3) taking the misrepresented figures of $60,000 to $70,000 of sales per month and multiplying that by 36 provides a range of $540,000 and $630,000, which contains the eventual final purchase price. Sharma multiplied his actual weekly sales of $10,000 by 36 and arrived at an actual value of $360,000, the difference claimed as the damages resulting from fraud. Accordingly, the Court found this valuation method appropriate.
The Fourth Circuit concluded that, at a minimum, the record supported Sharma’s use of a capitalization rate method based on the franchises’ steady stream of income and could serve to provide a fact finder a basis for determining damages. In short, Plaintiffs had introduced sufficient evidence of damages to create a material dispute of fact, and accordingly, the grant of summary judgment was vacated and the case was remanded for further proceedings.
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