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Contract – Buyer Alleging Fraud Can Try Damages Claim

Sharma v. USA International LLC (Lawyers Weekly No. 001-062-17, 13 pp.) (Niemeyer, J.) No. 15-2188, March 17, 2017; USDC at Alexandria, Va. (O’Grady, J.) 4th Cir.

Holding: A plaintiff who sued for fraud, alleging he discovered after purchasing two franchise restaurants that the sellers had provided inflated monthly sales figures that included an owner allegedly ringing up phony sales, can take his case to a jury; the 4th Circuit said the buyer’s use of the capitalization rate to calculate damages is “wholly appropriate,” as the restaurant franchises earned a steady stream of income before and after the sale.


In our view, plaintiffs have submitted sufficient evidence of their damages based on a well-accepted income approach to permit a jury to find with reasonable certainty the damages that they suffered. We conclude the district court erred in granting defendants summary judgment on this basis.

The district court found plaintiffs had advanced sufficient evidence to survive summary judgment as to all the elements of fraud except the element of damages. While Virginia law does not require a plaintiff to prove his damages with “absolute certainty,” he must provide sufficient evidence for a fact finder to make an intelligent and probable estimate of the amount of damages or loss sustained. When a transaction involves a transfer of goods or property, the proper measure of damages is the difference between the actual value of the property at the time the contract was made and the value that the property would have possessed had the representation been true, the latter often called the bargained-for value.

Applying this formula, the district court accepted, for the sake of argument, that the sale price of $600,000 provided sufficient evidence of the restaurants’ bargained-for value. We conclude the district court’s assumption was correct. Here, there is ample evidence that the parties negotiated at arms’ length to reach the sales price of $600,000. The seller initially sought $750,000 but the buyer, based on the sales data provided, offered only $700,000. The parties settled on a sales price of $720,000, as included in their preliminary agreement, then renegotiated the price down to $600,000, as included in their final agreement.

The parties’ negotiation of the sales price based on a multiple of the restaurants’ sales figures is informative as to the actual value of the restaurants at the time of sale, based on actual sales figures. Viewing the record in the light most favorable to plaintiffs, the parties’ negotiations presumed that the appropriate industry-standard multiple for valuing such a business was 36 times weekly sales. Using the seller’s reported sales figures would lead to a sales price of somewhere between $540,000 and $630,000, a range that approximates the final sales price of $600,000.

Focus on Sales

Pervading the entire narrative of the parties’ sales negotiations was an almost singular focus on the restaurants’ weekly or monthly sales. The seller’s accountant triggered the buyer’s interest in the business based on the restaurants’ sales; the seller continued to persuade the buyer to purchase the business based on the restaurants’ sales figures; the parties’ negotiating positions were justified by sales figures; and indeed the buyer’s conclusion that he had been defrauded was shown by demonstrating cooked sales figures. Thus, when the actual sales figures, which were roughly the same before and after the closing, turned out to be only 60 percent of the sales figures represented in the financial statement, the buyer multiplied his actual weekly sales of approximately $10,000 by 36 to establish the actual value of $360,000 at the time of the purchase, claiming damage as the difference between the two figures.

To be sure, the 36 multiplier used to capitalize earnings in this case could be challenged at trial, as could any capitalization rate used to value a business with a stabilized flow of income. But the question here is whether plaintiffs provided enough evidence for a fact finder to make an intelligent and probable estimate of the restaurants’ actual value.

We conclude that, at a minimum, the record supports plaintiffs’ multiplying their weekly sales by 36 to determine the actual value of the restaurants at the time of the purchase. This method is a “capitalization rate method,” which determines the value of an income producing property by first determining the stabilized net operating income and then multiplying by a capitalization rate. Use of the capitalization rate here is wholly appropriate, as the restaurant franchise earned a steady stream of income before and after the sale.

Plaintiffs have introduced sufficient evidence of their damages to create a material dispute of fact.

Vacated and remanded.

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