Debtor induced to buy business based on inaccurate data

Where the debtor was induced to buy a bagel business based upon inaccurate information provided by the seller, his objection to the seller’s claim for damages was sustained. But because the debtor received more value from the business than his investment he was awarded no damages.

Background

On April 4, 2014, debtors Khader and Nanette Azzouz entered into an asset purchase agreement to buy a bagel business for $575,000 from Annab Inc. At closing, the plaintiff paid the defendant $70,000 in cash and signed a promissory note for the remaining balance of $485,000. The plaintiff received $20,000 in sales commissions at settlement.

The plaintiff gained full access to the Quickbooks records April 6, 2014 – two days after he purchased the business. After assuming control, he discovered that Quickbooks contained no records tracking payroll expenses. After the plaintiff assumed control of the business, he determined that the actual payroll was $320,320 annually. This amount was double the $180,000 previously reported on the Annab Inc. tax returns given to the plaintiff before settlement.

The plaintiff attempted to rescind the agreement July 15, 2014. The defendant refused to honor the rescission. The plaintiff continued to operate his bakery, but finally abandoned it and turned the keys over to the attorney for the defendant Oct. 15, 2014.

State litigation ensued over the failed business transfer with both parties contending the other breached the agreement. The plaintiff then filed for bankruptcy and filed this adversary proceeding for breach of contract by the defendant to recover his deposit and other damages. The defendant filed a claim in the bankruptcy case for the damages it suffered when the plaintiff breached the agreement and the plaintiff is objecting to the claim as part of this proceeding.

Analysis

The court finds that Mr. Azzouz was induced to buy the business based on inaccurate information provided in the tax returns. This constituted a material breach of the contract by the defendant that resulted in damages to the plaintiff. Having concluded that the defendant breached the contract, the court will sustain the debtor’s objection to claim 5-1 filed by Annab Inc. in the amount of $511,656.56.

The plaintiff originally sought damages in the amount of $90,000. However, the defendant only received $70,000 from the buyer at settlement. The plaintiff received the $20,000 difference as a sales commissions at closing. Also, the plaintiff concedes that the defendant should receive a credit of $51,000 which represents the receivables Mr. Azzouz collected that were never turned over to Annab Inc. in accordance with the terms of the default provision in the agreement. The court agrees. This reduces his damage claim to $19,000.

Plaintiff also received other valuable benefits while he ran the business he later surrendered.During this period, he failed to honor his obligation to pay the defendant $6,530 each month to cover the $5,750 in rent and $780 in condo fees he agreed to pay under the deed of lease. In other words, Mr. Azzouz enjoyed the benefit of operating his business rent free for several months at the defendant’s expense. This represents a benefit the plaintiff would not have received had the contract not been broken. The amount of rent and fees due to the defendant but not paid was $26,120, which exceeds the damages of $19,000 the plaintiff may claim.

The court therefore finds that the plaintiff is entitled to no damages under the agreement because he received more value from the business than his $90,000 deposit was worth.

Azzouz v. Annab Inc., No. 16-1117, Oct. 28, 2019. EDVA Bankr. at Alexandria (Kindred). VLW No. 019-4-031, 9 pp.