Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Bankr. S.D. Tex.: Franchisee’s claim that he was defrauded into buying a restaurant proceeds, (Feb 11, 2015)

By Dan Selcke, J.D.

A reasonable jury could find that an incomplete income statement concerning a restaurant’s profitability was inaccurate, the bankruptcy court for the southern federal district in McAllen, Texas, has held. The statement left out the salary the restaurant’s former owner paid himself, which distorted the restaurant’s economic performance. Jose Gomez, who bought the restaurant based in part on that income statement, sued the defendants for fraud (In re Saenz Jr., February 9, 2015, Isgur, M.).

Franchise purchase. Humberto Saenz operated several Pizza Patron restaurants in South Texas, including one in Rio Grande City. He had purchased these restaurants from franchisor Pizza Patron Inc. (PPI). In 2009, Jose Gomez began negotiating with Saenz to buy the Rio Grande franchise. Gomez and Saenz came to an agreement, and Saenz provided Gomez with several documents concerning the financial health of the franchise. According to Gomez, a loan officer at the International Bank of Commerce (IBC) helped Saenz prepare an income statement which laid out how much the Rio Grande franchise had made over a certain period of time. Based in part on that statement, Gomez went through with the deal, obtaining a small business loan from Lone Star National Bank to finance the purchase of the franchise.

Case history. Years after buying it, Gomez had to close the franchise because he could not afford to keep it open. Gomez filed suit against Saenz, PPI, IBC, and Lone Star. During the course of the suit, he filed for Chapter 7 bankruptcy, so the case was removed to bankruptcy court, where IBC filed a motion for summary judgment.

Material representation. The court walked through Gomez’s allegations to determine if he had established genuine issues of material fact as to the elements of fraud, and ultimately determined that he had. To start, there was no question that a material representation had been made. An IBC loan officer helped prepare an income statement indicating that the Rio Grande City franchise made a net profit of $107,505.15 between January and September of 2009. That statement was material because Gomez had based his decision to purchase the franchise partly on those numbers.

Falsity. Next, the court considered whether there was a material issue of fact as to whether the representation was false, a more contentious issue. In arguing that the income statement did not reflect the actual profitability of the franchise, Gomez first pointed to an IBC bank account Saenz used for the Rio Grande City restaurant. Contrary to the income statement, which stated that the restaurant had made $107,505.15 between January and September of 2009, the balance in this account had dropped from $3,560.73 to $425.97 over the same period. This fact alone, however, was not enough to convince a reasonable fact finder that the income statement must have been false. The absence of a lot of money in the bank did not necessarily mean that a restaurant was unprofitable, and Gomez provided no evidence to counter Saenz’s reasonable explanation for the discrepancy: that he took money out of the account each week to pay employee salaries. Gomez also produced no evidence that Saenz was not keeping money in an account at a different bank, another reasonable explanation.

Gomez then pointed to deposition testimony from Saenz that he paid himself a cash salary from the IBC account, and that IBC knew about this practice. Saenz purposefully left his salary off of the wages portion of the income statement, which was prepared with IBC’s help. By failing to account for it, IBC arguably made a false representation, since without it the income statement gave the impression that the restaurant was profitable to the tune of $107,505.15 without the owner needing to put in much work. In reality, Saenz had to work hard to realize those kinds of profits. If he had not, he would have had to pay an additional employee to do that work, and that employee’s salary would have been reflected on the income statement. Leaving Saenz’s salary off the statement distorted the true economic performance of the restaurant, and created a genuine issue of material fact as to its accuracy.

Remaining fraud elements. Gomez was also able to establish genuine issues of material fact as to the other elements of fraud. Saenz testified that he had informed officials at IBC about his salary and that he made the decision to leave it off the income statement, which suggested that IBC knew that the statement was false when it helped Saenz put it together. Saenz also testified that he had told the IBC loan officer who helped him create the income statement that he needed it because he had located an interested buyer for the restaurant. That fact could allow a reasonable fact finder to infer that IBC helped create the statement intending that Gomez, the buyer, would rely on it.

Also, Gomez had testified that the income statement was “very important” to his decision to buy the franchise, which showed that he actually relied on it. The fact that he saw the statement after he and Saenz had agreed on a purchase price did not matter, as he saw it before the deal officially closed and still could have backed out or renegotiated had the statement showed that the restaurant was not as profitable as he thought. Finally, Gomez got a small business loan, put in some of his own money, and later lost money based on his decision to purchase the restaurant, a decision he would not have made had the income statement presented an accurate picture of its profitability. This established injury. Because Gomez had established genuine issues of material fact as to each of the elements of fraud, the court denied IBC’s motion for summary judgment.

The case number is: 13-70423

Attorneys: Mark Weitz (Weitz Morgan PLLC) for Jose Maria Gomez. Antonio Villeda (Law Offices of Antonio Villeda) for Humberto Saenz, Jr., and Estrella Ventures, Inc. Edmundo Ramirez (Ellis, Koeneke & Ramirez, LLP) for International Bank of Commerce

Companies: Estrella Ventures, Inc.; Pizza Patron Inc.; International Bank of Commerce

Cases: FranchisingDistribution TexasNews