Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Cal. App.: Restaurant purchaser awarded damages stemming from non-disclosure of pending ADA lawsuit, (Aug 25, 2016)

By Michael Menzhuber, J.D., LL.M.

A decision to award damages to a franchise restaurant purchaser, based on a determination that the seller’s failure to disclose a pending American with Disabilities Act (ADA) lawsuit caused him to incur both repair expenses and legal costs, was affirmed by the California appellate court in Sacramento. The appellate court determined that: (1) any of the purchaser’s unperformed contract obligations had been waived; (2) all of the expenses incurred by the purchaser could be traced back to the non-disclosure of the lawsuit; and (3) the purchaser suffered damages as a result of his justifiable reliance on the non-disclosure of the lawsuit (Soin v. Sger, August 23, 2016, Hull, J.).

A trial court awarded Rakesh Soin, the purchaser of a Der Winerschnitzel franchise restaurant, compensatory and punitive damages after it determined that he incurred ADA-related repair expenses and legal costs as a result of the failure of the seller, Nasser Sger, to disclose a pending ADA lawsuit prior to the close of escrow. On appeal, Sger contended that there was insufficient proof that Soin: (1) performed all of his contractual obligations; (2) justifiably relied on Sger’s failure to disclose the ADA lawsuit; and (3) suffered any damages.

Breach of contract. According to Sger, Soin did not perform all of his contractual obligations because he failed to obtain an ADA inspection and fix whatever the inspection revealed, as required by the franchisor’s resale of evaluation report. The court disagreed and found that the "inspect and correct" clause of the report was for the franchisor’s benefit, not Sger’s, and that the franchisor waived performance of the clause when it released the funds to Soin that he had escrowed for the maintenance and upgrades required by the report.

The court also found that, even if the "inspect and correct" clause was for Sger’s benefit, he waived Soin’s non-performance when he: (1) refused to give Soin possession prior to the close of escrow, even though the ADA inspection and repairs were purportedly done before the close of escrow; and (2) closed escrow, accepted payment for the restaurant, and walked away from it without requiring Soin to obtain the necessary ADA inspection report or complete any ADA-related repairs.

Sger argued that Soin failed to prove that Sger’s failure to disclose the pending ADA lawsuit caused the repair expenses and litigation defense costs the trial court awarded as damages. According to Sger, because Soin had a contractual duty to correct any ADA deficiencies, the failure to disclose the lawsuit did not damage Soin in any way. However, after finding that the evidence showed that both the franchisor and Sger waived Soin’s performance of the "inspect and correct" clause, the court determined that Soin’s nonperformance could not be raised as a defense.

The court found that all of the expenses incurred by Soin could be traced back to Sger’s failure to disclose the lawsuit because Soin testified that he would have walked away from the purchase if Sger had disclosed the lawsuit. Sger, not Soin, should have been responsible for making the repairs required by the lawsuit because Sger had promised to handle any lawsuits arising prior to the close of escrow.

Fraud. Sger argued that Soin could not have reasonably relied on Sger’s failure to disclose the lawsuit because the franchisor’s report disclosed some ADA violations on the property and Soin had a contractual obligation to further investigate and repair any additional ADA violations. Because the investigation would have revealed the ADA violations included in the lawsuit, concealing the lawsuit did cause Soin to suffer any damages.

The court, however, concluded that Soin justifiably relied on Sger’s nondisclosure because there was no evidence that a visual inspection for ADA violations would have revealed the material fact that Sger concealed the pending lawsuit. Therefore, Soin’s failure to conduct the inspection, whether excused or not, was irrelevant.

Damages. Because Sger’s damages argument was identical to his breach of claim argument, which was rejected, the court determined that Soin sufficiently proved that Sger’s fraudulent concealment of the lawsuit caused him damages.

The case is No. C071206.

Attorneys: Matthew D. Pearson (Pearson & Pearson, APC) for Rakesh Soin. Richard Montgomery Watts, Jr. (Millstone, Peterson & Watts, LLP) for Nasser Sger.

Cases: FranchisingDistribution CaliforniaNews