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Fraud in Business Transfers

On Behalf of | Feb 19, 2014 | Business Disputes

When buyer of a business is a victim of fraud by the seller, New Hampshire law generally provides two alternatives for recovery. When a party enters into an agreement in reliance upon a misrepresentation of material fact, he may either seek to rescind the agreement or proceed with the transaction and then sue for misrepresentation.  See Green v. Sumner Properties, 152 N.H. 183, 184-5 (2005).  If a buyer has bought a business based upon financial information he later believes is false, often that buyer is not looking to undo or rescind the deal but to get damages from the seller because the buyer believes he paid too much for the business. “The general rule is . . . that the measure of damages recoverable for misrepresentation, whether intentional or negligent, is actual pecuniary loss.”  Manchester Mfg. Acquisitions, Inc. v. Sears, Roebuck & Co., 802 F.Supp. 595, 606 (D.N.H. 1992) (citing Crowley v. Globe Realty, Inc., 124 N.H. 814, 818 (1984)) (emphasis in original).  Actual pecuniary loss is the difference between the amount paid for the item and the item’s actual value, Wilson v. Came, 116 N.H. 628, 630 (1976), as of the date of the transaction, Perkio v. Prunnier, 121 N.H. 871, 873 (1981).

Expert testimony is required when the subject matter is involves scientific, technical or other professional study which is beyond the knowledge of an average lay jury.  State v. Gonzalez, 150 N.H. 74, 77 (2003).  Business valuations, which require the examination of numerous intangible factors, are traditionally in the realm of expert testimony.  Cf.Marcoux v. Shell Oil Prods, LLC, 524 F.3d 33, 52-3 (1st Cir. 2008), aff’d in part, rev’d in part, 130 S.Ct. 1251 (2010). The seller may also retain an expert to show that there was no fraud or if there was fraud it was not the cause of all or a portion of the damages. For example if a buyer of a business claims that the seller misrepresented its net revenues and therefore the buyer’s net revenues are less it is possible that the seller’s expert may opine that other factors, such as a change in the industry or the economy or bad management by the buyer resulted in the lower than anticipated net revenues. I have litigated both sides of these issues and the decision as to whether the seller hires an expert or solely relies on “poking holes” in the buyer’s expert opinion is a strategy decision based on the specific facts of each case. The buyer however will generally need an expert to try to prove his damages.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf.  Attorney Marr is licensed and practices in both New Hampshire and Massachusetts.  Attorney Marr can be reached at [email protected].