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Understanding Fraud in Post-Sale Commercial Business Transactions

fraud-litigation-commercial-business.jpgToo often, unfortunate situations arise during the commercial sales of businesses. These situations arise frequently because sellers of businesses either actively misrepresent the facts surrounding the business or fail to disclose all the proper information to the prospective buyer.

When parties decide to sell a business, they are under a necessary duty to disclose all pertinent information related to the sale. Most sellers attempt to put a positive spin on a negative situation, but too often, they cross the line into deception.

According to California law, in order to show the defendant acted fraudulently, you have to prove that the defendant:

  • Made a misrepresentation (false representation, concealment, or nondisclosure);

  • With knowledge of its falsity;

  • With the intent to defraud or to induce reliance;

  • That you justifiably relied on the misrepresentation of the defendant; and

  • That you suffered damages.

It is important to note that that the statute of limitations for fraud is three years from the date of discovery of the facts constituting fraud.

When Sale of Business Fraud Can Lead to Securities Fraud

The seller of a business can be held liable for any misrepresentations he or she made during the sale or negotiations of the business. These misrepresentations include verbal statements, gestures, omissions, knowing concealment and even misrepresentations made negligently. Fraud commonly occurs in the sale of business transactions when the seller fails to fully disclose financial records tending to show the profitability of the business.

If the seller made material misrepresentations during the negotiations or sale of the business, you will have an avenue of recourse. A material misrepresentation is one that makes or breaks the deal. It usually involves a matter that causes the buyer to purchase the business or walk away from it.

Aside from showing the misrepresentations made by the seller, you have to show that you reasonably relied on these misrepresentations. Reasonable reliance is the obligation of a buyer to use common sense in accepting the statements of the seller as true. This is why you, as the buyer, must conduct a due diligence investigation into the business, prior to signing any contracts. Performing your due diligence will provide you with sufficient information to determine whether or not you can rely on the statements of the seller.

There are many disclosure requirements under federal and state securities law. If you, as the buyer, purchased stock from a company, the seller could be liable for securities fraud.

If you can prove that you entered into a sale of business contract with a seller, who fraudulently tricked you into entering into the contract in the first place, you could ask the court to void or cancel the contract. If you wait too long to act on the misrepresentations of the seller, the judge might decide you delayed too long in addressing the problem and deny your request to void the contract.

If you are the victim of fraud in the purchase of a business, you should contact an experienced San Jose fraud litigation attorney who will hold the proper parties accountable and get you the compensation you deserve.

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