INTENTIONAL TORTS – Intentional Misrepresentation – Contracts – Breach of Contract
Sellers provided fraudulent statements, buyers claimed
Case: Frescos Mexican Grill and Francisco Izawa v. AVT, Inc. dba AVT Vending, Inc., dba Jalapenos Mexican Food; Shannon Illingworth; and Natalie Russel, No. 30-2012-00620366-CU-FR-CJC
Court: Superior Court of Orange County, Santa Ana
Judge: Frederick P. Aguirre
Plaintiff Attorney: Gregory G. Brown, Brown & Charbonneau, LLP, Irvine, CA
Defense Attorney: William B. Hanley, Law Offices of William B. Hanley, Newport Beach, CA
Facts & Allegations
On Nov. 14, 2011, plaintiff Francisco Izawa entered into a contract to purchase Jalapenos Mexican Restaurant on El Toro Road, in Lake Forest, from AVT Inc. The purchase price was $325,000 based upon representations of $1,062,000 in gross revenues and $227,000 in net profits for 2011, and of $1,011,000 in gross revenues and $212,000 in net profits for 2010. After the sale, Izawa learned that the business had brought in gross revenues of approximately $650,000 to $750,000 in prior years and that he had allegedly been given fraudulent Profit & Loss Statements.
On Aug. 15, 2012, Izawa demanded that the sellers buy the restaurant back, but his demand was ignored.
Thus, Frescos Mexican Grill and Francisco Izawa sued the sellers of the restaurant, AVT Inc. (which was doing business as AVT Vending Inc.) and AC Mexican Food Inc. (which was doing business as Jalapenos Mexican Food); the Chief Executive Officer and major shareholder of AVT and AC Mexican Food, Shannon Illingworth; and the President, Chief Financial Officer and shareholder of AVT and AC Mexican Food, Natalie Russell. Izawa and Frescos Mexican Grill alleged that the defendants’ actions constituted a breach of contract, intentional misrepresentation, and fraudulent concealment.
Plaintiffs’ counsel argued that Izawa and Frescos Mexican Grill had obtained a second set of financial records as well as other records that were not disclosed in due diligence. Counsel contended that these financial records showed that the business had actually lost money in prior years and that due to the losses each year, Izawa was forced to sell the restaurant in September 2014 for the transaction costs of $10,000.
Defense counsel contended that Illingworth, Russell, AVT Inc. and/or AC Mexican Food did not ignore the request to buy back the restaurant and that they actually offered to buy the restaurant back, but that Izawa refused. In addition, defense counsel maintained that the business was generating over $1 million in gross revenues.
In response, plaintiffs’ counsel introduced extensive evidence proving that Illingworth, Russell, AVT Inc. and AC Mexican Food were not being truthful. The evidence included U.S. Securities and Exchange Commission filings, which allegedly showed the gross revenues for 2011 total $662,058 and allegedly showing that the business lost $68,000.
The plaintiffs’ accounting expert calculated the difference in price paid versus the actual value as being $233,000. The expert also calculated the losses during ownership and lost profits up to the time of trial as being $1,025,000. In addition, the expert calculated the money invested into the business by Izawa as being $19,058 and calculated the lost future profits based upon Izawa’s expectancy as being $372,942.
Thus, Izawa and Frescos Mexican Grill sought recovery of damages based upon the calculated amounts.
On March 16,2015, the jury found that the actions of AVT Inc. and AC Mexican Food constituted intentional misrepresentation and fraudulent concealment. It also found that Illingworth and Russell were acting on behalf of both corporations when the wrongful conduct occurred. As a result, the jury found that the compensatory damages of Izawa and Frescos Mexican Grill totaled $1.65 million. The jury also found that each of the four defendants’ acts of intentional misrepresentation and fraudulent concealment were committed with malice, oppression and/or fraud, which supported an awarding of punitive damages.
On March 17, 2015, at the conclusion of the punitive damages phase of trial, the jury awarded Izawa and Frescos Mexican Grill $1.28 million in punitive damages, including $500,000 in punitive damages against AVT Inc., $750,000 in punitive damages against Illingworth, $25,000 in punitive damages against Russell, and $5,000 in punitive damages against AC Mexican Food.
Thus, the plaintiffs’ recovery totaled $2.93 million.
$1,650,000 compensatory damages
$750,000 punitive damages against Shannon Illingworth
$25,000 punitive damages against Natalie Russell
$5,000 punitive damages against AC Mexican Food Inc.
$500,000 punitive damages against AVT Inc.
$1,900,000 for compensatory damages plus attorney fees, expert fees, and costs (before punitive damage phase)
$325,000 to buy the restaurant back (the restaurant had already been sold) and $100,000
Trial Length: 3 weeks
Barbara C. Luna, Ph.D., accounting, Sherman Oaks, CA
The plaintiffs are entitled to recovery of all attorney fees, expert fees, and costs under the contract. Post-trial motions are to be heard on June 22, 2015.
This report is based on information that was provided by plaintiffs’ and defense counsel.