United States District Court, E.D. Virginia, Alexandria Division
LIAM O'GRADY, District Judge.
This matter comes before the Court on the defendants' motion for summary judgment and motion in limine. (Dkt. Nos. 45, 63). Plaintiffs have opposed the motions, (Dkt. Nos. 56, 66), and defendants have replied. (Dkt. Nos. 57, 68). The court heard oral argument on May 8, 2015. During the hearing, plaintiffs asked to submit supplemental exhibits to the Court. The Court granted this request. Having considered the pleadings, exhibits, and heard oral argument, the Court grants summary judgment for the reasons that follow.
Defendant USA International, LLC ("USA International") owned and operated a Checkers restaurant and an Auntie Anne's restaurant inside of a Walmart beginning in November 2012. Defendant Khalil Ahmad ("Ahmad") owned 90% of USA International, and defendant Mahrah Butt ("Butt") owned 10% of USA International.
Sometime in February or March of 2013, Ahmad and plaintiff Jatinder Sharma ("Sharma" or "plaintiff") were introduced through Muhammad Khan ("Khan"), an individual who served as a certified public accountant for Ahmad and Sharma separately. Ahmad was interested in selling ownership of the restaurants because he was acquiring a Steak n Shake franchise and he was uncertain whether he would be allowed to have two burger chains. See Pls.' Ex. 5, Dep. of Ahmad at 52:3-7. Sharma, a businessman who owned three 7/11 franchises but had not previously owned a fast food restaurant, became interested in buying the restaurants because he had previously heard from Khan that the restaurants were doing very well in sales. See Pls.' Ex. 1, Dep. of Sharma at 24-27.
Prior to entering the Preliminary Agreement, Sharma received statements regarding the 2012 tax returns filed for Checkers and Auntie Anne's. The tax documents indicated that the restaurants' combined monthly sales were approximately $75, 000 per month for the months of November and December of 2012. See id. at 28:14-29:11. Sharma could not recall whether Khan or another individual provided this information to him. Id.
When Ahmad and Sharma met, Ahmad reportedly told him that the business "did about [$120, 000] in a matter of... 40 days from November through December 2012..." Id. at 36:14-18. Ahmad admitted in his testimony that he showed Sharma invoices for January and February of 2012 and that he told Sharma sales were low, but would pick up in later months. See Pls.' Ex. 5, Dep. of Ahmad at 57-58.
Khan drafted a contract for Sharma to purchase the Checkers and Auntie Anne's from USA International. On March 23, 2013, Sharma executed the Conditional Asset Purchase Agreement, identified by the parties as the Preliminary Agreement. The Preliminary Agreement called for a purchase price of $720, 000 and included a contingency clause requiring the combined revenue from monthly sales in both stores to be at least $90, 000 during the last two months prior to settlement. Sharma paid a $50, 000 deposit as required by the contract. Ahmad admitted in his deposition that the $720, 000 price was based in part on the restaurants being able to do $60, 000 to $70, 000 in combined monthly sales revenue. See Pls.' Ex. 5, Dep. of Ahmad at 67:20-68:1.
Final Sale Agreement
After formation of the Preliminary Agreement and before execution of the final Sale Agreement, Sharma received from the defendants two cash flow income statements, also known as profit/loss statements, via Khan. Ahmad confirmed during his deposition that the profit/loss statements were created by Khan based on information provided by Ahmad and Butt. See Pls.' Ex. 5, Dep. of Ahmad at 76-80. Butt regularly provided sales figures to Khan-or to Ahmad, who forwarded the figures to Khan-via phone call or text message. See Pls.' Ex. 6, Dep. of Butt at 23:15-24:20. She also testified that she knew Khan and/or Ahmad were providing Sharma with monthly sales figures based on the numbers she provided. Id. at 77:5-78:20. Additionally, Butt stated that she gave Sharma verbal assurances regarding sales figures on about three occasions during the spring of 2013. Id. at 86:1-11.
In mid-April 2013, Sharma attended meetings with Checkers corporate officials in Tampa, Florida. The Checkers representatives told him that the purchase price of $720, 000 was "higher" than it should be and the "business is not worth that much." Pls.' Ex. 1, Dep. of Sharma at 59-60. Because Checkers did not approve the purchase price of $720, 000, Sharma negotiated a lower purchase price with Ahmad, reflected in a modified contract identified by the parties as the Sale Agreement. See id. at 64.
On May 21, 2013, the parties executed the final Sale Agreement. This contract modified two material terms from the original Preliminary Agreement. The final Sale Agreement (1) reduced the purchase price to $600, 000 and (2) removed the $90, 000 monthly sales contingency clause. The modified contract also specified the allocation of the purchase price of each restaurant: $250, 000 for the purchase of Auntie Anne's and $350, 000 for the purchase of Checkers. Sharma contends that he relied on the financial statements provided to him by or at the direction of the defendants, particularly the April profit/loss statement, in entering into the final Sale Agreement at the $600, 000 purchase price. See id. at 64-65.
Closing Pursuant to the Sale Agreement
As required by the Checkers franchisors, Sharma sought and received approval of the purchase agreement. On July 23, 2013, Sharma personally obtained a loan commitment from BB&T Bank ("BB&T) for the purchase price. See Defs.' Ex. 3, Dep. of Sharma at 26:22-27:3. On July 25, 2013, he and his wife created and incorporated plaintiff Haymarket Fastfoods, Inc. ("Haymarket") to close on the sale. At some point thereafter, but prior to closing, Sharma assigned all rights and responsibilities under the Sale Agreement to Haymarket.
Sometime in September, the defendants sent or caused to be sent another financial statement to Sharma, acting as an agent for Haymarket. This statement reflected the profits and loss for the eight months ending in August 2013, showing that the average monthly gross sales were approximately $67, 083.62. See Defs.' Ex. 3, Dep. of Sharma at 24:13-15; see also Ex. 4 to Second Am. Compl. Sharma contends that he, acting as an agent for Haymarket, relied on this financial statement and the prior statements in going forward with the closing. See Pls.' Ex. 2, Dep. of Sharma at 77:12-16.
On or about October 11, 2013, Sharma obtained a loan for $489, 600 from BB&T on behalf of Haymarket to close on the sale. On October 14, 2013, Haymarket paid the purchase price plus closing and inventory costs and assumed the lease for the restaurants.
Sharma's Management of the Business
After Haymarket took ownership of the restaurants, Butt stayed on as manager for five days to help with the transition. See Defs.' Ex. 4, Dep. of Sharma at 9-12. Butt had previously worked for Ahmad as a manager of his Subway restaurant before coming to manage the Checkers, and this was the first and only venture of Ahmad's of which she had partial ownership. See Pls.' Ex. 6, Dep. of Butt at 33:4-10. Butt testified that pursuant to an agreement with Ahmad, her 10% stake was limited to the Checkers side of the business, and she would receive $18, 000 from the sale of the Checkers, whether or not that constituted 10% of the proceeds of the sale. See id. at 61:19-22; 128-129.
Sharma observed slow sales during that first week, and he soon became convinced that the defendants had been inflating their sales numbers in the profit/loss statements. He testified that this conclusion was based on his own research as well as the statements of two employees. See Pls.' Ex. 1, Dep. of Sharma at 101:4-5. With respect to his research, Sharma stated that he asked the person who delivered sandwich buns to the restaurant whether Sharma's purchases during the first week were much lower than the prior purchases. Id. at 79-80. The delivery person responded in the negative, saying Sharma's purchases were "in line" with prior purchases. Id. at 80. A few days later, Sharma met with the sales representative for the main vendor and asked the same question comparing his orders to orders under prior ownership. The representative told him his orders were "in line" with the prior orders. Id.
Sharma further testified that he reviewed the inventory purchase history when Haymarket took over the business. The implication of Sharma's testimony is that he believed USA International's food purchases were significantly lower than their sales figures would require. Id. at 114-115. However, Sharma's language on this point is couched in hypotheticals and is therefore somewhat unclear. See, e.g., id. at 114:5-7 ("My research, what I did is I found out that if we have let's say a hundred [w]ings that I purchased, I cannot sell 200 [w]ings").
Sharma also looked at the transaction history from the sales computer. The sales data showed that on multiple occasions, sales were wrung up very fast and many customers were being served per minute. Id. at 113. He found that the dollar amounts of the sales also tended to be relatively high. However, Sharma conceded that he was aware the computers and cash registers were not functioning properly during that time period. Id. at 115:15-20. Plaintiffs have also attached an apparent printout of the computer's records of sales occurring on April 21, 2013. See Pls.' Ex. 4. The sales are logged under Butt's name, and there appear to be multiple instances of large numbers of sales being processed in as little as one minute. Id.
Finally, plaintiffs have submitted records of USA International's bank account, the sole account used in the operation of the restaurants under USA International's ownership. See Pls.' Ex. 7. Plaintiffs argue that the records show lower deposit amounts than would be expected based on the reported sales figures.
Sharma spoke with two employees who had worked with Butt when she managed the Checkers restaurant. John Debrah, who no longer works at Checkers, reportedly told Sharma that he saw Butt ring up sales multiple times when no customer was there. See Pls.' Ex. 1, Dep. of Sharma at 101:7-16. Sonia Romero, an employee who still works at Checkers, gave Sharma a similar account. Both Debrah and Romero only observed Butt using the cash register in this manner at the Checkers restaurant.
Romero was deposed in this case, and she testified that she has worked at Checkers since it opened and she continues to work there. See Dep. of Romero. at 6:8-11. Her job responsibility consisted of working in the kitchen making hamburgers, and while she could see the registers from the kitchen, she has never operated the cash registers or been trained to operate the registers. Id. at 7:12-19; 9:17-22; 21:1-4. She testified that when a customer orders, the order appears on the computer and is printed on a paper receipt. As a member of the kitchen staff, she received the paper receipt, and after making the sandwich, she put the receipt in the customer's bag of food. Id. at 15-16. Although there were two registers, Romero stated that only one was used at a time. Id. at 21:5-8.
Romero further testified that when she began working at Checkers, Butt took orders from customers and no one else operated the cash register. Id. at 16; 19:8-10. On multiple occasions, Butt told her not to make a sandwich even though a paper receipt had been printed. Id. at 16-17. Butt would "bring out this report that she would make, then [Romero] would not make up the food." Id at 16:21-22. Romero could not remember how many times this occurred, but she said that many receipts came out when it did occur. Id. at 17:1-6. When asked during her deposition whether Butt could have been training workers to operate the cash register, Romero responded no. Id. at 22:1-3. Since Sharma took over the Checkers restaurant, Romero has never been asked not to make a sandwich when a receipt was produced. Id. at 19:15-18.
On December 4, 2013, Sharma filed suit against the defendants in the Circuit Court for Prince William County, Virginia. Defendants removed the case to this Court on December 26, 2013. Plaintiffs filed a second ...