Opinion
C.A. No.: CPU4-12-003579 SPEED
10-18-2013
DEVANG V. PATEL and MA SADHI, LLC, Plaintiffs, v. SHREE JI, LLC, JITENDRA R. MAGDALIA, and BHAVIN JITENDRA MAGDALIA, Defendants.
Douglas A. Shachtman, Esq. The Shachtman Law Firm 1200 Pennsylvania Avenue, Suite 302 Wilmington, DE 19806 Attorney for Plaintiffs Michael I. Silverman, Esq. Silverman McDonald & Friedman 1010 N. Bancroft Parkway, Suite 22 Wilmington, DE 19805 Attorney for Defendants
Douglas A. Shachtman, Esq.
The Shachtman Law Firm
1200 Pennsylvania Avenue, Suite 302
Wilmington, DE 19806
Attorney for Plaintiffs Michael I. Silverman, Esq.
Silverman McDonald & Friedman
1010 N. Bancroft Parkway, Suite 22
Wilmington, DE 19805
Attorney for Defendants DECISION AFTER TRIAL
Plaintiffs bring this fraud action seeking declaratory judgment against Defendants for alleged misrepresentations made by Defendants during the course of the sale of a liquor store business. Trial was held on August 14, 2013, on Plaintiffs' claim for fraud and Defendants' counterclaim for breach of contract. At the conclusion of the trial, the Court reserved decision. This is the Court's final decision after trial.
It is undisputed that an agreement existed between the parties for the sale of a liquor store from Defendants to Plaintiffs. The Court is called upon to decide whether Defendants are liable for fraud for alleged misrepresentations made by Defendant Jitendra R. Magdalia during the course of the sale, and whether Plaintiffs are in breach of contract for failing to pay interest and attorney's fees.
FACTS
On September 10, 2011, Plaintiff Devang V. Patel ("Patel"), as an agent of Plaintiff Ma Sadhi, LLC ("Ma Sadhi") (collectively, "Plaintiffs"), entered an agreement with Shree Ji, LLC ("Shree Ji"), whereby Plaintiffs purchased Peddler's Liquor Stores ("Peddlers") , including fixtures, equipment, and inventory, from Shree Ji at a price of $230,000.00 (the "Agreement").
The Agreement provided that the inventory included in the transaction would be determined the day before the closing, and was to be paid for by Plaintiffs in accordance with the terms of a promissory note. The Agreement also afforded Patel the opportunity to observe the daily operation of Peddlers for over a month after the execution of the Agreement, and the right to void the Agreement if Patel was not satisfied with the volume of business during that period. Furthermore, the agreement provided for access to Shree Ji employees for training and consultation purposes, for a period of one month after Patel took possession of Peddlers.
The Agreement specifically provides: "Seller agrees to allow Purchaser, at random times requested by Purchaser, to observe seller's day-to-day business operations, including the volume of the business sales through October 15, 2011. In the event Purchaser is not satisfied with the volume of business sales occurring during this period of time, Purchaser shall notify Seller in writing on or before October 24, 2012 that this contract is null and void." Exhibit 1 at paragraph 7.
Closing was to take place on December 29, 2011. Patel hired a third party, The Elite Inventory Group ("Elite"), to conduct an inventory count on the night of December 28, 2011. Elite reported an inventory of 24,315 units, valued at retail price of $192,382.63. The parties agreed to a mark-up of 1.45%, thus bringing the total purchase cost of the inventory to $133,132.64.
Supplies were priced at cost. Joint Exhibit 2.
On December 29, 2011, Patel, on behalf of Ma Sadhi, executed a promissory note, promising to pay Shree Ji the principal sum of $133,132.64 plus 6.5% interest annually. The promissory note called for payment of 50% of the principal plus interest, due six months from the date of closing.
On September 14, 2012, Plaintiffs brought this fraud action seeking declaratory judgment against Defendants, Shree Ji, Jitendra R. Magdalia ("Jitendra"), and Bhavin Magdalia ("Bhavin") (collectively, "Defendants"), for alleged misrepresentations made prior to closing.
It is Plaintiffs position that Jitendra, as an agent of Shree Ji, represented to Plaintiffs that there was no "dead" inventory at Peddlers prior to closing. Plaintiffs assert that it relied on Jitendra's representation when evaluating the value of the products transferred in the inventory sale. Plaintiffs also assert that it relied on Jitendra's representation in the execution of the promissory note. Plaintiffs argue that it was later discovered that $22,603.40 worth of inventory was in fact "dead". Plaintiffs seek a declaratory judgment valuing the inventory at $109,398.52, as well as damages equivalent to the value of the "dead" inventory, plus punitive damages.
Defendants, on the other hand, maintain that no representations regarding inventory were ever made by Jitendra, and even if they were, Jitendra was not an agent of Shree Ji; rather, he was merely an employee of Peddlers, and he lacked the authority to act on behalf of Shree Ji. Furthermore, Defendants contend, Plaintiffs have breached the contract by failing to pay interest and attorney's fees. Defendants seek an order declaring the validity of the contract, as well as costs.
Trial was held on August 14, 2013. At trial, the Court heard the testimony of four lay witnesses: Devang Patel; Bhavin Magdalia; Jitendra Magdalia; and, Bhrugisha Patel. One expert witness, Robert Aerenson, testified for the defense. Documentary evidence was submitted jointly by the parties. During its closing argument, Defendants moved for a Directed Verdict pursuant to Court of Common Pleas Civil Rule 50(a). The Court reserved decision on Defendants' motion for directed verdict. For the reasons discussed herein, the Court need not address Defendants' motion for directed verdict. This is the Court's final decision after trial.
Joint Exhibits 1 through 7 were admitted into evidence.
a. Plaintiffs' Case-in-Chief
Patel was the sole witness to testify during Plaintiffs' case-in-chief. Patel testified that he is an electrical engineer, employed by Ebay Enterprise in King of Prussia, Pennsylvania. Patel testified to the following: although he had no experience in the liquor industry, he decided to purchase a liquor store as a business opportunity for his brother. Through a brokerage firm, Patel learned of two liquor stores for sale in Delaware and contacted the sellers. Neither business suited Patel's budgetary restraints, so one of the sellers gave Patel the telephone number of Jitendra, who was also selling a liquor store. Patel contacted Jitendra, and met with him at Peddlers. After a short discussion, Jitendra offered to sell Peddlers at a price of $275,000.00. Patel requested the business' tax return forms from the previous three years, and he provided Jitendra with his email address. On June 20, 2011, the tax returns were sent to Patel via email by Bhavin. Although Patel gave his email address to Jitendra, he was not surprised that the email came from Bhavin.
A week or two later, Patel returned to Peddlers and again discussed purchasing the store. Patel conveyed an offer of $200,000.00 to Jitendra. Without consulting anyone, Jitendra declined the offer. Two weeks later, Patel called Jitendra and made an offer of $220,000.00. Jitendra presented a counteroffer of $240,000.00. During the telephone conversation, the parties agreed to a price of $230,000.00.
Patel testified that the length of time it took to sell inventory was very important; he would need to sell inventory in a fashion that would generate enough funds to purchase more liquor. According to Patel, during the inventory assessment conducted by Elite, he asked Jitendra what would be done about "dead" inventory. Jitendra responded that there was no "dead" inventory. Patel also testified that he would have requested that "dead" inventory be kept out of the financing, and that he would not have signed the promissory note for the same amount if he was aware of any "dead" inventory.
After Patel took possession of Peddlers, Patel's brother began working there during the weekdays, while Patel operated the store on the weekends. They would move the products to the front of the shelves, so that items which were not selling became readily apparent. Patel noticed that some products were not selling at all, so he created a computer program to generate an inventory report in July or August of 2012 ("2012 Report"), to identify which products did not sell within six months of the Elite inventory assessment. Patel determined the value of the unsold inventory to be $32,290.85.
Joint Exhibit 5.
Patel attempted to generate sales of these items by repositioning them in the store and reducing prices to the extent allowed by the liquor control board. Ultimately, Patel was able to sell some, but not all, of the "dead" liquor, but at a price that cut his profits in half. Additionally, Patel discovered that some non-alcoholic products had expired; these products, along with items that had "gone bad" were removed from the shelves. The expired and spoiled inventory constituted roughly 1.00% of the total "dead" inventory.
Patel testified that he called Bhavin to discuss how they would handle the "dead" inventory; however, Bhavin maintained that Patel was obligated to pay the amount set forth in the promissory note. On June 30, 2012, Patel sent an email to Bhavin's email address in which Patel identified the total amount of "dead" inventory, and stated that he would deduct the "dead" inventory from the total due on the promissory note. Patel testified that he complied with the promissory note requirement that he pay the half of the principal due, plus interest, six months from the date of closing. On July 2, 2012, Patel sent an email to Bhavin's email address, requesting that someone pick up a check for the first payment, and to discuss the "dead" inventory issues.
On cross examination, Patel testified that, although he and his brother visited Peddlers for training and observation five or six times prior to the closing, Patel did not notify anyone that the volume of sales was not satisfactory. Patel conceded that price, placement and, in some instances, season are all factors in product turnover.
b. Defendant's Case in Chief
Robert Aeronson ("Aeronson"), a liquor store owner, offered expert testimony on behalf of the defense. Aeronson testified that "slow inventory" is that which does not sell often. According to Aeronson, demand, shelf position, store location, and pricing are all factors which affect inventory turnover. Additionally, Aeronson explained, some products are seasonal, and some product turnover is reliant on current trends, particularly those consumed by younger clientele. On cross examination, Aeronson testified that he is unaware where Peddlers is located, and he does not know if the slow inventory therein includes seasonal items.
Bhavin, a former employee of Peddlers with a bachelors degree in computer science, testified that he worked in the liquor store for ten years, and he still operates a beer store in Pennsylvania. Bhavin testified to the following: his father, Jitendra, owned Peddlers for ten years until it was sold to Bhrugisha Patel ("Bhrugisha"), the sole member of Shree Ji. Sometime thereafter, Bhavin and Brugisha married. Bhavin worked at Peddlers from 10:00 a.m. until 6:00 p.m., every day except Sundays, and he was the party that negotiated with Patel. Bhavin testified that Patel never asked for data on inventory, nor did he ask how long inventory sat on the shelves. Patel's brother visited the store daily during the month proceeding the sale; however, Patel did not visit the store often. Bhavin testified that Patel did not raise the issue of inventory turnover until days before the first payment on the promissory note was due-nearly six months after the sale of the business was completed. On cross examination, Bhavin testified that while he did the majority of the product ordering for Peddlers, Jitendra would do the ordering when Bhavin was not there.
At a prior hearing, the parties represented that Bhrugisha Patel is not related to Devang Patel.
Jitendra Magdalia was the third witness to testify for the defense. Jitendra testified that sometimes product would turnover slowly; in such situations, he would reduce the price to get the product to sell. On cross examination, Jitendra testified that he was the manager of Peddlers at the time of the sale to Patel, and that he would be able to identify what products were selling slowly. Jitendra explained that if an item sits on the shelf, he would assume it was not selling.
With the consent of both parties, Bhrugisha served as interpreter for Jitendra.
Finally, Bhrugisha Patel testified that she purchased Peddlers through her corporation, Shree Ji. Bhrugisha testified that she is employed as a pharmacist, and that she purchased Peddlers as an investment. Bhrugisha testified that she was aware of the negotiations with Patel, but the discussions with Patel were handled by Bhavin. On cross examination, Bhrugisha testified that she was aware that Jitendra was working at Peddlers at night. Bhrugisha also testified that she would expect the manager of a liquor store to be knowledgeable about the inventory. Bhrugisha maintained that Jitendra was only authorized to talk to customers about the liquor; he was not authorized to talk to customers about selling the store.
Discussion
a. Plaintiff's Claim for Fraud
To prevail on an action for fraud, the plaintiff must prove, by a preponderance of the evidence: (1) a false representation, usually of fact, was made by the defendant; (2) the defendant knew or believed the representation was false, or was made with reckless indifference to the truth; (3) intent to induce plaintiff to act or refrain from acting; (4) the plaintiff acted or failed to act in justifiable reliance on the representation; and (5) as a result of such reliance, the plaintiff suffered damages.
Lord v. Souder, 748 A.2d 393, 402 (Del. 2000); Pusey v. West, 1989 WL 48685, at *1 (Del. Super. May 10, 1981).
Patel asserts that Jitendra misrepresented that the store contained no "dead" inventory. According to Patel, on the night of the Elite inventory assessment, Patel asked Jitendra how they would deal with "dead" inventory. Jitendra responded that there was no "dead" inventory. To prove that Jitendra's statement was false, Patel relies solely on his determination that some products did not sell within six months of his possession and operation of the liquor store. This reliance is misplaced; the fact that certain products did not sell within six months does not, in and of itself, prove that Jitendra's representation was false.
Even assuming all facts to be as Patel presented them, Patel failed to establish that Jitendra's representation was false. Jitendra made a representation of present fact-that, at the time the statement was made, there was no "dead" inventory. There is nothing in the record to indicate that Jitendra made a representation regarding future events. Jitendra did not represent that the inventory would sell within six months. In fact, Jitendra made no representation that the inventory would sell at all once in Patel's possession. Patel offered nothing to prove that, at the time the statement was made there was, in fact, "dead" inventory. Thus, the fact that certain items did not sell within six months does not prove that Jitendra's representation of fact was false.
Patel also failed to establish what constitutes "dead" inventory. Expert testimony is required when an issue is beyond the knowledge of a typical layman. In the Court's judgment, Patel should have offered expert testimony on the meaning of "dead inventory" in the context of a liquor store business. In closing, counsel for Patel argued that an expert was unnecessary because the parties understood what "dead" inventory means. However, only evidence of Patel's interpretation of "dead" inventory was adduced at trial. Patel testified that he understood "dead" inventory to be "something that doesn't sell for whatever reason." Patel's classification of inventory as ""dead"" after a six-month period appears to be arbitrarily selected. Patel offered nothing to lead the Court to conclude that his subjective understanding of the term controls.
USH Ventures v. Global Telesystems Group, Inc., 2000 WL 1211205, at *2 (Del. Super. June 29, 2000).
Even if the Court were to find that Jitendra knowingly made a misrepresentation, the facts do not support a finding that Patel's reliance on the representation was reasonable. At trial, Patel described in detail the diligent efforts he expended in his quest for a liquor store. Negotiations for the sale of Peddlers spanned a number of weeks. Patel reviewed the business tax returns. The option to observe operations and sales in the store prior to closing was included in the Agreement at Patel's request. Patel testified that one of his biggest concerns was how to repay the inventory he financed. Patel explained that the length of time it took to sell inventory was very important, as he would need to sell inventory in a manner that would generate enough funds to purchase more liquor. It was Patel's decision to hire Elite to conduct the inventory count. In light of these facts, the Court cannot conclude that Patel's reliance on an ambiguous oral representation made by Jitendra, moments before the Elite inventory was conducted, was reasonable.
Based on the evidence presented, the Court finds that Patel failed to meet his burden of proving, by a preponderance of evidence, each element of his claim for fraud.
b. Defendants' Counterclaim
Defendants allege that Patel is in breach of contract for failing to pay interest and attorney's fees. Defendants request that judgment be entered in its favor, and that it be awarded costs incurred in this action.
To prevail on its counterclaim for breach of contract, Defendants must prove, by a preponderance of the evidence, that: (1) a contract existed between the parties; (2) breach by defendant of an obligation imposed by the contract; and (3) as a result of that breach plaintiff suffered damages.
VLIW Technology, LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003); Gregory v. Frazer, 2010 WL 4262030, *1 (Del. Com. Pl. Oct. 8, 2010).
It is undisputed that, in addition to a contract for the sale of the liquor store, a contract for the sale of inventory existed between the parties. Patel executed a promissory note, whereby he agreed to pay Shree Ji the principal sum of $133,132.64, plus 6.5% annual interest, for the inventory. The promissory note called for payment in two installments, and provided for "5% of the amount of the debt and interest as counsel fees" in the event of default. It is undisputed that Patel breached the agreement by failing to make full payment; at trial, Patel testified that on the second installment he paid less than the amount set forth in the promissory note. However, Defendants offered nothing to establish how much interest remains outstanding.
Joint Exhibit 4.
The Court will only award damages that can be proven with reasonable certainty. Defendants have made no showing of the damages it incurred as a result of Patel's breach. Accordingly, the Court has no basis to award interest or attorney's fees to Defendants on their breach of contract counterclaim.
See Pharmathene , Inc. v. SIGA Technologies, Inc , 2010 WL 4813553, at *11 (Del. Ch. Nov. 23, 2010) (citation omitted).
Conclusion
For the foregoing reasons, judgment is entered in favor of Defendants on Plaintiff's claim for fraud and declaratory judgment. On Defendants counterclaim for breach of contract, I find in favor of Plaintiff. Each party shall bear its own costs.
IT IS SO ORDERED this 18th day of October, 2013.
/s/ _________
Alex Smalls, Chief Judge Devang-OP Oct 18 2013