Court Throws Out Fraudulent Inducement Defense in Business Purchase Dust Up
June 13, 2022, US Bankruptcy Court for the District of New Mexico – The New Mexico Bankruptcy Court rejects Debtor S-Tek 1, LLC’s claims of “fraud”, “negligent misrepresentation” “breach of contract” and “violation of the New Mexico Unfair Trade Practices Act” against Surv-Tek, Inc. (“Defendant”) but allows Surv-Tek’s counterclaim of alleged breach of promissory note and security agreement against Debtor S-Tek.
The entire adversary proceeding revolves around the sale of Surv-Tek’s surveying business to S-Tek, an entity formed by Randy Asselin (“Asselin”) and Christopher Castillo (“Castillo”) to purchase the business.
S-Tek claimed that Surv-Tek and its principals, Russ Hugg and Robbie Hugg committed “fraud” through various “misrepresentations” and “fraudulently induced” them to enter into the closing agreement, promissory note, and security agreement for the purchase of the surveying business. The Court found that S-Tek’s allegation is predicated on Mr. Asselin and Mr. Castillo’s belief that Surv-Tek’s level of profitability was dependent on Robbie Hugg’s skill and experience, which was arguably at such a high level that without his services S-Tek “could never achieve profitability comparable” to that of Surv-Tek. However, the Court observed that the evidence suggests that Surv-Tek’s profitability during the period of Robbie Hugg’s absence in 2019 was comparable to periods before and after the absence and consequently S-Tek did not prove that Surv-Tek was less profitable during Robbie Hugg’s absence.
S-Tek also alleged that Surv-Tek “misrepresented” that non-surveyors could run the business as profitably as Surv-Tek. However, the Court rejected this allegation due to lack of any clear evidence of any such representation. The Court held that the Surv-Tek Parties did not negligently fail to disclose how the business was operated and that Mr. Asselin and Mr. Castillo’s misunderstanding in that regard resulted from their alleged failure to perform adequate due diligence.
The Court however allowed Surv-Tek’s $1,768,941 claim over breach of promissory note due to S-Teks’ failure to prove any affirmative defenses against the claim.
S-Tek 1, LLC v. Surv-Tek, Inc. (In re S-Tek 1, LLC), 2022 Bankr. LEXIS 1648