Insurance and Real Estate Defense

By September 5, 2014 October 24th, 2018 Insurance, Jenna

BUSINESS BROKER SUCCESSFULLY DEFENDED IN MALPRACTICE LITIGATION

Highlights

  • Based on its years of experience in insurance and real estate defense, Cummins & White successfully represented a business broker who was sued for malpractice after the sale of a small bakery/restaurant and lease negotiation went askew shortly after escrow closed.
  • At trial, attorneys Larry Arnold and Kevin Price clearly established that their client followed accepted standards of care and code of ethics by completing the necessary due diligence and properly investigating the buyer’s credit worthiness.
  • After showing that the buyer’s default was due solely to actions by her fiancé when he cleaned out her bank accounts, the jury awarded a defense verdict.

Attorneys

Case Study

Larry Arnold and Kevin Price of Cummins & White, LLP, successfully defended a business broker who was sued for malpractice in connection with the sale of business assets and the lease of commercial property. The plaintiffs claimed that the broker had not completed the necessary financial due diligence on the buyer, and sought more than $200,000, plus punitive damages and attorney’s fees. After trial, the jury arrived at a complete defense verdict.

Background

The owners of a bakery and café engaged an Orange County business broker to find a buyer for their business assets and to assume their lease. As a condition of the new lease, the landlord required the sellers to personally guarantee the buyer’s rent payments. The transaction went as planned until shortly after escrow closed, when the buyer’s fiancé absconded with her life savings. Left without start-up capital and facing bankruptcy, the buyer defaulted on the lease, making the plaintiffs responsible for lost rent under the guarantee. In a sympathetic gesture, the business broker searched for and located a replacement tenant. Due to a declining real estate market, the new monthly rent was $1,000 lower than the amount in the personal guarantee.

When the lease and personal guarantee expired, the landlord sued the sellers for unpaid rent and the difference between the original and revised lease agreements. The sellers ultimately settled with the landlord for $100,000, then sued the broker claiming that he did not perform adequate due diligence on the first buyer and misled them about the rent for the replacement tenant. Charging the broker with breach of fiduciary duty, fraud, and negligence, the owners sought $211,000, plus punitive damages and attorneys’ fees and costs.

Legal Strategy

Larry Arnold and Kevin Price of Cummins & White, LLC, were retained to represent the business broker by the broker’s errors and omissions insurance carrier. Settlement discussions were unsuccessful, and the case proceeded to trial in Orange County Superior Court.

The defense team’s trial strategy included presentation of evidence and expert witness testimony to:

  • Acknowledge that what happened to the sellers was unfortunate.
  • Establish that the sellers were sophisticated business owners and were experienced in these types of transactions.
  • Prove that the business broker had completed due diligence on the buyer by submitting to the sellers and the landlord appropriate financial statements, credit reports, and a business plan.
  • Demonstrate that the broker followed the accepted standard of care and acted in the best financial interest of the plaintiffs during the transaction.
  • Establish that the lease default was not caused by the broker’s negligence, but was caused when the buyer’s fiancé absconded with $400,000 and forced her into bankruptcy.

Result/Implication

After presentation of the evidence and brief deliberations, the jury issued a defense verdict in favor of the business broker, and against the plaintiff sellers.

Mr. Arnold said the verdict was a significant victory, especially in light of the last settlement demand from the plaintiffs, which was $600,000, plus attorneys’ fees. “We focused on removing emotions by acknowledging that what happened to the very likeable sellers was sad, but was not caused by our client. This was a clear victory—we understand the value of our client’s professional reputation and were pleased that the jury rejected the claims of malpractice or intentional acts.”

Mr. Price added, “We challenged the plaintiffs’ testimony, but without bullying them. The plaintiffs were not at fault for their loss, but we had to show the jury that their claims against the broker didn’t make sense. The villain in this case was the ex-fiancé, not the business broker.”