Hart v. Steel Products, Inc.

Paul and Linda Hart (plaintiffs) purchased a steel-manufacturing business called Steel Products, Inc. from Alvah Rochon and Katherine Scales (defendants). During the negotiation for the purchase, the Harts were provided the financial statements from 1990, which showed ordinary income of $176,301.94. The Harts agreed to purchase the business for $292,500. Out of the total purchase price, $100,000 was paid through an assumption of existing accounts payable, and $150,000 was paid through a promissory note, or loan, to Scales. After the purchase, the Harts contributed an additional $115,114.56 from personal funds as capital for the business to pay certain operating expenses. However, the Harts also used the business’s funds to pay the payments on the note to Scales. Also, the Harts failed to obtain insurance on a trailer with a 500-gallon gas tank. That trailer was stolen. Additionally, a two-and-one-half ton truck owned by the business broke down when its engine seized. The truck was then sold. Eventually, the Harts reviewed the amended income tax return for 1990 and discovered that Steel Products, Inc. had actually suffered a loss of $4,344.76 for that year. The Harts sued Scales and Rochon, alleged fraud, and requested a recission of the contract. After a bench trial, the trial court found for the Harts and awarded $215,114.56 in damages, which included $100,000 for the assumption of the accounts payable and $115,114.56 for the additional capital contribution. Scales and Rochon appealed.