You Are Damned if You Have Impaired Business Integrity.

Posted: October 13, 2011 in Lawsuits

That’s the lesson learned by a Massachusetts business owner in a case that just came down from the Massachusetts Appeals Court, A.C. Vaccaro, Inc. v. Anthony Vaccaro, ___ Mass. App. Ct. ___ (Oct. 13, 2011). The business owner lost the case, in part, because the buyer showed that he lacked “business integrity,” by not filing tax returns and by misrepresenting revenues to the buyer.

The case involved the purchase of a small business by the plaintiff from the defendant. After the purchase, the plaintiff alleged that the defendant had misrepresented the volume of business that the plaintiff could expect, and sued for damages. The plaintiff also alleged that the defendant violated the spirit and letter of an accompanying non-compete agreement by referring customers away from the plaintiff.

The plaintiff prevailed on claims for breach of contract and violation of Chapter 93A and was awarded damages and attorneys’ fees of $119,200. Presumably, that number will go up significantly if attorneys’ fees on appeal are awarded, and interest is added to the judgment. The judgment will be pushing $200,000, which incidentally was the purchase price of the business.

An interesting wrinkle arose during the litigation when the plaintiff discovered that the defendant had not paid its federal income taxes for the three years prior to the sale and had not even filed returns. The defendant was allowed, over the plaintiff’s strong objection, to present this evidence at trial. The Appeals Court affirmed this ruling, reasoning that the defendant had made specific representations in the purchase and sale agreement that taxes had been paid in accordance with the representations as to the volume of business.

Additionally, the Appeals Court reasoned that the failure to pay taxes or file tax returns “undermine generally [the defendant’s] credibility in a case challenging his business integrity.” One wonders how wide this opens the door to show a defendant’s lack of business integrity in business tort cases.

That question remains to be answered, but what is certain is that failing to play by the rules will eventually come back to bite you. If you don’t pay your taxes, you will be exposed eventually. You can’t fire employees for fear that they will turn you in. You will have to fear all litigation for fear that your actions will be exposed in court. The same is true if you misclassify your employees, if you don’t provide worker’s comp. insurance, etc., etc. In Massachusetts especially, there is a large push for businesses to follow a variety of laws that protect the public and benefit the government. Not following these rules will impact your business integrity and subject you to lawsuits, government sanctions, etc. You take shortcuts and violate these laws at your peril.

If you have any questions about your obligations as a business or employer, call me at 617.338.7000.

By Adam P. Whitney

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s