Legal Question in Business Law in California

misleading affidavid, it is sufficient grounds to cancel sales contract

If seller of a business signs an affidavit of no creditors and turns out to be misleading, is it sufficient grounds for buyer to cancel escrow and sales contract.

What if in the affidavit there is an indemnification.

Indemnification. If, contrary to no security interest, no creditors, no claims as stated of this affidavit, there are any security interests or other liens, debts, liabilities or claims, Seller and the signer of this affidavit will remove the encumbrances, pay the debts, liabilities or claims, and protect Buyer from any loss or liability.

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Asked on 12/20/00, 5:07 am

1 Answer from Attorneys
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: misleading affidavid, it is sufficient grounds to cancel sales contract

The rule for rescission of a contract for misrepresentation is one of reason, and a court would consider whether the misrepresentation was intentional, negligent or innocent, and whether the matter misrepresented was highly material or relatively unimportant in the big picture.

Since you have an indemnification provision, I think (based on the limited facts given) a court would be more likely to tell you to rely upon your right to indemnity than to allow you to rescind the whole deal. However, if the undisclosed debts are relatively large, if the seller's ability to indemnify is doubtful, and/or the seller acted fraudulently, the court might find the deal was too badly tainted by the failure to disclose and order rescission.

I hope this somewhat ambivalent answer gives you what you need to figure out your course of action. If you feel you could use legal assistance, please contact me. Use of professional advisors (lawyer, accountant, etc.) in purchase of a business is always wise.

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Answered on 12/26/00, 3:42 pm


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