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539 Absecon Boulevard, L.L.C. v. Shan Enterprises Limited Partnership

406 N.J. Super. 242, 967 A.2d 845 (App. Div. 2009)

CONSUMER FRAUD ACT — The sale of a business and land incidental to the operation of that business is not covered by the Consumer Fraud Act because such a transaction is essentially the sale of a business and such sales are not covered by the Act.

A buyer purchased a motel, the land upon which the motel was situated, and an adjoining property. Two contracts of sale were executed, one for the motel and its land, and the other for the vacant parcel. The buyer hired a management company for the motel business. Before the sale, the management company conducted an appraisal of the business value based on the motel’s tax returns. When the buyer’s lender appraised the property for less, the buyer agreed to proceed, but executed three promissory notes in favor of the seller. After the sale was completed, the buyer learned that the seller had received almost $200,000 over a two-year period for a phantom motel booking. What had happened was that the seller received hotel bookings for a large number of rooms, but there was no group rate contract for the rooms, none of the booked rooms were actually occupied, and the room charges were paid in cash in increments of $5,000 to $9,000. Additionally, the booking rate charged for the rooms greatly exceeded the daily rate for motel rooms for that period. Nonetheless, the funds were listed on the motel’s books as ordinary revenue.

The buyer claimed that the phantom booking revenues should not have been listed in the motel’s books as ordinary income, and that if the income had been excluded from the books, it would not have purchased the motel. On that basis, it sued the seller for common law fraud, as well as charging a violation of the Consumer Fraud Act. The lower court found that the seller fraudulently misrepresented the motel’s value and that the buyer proved it by a “preponderance of the evidence” but not by “clear and convincing evidence.” In order to prevail on a common law fraud claim, one must demonstrate fraud by “clear and convincing evidence.” Since the lower court found that the buyer’s proofs did not meet this standard, it dismissed the common law fraud claim. With respect to the Consumer Fraud Act claim, the lower court found that the seller, who had owned and sold many properties, was subject to the Consumer Fraud Act. The Court reasoned that the Consumer Fraud Act applies to the sale of real estate and that even though the transaction involved both real estate and a business, it was primarily a sale of real estate together with the improvements attached to it. The lower court then found that since the buyer demonstrated fraudulent conduct by a preponderance of the evidence, the seller was guilty of fraudulent misrepresentation under the Consumer Fraud Act. As a result, it awarded the buyer damages equal to the difference between the value of the property attributable to the phantom income, which it then trebled in accordance with the Consumer Fraud Act. The buyer’s damages were then reduced by the amounts due to the seller under the promissory notes.

The seller appealed and the Appellate Division reversed. The Court found that the Consumer Fraud Act does not apply to the sale of a business, and, despite the lower court’s characterization of the transaction as a real estate deal, the fraud involved the sale of the motel business and not the sale of the land. It noted that the fraud claimed by the seller involved the value of the motel business, which the buyer claimed was worth less based on the inclusion of the phantom hotel booking revenue as ordinary income. None of the claims involved the value of the real property. Therefore, the Court determined that the fraud was in the sale of a business, not of real property. Since the sale of a business is not covered under the Consumer Fraud Act, the buyer had no actionable claim under the Consumer Fraud Act. The Court, while acknowledging the remedial nature of the statute, refused to extend it further to include the seller’s conduct. Since the buyer had no Consumer Fraud Act claim, and the lower court had concluded that the buyer failed to prove common law fraud by clear and convincing evidence, the buyer was not entitled to any damages. Consequently, the Court remanded the matter to the lower court to determine the contract damages owed to the seller in connection with the promissory notes.

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