Multi Investments, Inc., offers to buy Nano Toy Corporation. On May 1, Nano prov

Question

Multi Investments, Inc., offers to buy Nano Toy Corporation. On May 1, Nano provides copies of its financial statements for the pre­vious year, showing an inventory of $10 million. On May 15, Nano discovers that the previous year’s inventory is overstated by $5 million, but does not inform Multi. On June 1, Multi, relying on the fi­nancial statements, buys Nano. On June 10, the buyer discovers the inven­tory over­statement. Can Multi succeed in a suit against Nano for fraud?
Multi Investments, Inc., offers to buy Nano Toy Corporation. On May 1, Nano provides copies of its financial statements for the pre­vious year, showing an inventory of $10 million. On May 15, Nano discovers that the previous year’s inventory is overstated by $5 million, but does not inform Multi. On June 1, Multi, relying on the fi­nancial statements, buys Nano. On June 10, the buyer discovers the inven­tory over­statement. Can Multi succeed in a suit against Nano for fraud?
Multi Investments, Inc., offers to buy Nano Toy Corporation. On May 1, Nano provides copies of its financial statements for the pre­vious year, showing an inventory of $10 million. On May 15, Nano discovers that the previous year’s inventory is overstated by $5 million, but does not inform Multi. On June 1, Multi, relying on the fi­nancial statements, buys Nano. On June 10, the buyer discovers the inven­tory over­statement. Can Multi succeed in a suit against Nano for fraud? Multi Investments, Inc., offers to buy Nano Toy Corporation. On May 1, Nano provides copies of its financial statements for the pre­vious year, showing an inventory of $10 million. On May 15, Nano discovers that the previous year’s inventory is overstated by $5 million, but does not inform Multi. On June 1, Multi, relying on the fi­nancial statements, buys Nano. On June 10, the buyer discovers the inven­tory over­statement. Can Multi succeed in a suit against Nano for fraud?

Explanation / Answer

Yes, Multi can succeed in a suit against Nano for fraud, be- cause Nano had a duty to disclose that the inventory was overstated as soon as it learned of that fact. Usually, no party to a contract has a duty to come forward and disclose facts. Each party is responsible for the utilization of common sense and normal business sense in negotiating a contract. An action for fraud can be based on a failure to disclose material facts if there is a certain relationship between the parties like between partners in a partnership or a party could not reasonably discover a fact known to the other party. An action may also be maintained if, as here, a party who

misstates a material fact later learns of the misstatement. The contents of an action for fraud are (1) the misrepresentation of a material fact, (2) the intent to deceive, and (3) the innocent party’s justifiable reliance on the misrepresentation. Here, by providing financial statements,   Nano  made certain representations. The representations were false, however, as Nano learned.   Nano’s knowledge of the overstated inventory and failure to disclose this to Multi evidenced intent to deceive.Multi's reliance on Nano's statements was reasonable and justifiable

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