Consumer Fraud Act Does Not Apply to Sale of Ongoing Business

On March 26, 2009, the Appellate Division decided in the case of 539 Absecon Boulevard v. Shan Enterprises, that New Jersey’s Consumer Fraud Act, N.J.S.A. 56:8-1, et seq., does not apply to the sale of an ongoing business.  The Consumer Fraud Act was enacted by the New Jersey legislature to protect consumers from unconscionable business practices and has been expanded to apply to a variety of situations.  Victims of consumer fraud should contact a New Jersey consumer fraud lawyer for assistance.  

In the present case, the defendant had placed for sale a Comfort Inn located in Absecon, New Jersey.  The plaintiff was interested in purchasing the hotel and asked to look at the defendant’s business and tax records.  After examining these documents and finding them satisfactory, the plaintiff decided to purchase the hotel.  The tax documents produced by the plaintiff showed that the Inn made a significant profit in the three years prior to the year of purchase.

Eventually the plaintiff began to run the Inn; however, in the first year, plaintiff’s income from the hotel was projected to be much lower than what defendant had reported in its documents.  It was later determined that the discrepancy was the result of “phantom income” being reported by the defendant from a group booking of rooms by a company at a higher rate.  When asked to produce a contract with that company and other related documentation in anticipation of litigation, defendant denied any wrongdoing and turned the matter over to an attorney.  The defendant later claimed that financial documents related to this company were destroyed in a flood in his basement.  Plaintiff argued that if it had known the Inn’s true level of income without the “phantom income” included, it would not have purchased the Inn because the Inn would not have been profitable. 

Plaintiff sued defendant under the Consumer Fraud Act, as well as several common law theories.  After a bench trial, the trial court found in favor of plaintiff on the Consumer Fraud Act claim.  The trial court found that it was quite clear that the defendant had misrepresented the Inn’s income to the plaintiff, and therefore, the defendant had engaged in an unconscionable business practice that is prohibited by the Consumer Fraud Act.  The Consumer Fraud Act claim was appealled to the Supreme Court of New Jersey.  The Supreme Court agreed with the trial court’s factual findings, but ultimately concluded that the Consumer Fraud Act does not apply to the sale of an ongoing business.

In its analysis, the Court first looked at the text of N.J.S.A. 56:8-2, which provides that the Consumer Fraud Act applies to the use of an unconscionable commercial practice by “any person” “in connection with the sale or advertisement of any merchandise or real estate.”  The Consumer Fraud Act defines “merchandise” to include “any objects, wares, goods, commodities, services or anything offered, directly or indirectly to the public for sale.”  The Court was also mindful that the Consumer Fraud Act is remedial legislation and should be construed to accomplish its dual purposes of protection of consumers and deterrence of unconscionable business practices.

Despite the fact that the statute specifically states that it applies to “real estate,” our courts have adopted a limited construction of the Consumer Fraud Act’s applicability to real estate transactions.  Essentially, New Jersey courts have limited the Consumer Fraud Act’s applicability in real estate transactions only to unconscionable business practices by professional sellers, and brokers, agents, and salespersons representing such professional sellers.  However, the Supreme Court also noted that there is nothing to preclude the Consumer Fraud Act from applying in favor of business entities that have been victimized by an unconscionable business practice.  While the Court recognized that applicability of the Consumer Fraud Act requires a case-by-case analysis, the Supreme Court held that there was no textual basis in the statute or other reason to expand the scope of the Consumer Fraud Act to transactions that, at their core, involve the sale of an ongoing business from one group of proprietors to another.

Nevertheless, the Consumer Fraud Act is still a broad piece of legislation that is applicable to many transactions and situations.  Anyone who has been victimized by an unconscionable business practice should contact a New Jersey consumer fraud lawyer for assistance.