Legal question about a sale

In My Humble Opinion
1

A friend of mine, Dave, is in a bit of an odd place. Note, before going any further, he is consulting his lawyer about the issue so this is not a request for advice. I had some questions about the situation and thought I’d ask here.

Basic story.

About 4 years ago he bought an online business. The person he bought the business from, we will call him Bob, bought the business originally from another two guys who we will merge into one and call Steve.

So Dave bought the business from Bob. As far as Dave knew, Bob owned the business.

The business was not doing very well. Recently another company wanted to do a deal with Dave using the business. This could generate a reasonable amount of income.

Suddenly Steve calls up. Steve is stating that Bob never paid for the business and that Dave has to turn it over back over to Steve.

This is where things get interesting.

Steve was investigated by the SEC, found guilty of stock manipulation and fined rather heavily. Steve sold the business to Bob right before the SEC investigation. Both Steve and Bob admit that Bob never made any payments for the business and that Steve let this go. Additionally, when Bob sold the business to Dave, Steve was aware of the transaction and nothing was done at that time. All three of them had dinner together when the sale occurred.

Additionally, the company that Steve had setup to run the business and that sold the business to Bob no longer exists and Steve let all the incorporation stuff lapse, mainly due to getting hammered by the SEC.

Now that the business may become lucrative Steve wants it back and is threatening to sue Dave.

Now onto my questions.

Does Steve have any standing to sue Dave? They never did a deal between themselves. Dave bought the business, with the knowledge of Steve, from Bob. It seems to me that Steve has to sue Bob for the money, not Dave. Dave never entered any agreement with Steve and the contract says nothing about Steve at all.

Second, does the fact that Steve knew about the deal even though he had never been paid matter? It seems to me that since Steve knew that Bob was selling the business, Steve consented when he chose not to do anything about the sale.

Third, the corporation that actually sold the business to Bob no longer exists. Can Steve sue on behalf of a corporation that no longer exists?

The rest is speculation and a question. It appears from what I know of the story that Steve and Bob colluded on the sale. Steve was going to get hammered by the SEC and it appears to me that Steve transferred the property to Bob to get it away from the SEC. I mean, come on, do you really sell a business and then take absolutely no action when no payment is ever made? Steve never took any action to remedy Bobs lack of payment.

Assuming that Steve and Bob did collude to hide the business from the SEC, where does that leave Dave? If Steve and Bob did this to get the business out of the SEC investigation I know that Steve and Bob and going to have some nasty days in front of them but what happens to the actual business? Can the SEC take it? Dave bought it in good faith and it seems like he shouldn’t a) have to turn the business back over to Steve and shouldn’t be liable for any SEC issues.

Yeah, it is a rather screwy situation. Dave did everything right but Steve is getting ugly and threatening lawsuits.

My suggestion has been to get a hold of the SEC, tell them the whole story and let the SEC deal with Steve. (Side note, Steve has a bad history of pulling scams). Plus a call to the FBI might be in order for financial crimes.

Slee

2

From what I can tell (and law and rules in various jurisdictions will vary this answer), Steve will have standing to sue Dave (he clearly has sufficient interest to do so) but it is unlikely to succeed as a good title has clearly passed (the lack of money transfer is NOT a bar to transfer of title) and plus Steve agreed to the sale to Dave…4 years ago and while we are at it the whole thing was to avoid criminal liability so yeah, very unlikely to succeed.

Steve could potentially sue Dave for breach of contract, if their was an understanding that the business would not be sold on, but again the acquiescent places success in doubt. Finally wrt Company, that is a jurisdiction and fact specific answer, if there is a successor entity or person, they could potentially sue.

3

Steve definitely has standing to sue Dave, but a) Bob will likely have to be joined as a necessary party, and b) Dave has an excellent defense due.

Yes, Steve can sue Dave even though Dave knew nothing about the shenanigans. While this may seem unfair at first, Dave can turn right around and sue Bob. That’s why I think Bob would likely be a necessary party in the first question.

Can you sue on behalf of a corporation that no longer exists? Yes, in the right circumstances. When you can sue someone for a legitimate reason (regardless of whether or not you will win), it’s called a cause of action. A cause of action is considered an asset, and can live on beyond the end of a corporation.

I’m a bit far removed from my Securities Laws class, so I can’t say where the company will end up. Worst case scenario is he is out the company but can sue Steve and Bob. It’s unpleasant, but the good guy usually wins.

Usually.

4

Dave bought the business four years ago from Bob? And Bob bought the business from Steve some time before that?

What are statutory time limitations like in this jurisdiction? In mine, any lawsuit Steve (or his corporation, if he revives it) could launch against Dave would be extinguished by time at this point. With only a few statutory exceptions, and this scenario wouldn’t fit any of them, you only have two years to launch a suit in my jurisdiction. I don’t know about Dave’s jurisdiction, but he may find it worthwhile to investigate time limitations on lawsuits.

5

We prefer that questions seeking legal or medical advice be started in IMHO, rather than in General Questions. Moved.

samclem, Moderator

6

Thanks for the responses.

As far as the statue of limitations goes, it is coming up quick if I understand correctly.

There is another question about assets from a corporation. My understanding is that Steve let the corporation lapse. They just didn’t pay the fee and do any paper work to keep the corporation alive.

If that is the case, how does the cause of actions ownership get transferred? Is the successor listed in incorporation papers?

As always, you all rock.

Thanks,
Slee

7

Wouldn’t there have to be some kind of lien, or something saying the business is collateral for the the amount of the sale, for Steve to be able to (successfully) sue Dave? If Steve sold Bob a lamp, then Bob sold the lamp to Dave, Steve doesn’t still own the lamp, even if Bob never paid Steve. Bob owes Steve money, not a lamp.

It would be different if there were a written contract saying Steve still owned the lamp until paid by Bob, but even then, I’m not it would matter. This isn’t Real Estate. I’d expect different laws in that case.

It’s an interesting question, and I await some actual lawyers weighing in. (Can’t tell if any of the prior responders are lawyers.)

(IANAL)

8

Well I gave one of the earlier reply and I am a lawyer.

Firstly, no what Steve needs to succeed in proceedings against Dave is to show that he still has good title to the lamp/business. In this case he is unlikely to so succeed. it’s a fairly run of the mill recovery suit.

Secondly, the Company it seems is dormant rather than wound up. In this case it has to be revived (usually done with a fee and application to the appropriate authority) and it can sue once so revived. If it had been wound down, then who could sue would have depended on a mixture of local rules and the terms of the windup.

9

I gave a reply too, and I am also a lawyer.

I’m wondering if privity of contract can affect Steve’s claim. Steve had no contract with Dave–Steve’s contract for sale to Bob would seem to me to be the extent of Steve’s involvement. Steve may have a claim against Bob, for the non-payment of consideration; but against Dave’s ownership through a subsequent purchase from Bob? I don’t think so. Remember, there are two contracts here; and Steve is not a party to the second.

Look at it this way: If Fred sells Mike his car (Contract A), and Mike subsequently sells it to Charlie (Contract B), and Charlie decides to strip it and sell it for parts; does Fred have a claim against Charlie for destroying the car and/or the proceeds of the parts? No, it is no longer Fred’s car, and has not been since Fred sold it to Mike under Contract A. Since Mike sold it to Charlie under Contract B, it is Charlie’s, and he can do with it as he pleases. Fred has no part in Contract B (here’s where privity of contract comes into play); thus, Fred cannot claim against Charlie.

Dunno. What does anybody think?

10

I think that there is no contractual claim and frankly no claim with a hope of winning in the case under the OP. Contractual cases are a non starter, the only thing he can do is in tort for recovery of assets under title, which IMNSHO will fail.

11

The company may be dormant but the guys who owned the original company are barred from being company officers for another year or so by the SEC. So if they try an revive the company the SEC will come hunting for their heads.

Dave talked to a lawyer today and the lawyer basically gave the same answer. According the the guy Dave talked to today, Steve can threaten all he wants but if Steve sues it’ll be tossed out of court. Especially when Steve’s business history comes out. It’ll look like Steve transferred the business to Bob to get it out of the SECs purview.

Steve apparently has a pretty bad record and has been spanked by the SEC. Something like $500,000 in fines and Steve could not be a company officer for five or seven years.

Thanks for the opinions.

If anything new develops I’ll come back and post.

Slee