|
|
|
Lawletter No. 196 How damages are proved in service station cases To prove that he lost profits, the dealer must produce his station books and records. Inaccurate accounting records can make presenting a legal claim difficult or impossible at best and downright dangerous at worst. The majors are of course aware that dealers have this problem. This probably one of the reasons that oil companies seem to disregard the law so often and so confidently. Anyone in the business should be aware of the how lost profits must be proved in court. Without an advance knowledge of the problem, dealers who become involved in lawsuits may be in for a rude awakening when the oil company demands production of their books. Cases in which the dealer must prove lost profits: Here are some examples of the kinds of claims for which the dealer would have a lost profits claim: (1) Termination of the franchise: Claims for wrongful termination of a franchise arise primarily under the PMPA and the antitrust laws. Damages in these cases are based on the net profits the dealer would have made had he not lost the business. In such cases, the dealer's actual profits while he operated the business are used to project what his future profits would have been. (2) Price discrimination: A claim for unlawful price discrimination must be based on the profits the dealer would have made had the supplier not discriminated in price. Typically, evidence of damages consists of the profits the dealer made before, during and after the discrimination. The station books and records must be used to prove such losses. (3) Fraud and oral contracts: In some cases, the dealer wants to sue an oil company because he was promised something he never received. If the subject of the promise was something he planned to use to make more money his claim for damages is based on lost profits. Problems with inaccurate books: When we say inaccurate books, we mean accounting records which substantially understate or misrepresent the dealer's income. We are not referring to the unavoidable minor accounting errors which are unavoidable in any business. Inaccurate books and records can have at least three serious consequences in these situations: (1) The dealer cannot recover all of his actual damages. You can hardly go into court and claim that you made more money than your books show, unless you have an extremely good explanation. Tax fraud is not a good explanation; (2) If the oil company finds out that your books are inaccurate and proves it in court, the judge or jury may be inclined to disbelieve the rest of your testimony; and (3) If the oil company alerts the Franchise Tax Board or the IRS, you may be subject to a tax audit. How the oil company can find out: There are a number of ways that an oil company may be able to determine that your books are inaccurate. Here are a few examples: (1) Comparing purchases and sales: If the refiner supplied you with 1,000,000 of gasoline over a 12-month period, and your records show you sold only 750,000 gallons, obviously something is amiss. Substantial discrepancies strongly suggest that you did not pay all of the sale tax due and that you made profits that you did not enter on your books or show on your taxes. (2) Backroom revenue: Oil companies know generally what types of locations should produce specific approximate ratios between gasoline volume and backroom revenue. If you are grossly understating your revenue, it will look suspicious. Furthermore, if you accept the company's credit card for backroom sales, the invoices should provide a basis for estimating total sales. (3) Physical examination: A physical examination of your books by a forgery expert may reveal that the entries were changed or made long after the transactions occurred.
Tax returns: As a general rule (with some exceptions), tax returns are privileged and confidential. However, the following points are important: (1) Records given to accountants not privileged: Whatever you give your accountant for the purpose of preparing your tax return is not privileged or confidential. There is no accountant-client privilege, unlike the attorney-client privilege. While accountants are bound by professional ethics to keep information you give them confidential, they are released from this obligation if you sue for lost profits. The oil company can subpoena the accountant. (2) Tax authorities may check court records: It may be that the dealer's station books and records are accurate. But if his tax returns are not accurate, and if he produces his books and records in a legal proceeding for damages, the IRS or state authorities may be alerted. (3) Tax returns not privileged in some cases: In some cases, you must produce your tax return. For example, state law requires you to support a claim for the loss of the goodwill of your business due to property condemnation with tax returns. You may also have to produce tax returns in divorce cases and under other special circumstances. PMPA: A key advantage of the Petroleum Marketing Practices Act is that it allows a dealer to seek an advance injunction against improper termination or nonrenewal of the franchise. If the dealer takes prompt action upon receiving a notice of nonrenewal, he may not necessarily have to prove damages. But the dealer must act quickly. (E.g., see Lawletter No. 122) Recommended procedures: We suggest the following: (1) Be aware of the problem: Any dealer should be aware of the effect of his accounting practices on his legal rights. Any time you discuss any legal problem connected with your business with your attorney, make sure you cover the issues discussed in this article. (2) PMPA cases: The problems covered in this article provide yet another example of why you should see an attorney right away if you receive a notice of termination or nonrenewal. You will want to protect your right to seek injunctive relief, particularly where you might have a problem proving damages if you give up the station. |
|
|