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From Lawletter No. 161 The dangers of "straw man" business sales It is not uncommon for a dealer to buy a service station business and put it in another person's name. Anyone considering such an arrangement should be aware of the risks involved. Reasons for strawman purchases: The California service station franchise assignment law allows a dealer to sell his business to a qualified buyer. But the oil company can require the buyer to meet its current standards for new dealers. Some majors limits the number or types of units that one dealer may have. A dealer may try to get around such requirements by having a third party "purchase" the franchise. Fraudulent credit statements: In such cases, the third party submits a dealer application which includes a financial statement. The real buyer usually provides the third party with the funds to make the purchase, and in his credit application to the company, the third party shows those funds as his own. Furthermore, he does not list the real buyer as his creditor. In such a case, both the real buyer and the third party have committed a fraud on the franchisor.If the company later discovers the fraud, it may have the right to terminate the franchise. Situations where the sales rep. is a party to the fraud: In some situations, company marketing personnel will actually encourage a dealer to put the franchise in another person's name, even though company policy formally prohibits the practice. Such cases can present some very difficult legal questions in the event of a later dispute.
Recommended procedures: In considering any such arrangement, we suggest that you: 1. Consider possible consequences: Before aiding or encouraging the preparation and submission of a false credit statement to the company, carefully consider the possible consequences. One factor that should not be overlooked is that if the franchisor is able to establish a valid legal cause for terminating the franchise under the Petroleum Marketing Practices Act, the buyer's entire investment may be lost. For a detailed discussion of the problems associated with false credit applications, see Lawletter No. 142. 2. Save proof marketing department is aware of the transaction: We realize that in some cases, the buyer acts in good faith in these transactions. The oil company does have a motive for creating such "phony" transactions. The California assignment law requires that the new dealer standards which are used to disapprove other transactions be uniformly enforced. Even one case of a deviation from such standards can seriously undermine the company's right to reject any buyer. If the marketing department is actually aware of the nature of the transaction, make careful written records of this fact. You may wish at a later date to show that since the company was well aware of the true facts, there was no fraud. 3. Be aware of the risk even where sales rep. knows the true facts: Do not assume that just because the sales rep. knew the true facts that there was no fraud. If the company contends that no one above the rep. knew of the true nature of the transaction, the dealer may very well have to try to prove otherwise in order to keep his franchise. Since a sales representative typically does not have legal authority to bind the company, the dealer in many cases is not legally entitled to rely on his actions. |
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