## Facts

- Paul and Linda Hart decided to buy a business after Paul Hart sold his veterinary practice and moved to Indiana.
- Steel Products, Inc. was a steel-manufacturing business owned by Katherine Scales (sole shareholder) and managed by Alvah Rochon.
- Hart’s offer to purchase Steel Products’ assets was contingent on a satisfactory review of the company’s books and financial statements.
- Rochon provided tax returns for 1987–1989 showing mixed results (two years with losses and one year with income).
- Rochon took Hart to the company’s accountant and authorized release of 1990 financial information showing ordinary income of $176,301.94.
- Relying on the represented 1990 profitability, the Harts purchased Steel Products’ assets for $292,500, including:
  - $100,000 through assumption of existing accounts payable; and
  - $150,000 through a promissory note (loan) to Scales.
- After the purchase, the Harts contributed $115,114.56 of personal funds as additional capital to pay operating expenses.
- The Harts also used business funds to make payments on the promissory note to Scales.
- During the Harts’ operation of the business, a trailer with a 500-gallon gas tank was stolen after the Harts failed to obtain insurance on it, and a two-and-one-half ton truck was sold after its engine seized.
- In 1993, Hart reviewed Steel Products’ amended 1990 tax return and learned it reported an ordinary loss of $4,344.76, not the previously shown profit.
- The Harts sued Steel Products, Scales, and Rochon for fraud and sought rescission of the asset-purchase contract.
- After a bench trial, the trial court found fraud, ordered rescission, pierced the corporate veil to hold Scales personally liable, awarded the Harts $215,114.56 (including $100,000 for assumed accounts payable and $115,114.56 for the additional capital contribution), and denied punitive damages.
- Defendants appealed, challenging reliance, rescission, and veil piercing; the Harts challenged the denial of punitive damages.

## Issues

1. Whether sufficient evidence supported the trial court’s finding that Hart reasonably relied on the 1990 tax return and financial information.
2. Whether rescission was a proper remedy for the fraudulent inducement and, if so, whether restitution was calculated to restore the parties as nearly as possible to their pre-contract positions.
3. Whether the evidence supported piercing the corporate veil to impose personal liability on Scales.
4. Whether the trial court erred by denying punitive damages.

## Decision

- The court affirmed the trial court’s fraud finding, including that Hart reasonably relied on the 1990 financial information showing substantial income.
- The court affirmed rescission as an available remedy for fraud in the inducement of the asset-purchase agreement.
- The court reversed the restitution award in part and remanded for recalculation to account for proper credits and offsets, including what portion of the assumed accounts payable was actually paid and adjustments for assets that could not be returned (such as missing, stolen, or disposed property).
- The court affirmed piercing the corporate veil and holding Scales personally liable.
- The court affirmed the denial of punitive damages.

## Legal Principles

- Fraud may be proved when a seller supplies materially false financial statements or tax information to induce a transaction and the buyer justifiably relies on that information.
- Justifiable reliance is a fact-sensitive question; a buyer may rely on financial information furnished by the seller and its accountant when the transaction is conditioned on review of those materials.
- Rescission is an equitable remedy for a contract induced by fraud; it seeks to return the parties, as nearly as possible, to the positions they occupied before the transaction.
- Restitution following rescission requires accounting for consideration paid and benefits received, including credits for unpaid assumed obligations and offsets for property that cannot be returned in kind because it was lost, sold, or otherwise disposed of.
- A court may pierce the corporate veil when the corporation is used to commit fraud or when recognizing the corporate form would sanction fraud or result in injustice; factors may include undercapitalization and the shareholder’s control and use of the entity in the wrongful conduct.
- Punitive damages are not awarded as a matter of course in fraud cases; they require clear and convincing proof of conduct warranting punishment and deterrence, and appellate review is deferential to the trial court’s decision.

## Conclusion

The Indiana Court of Appeals upheld the trial court’s determinations that defendants committed fraud, that the Harts’ reliance on the 1990 financial information was justified, that rescission and veil piercing were proper, and that punitive damages were not required, but it sent the case back to recalculate restitution so the rescission remedy included appropriate credits and offsets (including for accounts payable and nonreturnable assets) consistent with restoring the parties to their pre-contract positions.


Hart v. Steel Products, Inc., 666 N.E.2d 1270 (1996)