Fraud By Residential Real Estate Sellers

Fraud claims can arise from several sources of law. This article discusses three main areas: fraud at common law, fraud pursuant to the Statutory Fraud Act, and fraud under the Deceptive Trade-Consumer Protection Act, all within the context of residential real estate.

COMMON LAW FRAUD

What is fraud at common law?

The required elements of a successful common-law fraud action are:

(1) the defendant [e.g., a seller] made a material representation to the plaintiff;

(2) the representation was false;

(4) when the defendant made the representation the defendant knew it was false or made the representation recklessly and without knowledge of its truth and as a positive assertion;

(5) the defendant made the representation with the intent that the plaintiff should act upon it;

(6) the plaintiff acted in [justifiable] reliance on the representation; and

(7) the plaintiff thereby suffered damages.

See the commercial real estate case of Nooner Holdings, Ltd. V. Abilene Village, LLC, 668 S.W.3d 956 (Tex.App.—Eastland 2023, pet denied).

Two specific subsets of common law fraud are especially important in the context of real estate transactions: fraudulent misrepresentation and fraudulent inducement.

Justifiable Reliance

As a warning to buyers of commercial real estate (in this case a shopping center), the Nooner case generally makes it clear that a buyer may not assert justifiable reliance in a situation where:

(1) the buyer is on notice (however slim) that there may be problems with property condition;

(2) numerous “red flags” exist on the ground; and

(3) there exists an a thorough “as is” clause that expressly imposes a due-diligence review obligation on the buyer.

The outcome of Nooner would almost certainly have been different if the case had involved residential property, since the Deceptive Trade Practices Act applies to residential transactions. Clearly, when selling a home, it is not sufficient to make partial disclosure and then shift the due-diligence investigative burden to the buyer.

Fraudulent Misrepresentation

To make a case for fraudulent misrepresentation, the plaintiff must prove that the defendant made a material misrepresentation that was false, and which was either known to be false when made or which was asserted by the defendant without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused damage to the plaintiff. Sears, Roebuck & Co. v. Meadows, 877 S.W.2d 281 (Tex. 1994).

A plaintiff must show that a fraudulent misrepresentation was knowingly made by the defendant. There is an interesting pro-seller Travis County case where the seller was sued post-closing for not disclosing defects in a well—and after declaring that “everything in this home works the way it should work.” The court of appeals stated that “to the extent that the effect of an ‘as is’ contract may also be nullified through the seller’s use of fraud, we find no evidence of record illustrating that [the seller] knew the actual condition of the [defective] well when he made representations about it being functional or having a certain level or amount of water. Nor does the record contain evidence from which reasonable minds could infer that he garnered such knowledge after making those representations and before the closing date.”

The court refused to attribute actual knowledge to the seller even though the seller had recently conducted repairs on the well! Summary judgment in favor of the seller was upheld. Boehl v. Boley, No. 07-09-0269-CV (Tex.App. Jan. 26, 2011).

Fraudulent Inducement

Fraudulent inducement is a species of common-law fraud that arises only in the context of a contract between a buyer and a seller. Anderson v. Durant, 550 S.W.3d 605, 614 (Tex. 2018). A cause of action for fraudulent inducement requires the existence of an enforceable contract. Zorilla v. Aypco Constr. II, LLC, 58 Tex. Sup. Ct. J. 1140 (Tex. 2015).

A party claiming fraudulent inducement must show that:

(1) the defendant made a material misrepresentation;

(2) the defendant knew at the time that the representation was false or lacked knowledge of its truth;

(3) the defendant intended that the plaintiff should rely or act on the misrepresentation;

(4) the plaintiff relied on the misrepresentation; and

(5) the plaintiff’s reliance on the misrepresentation caused injury.

See International Bus. Machines Corp. v. Lufkin Industries, 573 S.W.3d 224 (Tex. 2019).

The Texas Supreme Court has stated that fraudulent inducement claims are not subject to the usual economic loss rule. Formosa Plastics Corp. United States v. Presidio Eng’rs & Contractors, 960 S.W.2d 41 (Tex. 1998).

Fraud by Non-Disclosure

Is an actively stated misrepresentation or false promise by the seller required in order to prove fraud at common law? What about failure to disclose? Fraud by non-disclosure occurs when:

(1) a [seller] conceals or fails to disclose a material fact within the knowledge of that party,

(2) the party knows that the [buyer] is ignorant of the [material] fact and does not have an equal opportunity [or access] to discover the truth,

(3) the party intends to induce the other party to [purchase the property] by concealing or failing to disclose the [material] fact, and

(4) the other party suffers [damages] as a result of acting without knowledge of [and relying upon] the undisclosed fact.

See Bradford v. Vento, 48 S.W.3d 749 (Tex. 2001).

A duty to disclose material facts is a required element of fraud by non-disclosure. A Dallas Appeals Court case explains:

A misrepresentation may consist of the concealment or nondisclosure of a material fact when there is a duty to disclose. The duty to disclose arises when one party knows that the other party is ignorant of the true facts and does not have an equal opportunity to discover the truth [Italics added]. A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question.

See Coldwell Banker Whiteside Associates v. Ryan Equity Partners, 181 S.W.3d 879, 888 (Tex. App.—Dallas 2006, no pet.).

Given this broad definition of duty, it can be safely assumed that a seller who otherwise satisfies the elements of fraudulent misrepresentation or fraudulent inducement will not escape liability merely because there was no active misrepresentation—at least so long as a duty of disclosure exists, which is most definitely true under the DTPA in sales of Texas residential real estate.

THE STATUTORY FRAUD ACT

The Statutory Fraud Act

The Statutory Fraud Act (Bus. & Com. Code Sec. 27.01) defines fraud in real estate and stock transactions as follows:

Bus. & Com. Code Sec. 27.01. Fraud in Real Estate and Stock Transactions

(a) Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a (1) false representation of a past or existing material fact, when the false representation is (A) made to a person for the purpose of inducing that person to enter into a contract; and (B) relied on by that person in entering into that contract; or a (1) false promise to do an act, when the false promise is (A) material; (B) made with the intention of not fulfilling it; (C) made to a person for the purpose of inducing that person to enter into a contract; and (D) relied on by that person in entering into that contract.

Elements of Statutory Fraud

Elements of statutory fraud are the same as the elements of common law fraud (discussed below) except that Section 27.01(a) does not require proof of knowledge or recklessness as a prerequisite to the recovery of actual damages. In other words, it is not necessary to prove that the representation as was false. Tex. Bus. & Com. Code Sec. 27.01(a)(1) and (2); and Miller v. Argumaniz, 479 S.W.3d 306 (Tex.App.—El Paso 2015, pet. denied). This eases the plaintiff’s burden of proof under the Act considerably, which increase the risk of a judgment against a non-disclosing seller.

The Nelson case summarizes the elements of fraud under the Statutory Fraud Act:

To establish statutory fraud, the plaintiff must show the following:

(1) the transaction involves real estate or stock;

(2) the defendant made a false representation of a past or existing material fact or made a promise to do an act with the intention of not fulfilling it;

(3) the defendant made the false representation or promise for the purpose of inducing the claimant to enter into a contract; and

(4) the plaintiff relied on the false representation or promise in entering into the contract.

See Nelson v. McCall Motors, Inc., 630 S.W.3d 141 (Tex.App.—Eastland 2020, no pet.).

Contract Required

Unlike the DTPA (see below), the Statutory Fraud Act “is applicable only when a conveyance of the property has been made or, in the very least, when there is a valid real estate contract. . . .” BLM of Brownwood, Inc. v. Mid-Tex Cellular, Ltd., No. 11-11-00311-CV, 2014 WL 1285765 (Tex.App—Eastland 2014, no pet.).

Damages

Violations of the Statutory Fraud Act can result in actual as well as exemplary damages plus reasonable and necessary attorney’s fees, expert witness fees, deposition costs, and costs of court. Actual awareness of the falsity of the representation or promise is required for the award of exemplary damages but may be inferred by surrounding circumstances. Hines v. Hash, 843 S.W.2d 464 (Tex. 1992). Actions under the Statutory Fraud Act must be brought within four years of the time when the claimant knew or should have known of the harm.

Note that there is a tie-in provision connecting the Statutory Fraud Act to the DTPA. Section 27.0015(b) states that “a violation of Section 27.01 [of the Statutory Fraud Act] that relates to the transfer of title to real estate is a false, misleading, or deceptive act or practice” as defined by the DTPA. Accordingly, DTPA remedies are available as well.

DECEPTIVE TRADE PRACTICES

The DTPA

The Deceptive Trade Practices-Consumer Protection Act (Bus. & Com. Code Sec. 17.46 et seq.) clearly imposes a duty to disclose material facts upon residential sellers. “Failing to disclose information is equivalent to a false representation when particular circumstances impose a duty on a party to speak, and the party deliberately remains silent.” In re Int’l Profit Assocs., Inc. , 274 S.W.3d 672 (Tex. 2009).

In addition to a laundry list of specific deceptive acts, DTPA Sec. 17.50(a)(3) prohibits “any unconscionable action or course of action,” which is broad enough to ensnare nearly all residential real estate sellers who act fraudulently. However, “mere puffing” by a seller is not considered to be a deceptive act. Bossier Chrysler Dodge II, Inc. v. Rauschenberg, 201 S.W.3d 787, 800 (Tex.App—Waco, 2006).

Under the DTPA, it is not required that there be a contract or that the consumer actually buy anything—only that the consumer is seeking or in the process of acquiring consumer goods or services by means of either purchase or lease. Martin v. Lou Poliquin Enterprises, Inc., 696 S.W.2d 180 (Tex.App.—Houston [14th Dist.] 1985).

DTPA Damages

Business & Commerce Code Section 17.50 lists available relief for victims of seller fraud. If a court decides that that the defendant’s actions were committed knowingly then treble damages plus attorney’s fees may be available (Bus. & Com. Code Sec. 17.50(b)(1)). It is not required that a buyer prove that a seller acted knowingly or intentionally—although the lack of intentionality restricts the buyer to actual rather than exemplary damages. Miller v. Keyser, 90 S.W.3d 712, 716 (Tex. 2002).

Note that there is a tie-in provision connecting the Statutory Fraud Act to the DTPA. Section 27.0015(b) states that “a violation of Section 27.01 [of the Statutory Fraud Act] that relates to the transfer of title to real estate is a false, misleading, or deceptive act or practice” as defined by the DTPA. Accordingly, DTPA remedies are available as well.

CONCLUSION

A buyer who believes he has been deceived in a residential real estate transaction may sue based on multiple causes of action including common-law fraud, the Statutory Fraud Act, the DTPA. Certain federal relief may be available as well. The shotgun approach—pursuing multiple causes of action simultaneously—is designed to insure that at least one or more of the causes of action presented will be successful at trial. DTPA and statutory lawsuits may be somewhat more popular than common law actions because attorney’s fees can more easily be recovered as part of the judgment.