Archives for the month of: February, 2014

ImageIn Texas, a fraud claim must be based on a false representation.  Courts have often repeated the principal that statements of pure opinion cannot be false representations.  Recently, the Texas Supreme Court repeated this rule in the case of Italian Cowboy Partners, Ltd. v. Prudential Ins., 341 S.W.3d 323 (Tex. 2011).  But, in Italian Cowboy, like most fraud cases involving opinions, the Texas Supreme Court went on to discuss the exceptions, which arguably swallow the rule. 

 
While it may appear at first blush that opinions won’t often create liability for fraud, the safe harbor for opinion is pretty cramped.  The first indication that opinions received little protection is that the general rule protects “pure opinions”.  The word “pure” is a close kin to works like “always” and “never”, and most of us have come to realize that “always” or “never” almost always never happen.  In the real world, purity is not so much a condition we encounter but an ideal we might seek.  Like perfection, it is a pursuit, not something that is attainable.
 
The next problem with this general rule is that sometimes it’s difficult to determine whether a statement is a statement of opinion or fact.  Webster’s definition of opinion is “a belief stronger than an impression and less strong than positive knowledge.”  Most of the time, Courts appear to follow this definition of opinion as is illustrated by the fact that courts group opinion statements with judgments, probabilities, and expectations.  See, Ryan v. Collins, 496 S.W.2nd 205, 210, 1973 Tex. App. LEXIS 2888 Tex. Civ. App. Tyler 1973 (in order to constitute actionable fraud [a] representation … must concern a material fact as distinguished from a mere matter of opinion, judgment, probability or expectation).   By putting opinions in a group with judgments, probabilities, and expectations, courts appear to be emphasizing that statements made about matters that fall short of positive knowledge are not actionable.  However, as stated above, the exceptions make the rule almost meaningless.
 
The major exceptions to the rule that opinions cannot be false representations are as follows: 1) opinions the speaker knows to be false; 2) opinions mixed with false statements of fact; 3) and opinions based on special knowledge.  The first exception presents the most difficulty for defendants.  In order to avoid the expense of trial, the accused is put in the position having to prove that although their opinion was wrong (or else there would have been no lawsuit) you didn’t know it at the time.  This situation is similar to having to prove a negative; its’s difficult if not impossible to do.
 
The second exception, if fairly self-explanatory and should be unnecessary.  When you express an opinion that is mixed with statements of fact that are false, that fact that you were expressing an opinion about the false facts does provide you with any protection.
 
The final major exception, is opinions based on special knowledge.  In this context, special knowledge means knowledge of specific facts that underlie the false opinion.  However, courts appear to often confuse special knowledge with special expertise such as medical, legal, or engineering expertise.  In practice, this exception often makes it difficult for those accused of fraud to avoid a trial or liability where they are significantly more sophisticated than the other party to the transaction.  The greater the difference in the parties sophistication; the greater the problem for defendant.
 
As I hope this article has shown, bad opinions can cause as much trouble as bad facts.  In order to reduce the chances of being sued for fraud in the event opinions turn out to be wrong, I have three suggestions.  First, make it clear when you are expressing an opinion.  You can do with phrases such as “in my opinion” or “I believe”.  Second, make sure you have your facts straight.  Especially when dealing with real estate or stock, false statements of fact can create liability even if you honestly believed them at the time.  If you opinions are mixed with or based on bad facts, your opinions won’t receive much, if any, protection from our courts.  Finally, as much as possible, when you are in a major transaction, give the party you are dealing with access to the same information you have, give them the opportunity to review it for themselves, and encourage them to look at it themselves.  Giving people access to the information you used to form your opinions, gives you the best chance to avoid liability if your opinions turn out to be wrong.  
 
Samuel B. Burke is board certified in Civil Trial Law by the Texas Board of Legal Specialization.  Sam can be reached at burke@dentonlaw.com and http://www.dentonlaw.com.
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Sellers Disclosures

With the economy beginning to pick up, new housing starts and sales of existing homes seem to be on the upswing as well.  It is important to know what duties the seller has in disclosing the physical condition of a home, and to what extent a buyer may rely upon such disclosures in purchasing real property.  Depending on the type of property being sold, commercial, residential, farm & ranch, unimproved, etc…., the required disclosures vary to some extent.  This article will solely focus on the required disclosures involved in the sale of residential real estate.

“Residential real estate” is defined as a single dwelling unit of residential real property located in Texas.  Section 5.008 of the Texas Property Code governs a seller’s duty to disclose the condition of residential real estate.  You may review the promulgated disclosure form on the Contract Forms tab of the Texas Real Estate Commissioner’s website found at http://www.trec.state.tx.us.

The disclosures required by Section 5.008, include (1) the presence and condition of equipment, fixtures and improvements; (2) the presence or absence of working smoke detectors; (3) defects in walls, foundations, plumbing, electrical, or other major components of the property, including “structural” components; (4) potential problems with termite damage, flooding, aluminum wiring, asbestos, or lead-based paint; (5) whether any item, equipment, or system is in need of repair; and (6) other items affecting the property such as alterations or repairs made without permits or non-compliance with codes, deed restrictions, common areas, and lawsuits.

For “lawsuits”, Section 5.008 only requires the disclosure of “pending” lawsuits at the time the disclosure is made, and does not require disclosure of previous suits which have been dismissed, settled, or completed through final judgment.

Disclosure of “structural” repairs includes any repairs performed to the load-bearing portion of a residence, and includes the foundation, walls, and roof. Repairs to cabinets, sinks, bathroom fixtures, and drywall not caused by a failure in the structural portion of the residence are not required to be disclosed as “structural” repairs.  Other areas of Section 5.008 may require the disclosure of repairs for those items.

A seller is not required to disclose to a potential buyer any deaths on the property that are unrelated to a physical condition associated with the property, or AIDS or HIV-related health problems of previous occupants.

The seller’s disclosure notice must be completed to the best of the seller’s knowledge and belief as of the date of completion and signature.  If there are items, components, or repairs which are not known by the seller on that date and time, the seller must indicate that fact.  There is no legal obligation of a seller to conduct an investigation into matters of which the seller has no knowledge nor any continuing obligation to disclose matters that are later discovered.  Also, a seller’s disclosure notice is not a warranty or guarantee by the seller of the physical condition of the property or dwelling.

However, particular attention should be paid to the form of the disclosure notice being used.  Some residential real estate sales contracts promulgated by real estate trade associations may include disclosures which go beyond those required by Section 5.008.  It is important to read each form of disclosure closely and make sure that each response is true and correct at the time and date such is being made.  Although not required by law, supporting documentation of any disclosed defect or repair may assist the seller in later defending against allegations of misrepresentation or deceptive trade practices.

Also, unless the real estate agent or broker has actual knowledge of a misrepresentation contained in the seller’s disclosure notice and fails to bring such to the attention of the buyer or the buyer’s agent, a seller’s real estate agent or broker is not legally responsible for any misrepresentations made by the seller in its disclosure notice.

Certain types of residential real estate sales transactions are exempted from providing a disclosure notice.  These include (1) court ordered sales; (2) transfers by a bankruptcy trustee; (3) deeds in lieu of foreclosure; (4) judicial and non-judicial foreclosure sales; (5) sales by a fiduciary or administrator of a decedent’s estate, guardianship, conservatorship, or trust; (6) transfers between co-owners; (7) transfers to a spouse or heir; (8) transfers incident to a divorce; (9) transfers to or from a governmental entity; (10) new residences which have not been previously occupied; and (11) where the value of the dwelling does not exceed five percent of the value of the property.

Finally, where a seller fails to provide a disclosure notice to a buyer, the buyer’s sole remedy is to terminate the contract for any reason within seven days from buyer’s receipt of the notice.

R. Scott Alagood is board certified by the Texas Board of Legal Specialization in both Commercial and Residential Real Estate Law and may be reached at alagood@dentonlaw.com or www.dentonlaw.com.

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