Interplay of Limitations and Imputed Notice (Based on Public Deed Records) in Real Estate Fraud / DTPA Claims

Trey Wilson San Antonio Texas Real Estate Attorney, Trey Wilson Real Estate Lawyer in San Antonio wrote:

THE RECORDING STATUTE 

Texas law provides for a comprehensive statutory recording system which provides in part that “[a]n instrument ... properly recorded in the proper county is notice to all persons of the existence of the instrument.” TEX. PROP. CODE ANN. § 13.002. 

The statute makes sense because purchasers of real estate are -- or definitely should be -- on notice of the contents of the deed history/ chain of title of property that they have purchased. Often, this notice arises from a title search performed as part of a closing.

THE STATUTE IS NO DEFENSE TO REAL ESTATE FRAUD

The recording statute has often, but unsuccessfully, been asserted as a defense in claims against a Seller of real property.  The defensive theory is generally something akin to:

"If the Plaintiff would have searched the deed records, he would have known that I did not... [own all of the land that I purported to transfer to him under our contract]or [disclose the fact that I had conveyed the property to somebody else] or [disclose the easement running through the property], etc., etc."

Despite the plain language of the recording statute, Texas courts have very rarely -- if ever - held that a purchaser’s failure to search the deed records would bar his fraud action against the seller. See Graham v. Roder, 5 Tex. 141, 147 (1849) (fraud and deceit action maintainable despite fact that plaintiff “did not go to the records, the proper source for information”); Buchanan v. Burnett, 102 Tex. 492, 119 S.W. 1141 (1909); Ojeda de Toca v. Wise, 748 S.W.2d 449 (Tex. 1988) (imputed notice under the real property recording statutes does not operate as a defense to a buyer’s action for damages arising out of deceptive trade practices). Instead, Courts have stated that the purpose of this "recording statute" is "to notify subsequent purchasers ... and not to give protection to perpetrators of fraud” See Boucher v. Wallis, 236 S.W.2d 519, 526 (Tex. Civ. App.— Eastland 1951, writ ref’d n.r.e.).

GENERAL STATEMENT OF THE LAW

Thus, it can fairly be stated that the law is currently as follows: In Texas, the existence of a recorded instrument (deed, easement, etc.) in real property records does not, in and of itself, bar a claim arising from fraud or deceptive trade practices related to the property made the subject of the instrument.  That is, imputed notice arising from the deed records does not constitute a direct defense against a real estate fraud or DTPA claim.

However, the implications of a recorded instrument on whether a real estate fraud claim is barred by limitations -- and when a cause of action accrues -- are far more dicey.  

RECORDING STATUTE AND LIMITATIONS

In Scott vs. Furrow (Opinion delivered March 9, 2016), the Fourth Court of Appeals recently addressed the interplay of the recording statute and statutes of limitations in the context of a Buyer's claim that a Seller of real estate and that Seller's broker had engaged in misrepresentations related to the waterfront character of  property in Seguin, Texas.

After a detailed analysis of established case law reflecting the General Statement of Law provided above in this post, the 4th Court concluded that, while the Texas Supreme Court's holding in Wise prevents a defendant from using imputed notice from the deed records as a direct defense against a DPTA claim, that Defendant could rely upon the deed records to establish when a plaintiff should have discovered a claim for limitations purposes. 

In reaching this conclusion, the 4th Court relied on Am. Homeowner Pres. Fund, LP v. Pirkle, No. 02-14-00293-CV, 2015 WL 5173066, at *9 n.11 (Tex. App.—Fort Worth Sept. 3, 2015, pet. filed) (citing Wise to note that failure to search deed records would not preclude fraud claim by purchaser but further noting limitations on such a claim would begin to run immediately because the purchaser was on notice of the deed records for purposes of limitations), Sherman v. Sipper, 152 S.W.2d 319 (Tex. 1941) (fraud will prevent the running of a statute of limitation only until such time as the fraud is discovered, or by the exercise of reasonable diligence it might have been discovered).

The Fourth Court also reconciled their decision with the Texas Supreme Court’s more recent holding in Ford v. Exxon Mobil Chem. Co, in which a plaintiff sued for real estate fraud, but -- in addressing a statute of limitations defense -- the Texas Supreme Court held constructive notice from the deed records provided sufficient notice for limitations to immediately begin to run. 

THE TAKE-AWAY

The take-away form the 4th Court's opinion in Scott vs. Furrow is this: A Plaintiff with a right in real property is not excused by another's fraud from reviewing open and available title records that reveal a title defect, and timely discovering such defect. Even in the face of fraudulent misrepresentation, a Plaintiff must exercise reasonable diligence to discover a title defect, and where -- by the exercise of such diligence he could have discovered such defect and would have known of his right -- he is legally presumed by the recording statute to have known it, and limitation will run against his claim from the time he could have made such discovery by the exercise of ordinary diligence.

SELLER'S DUTY TO DISCLOSE PROPERTY CONDITION IS ONGOING UNDER TEXAS COURT RULING

Trey Wilson San Antonio Texas Real Estate Attorney, Trey Wilson Real Estate Lawyer in San Antonio wrote:

I have written many times about the obligation of a Seller of residential real estate in Texas to disclose, in writing, material facts about the condition of property being sold. This obligation has been codified at Section 5.008 of the Texas Property Code, which requires the disclosures to be written, signed by the Seller, and delivered to the Buyer at or prior to closing of a purchase/sale of real estate. 

Section 5.008(d) expressly requires the disclosure notice to be "completed to the best of the Seller's belief and knowledge as of the date the notice is completed by the Seller."

Under the plain language of Section 5.008, it may appear that, so long as the disclosures are true when completed by the Seller and delivered to the Buyer, the Seller has fully complied with his legal obligations.  A recent (2014) court decision from the 11th Court of Appeals of Texas warns that this is not the case, and that a Seller has an ongoing duty to disclose conditions that occur following the date that the disclosures are completed by the Seller, and which render the disclosures to be incomplete or untrue.

In that case, Domel v. Birdwell, the Eastland Court of Appeals considered damages caused by a hail storm and flooding that had occurred after the Seller's completion of the required disclosures, but before the time that the Seller delivered such disclosures to the Buyer. 

The Seller failed to update the disclosures, which denied flooding, roof damage and insurance claims -- none of which had occurred when the disclosures were completed the year before the sale.   However, by the time that the ultimate Buyer came along, these events had all occurred, and the Seller simply delivered the "old" disclosures without updating them to include the flood and roof damages.

Among many unsuccessful arguments made by the Seller  was a claim that the statutory duty of disclosure -- and Section 5.008 in particular -- contains no obligation to update information.  While technically true if one were to read Section 5.008(d) in a vacuum, this argument failed.

Instead,  the Court found that a common-law obligation to update information arises from the fact that the earlier representation -- even if true when made -- becomes untrue and only "partial" based upon the new development.  That is, when one makes a representation, he has a duty to disclose new information when he is aware the new information makes the earlier representation misleading or untrue.  Untrue and partial representations are actionable under Texas law.

Here's another informative excerpt from the case:

In addition, as the Prudential court and several other Texas courts have noted, a general duty to disclose information in an arm's-length business transaction may arise when a party makes a partial disclosure that, although true, conveys a false impression. Prudential Ins., 896 S.W.2d at 162; see, e.g., Bradford,48 S.W.3d at 755-56; Hoggett v. Brown, 971 S.W.2d 472, 487 (Tex. App.-Houston [14th Dist.] 1997, pet. denied); Ralston Purina, 850 S.W.2d at 636. 

A corollary principle is that, when there is a duty to speak, silence may be as misleading as a positive misrepresentation of existing facts. Smith, 585 S.W.2d at 658 (citing Rowntree v. Rice, 426 S.W.2d 890 (Tex. Civ. App.-San Antonio 1968, writ ref'd n.r.e.)). Silence, therefore, can be equivalent to a false representation when there is a duty to speak and the party deliberately remains silent. Bradford, 48 S.W.3d at 755; SmithKline Beecham Corp. v. Doe, 903 S.W.2d 347, 353 (Tex. 1995); Smith, 585 S.W.2d at 658.

Since the Texas Supreme Court has declined to review the Birdwell case, the Eastland Court's holding will not be disturbed, and Sellers and their agents should be aware of the duty to update disclosures based on changed conditions.

Fraudulent Deeds...Can they be Set-Aside by Courts?

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Recently, I completed the successful defense of a client whose elderly parent had sued them to set-aside a years old deed to real estate in San Antonio on grounds of fraud.  

The fraud allegations in that case were unique, in that the parent was alleging fraud in the inducement, as opposed to fraud in securing the deed, or outright forgery. The parent alleged in the lawsuit that, even though the parent had knowingly and intentionally signed the deed in favor of the child, this conveyance was in consideration for a promise by the child (which was allegedly false at the time it was made) that such child would care for the parent for life.  

When the parent determined that the child wasn't doing a good enough job as a caretaker, suit was filed in an effort to have the Court determine that the deed was void, and should be set-aside.  Although the case was resolved quickly, in our client's favor, our research revealed some important points of law that are worth re-producing here.

First, deeds procured by fraud are voidable only, not void, at the election of the grantor.  

Second, it is well-settled law in Texas that a properly executed, notarized and recorded deed  (if if such deed is alleged to be fraudulent) is valid and represents prima facie evidence of title until there has been a successful suit to set it aside. See Meiners v. Texas Osage Cooperative Royalty Pool, 309 S.W.2d 898 (Tex. Civ.App. — El Paso 1958, writ ref'd n. r. e.); Whalen v. Richardson, 353 S.W.2d 941 (Tex. Civ.App. — Amarillo 1962, n. w. h.). To the same effect is Deaton v. Rush, 113 Tex. 176, 252 S.W. 1025 (1923), wherein the court stated that: A deed obtained by fraud is not void but voidable only. As between the original parties [Defendant's] title is prima facie good, and it could only be avoided by a suit and a decree annulling and canceling the deed.

Third, it is a fundamental rule of law that only the person whose primary legal right has been breached may seek redress for an injury. As such, a suit to set aside a deed obtained by fraud can only be maintained by the defrauded party. Smith v. Carter, 45 S.W.2d 398 (Tex.Civ.App. — Texarkana 1932, writ dism'd); Meiners v. Texas Osage Cooperative Royalty Pool, supra. A party who was not defrauded by the conveyance has not suffered an invasion of a legal right and therefore does not have standing to bring suit based on that fraud.

Fourth, at least one Texas Court of Appeals has allowed to stand a Judgment issued by a Texas District Judge setting aside a deed based upon an alleged false promise by the grantee to care for the grantor "for the rest of his life." Williams v. Kaufman, 275 SW 3d 637 (Tex.App. --Beaumont) 2009

While it appears that setting aside a deed based upon fraud in the inducement may be tough, and somewhat uncommon, deeds secured by forgery and other fraudulent artifices are more common. An individual involved in a dispute over a fraudulent deed should consult with an experienced real estate attorney to explain the law and discuss possible outcomes.

SA Appeals Court Reverses Real Estate Fraud/DTPA Judgment Favoring Buyer of Apartment Complex

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

On January 8, 2014, San Antonio's Fourth Court of Appeals reversed a $400,000+ verdict rendered in favor of the purchaser of the Woodlake Village Apartments against the seller of that real property.

The underlying verdict, entered by the Bexar County District Court in a 2007 lawsuit, found that the prior owner/Seller of the complex had engaged in statutory fraud in a real estate transaction, and had violated the Texas Deceptive Trade Practices Act ("DTPA") by making misrepresentation's about the condition of the complex' roof.

On appeal, the Fourth Court determined that the DTPA's express disclaimer of applicability to transactions where the consumer paid more than $500K for real estate other than their residence barred recovery on the DTPA claim. In reversing any recovery on the Buyer's DTPA claim, the Court cited evidence in the record demonstrating that  (i) the Buyer purchased a apartment complex (as opposed to his home); (ii) for a purchase price of $1.85 million. Author's Note:  TEX. BUS. & COMM. CODE ANN. § 17.49(f)) provides: “Nothing in this subchapter shall apply to a cause of action arising from a transaction . . . involving total consideration by the consumer of more than $500,000, other than a cause of action involving a consumer’s residence.” 

The court next considered the Seller's appellate claim that there existed no evidence that the Buyer, in consummating the purchase, relied upon any representation by the Seller concerning the roof. In his suit, the Buyer alleged that the Seller had committed statutory fraud under Texas Business and Commerce Code section 27.01. That statute provides: 

(a) Fraud in a transaction involving real estate . . . consists of a
(1) false representation of a past or existing material fact, when the false representation is
(A)made to the 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 . . . 

TEX. BUS. & COM. CODE. ANN. § 27.01(a). “Fraud under section 27.01 requires evidence that the defendant made a false representation to the plaintiff that induced the plaintiff to enter into a real estate contract to his or her detriment.” Martin v. New Century Mortg. Co., 377 S.W.3d 79, 86 (Tex. App.—Houston [1st Dist.] 2012, no pet.); see TEX. BUS.&COM. CODE. ANN. § 27.01(a). Reliance is an essential element of a statutory fraud claim. TEX. BUS.&COMM.CODE § 27.01(a); see Van Marcontell v. Jacoby, 260 S.W.3d 686, 691 (Tex. App.—Dallas 2008, no pet.). 

The Court cited the following facts/evidence in determining that there existed no/insufficient evidence that the Buyer had relied on any false representation of the Seller in connection with the roof:

•  Prior to closing, the Seller delivered expense reports to the Buyer's real estate agent that di not contain entries for roof repairs;
• The Seller admitted to patching the roof himself;
• The Buyer personally saw the condition of the roof prior to closing
• The Buyer obtained a property inspection report prior to closing that identified issues and problems with the roof;
• The purchase/sale contract entered by the parties contained a "present condition clause" (also referred to as an "AS IS clause"); and
• The purchase price of the property was reduced by a contract amendment after the Buyer performed his walk-through.

The court characterized this evidence as conclusively establishing "the opposite of a vital fact (reliance)," and found that there was no-evidence to support the trial court's finding of statutory fraud.  Thus, the trial court's decision was reversed, and the case was remanded for consideration of the amount of attorneys' fees to be awarded to the Seller under the parties' contract, which provided for an award of fees to the periling party in litigation.

In reaching its conclusion, the Court cited Regal Finance Co., 355 S.W.3d at 603 (citing City of Keller, 168 S.W.3d at 815–16); see also Lesieur v. Fryar, 325 S.W.3d 242, 249 (Tex. App.—San Antonio 2010, pet. denied) (holding recovery for fraud was precluded when plaintiff obtained a pre-purchase inspection that detailed the same foundation problems they alleged defendants misrepresented in sale of home). 

The Fourth Court's full Opinion is available here.