Real estate fraud is so prevalent in Texas that our lawmakers enacted an individual statute dedicated to defining fraud, and setting forth the remedies available to victims. The statute is often overlooked because it is not in the Texas Property Code, but rather, is nestled away in Chapter 27 of the Texas Business & Commerce Code.
The statute -- located at Section 27.01 of the Texas Business & Commerce Code -- was originally adopted in 1967, but amended in 1983 to provide more "teeth." Violations of the statute are frequently referred to as acts of "statutory fraud," in contrast to more "traditional" types of fraudulent representations, which are generally characterized as "common law fraud." Many lawsuits arising from fraudulent behavior in a real estate transaction (whether by active misrepresentation or failure to disclose) allege both "common law fraud" and "statutory fraud."
Section 27.01(a) defines fraud "in a transaction involving real estate (or stock...)" as consisting of:
(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
(2) 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.
As is clear from the plain language of subsection (a), the statute is implicated only in those instances where falsehood is material, made for the purposes of inducing entry into a contract, and actually results in entry into a contract involving real estate.
Subsection (b) declares that a person "who makes a false representation or false promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for actual damages." Though not referenced in the statute, Texas law defines "actual damages" as both "direct" and "consequential" damages. Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex.1997); Henry S. Miller Co. v. Bynum, 836 S.W.2d 160, 163 (Tex.1992) (Phillips, C.J., concurring).
Subsection (c) applies to situations where a person commits fraud (as defined in subsection (a)) "with actual awareness," and prescribes "exemplary damages" (also commonly referred to as "punitive damages") for such conduct. Subsection (c) further provides that "actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness." This reduces the victim's burden of proving the mindset of the fraudster.
Subsection (d) contains what I like to call a "derivative liability element," meaning that fraud can also occur by knowing complicity with another person's fraudulent conduct. This subsection provides that "a person who (1) has actual awareness of the falsity of a representation or promise made by another person and (2) fails to disclose the falsity of the representation or promise to the person defrauded, and (3) benefits from the false representation or promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages." As with subsection (c), "actual awareness" of someone else's fraud under subsection (d) "may be inferred where objective manifestations indicate that a person acted with actual awareness."
Subsection (e) of the statute contains some of the real "teeth" and allows a victim who has been defrauded under the statute to recover the following damages (in addition to the damages defined in subsections (a-d))
- reasonable and necessary attorney's fees
- expert witness fees
- costs for copies of depositions, and
- costs of court.
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