How to prove fraud in the inducement of sale-purchase agreement

ELEMENTS OF FRAUD Standards to prove fraud, fraudulent inducement of contract A party commits fraud by (1) making a false, material representation (2) that the party either knows to be false or asserts recklessly without knowledge of its truth (3) with the intent that the misrepresentation be acted upon, (4) and the person to whom the misrepresentation is made acts in reliance upon it and (5) is injured as a result. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); All Am. Tel., Inc. v. USLD Commc’ns, Inc., 291 S.W.3d 518, 527 (Tex. App.—Fort Worth 2009, pet. denied). MATERIALITY OF THE FRAUDULENT REPRESENTATION A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question. Miller v. Kennedy & Minshew, Prof’l Corp., 142 S.W.3d 325, 345 (Tex. App.—Fort Worth 2003, pet. denied). Materiality thus centers on whether a reasonable person would attach importance to and would be induced to act on the information in determining his choice of actions in the transaction in question. Burleson State Bank v. Plunkett, 27 S.W.3d 605, 613 (Tex. App.—Waco 2000, pet. denied). Proof that a defendant made a statement knowing of its falsity or without knowledge of its truth may be proved by either direct or circumstantial evidence. Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 526 (Tex. 1998). Intent may be inferred from a party’s actions before and after the fraudulent conduct and may also be established by either direct or circumstantial evidence. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434–35 (Tex. 1986). A defendant who acts with knowledge that a result will follow is considered to intend the result. Ernst & Young, L.L.P., 51 S.W.3d at 579. DETRIMENTAL RELIANCE BY DECEIVED PARTY The plaintiff must show actual and justifiable reliance on the misrepresentation. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010). To determine justifiability, courts inquire whether, “given a fraud plaintiff’s individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[,] it is extremely unlikely that there is actual reliance on the plaintiff’s part.” Id. (quoting Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014, 1026 (5th Cir. 1990)). In other words, a person may not justifiably rely on a representation if there are “red flags” indicating such reliance is unwarranted. Id. (quoting Lewis v. Bank of Am. NA, 343 F.3d 540, 546 (5th Cir. 2003)); see Gen. Motors Corp., Pontiac Motor Div. v. Courtesy Pontiac, Inc., 538 S.W.2d 3, 6 (Tex. Civ. App.—Tyler 1976, no writ) (citing Prosser on Torts for the contention that a person of ordinary intelligence may not “put faith in representations which any such normal person would recognize at once as preposterous . . . or which are shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth”). REMEDIES FOR FRAUDULENT INDUCEMENT OF CONTRACT “[I]t is well settled that one who is induced by fraud to enter into a contract has his choice of remedies. ‘He may stand to the bargain and recover damages for the fraud, or he may rescind the contract, and return the thing bought, and receive back what he paid.’” Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 10, 307 S.W.2d 233, 238–39 (Tex. 1957). We agree with Hannon’s observation that “rescission was the remedy sought to be crafted by the court in this case.” Rescission is an equitable remedy that extinguishes legally valid contracts that must be set aside because of, among other things, fraud. City of The Colony v. N. Tex. Mun. Water Dist., 272 S.W.3d 699, 732 (Tex. App.—Fort Worth 2008, pet. dism’d). Upon rescission, the rights and liabilities of the parties are extinguished; any consideration paid is returned, together with such further special damage or expense as may have been reasonably incurred by the party wronged; and the parties are restored to their respective positions as if no contract had ever existed. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 855 (Tex. App.—Houston [14th Dist.] 2001, pet. denied); see Johnson v. Cherry, 726 S.W.2d 4, 8 (Tex. 1987); Smith v. Nat’l Resort Cmtys. Inc., 585 S.W.2d 655, 660 (Tex. 1979); Holt v. Robertson, No. 07-06-00220-CV, 2008 WL 2130420, at *6 (Tex. App.—Amarillo May 21, 2008, pet. denied) (mem. op.). While a trial court may not grant relief to a party in the absence of pleadings to support that relief, Texas courts have traditionally construed pleadings liberally, and in the case of rescission, at least one court has held that “factual allegations in the petition, coupled with a prayer for general relief, are sufficient to support a decree granting rescission.” Green Tree Acceptance, Inc. v. Pierce, 768 S.W.2d 416, 421 (Tex. App.—Tyler 1989, no writ); see Tex. R. Civ. P. 301. Moreover, when the claims and defenses are those which contemplate a particular remedy, a party may be entitled to that remedy despite a failure to specifically plead for such relief. See Perez v. Briercroft Serv. Corp., 809 S.W.2d 216, 218 (Tex. 1991). SOURCE: Fort Worth Court of Appeals - 02-10-00012-CV - May 12, 2011

Unambiguous Contract enforced as written

CONTRACT CONSTRUCTION PRINCIPLES: AMBIGUOUS VS. UNAMBIGUOUS CONTRACT LANGUAGE Unambiguous Contract given effect & enforced as written: as a matter of law The interpretation of an unambiguous contract is a question of law for the court. MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 650-51 (Tex. 1999). The court's primary concern in interpreting a written contract is to determine the mutual intent of the parties as manifested in the contract. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). The parties' intent must be taken from the agreement, and the agreement must be enforced as written. Wells Fargo Bank, Minn., N.A. v. N. Cent. Plaza I, L.L.P., 194 S.W.3d 723, 726 (Tex. App.-Dallas 2006, pet. denied). We favor an interpretation that affords some consequences to each part of the agreement so that none of the provisions will be rendered meaningless. Coker, 650 S.W.2d at 394. Unless the agreement shows that the parties used a term in a technical or different sense, we give the terms their plain, ordinary, and generally accepted meaning. Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996). Under generally accepted principles of contract interpretation, all writings that pertain to the same transaction will be considered together, even if they were executed at different times and do not expressly refer to one another. DeWitt Cnty. Elec. Co-op., Inc. v. Parks, 1 S.W.3d 96, 102 (Tex. 1999). This rule, however, is a device for ascertaining and giving effect to the intention of the parties and cannot be applied arbitrarily. Id. SOURCE: Dallas Court of Appeals - 05-09-00586-CV - 5/18/11

How does Fraudulent Inducement Cause of Action differ from Fraud?

FRAUDULENT INDUCEMENT DEFINED:

The fraud / fraudulent conduct must be relevant to contract-formation. “Fraudulent inducement . . . is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties.” Haase v. Glazner, 62 S.W.3d 795, 798–99 (Tex. 2001).

Detrimental reliance by Plaintiff on deliberate falsehood by Defendant The elements of fraud are that a material representation was made, the representation was false, the speaker knew the statement was false when made, the statement was made to induce reliance, it did induce reliance, the reliance was justifiable, and the relying party suffered injury as a result. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010); Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 774 (Tex. 2009). [A] party who has actual knowledge of specific facts cannot have relied on a misrepresentation of the same facts. See Camden Mach. & Tool, Inc. v. Cascade Co., 870 S.W.2d 304, 311 (Tex. App.—Fort Worth 1993, no writ) (stating, in case where seller failed to disclose prior foundation repair but buyer discovered foundation settling in independent investigation, “When a person makes his own investigation of the facts, and knows the representations are false, he cannot, as a matter of law, be said to have relied upon the misrepresentations of another.”). The issue, then, is whether the [ name of litigants ] presented any evidence of reliance to support their claim for fraudulent inducement. See Grant Thornton, 314 S.W.3d at 923 (reliance is necessary element of fraud claims); Aquaplex, 297 S.W.3d at 774 (same). In the context of fraudulent inducement, this requires evidence that the claimant would not have entered into the contract but for the alleged misrepresentation or fraudulent nondisclosure. See ISG State Operations, Inc. v. Nat’l Heritage Ins. Co., 234 S.W.3d 711, 716 (Tex. App.—Eastland 2007, pet. denied) (stating that ordinary detrimental reliance is not sufficient to support fraudulent inducement claim; claimant must show that it was induced into executing contract) (citing Haase, 62 S.W.3d at 798); Procter v. RMC Capital Corp., 47 S.W.3d 828, 834 (Tex. App.—Beaumont 2001, no pet.) (holding that home buyer seeking to avoid effect of “as is” clause on basis of fraudulent inducement must put forth some evidence that he would not have assented to “as is” clause in contract but for seller’s misrepresentations about property condition at issue); see also Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 12–13, 307 S.W.2d 233, 240 (1957) (adopting the rule: “If one is induced to go through the form of making a contract because of some fraud or misrepresentation made by the other party or his agent, relative to a material element of the agreement, such that if he had known the truth he would not have given his assent, the contract may be avoided by him.”) (quoting 1 Elliot on Contracts § 70 (1913), emphasis added). SOURCE: Houston Court of Appeals – 01-10-00492-CV – 5/19/11

RELATED LEGAL TERMS: fraud vs. fraudulent inducement of contract, fraudulent misrepresentation, fraudulent concealment, failure to disclose material fact,

May Parol Evidence be considered in interpreting a contract?

CONTRACT CONSTRUCTION AND THE PAROL EVIDENCE RULE When is parol evidence [verbal, oral, affidavit testimony] proper in contract construction? The construction of an unambiguous contract is a question of law for the court to determine. MCI Telecomms. Corp. v. Tex. Util. Elec. Co., 995 S.W.2d 647, 650 (Tex. 1999). An unambiguous contract will be enforced as written, and parol evidence will not be received for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports. David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450 (Tex. 2008) (citing Universal C.I.T. Credit Corp. v. Daniel, 243 S.W.2d 154, 157 (Tex. 1951)). What is the role of extraneous evidence (outside the four corners of the contract)? Only where a contract is ambiguous may a court consider the parties’ interpretation and admit extraneous evidence to determine the true meaning of the instrument. Haden, 266 S.W.3d at 450 (citing Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex.1995)). SOURCE: Houston Court of Appeals - 01-09-00856-CV – 5/19/11 RELATED TERMS AND PHRASES: contract interpretation, construction, enforcement - parol [ not parole ] evidence rule - not the best evidence objection - explaining what the contract language means

Breach of fiduciary duty based on informal vs formal relationship

BREACH OF FIDUCIARY DUTY: FORMAL AND INFORMAL RELATIONSHIPS GIVING RISE TO DUTY

To recover on a breach of fiduciary duty claim, the plaintiff must first establish the existence of a duty, that is, the existence of a fiduciary relationship. See Meyer v. Cathey, 167 S.W.3d 327, 330–31 (Tex. 2005) (discussing interchangeably whether fiduciary relationship exists and whether fiduciary duty existed); Priddy v. Rawson, 282 S.W.3d 588, 599 (Tex. App.—Houston [14th Dist.] 2009, pet. denied) (identifying first element of fiduciary duty claim as existence of fiduciary relationship and second element as breach of duty created by that relationship).

There are two categories of fiduciary relationships. Meyer, 167 S.W.3d at 330–31; Priddy, 282 S.W.3d at 599. The first is a formal fiduciary relationship, such as attorney-client, principal-agent, and trustee-beneficiary relationships, as well as partners in a partnership. Chapman Children’s Trust v. Porter & Hedges, L.L.P., 32 S.W.3d 429, 439 (Tex. App.—Houston [14th Dist.] 2000, pet. denied). The second is an informal fiduciary relationship, “where one person trusts in and relies on another, whether the relation is a moral, social, domestic, or purely personal one.” Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 176 (Tex. 1997). This second category is also known as a “confidential relationship.” Chapman Children’s Trust, 32 S.W.3d at 439.

Kelly’s live petition asserted a claim for breach of a partnership agreement. This claim was not submitted to the jury, however. Accordingly, it has been waived. See Tex. R. Civ. P. 279 (providing “[u]pon appeal all independent grounds of recovery or of defense not conclusively established under the evidence and no element of which is submitted or requested are waived”). For purposes of this appeal, then, there was no partnership agreement between the parties and, by extension, no formal fiduciary relationship based on any such partnership.

A fiduciary relationship is an extraordinary one and will not be lightly created. Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App.—Houston [14th Dist.] 1997, pet. denied). “It is well settled that ‘not every relationship involving a high degree of trust and confidence rises to the stature of a fiduciary relationship.’” Meyer, 167 S.W.3d at 330 (quoting Schlumberger, 959 S.W.2d at 176–77). “A person is justified in placing confidence in the belief that another party will act in his or her best interest only where he or she is accustomed to being guided by the judgment or advice of the other party, and there exists a long association in a business relationship, as well as personal friendship.” Hoggett, 971 S.W.2d at 488.

Additionally, courts remain cautious to create informal fiduciary relationships in business arrangements.

The fact that one businessman trusts another, and relies upon his promise to perform a contract, does not rise to a confidential relationship. Every contract includes an element of confidence and trust that each party will faithfully perform his obligation under the contract. Neither is the fact that the relationship has been a cordial one, of long duration, evidence of a confidential relationship.Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594–95 (Tex. 1992), superseded by statute on other grounds as noted in Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 225–26 (Tex. 2002).

Courts review a variety of facts for determining whether an informal fiduciary relationship exists. The overarching consideration, however, is the nature of the relationship between the parties. See Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex. 1962) (holding “[t]he existence of the fiduciary relationship is to be determined from the actualities of the relationship between the persons involved”).

In reviewing the relationship between the parties, one factor we consider is whether the party claiming to be owed a fiduciary relationship justifiably placed special confidence in the other party to act in his best interest. See Trostle v. Trostle, 77 S.W.3d 908, 915 (Tex. App.—Amarillo 2002, no pet.) (holding, to establish fiduciary relationship, evidence must demonstrate plaintiff actually relied on purported fiduciary “for moral, financial, or personal support or guidance”); Lee v. Hasson, 286 S.W.3d 1, 14–15 (Tex. App.—Houston [14th Dist.] 2007, pet. denied) (same). An informal fiduciary relationship requires proof that, because of a close or special relationship, the plaintiff “is in fact accustomed to be guided by the judgment or advice” of the other. Thigpen, 363 S.W.2d at 253.

SOURCE: Houston Court of Appeals – NO. 01-09-00685-CV – 5/19/11

Liquidated Damages vs. Unenforceable Penalty

ARE LIQUIDATED DAMAGES CLAUSES ENFORCEABLE? – STIPULATED DAMAGES OR UNENFORCEABLE PENALTY?

“The term 'liquidated damages' ordinarily refers to an acceptable measure of damages that parties stipulate in advance will be assessed in the event of a contract breach.” Flores v. Millenium Interests, Ltd., 185 S.W.3d 427, 431 (Tex. 2005); see also Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 664 (Tex. 2005) (“[l]iquidated damages clauses fix in advance the compensation to a party accruing from the failure to perform specified contractual obligations”). Whether a contract term is a liquidated damages clause is a question of law for the court. Valence Operating Co., 164 S.W.3d at 664.

If a court determines that a contract term is a liquidated damages clause, the court may then determine whether the clause is enforceable, or whether it is an unenforceable penalty. The policy underlying the prohibition against penalties is to ensure that a party to a contract receives “just compensation,” that is, “neither more nor less than his actual damages.” Phillips, 820 S.W.2d at 788 (quoting Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 485-86 (1952)). In order to enforce a liquidated damages provision and determine the provision is not a penalty, “the court must find: (1) that the harm caused by the breach is incapable or difficult of estimation, and (2) that the amount of liquidated damages called for is a reasonable forecast of just compensation.” Phillips, 820 S.W.2d at 788 (quoting Rio Grande Valley Sugar Growers, Inc. v. Campesi, 592 S.W.2d 340, 342 n.2 (Tex. 1979)).

The party asserting that a liquidated damages clause is an unenforceable penalty bears the burden of proof. Urban Television Network Corp. v. Liquidity Solutions, Ltd., 277 S.W.3d 917, 919 (Tex. App.-Dallas 2009, no pet.) (citing Murphy v. Cintas Corp., 923 S.W.2d 663, 665-66 (Tex. App.-Tyler 1996, writ denied)).

CONTENTION MUST BE RAISED AND PLEADED AS AN AFFIRMATIVE DEFENSE Whether a contractual provision is an unenforceable penalty and not a liquidated damage clause is an affirmative defense. See Tex. R. Civ. P. 94; Phillips v. Phillips, 820 S.W.2d 785, 789 (Tex. 1991) (“Although penalty is not among the affirmative defenses enumerated in Rule 94, Tex. R. Civ. P., the listing in that rule is not exclusive. Penalty is, in the language of the rule, a 'matter constituting an avoidance or affirmative defense' [citations omitted].”) SOURCE: Dallas Court of Appeals - 05-09-00586-CV - 5/18/11

What kind of debt can be collected in sworn account suit under TRCP 185?

SWORN ACCOUNT SUIT UNDER RULE 185 REQUIRES UNDERLYING SALE A claim based on a sworn account is brought pursuant to Texas Rule of Civil Procedure 185. Tex. R. Civ. P. 185. Rule 185 is a procedural tool that limits the evidence necessary to establish a prima facie right to recovery on certain types of accounts. Id. Rule 185 applies only "to transactions between persons, in which there is a sale upon one side and a purchase upon the other, whereby title to personal property passes from one to the other, and the relation of debtor and creditor is thereby created by general course of dealing . . . ." Bird v. First Deposit Nat'l Bank, 994 S.W.2d 280, 282 (Tex. App.-El Paso 1999, pet. denied); see also Hou-Tex Printers, Inc. v. Marbach, 862 S.W.2d 188, 190 (Tex. App.-Houston [14th Dist.] 1993, no writ). Williams v. Unifund CCR Partners Assignee of Citibank, 264 S.W.3d 231, 234 (Tex. App.-Houston [1st Dist.] 2008, no pet.) (noting that passage of title is required to invoke procedural rule on sworn account). SOURCE: Fort Worth Court of Appeals Nos. 02-09-00446-CV, 02-09-00320-CV 3/24/11 Sworn account suit not viable for credit-card debt collection:

See Dulong v. Citibank (South Dakota), N.A., 261 S.W.3d 890, 894 (Tex.App.-Dallas 2008, no pet.); Williams v. Unifund CCR Partners, 264 S.W.3d 231, 234 (Tex.App.-Houston [1st Dist.] 2008, no pet.); Sherman Acquisition II LP v. Garcia, 229 S.W.3d 802, 807 (Tex.App.-Waco 2007, no pet.); Tully v. Citibank (South Dakota), N.A., 173 S.W.3d 212, 216 (Tex.App.-Texarkana 2005, no pet.); Bird v. First Deposit Nat'l Bank, 994 S.W.2d 280, 282 (Tex.App.-El Paso 1999, pet. denied); Hou-Tex Printers, Inc. v. Marbach, 862 S.W.2d 188, 190 (Tex. App.-Houston [14th Dist.] 1993, no writ).

Elements of Judicial Estoppel Defense

WHAT IS JUDICIAL ESTOPPEL IN TEXAS?

Judicial estoppel precludes a party who successfully maintains a position in one proceeding from later adopting a clearly inconsistent position in another proceeding to obtain an unfair advantage. Ferguson v. Bldg. Materials Corp. of Am., 295 S.W.3d 642, 643 (Tex. 2009) (citing Pleasant Glade Assembly of God v. Schubert, 264 S.W.3d 1, 6 (Tex. 2008)).

The doctrine is not intended to punish inadvertent omissions or inconsistencies but rather to prevent parties from playing fast and loose with the judicial system for their own benefit. Id. (citing Schubert, 264 S.W.3d at 7).

REQUIREMENTS FOR PROVING APPLICABILITY OF JUDICIAL ESTOPPEL

The elements of judicial estoppel are (1) a sworn, prior inconsistent statement made in a prior judicial proceeding; (2) the successful maintenance of the contrary position in the prior action; (3) the absence of inadvertence, mistake, fraud, or duress in the making of the prior statement; and (4) the statement was deliberate, clear, and unequivocal. DeWoody v. Rippley, 951 S.W.2d 935, 944 (Tex. App.-Fort Worth 1997, writ dism'd by agr.).

SOURCE: Fort Worth Court of Appeals Nos. 02-09-00446-CV, 02-09-00320-CV 3/24/11

CITED CASES:

Dickson v. Stockman, 411 S.W.2d 610, 614 (Tex. App.-Fort Worth 1966, writ ref'd n.r.e.) (affirming judicial estoppel against appellant pleading claims contradicting those made in prior successful summary judgment action); Wall v. Young Cnty. Lumber Co., 368 S.W.2d 789, 792 (Tex. App.-Fort Worth 1963, no writ.) (concluding that appellant "necessarily" taking a positive position of creditor in prior sworn account action seeking repayment of advanced funds was "judicially estopped" in later action from asserting title to the advanced funds or title to the land purchased with the funds); see also Comerica Acceptance Corp. v. Dallas Cent. Appraisal Dist., 52 S.W.3d 495, 497 (Tex. App.-Dallas 2001, pet. denied) (indicating that common definition of term "owner" does not include person in possession of personal property collateral for purpose of selling it pursuant to a security agreement); Borg-Warner Acceptance Corp. v. Massey-Ferguson, Inc., 713 S.W.2d 351, 354 (Tex. App.-Dallas 1985, writ ref'd n.r.e.) (op. on reh'g) (noting that it is well settled in Texas law that an owner cannot have a lien on his own property because they are inconsistent interests); cf. Williams v. Unifund CCR Partners Assignee of Citibank, 264 S.W.3d 231, 234 (Tex. App.-Houston [1st Dist.] 2008, no pet.) (noting that passage of title is required to invoke procedural rule on sworn account).