Tuesday, May 22, 2012

Limitations on Cancellation and Rescission

A. Limitations on Cancellation and Rescission
"In equity, rescission allows for the forced termination of an agreement and the restoration of benefits or consideration previously transferred." See Carrow v. Bayliner Marine Corp., 781 S.W.2d 691, 696 (Tex. App.-Austin 1989, no writ). At common law, a party seeking the equitable remedy of rescission must first satisfy several requirements, which include (1) giving timely notice to the seller that the contract is being rescinded; and (2) tendering or offering to tender the property received and the value of any benefit derived from its possession back to the seller. Id. (citing David McDavid Pontiac, Inc. v. Nix, 681 S.W.2d 831, 836 (Tex. App.-Dallas 1984, writ ref'd n.r.e.)). The party seeking equitable rescission bears the burden of proof on the issues of notice and tender. Id. (citing Nix, 681 S.W.2d at 836).
Morton argues in Issue 4 that these common-law limitations implicitly are incorporated into the express statutory remedy of cancellation and rescission authorized under the Texas Property Code, and that the Nguyens are not entitled to cancellation and rescission because they failed to tender or offer to tender the value of their almost three-year possession of the property back to Morton.[8]
In support of this argument, Morton cites to a line of cases from the Fifth Court of Appeals analyzing the similar statutory remedy of "restoration of consideration" under the DTPA. These cases hold that the DTPA remedy of "restoration of consideration" is "a statutory recognition" of the equitable remedy of rescission and restitution, as well as the common-law limitation that the complaining party "surrender any benefits received" before electing to avoid the contract and "recover that [which] he parted with." Smith v. Kinslow, 598 S.W.2d 910, 915 (Tex. App.-Dallas 1980, no writ); see also TEX. BUS. & COM. CODE ANN. § 17.50(b)(3) ("In a suit filed under this section, each consumer who prevails may obtain . . . orders necessary to restore to any party to the suit any money or property, real or personal, which may have been acquired in violation of this subchapter."). In other words, the Fifth Court of Appeals has held that the statutory remedy of "restoration of consideration" under the DTPA incorporates the common-law notice and tender requirements applicable to the equitable remedy of rescission and restitution. See, e.g., Nix, 681 S.W.2d at 835-36 (purchaser was not entitled to "restoration of consideration" under DTPA because limitation on remedy of rescission requires and record contained no evidence of "tender, or offer of tender" of value of benefits received from using the product approximately one month); see also Chubb Lloyds Ins. Co. of Tex. v. Andrew's Restoration, Inc., 323 S.W.3d 564, 580-81 (Tex. App.-Dallas 2010, pet. granted) (consumer was not entitled to "restoration of consideration" under DTPA because consumer failed to show that he complied with prerequisite of surrendering benefits received from other parties), aff'd in part, rev'd in part, —S.W.3d—, No. 10-0995, 2012 WL 1370851 (Tex. Apr. 20, 2012). Cf. Schenck v. Ebby Halliday Real Estate, Inc., 803 S.W.2d 361, 366-67 (Tex. App.-Tyler 1990, no writ) (jury's finding that consumer acted negligently or wrongfully constituted equitable bar to "restoration of consideration" under DTPA under equitable doctrine requiring claimant seeking equitable relief to have "unclean hands"). Morton argues that these cases from the Fifth Court of Appeals should guide our analysis of the similar statutory remedy of "cancellation and rescission" under subchapter D of chapter 5 of the Texas Property Code.
The Texas Supreme Court recently considered the position taken by the Fifth Court of Appeals and rejected it in Cruz v. Andrews Restoration, Inc., —S.W.3d—, No. 10-0995, 2012 WL 1370851, at *7-8 (Tex. Apr. 20, 2012). Reiterating its prior holding from Smith v. Baldwin, 611 S.W.2d 611, 616-17 (Tex. 1980), in which the court stated that "[t]he DTPA does not represent a codification of the common law" and was intended "to provide consumers a cause of action for deceptive trade practices without the burden of proof and numerous defenses encountered in a common law fraud or breach of warranty suit," the court held in Cruz: "[C]ompliance with [the] requirements [of notice and tender] is unnecessary under the DTPA. Instead, we adopt the Restatement approach and conclude that notice and restitution or a tender of restitution are not prerequisites to a remedy under [the DTPA] . . . ." Cruz, 2012 WL 1370851, at *8. This holding weighs against a conclusion that the statutory remedy of cancellation and rescission under the Texas Property Code incorporates the same common-law limitations.
With respect to the history and purpose of subchapter D of chapter 5, the following explanation illuminates our discussion:
In 1995, the Legislature amended chapter 5 of the Texas Property Code to address serious abuses in the acquisition of homes in the colonias. The colonias are substandard, generally impoverished, rural subdivisions that typically lack basic utilities and other infrastructure. Concentrated along the Texas border with Mexico, colonia residents almost always acquire residential lots through executory contracts called "contracts for deed" or "contracts for sale" . . . .
The Legislature found that purchasers had little legal protection under the contract-for-deed financing arrangement and no statutory right to critical information about the colonia property being purchased. Sellers have sold individual lots to two or more purchasers, sold lots without written contracts, and placed liens on lots subsequent to the sale without informing the purchasers and colonia residents. Colonia residents also complain that sellers frequently misrepresent the availability of water, sewer service, and other utilities, and that the residents are often not informed when property being sold lies in a flood plain or is otherwise unsuitable for habitation.
Although the Legislature considered a prohibition of contract-for-deed conveyances to end these abuses, it determined that many residents building homes in these areas need this method of financing because they do not have access to traditional mortgage financing. The contract-for-deed arrangement, however, allows low-income persons to purchase property and build homes on the property.
To address the fraudulent and abusive conduct, the Legislature amended the statute in 2001, substantially increasing the monetary penalties and applying the protections statewide.
Flores, 185 S.W.3d at 434-35 (Wainwright, J., concurring) (emphasis added, citations omitted). Subchapter D, therefore, provided new grounds to rescind a contract for deed that previously had been unavailable to purchasers at risk of being misled by incomplete disclosures regarding the nature of the purchased property. Accordingly, no common-law remedies were codified by the Legislature's enactment of subchapter D. In fact, to read the statute as incorporating common-law limitations into the statutory remedy would frustrate the very purpose of these sections, which were designed to "address the fraudulent and abusive conduct" of sellers. See id. at 435 (Wainwright, J. concurring). The Legislature could have included express limitations on the remedy of cancellation and rescission for these new grounds, but did not do so. We overrule Morton's Issue 4.[9]
B. Equitable Defenses of Quasi-Estoppel and Laches 
Morton argues in Issues 5-8 that the equitable defenses of quasi-estoppel and laches apply to the statutory remedy of cancellation and rescission, and that he established such defenses.
Common-law defenses may not be used to defeat claims brought under a statute that was not designed to be a codification of the common law.

SOURCE: FOURTEENTH COURT OF APPEALS - No. 14-11-00126-CV - 5/17/12 (substituted opinion)

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