DAVID J. WILLIS ATTORNEY
Copyright © 2018. All rights reserved worldwide.
Deceptive Trade Practices In Texas Real Estate
by David J. Willis J.D., LL.M.
The Deceptive Trade Practices-Consumer Protection Act ("DTPA," found at chapter 17 of the Texas Business & Commerce Code) was passed in 1973 to protect Texas consumers against unscrupulous sellers of consumer goods and services. Tex. Bus. & Com. Code sec. 17.44(a) states that the DTPA "shall be liberally construed and applied to promote its underlying purposes, which are to protect consumers against false, misleading, and deceptive business practices, unconscionable actions, and breaches of warranty and to provide efficient and economical procedures to secure such protection." All states now have some version of this sort of law.
The enactment of the DTPA also provided a healthy subsidy to the plaintiffs' bar by creating a profitable avenue for collecting contingent fees—not good news for real estate investors. Anytime a plaintiff is relieved of the burden of raising legal fees and costs in order to pursue a lawsuit, then suits become both more numerous and harder to settle.
Originally one of the most progressive consumer protection laws in the U.S., the broad tools and remedies of the DTPA have been curtailed by amendments over the years, most significantly in 1995 when a conservative legislature riding the wave of tort reform (also referred to as "tort deform" if you are not a fan of those changes) amended the Act to include provisions more favorable to the defendant. The DTPA remains, however, a formidable consumer weapon.
The issue of whether or not real estate is a consumer good subject to DTPA remedies was resolved long ago. It is. Chastain v. Koonce, 700 S.W.2d 579, 582 (Tex.1985). In fact, the definition of consumer good includes just about everything except intangibles such as accounts receivable, stock, and money.
You must qualify as a consumer to seek relief under the DTPA. A "consumer" in the DTPA context may be an individual, partnership, corporation, LLC, or even a state agency. Excluded are business consumers with assets of 25 million or more. Suits may also be brought in the interest of consumers at large by the Texas attorney general's consumer protection division and, with the AG's consent, by local county and district attorneys.
Amazingly, it is not required that the consumer actually pay for the goods or services in question—only that the consumer must be seeking or in the process of acquiring them by means of either purchase or lease. Martin v. Lou Poliquin Enterprises, Inc., 696 S.W.2d 180 (Tex.App.—Houston [14th Dist.] 1985). There is not even a requirement that the consumer be in privity (in a direct contractual or business relationship) with the defendant—only that the claimed violation occurred in connection with the consumer's transaction. Amstad v. U.S. Brass Corp., 919 S.W.2d 644, 649 (Tex.1996). The consumer is simply required to be the intended beneficiary of goods or services (a very broad requirement indeed). Arthur Anderson & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 815 (Tex.1997). "The connection can be demonstrated by a representation that reaches the consumer or by a benefit from the second transaction to the initial seller." Todd v. Perry Homes, 156 S.W.3d 919, 922 (Tex.App.—Dallas 2005, no pet.).
A consumer may not sell, assign, or transfer his or her DTPA claim to another. PPG Indus. v. JMB/Houston Ctrs. Partners, 146 S.W.3d 79, 82 (Tex.2004).
Fortunately for attorneys and real estate brokers, their services fall within the professional services exemption of sec.17.49(c). This exemption is lost, however, in cases of fraud or misrepresentation. Since fraud is nearly always alleged in suits involving real estate, professionals in this area should expect to have to fight diligently to protect their status under this exemption.
Certain large transactions are also exempted under sec. 17.49, although (significantly for real estate investors) the large transaction exemption does not apply in the case of a consumer's residence.
Causes of Action under the DTPA
If a real estate investor is sued, it is a given that allegations of deceptive trade practices will be among the causes of action. Note that DTPA causes of action are cumulative as to other remedies (Tex. Bus. & Com. Code § 17.43), meaning that a plaintiff can throw not only DTPA allegations at a defendant but just about everything else from both statutory and common law except (perhaps) the kitchen sink, so long as the plaintiff can plausibly argue that the defendant's conduct was a "producing cause" of economic damages or damages for mental anguish. Tex. Bus. & Com. Code § 17.50(a).
A related note: the DTPA states that in event the Act conflicts with the Property Code, then the Property Code provisions will prevail. Tex. Bus. & Com. Code § 17.44(b).
Business & Commerce Code section 17.46(a) declares:
False, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful and are subject to action by the consumer protection division under sections 17.47, 17.58, 17.60, and 17.61 of this code.
Section 17.46(b) of the DTPA also declares the following to be unlawful:
(1) passing off goods or services as those of another;
(2) causing confusion or misunderstanding as to the source, sponsorship, approval, or certification of goods or services;
(3) causing confusion or misunderstanding as to affiliation, connection, or association with, or certification by, another;
(4) using deceptive representations or designations of geographic origin in connection with goods or services;
(5) representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have or that a person has a sponsorship, approval, status, affiliation, or connection which he does not;
(6) representing that goods are original or new if they are deteriorated, reconditioned, reclaimed, used, or secondhand;
(7) representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another;
(8) disparaging the goods, services, or business of another by false or misleading representation of facts;
(9) advertising goods or services with intent not to sell them as advertised;
(10) advertising goods or services with intent not to supply a reasonable expectable public demand, unless the advertisements disclosed a limitation of quantity;
(11) making false or misleading statements of fact concerning the reasons for, existence of, or amount of price reductions;
(12) representing that an agreement confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law;
(13) knowingly making false or misleading statements of fact concerning the need for parts, replacement, or repair service;
(14) misrepresenting the authority of a salesman, representative or agent to negotiate the final terms of a consumer transaction;
(17) advertising of any sale by fraudulently representing that a person is going out of business;
(19) using or employing a chain referral sales plan . . . ;
(20) representing that a guarantee or warranty confers or involves rights or remedies which it does not have . . . ;
(21) promoting a pyramid promotional scheme, as defined by Section 17.461;
(22) representing that work or services have been performed on, or parts replaced in, goods when the work or services were not performed or the parts replaced;
(24) failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed. . . .
Relief for Consumers
Sec. 17.50 spells out relief available to consumers. Basically, a consumer who claims to have suffered economic damages or damages for mental anguish may seek relief if the other party's action was a "producing cause" of the damages. That is a rather liberal standard, especially considering that most events in life and business have multiple causes—and the defendant's alleged action is required to be only one of them. Any offense enumerated in the laundry list of sec. 17.46 is a basis for a consumer claim, so long as the defendant's actions were "relied on by a consumer to the consumer's detriment" (§ 17.50(B)).
Additionally, a consumer may file suit if the consumer has relied to that consumer's detriment upon:
17.50(a)(2) breach of an express or implied warranty;
17.50(a)(3) any unconscionable action or course of action by any person. . . .
Breach of warranty would seem to be reasonably clear. But what about "unconscionability?" Isn't that rather subjective? What exactly does it mean? It turns out that the key factor in unconscionability is the taking advantage of another who is less sophisticated and less informed—something real estate investors are accused of doing nearly every day in courts across Texas. Insurance Co. of N. Am. v. Morris, 981 S.W.2d 667,677 (Tex.1998). Further, it is likely that a real estate investor will be considered the party with superior knowledge in nearly every encounter with a consumer, making it easier for a plaintiff to paint a picture of exploitation. This is true regardless of whether the investor is a real estate license holder or not.
In terms of seller disclosure requirements, there is no doubt failure by a seller of real property to disclose material adverse conditions and defects is a violation of the DTPA. Refer to chapter 2 for more discussion of the obligation to disclose on the part of sellers and real estate license holders.
If a trial court determines that the defendant committed a deceptive act, breach of warranty, or unconscionable act knowingly, then the availability of treble damages plus attorney's fees is triggered (§ 17.50(b)(1)). Otherwise, a DTPA claim does not require that the consumer prove that the defendant acted knowingly or intentionally, at least so long as the plaintiff's objective is merely actual rather than exemplary damages. Miller v. Keyser, 90 S.W.3d 712, 716 (Tex.2002). Note, however, that exemplary damages may be available to the plaintiff by other means—common law or statutory fraud, for instance.
Practice note: alleging and proving intent can be hazardous when it comes to the defendant's insurance. Intentionality generally voids coverage, which can limit the plaintiff's chances for a sizeable settlement or judgment.
It should be clear by now that a real estate investor may begin to incur potential liability the moment he or she starts advertising. But doesn't the law cut some slack when it comes to the game of luring consumers through the front door? It does. A certain level of factual flexibility in advertising is recognized by courts as the commercial norm—so "mere puffing," as the case law calls it, is not actionable. "Three factors are considered in determining whether a representation is 'mere puffing:' (1) the specificity of the representation; (2) the comparative knowledge of the buyer and seller; and (3) whether the representation relates to a future event or condition." Bossier Chrysler Dodge II, Inc. v. Rauschenberg, 201 S.W.3d 787, 800 (Tex.App—Waco, 2006). We again return to the concept that taking advantage of another who possesses less knowledge or experience seldom turns out well in a court of law.
"Bait and switch" is not considered mere puffing. See 17.46(B)(10); Martin v. Lou Poliquin Enterprises, Inc., id.
A requirement of 60 days' notice and demand was included in the DTPA to promote settlement and avoid frivolous lawsuits:
Sec. 17.505. NOTICE; INSPECTION.
(a) As a prerequisite to filing a suit seeking damages under Subdivision (1) of Subsection (b) of Section 17.50 of this subchapter against any person, a consumer shall give written notice to the person at least 60 days before filing the suit advising the person in reasonable detail of the consumer's specific complaint and the amount of economic damages, damages for mental anguish, and expenses, including attorneys' fees, if any, reasonably incurred by the consumer in asserting the claim against the defendant. During the 60-day period a written request to inspect, in a reasonable manner and at a reasonable time and place, the goods that are the subject of the consumer's action or claim may be presented to the consumer.
(b) If the giving of 60 days' written notice is rendered impracticable by reason of the necessity of filing suit in order to prevent the expiration of the statute of limitations or if the consumer's claim is asserted by way of counterclaim, the notice provided for in Subsection (a) of this section is not required, but the tender provided for by Subsection (d), Section 17.506 of this subchapter may be made within 60 days after service of the suit or counterclaim.
(c) A person against whom a suit is pending who does not receive written notice, as required by Subsection (a), may file a plea in abatement not later than the 30th day after the date the person files an original answer in the court in which the suit is pending. This subsection does not apply if Subsection (b) applies.
As an accommodation to defendants, the DTPA provides a means of minimizing a potential damage award by making a reasonable offer of settlement, but this offer must encompass both the consumer's damages and attorney's fees:
Offer of Settlement
Sec. 17.5052. OFFERS OF SETTLEMENT.
(a) A person who receives notice under Section 17.505 may tender an offer of settlement at any time during the period beginning on the date the notice is received and ending on the 60th day after that date.
(b) If a mediation under Section 17.5051 is not conducted, the person may tender an offer of settlement at any time during the period beginning on the date an original answer is filed and ending on the 90th day after that date.
(c) If a mediation under Section 17.5051 is conducted, a person against whom a claim under this subchapter is pending may tender an offer of settlement during the period beginning on the day after the date that the mediation ends and ending on the 20th day after that date.
(d) An offer of settlement tendered by a person against whom a claim under this subchapter is pending must include an offer to pay the following amounts of money, separately stated:
(1) an amount of money or other consideration, reduced to its cash value, as settlement of the consumer's claim for damages; and
(2) an amount of money to compensate the consumer for the consumer's reasonable and necessary attorneys' fees incurred as of the date of the offer.
(e) Unless both parts of an offer of settlement required under Subsection (d) are accepted by the consumer not later than the 30th day after the date the offer is made, the offer is rejected.
(f) A settlement offer tendered by a person against whom a claim under this subchapter is pending that complies with this section and that has been rejected by the consumer may be filed with the court with an affidavit certifying its rejection.
(g) If the court finds that the amount tendered in the settlement offer for damages under Subsection (d)(1) is the same as, substantially the same as, or more than the damages found by the trier of fact, the consumer may not recover as damages any amount in excess of the lesser of:
(1) the amount of damages tendered in the settlement offer; or
(2) the amount of damages found by the trier of fact.
(h) If the court makes the finding described by Subsection (g), the court shall determine reasonable and necessary attorneys' fees to compensate the consumer for attorneys' fees incurred before the date and time of the rejected settlement offer. If the court finds that the amount tendered in the settlement offer to compensate the consumer for attorneys' fees under Subsection (d)(2) is the same as, substantially the same as, or more than the amount of reasonable and necessary attorneys' fees incurred by the consumer as of the date of the offer, the consumer may not recover attorneys' fees greater than the amount of fees tendered in the settlement offer.
Subsection (g) is the key provision here, limiting the defendant’s potential liability.
A settlement offer is not an admission of guilt or liability and cannot be introduced into evidence at trial. Tex. Bus. & Com Code sec. 17.5052(k). Given the foregoing, missing an opportunity to make a reasonable offer of settlement in response to a DTPA claim is simply negligent on the part of a potential defendant.
Notice Letters – Comments for Prospective Plaintiffs
Writing a good notice and demand letter entails both substance and style and should always be handled by an attorney experienced in that particular field of law. There are at least two reasons for this. Firstly, an attorney is not only more likely to comply with the express requirements of the statute (insuring that a corrected notice will not have to be re-given later), but will also take into account the practical realities and nuances of pre-litigation legal diplomacy. The tone of the letter will be designed to strike the right balance between toughness and conciliation.
Secondly, a letter from a qualified attorney always carries more weight than a letter directly from the aggrieved person. It has credibility. If nothing else, an attorney letter demonstrates that the prospective plaintiff is both serious and willing to spend money on legal fees in order to get the issue solved.
Any good notice and demand letter should do at least three things: (1) explain the basics—list the parties, offer a detailed description of the circumstances (at least from the complainant's point of view), and provide an historical timeline; (2) cite specifically which statutes and remedies may apply; and (3) offer some proposal for moving forward (e.g., settlement, correction of the alleged violation, mediation, etc.) which must be met or agreed to within a specific timeframe (usually 10 days unless a statute requires more, as is the case with the DTPA) or suit may be filed without further notice.
Notice Letters – Comments for Prospective Defendants
When receiving such a letter, the first step is to take a breath. Not all such demands result in lawsuits. Not all of them are followed up with further action. Occasionally, the complainant will run out of determination or money or both and simply go away. Having said that, it is seldom wise to ignore a legal demand letter. No matter how preposterous the demand, it is almost always better practice to send a response declining same.
First, an investor on the receiving end of a demand letter should investigate the facts and determine what merit the allegations have. Next, evaluate the letter itself. Does it meet the three-prong test outlined above? Does it come from an attorney—and not just any attorney but one well-credentialed and experienced in real estate law or civil litigation? If so, you should most definitely respond within the prescribed time period. A bona fide offer of settlement will take treble damages off the table, an essential part of minimizing damage from this event and thus integral to asset protection.
The Value of a Good "As Is" Clause
The value of an effective "as is" clause cannot be underestimated in Texas, and not just in the context of the DTPA. For DTPA purposes, such a clause—when properly written—negates the requirement of "producing cause," letting the defendant off the hook, so long as the consumer knowingly and voluntarily signed a contract containing such a clause. Prudential Insurance Company of America v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex.1995). As a reminder, an "as is" clause should be clear, unequivocal, and conspicuous (bold and capitalized). A sample "as is" clause is provided in chapter 2, although such clauses should always be customized to the circumstances.
Waiver of Consumer Rights
A consumer may also waive his or her DTPA rights in writing pursuant to sec. 17.42, but the requirements for a valid waiver are extremely strict (including the requirement that the consumer be represented by a lawyer), so these tend to be uncommon. In fact, sec. 17.42(a) declares that "Any [emphasis added] waiver by a consumer of the provisions of this subchapter is contrary to public policy and void. . . ." The statute goes on to describe the very limited circumstances under which such a waiver mightbe enforceable. Moreover, the defense of waiver is not assertable in an action that is brought by the attorney general on behalf of the public generally (§ 17.42(e)); nor will a waiver be effective against anything the DTPA defines as a deceptive act. Southwestern Bell Tel. Co. v. FDP Corp., 811 S.W.2d 572, 576-77 (Tex.1991).
Attempting to procure an enforceable DTPA waiver from a prospect in a real estate transaction is likely to be not only risky but of questionable value. A court will find the waiver void if it wants to—particularly if the judge or jury dislikes real estate investors, which is true in most cases. And the consumer will most certainly be alarmed at the idea of a blanket waiver of his or her consumer protections and having to get a lawyer to sign off on that (What lawyer will want the liability?). All in all, it may be best to avoid such waivers entirely.
An exception is in connection with the sale of new homes. "[T]he implied warranty of good workmanship [for a new home] may be disclaimed by the parties when their agreement provides for the manner, performance or quality of the desired construction." But the implied warranty of habitability, in the same context, may not be disclaimed. Centex Homes v. Buecher, 95 S.W.3d 266, 274-75 (Tex.2002).
Does an "as is" clause constitute the effective equivalent of a waiver of consumer rights? No, not according to the Prudential case. See also Larsen v. Carlene Langford & Assocs., 41 S.W.3d 245, 255 (Tex.App.—Waco 2001, pet. denied).
Statute of Limitations
A suit pursuant to the DTPA must be brought within two years after the false, misleading, or deceptive act took place—or within two years after the consumer should reasonably have discovered such an act. This period may be extended up to 180 days if it can be proven that a late filing resulted from the defendant's wrongful conduct designed to avoid or delay the filing. Tex. Bus. & Com Code § 17.565. As a practical matter, the two-year rule tends to prevail since most courts take the view that the consumer should have discovered the illegal act when it occurred.
Groundless or Bad Faith Lawsuits
The DTPA offers some relief to defendants in sec. 17.50(c) which provides that "on a finding by the court than an action under this section was groundless in law or in fact or brought in bad faith, or brought for purpose of harassment, the court shall award to the defendant reasonable and necessary attorneys' fees and court costs." This is, of course, in addition to rejecting the plaintiff's claim. And note the word shall. Once a finding of groundlessness or bad faith is made, an award of attorney's fees to the defendant is mandatory.
Receivership after a DTPA Judgment
A court-appointed receiver may be granted broad powers to manage and operate the business of a judgment debtor, including the power to manage its finances. Section 17.59 offers an expedited path to receivership for a judgment creditor, so long as there has been a good-faith but failed attempt to execute on the judgment by the usual means. If such is the case, section 17.59(a) provides that certain presumptions exist:
(1) that the defendant is insolvent or in danger of becoming insolvent; and
(2) that the defendant's property is in danger of being lost, removed, or otherwise exempted from collection on the judgment; and
(3) that the prevailing party will be materially injured unless a received is appointed over the defendant's business; and
(4) that there is no adequate remedy other than receivership available to the prevailing party.
In other words, all the usual preconditions for receivership are simply presumed, facilitating a relatively smooth appointment process. The consequences of a receiver's intervention can be devastating and often fatal to the business involved.
The DTPA and Real Estate Investors: Beware of Overly-Clever Schemes
Many real estate investors are engineers, medical doctors, computer people, or others whose education and experience is quantitative rather than linguistic. In their minds, something is either "legal" or it is not. Simple.
What non-lawyers typically do not understand is that the law, particularly when it reaches the courtroom, is not black and white, off and on, or yes and no. It is a continuum between good and bad. And somewhere along that continuum a judge or a jury may feel that the weight of the evidence establishes that something undesirable has occurred—fraud, deception, or the like—and the human urge is to find a remedy and assess a punishment.
In court, once you get past the summary judgment stage (where anything patently frivolous is usually eliminated) then everything, including the plain language of a statute, becomes a subject for interpretation. At that point, the fact that one individual is an unsophisticated ordinary person who has lost his home and the other person is a sharp real estate investor matters.
Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
Copyright ©2018 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.