WHAT IS STATUTORY FRAUD IN TEXAS?

Fraud.jpgChapter 27 of the Texas Business and Commerce Code provides an additional remedy to persons who are victims of fraud in connection with real estate and stock transactions. The elements of statutory fraud are essentially the same as common-law fraud, except to establish statutory fraud the plaintiff does not have to prove the defendant’s knowledge or recklessness.

To bring an action for statutory fraud, the plaintiff must establish that there was fraud in connection with a transaction involving real estate, stock in a corporation or stock in a joint-stock company. A transaction means that there is either a sale of real estate or a stock or there was a contract to sell real estate or stock entered into between the parties. Real estate includes land, the structures or improvements on the land and any assets of the real estate, such as minerals and water. A transaction involving the purchase of a stock option, however, is not considered a transaction involving stock in a corporation under Chapter 27.

To prevail in an action for statutory fraud, the plaintiff must prove that the defendant:

1. Made a false representation of past or existing material fact,
2. Made a false promise to do an act, or
3. Benefited by not disclosing that a third-party’s representation or promise was false.

The proof of the element of a false representation of past or existing material fact is the same for common-law and statutory fraud. A false promise must be material and made with the intent not fulfill it. A claim of nondisclosure may be established by showing the defendant had actual awareness that the third -party’s representation was false, did not disclose this to the plaintiff and the defendant benefited from the non-disclosure. Actual awareness may be inferred when objective manifestations indicate that the defendant was actually aware that his actions were false, deceptive or unfair.

The plaintiff must also prove that the false promise was made prior entering into a contract and for the purpose of inducing the plaintiff to enter into the contract. This element can be shown by establishing that the defendant either intended that the plaintiff enter into the contract or had reason to believe that the plaintiff would enter into the contract in reliance on the representation. The element of reliance is the same for both common-law and statutory fraud.

The plaintiff must further prove that the false representation or promise caused injury or damages. In an action for statutory fraud, a plaintiff may recover both actual and exemplary damages. To recover exemplary damages from a defendant who made a false representation, the plaintiff must prove, by clear and convincing evidence, that the defendant had actual awareness of the falsity of the representation. When the action involves non-disclosure concerning third parties, the plaintiff must prove, by clear and convincing evidence, that the defendant had actual awareness of the falsity of the third party’s promise or representation in order to recover exemplary damages.

In addition to actual and exemplary damages, a successful plaintiff may recover interest, court costs, attorneys fees, expert witness fees and charges for the depositions taken in connection with the suit.

Defenses to a suit for statutory fraud include evidence that the plaintiff disclaimed any reliance on the representation, ratified the defendant’s actions or that the plaintiff had actual knowledge of the falsity of the representation. Statutory fraud may not be available when the contract in question is subject to the Statute of Frauds and is required to be in writing.

The statute of limitations for statutory fraud is four (4) years. A cause of action accrues on the date the defendant made the false representation. But the limitations period does not begin until the fraud is or could have been discovered by reasonable diligence.

At the Law Office of Stephen O’Rear, P.C. we help people and small businesses who are victims of fraud in real estate or stock transactions.