When a Lie Goes Unpunished: Due Diligence Is Critical

Along about 1981, Lawrence Marshall decided to buy up land in South Texas around Uvalde. He eventually ended up with 6,828.2 acres at a cost of $2,047,985.16. Then, he went to building a hunting lodge, roads, game proof fencing, machine shops, deer feeders and barns. I like this guy. These extras cost $820,534.90. Then, he stocked the ranch with exotic deer, sheep and goats.

Alas, an outbreak of anthrax in 1987 killed some of the animals, and in 1991 Marshall decided he’d better sell the ranch. It took awhile, but finally in 1996 Marshall sold the ranch to Gilmore-Barclay, Ltd., a real estate investment limited partnership, for the bargain basement price of $822,000, $616,500 of which he seller-financed non-recourse. In April of 1997, Gilmore-Barclay, Ltd., sold the ranch to M. F. Kusch, for $1.2 million, consisting of $298,049.62 in cash and assumption of the non-recourse note. Later that same year, there was another outbreak of anthrax on the ranch that again killed many animals.

Kusch didn’t bargain for anthrax, so he sued everybody in sight: Marshall, Gilmore-Barclay, Ltd., its general partner Terracotta Land Company, Inc., and both real estate brokers involved in the sale to Kusch.

And so to court everyone went. Fraud, Deceptive Trade Practices, and Conspiracy were the themes. Everybody settled out before trial except for Marshall. The jury found that Marshall had committed fraud and violated the DTPA, awarding $369,502 in actual damages, $3 million in punitive damages, additional damages in the amount of $737,004, plus pre-judgment interest, post-judgment interest, and attorneys fees. Ouch. Right about then, it looked like the settlement option was the best way to go. And so, at that point Marshall did the only rational thing to do, which was to appeal.

Marshall’s problems stemmed from some comments he had made way back in 1996 to the effect that there was no anthrax on this land. Those comments were made to the broker for Gilmore-Barclay, Ltd. In 1997, those comments were repeated by that broker to Kusch’s broker. I can imagine Marshall’s lawyer saying “you don’t want this case to go to trial, because your defense is going to be “I lied about the anthrax but it makes no difference that I lied,” not exactly a compelling defense. Kusch had to be licking his chops once he got the case to the jury.

But Kusch had problems of his own. Fraud requires:

(1) a material misrepresentation;

(2) that was either known to be false when made or was asserted without knowledge of its truth;

(3) which was intended to be acted upon; and

(4) which caused injury.

Under Texas law, a misrepresentation does not have to be made directly to the relying party, it can go through intermediaries such as brokers. But it must, at some point, reach the relying party. The relying party, in other words, must have heard something he relied on. Which brings us back to Kusch’s problem: Kusch never asked, nor was affirmatively told, anything about anthrax. Since the misrepresentation was never communicated to Kusch, he had nothing to rely on, and so Marshall could not be liable to Kusch for fraud as a matter of law. In other words, the trial court should never have entered a verdict against Marshall based on fraud. That settlement option wasn’t looking so good right about now.

Next up was “fraud by omission.” Kusch claimed he was the beneficiary of Texas law of fraudulent omission, which is basically as follows: a seller of real estate is under a duty to disclose material facts that would otherwise not be discoverable by the exercise of ordinary care and diligence on the part of the purchaser, or that a reasonable investigation and inquiry would not uncover. The court disposed of this argument rather quickly: that duty is owed from buyer to seller. Kusch was indeed the buyer, but Marshall wasn’t the seller. And so it’s Marshall 2, Kusch 0, with one huge battle to go, the infamous DTPA.

Marshall took the same tack on the DTPA: “even though I misrepresented the anthrax, nothing I said made it to Kusch’s ears so I’m not liable.” Kusch countered that Marshall’s misrepresentation was connected to his transaction due to the non-recourse note and lien on the property. Interestingly, both parties here relied on the very same case to argue the exact opposite meaning.

The court decided that Marshall’s benefit came from his sale of the property to Gilmore-Barclay, Ltd. That the note was later assigned to and assumed by Kusch made no difference in that benefit; it didn’t connect the note and lien to Kusch’s purchase transaction. There being no connection, and no privity of contract (Kusch didn’t buy the property directly from Marshall), the DTPA didn’t apply to this case as a matter of law. Game, Set, Match. Now, finally, a settlement definitely looked like not the way to go in this case.

For those of you interested in some sort of reckoning for Marshall, answering for his misrepresentation in some way, don’t forget that Marshall still had to pay his attorneys fees incurred in this matter, which probably were fairly substantial. And he had to deal with the emotional torment of uncertainty which is inherent for all parties in litigation.

This case illustrates how critical it is for buyers of property to conduct adequate due diligence. What is adequate due diligence? It is a review and analysis that turns up every material fact that impacts a land’s fair market value and how the buyer intends to use the property in the future. Land situated in urban areas or subject to multiple uses and zoning requires even more due diligence.

In this case, whatever due diligence Kusch undertook wasn’t enough. He got stuck with some land with a history of anthrax, which probably will affect the fair market value of that land for some time in the future. He may have grossly overpaid for the land. The red flag was there to prompt additional questions-why didn’t Kusch ask probing questions until somebody mentioned the word “anthrax”?

Marshall v. Kusch, Case No. 05-00-01791-CV, Texas Court of Appeals for the Fifth District, Dallas, Texas, August 22, 2002

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