Friday, July 29, 2016

Lessons from a Used Car Lot

A used car case is relevant to Texas real estate. Trust me. Read on.

Christin Bishop needed a gently used car. In February 2012 she found a 2010 Kia Forte offered by Creditplex Auto Sales d/b/a Greenville Mitsubishi. This particular Kia had been purchased at auction a few months prior for $9,210, with the disclosure made to Creditplex that the car had suffered frame damage.

Christin and her mother Cynthia bought the car for $15,800. They financed the purchase with a 72-month loan at 17.95% interest (interest in excess of 18% in Texas may be usurious BTW). The Bishops also purchased a service contract for $1,500, but they failed to have the car inspected or obtain a Carfax report about the car before they bought it.

Presumably the car had a full-on “AS IS” sticker on the window. For some reason that remains elusive to me, this part of the text in the appellate opinion was deleted. No worries; let’s assume that the appropriate “AS IS” warning was printed for all to see.

Christin kept the car for about a year, then decided to trade it since she needed something larger to accommodate her children. She took the Kia to a local dealership to sell it, but the franchise refused to buy it because it had frame damage.

Oh yeah I forgot to tell you that Creditplex, relying on the “AS IS” language, did not disclose to Christin that the Kia had been wrecked before she bought it.

So Christin sued Creditplex, its general manager and owner for failure to disclose pivotal information she needed in order to make an informed decision. The trial court granted a verdict for Creditplex to the effect that “AS IS” meant “AS IS,” and the court entered judgment for Creditplex and the other defendants.

Christin appealed and continued her same argument: vendors should not be allowed to hide information from consumers to their detriment, simply by placing an “AS IS” sign on the products that are being sold. A compelling argument, truly, except that in Texas such “AS IS” disclaimers are difficult to overcome. Almost impossible, really.

Using various real estate cases, the defendants reminded the Court of Appeals that since at least 1995 Texas Courts have uniformly held that an “AS IS” disclaimer is effective, even though the consumer-buyer may be disadvantaged. Indeed, the Supreme Court of Texas has previously written that “by agreeing to purchase something ‘as is,’ a buyer agrees to make his own appraisal of the [deal] and accept the risk that he may be wrong.”

However, this Court of Appeals focused on the following circumstances: (1) Creditplex was experienced in used car sales but Christin was not; (2) Christin did not negotiate the price; (3) Christin was unsophisticated when compared to Creditplex; (4) the provisions of this “AS IS” clause were not crystal clear; (5) Creditplex chose not to disclose an obvious defect that materially diminished the value of the car; and (6) the “AS IS” provision was not negotiated, but rather was a ‘boiler-plate’ insertion.

The Court of Appeals sensed that the conduct of Creditplex may have been fraudulent, which can be a narrow exception to the Texas “AS IS” rule. Using the fraud theory, Christin wins and the judgment of the trial court is reversed. See Bishop v. Creditplex Auto Sales; Cause No. 05-15-00395-CV; Tex. App. 5th Dist.; July 29, 2016:

Lessons learned:

 1.      Yes this case is about a used car. No I don’t typically write about used cars or any other personal property. But – an exception had to be made.

 2.      This Texas Appellate Court used real estate appellate cases to determine that not all “AS IS” clauses work. A seller or landlord cannot simply paste an “AS IS” disclaimer in a contract or lease and assume that it will not be successfully challenged.

3.      If there is a major deception which the buyer / tenant could not have reasonably anticipated or avoided, and if there is a disparity in negotiating positions (as there always is in consumer transactions), then Texas Courts will find a way to deliver justice to the consumer. As they should, IMHO, not that anyone asked.

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Tuesday, July 5, 2016


Carmen White signed a Texas Apartment Association residential lease. Section 12 provided that Carmen must reimburse the landlord for all damages caused to the apartment community by her negligence and also caused by any other party not due to landlord’s negligence or fault.

Carmen received a new washer and dryer from her parents. She was able to connect the washer but she could not connect the dryer because the cord sparked and the circuit breaker tripped. So at Carmen’s request an apartment employee connected the dryer for her.

It was only a few days later that Carmen’s apartment and adjoining units were destroyed in a fire that originated in Carmen’s unit. Evidently Carmen was using the dryer to separate allergens from dry and unwashed items.

The fire started in the dryer. The casualty loss was over $83,000.

Philadelphia Indemnity paid the claim and demanded reimbursement from Carmen. When payment was not forthcoming, Philly Indemnity brought a lawsuit against her for negligence and breach of contract.

At trial, the jury found that Carmen breached the lease agreement by failing to pay for the loss (recall that an employee of the Landlord installed Carmen’s dryer!). The jury awarded $93,000+ to Philly Indemnity.

Carmen petitioned the trial court for judgment in favor of Carmen notwithstanding the jury’s decision. The trial court agreed with Carmen without specifying the reasons, and essentially ignored the jury’s verdict.

Carmen won; Philly Indemnity appealed.

The Texas Court of Appeals affirmed the trial court’s decision that the jury was wrong, based on the reasoning that the reimbursement provision in the TAA Lease was void. The Court of Appeals reasoned that it is against Texas public policy to hold residential tenants liable for the conduct of others over whom such tenants have no control. Such as the Landlord’s employee who negligently installed the dryer.

Philly Indemnity appealed again.

The Texas Supreme Court evaluated the facts and Lease. In a 36-page opinion, the Court concluded that: (a) the general rule in Texas is that parties may contract as they wish if there is no violation of law or offense to Texas public policy; (b) Texas landlords may impose virtually unlimited liability upon their tenants; (c) the reimbursement policy is enforceable; but (d) essential facts were not properly developed in the trial court.

The Supremes sent the case back to the trial court to find those missing “essential facts,” but in doing so the Supremes also advised that while the Court of Appeals’ conclusion may have been correct, their reasoning was not. Meaning, because the facts were not properly developed the Court of Appeals affirmation of the trial court’s Judgment was correct, but their reasoning that the repair reimbursement clause was void because it violated Texas policy was incorrect.

Whew. Complicated stuff. No wonder it took 36 pages to explain.

So far, Carmen White has won at every turn. See Philadelphia Indemnity Insurance v. White; Cause No. 14-0086; Texas Supreme Court; May 13, 2016:

Lessons learned:

1.      I was surprised at this outcome. Every other year when our Texas legislature meets we get more laws in favor of consumers in all areas, including residential leasing. It doesn’t comport with our Texas system of favoring residential consumers to hold such tenants liable for virtually anything that happens at the community, as long as it was not caused by Landlord’s negligence.

2.      Seemingly Texas landlords may now impose further obligations on their tenants, including liability for matters beyond the control of those tenants. If our 2017 legislature doesn’t fix this problem, then based on this new Supreme Court authority a Texas residential tenant may now be found liable for a multi-million dollar loss which the tenant did not cause.

3.      Perhaps property managers should require substantial renters’ insurance from all tenants as a condition to allowing the tenants to move into the dwelling. Because as a matter of practicality, few residential tenants would be able to pay for the loss.

Reprinted with the permission of North Texas Commercial Association of Realtors®, Inc.