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. 5^th Dist.; July 29, 2016: http://caselaw.findlaw.com/tx-court-of-appeals/1739567.html.

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.

Part Two: Do Non-Representation Provisions Really Work?

Matlock Place Apartments, LP (it’s in Arlington Texas) was controlled by Hagop Kofdarali. Druce Properties, LLC purchased the apartments in 2004. Both were fairly sophisticated owner / operators, with at least some level of experience in managing  multi-family properties.

 

When Hagop’s sister initially purchased the property in 2002 the occupancy rate was only 40% - 50%. In 2002 and 2003 Hagop spent more than $500,000 in repair and remodel expenses, possibly as a condition to a $1.8 million loan.

 

Hagop then listed the property with a national brokerage firm. The firm prepared and distributed to Druce a marketing brochure which provided for a 93% occupancy rate and claimed “Major Rehab Just Completed.” Hagop, however, testified at trial that occupancy could fluctuate monthly anywhere from 80% - 93%, and that the rehabilitation was incomplete because the roof repairs and unit-interiors still required work.

 

Druce and Hagop signed a letter of intent for $2.4 million, which provided a 21-day inspection period as well as a $100,000 credit at closing for “repairs and maintenance.” Druce testified that he personally inspected the property and viewed 10 of the 99 units. He was satisfied with what he saw, and continued with the analysis.

 

After the contract was signed Druce received 1,500 – 2,000 pages of documents from the property manager. Included within the package were disclosures regarding delinquent rentals and serious criminal activities. Druce claims he did not notice them, since they were “buried” in the pile of paper.

 

Druce and Hagop closed the deal in July 2004. Druce evidently visited the property a few days before closing and noticed that it looked deserted. During that visit he also learned from an Arlington police officer that the area was well known for drug dealers, addicts and prostitutes. But he bought it anyway, claiming he was financially and emotionally invested in it, thinking that the income stream would be “gigantic.”

 

After closing the occupancy rate was between 58% and 78%. Druce spent $800,000 to rehabilitate the property, all in an effort to merely break even.

 

Druce, claiming he relied on Hagop’s representations as contained in the marketing piece and that such reps were untrue, brought a lawsuit seeking damages. The trial court entered Judgment against Hagop for approximately $2.4 million, finding that Hagop committed fraud by failure to disclose.

 

Hagop’s appeal was primarily centered around the theory that Druce could not have relied on anything that Hagop (or his broker) did or did not say or represent, because of the full-blown “as is, where is, non-reliance” clause in bold, upper case type in the Contract.

 

The Texas Court of Appeals in Fort Worth agreed with Hagop. Judgment reversed. Hagop wins. Druce loses. A properly worded “as is, where is, non-reliance” clause may still be effective in Texas.

 

See Matlock Place Apartments v. Druce; No. 02-09-00130; Court of Appeals, Second District of Texas; January 17, 2012.

 

Lessons learned:

 

1.      Recently, my son published an article evaluating the continuing effectiveness of “non-reliance” clauses in commercial real estate. Recent Texas Supreme Court authority indicated that such clauses are almost extinct. This Fort Worth Court, however, has a different view.

 

2.      Sellers should check their Contract forms to be sure they track the language of the “non-reliance” clause in this case as close as possible.

 

3.      Buyers should check their Contract forms to be sure they track the language of the Italian Cowboys case my son wrote about.

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