Originally published by David Fowler Johnson.
In Bombardier Aero. Corp. v. Spep Aircraft Holdings, a plaintiff who had purchased an aircraft sued the defendant for fraud associated with representations regarding whether the aircraft was new or used. No. 17-0578, 2019 Tex. LEXIS 101 (Tex. February 1, 2019). The plaintiff later found that parts of the aircraft were used, and sued for breach of contract and fraud. The jury found for the plaintiff and awarded actual damages and punitive damages. The court of appeals affirmed.
The Texas Supreme Court affirmed the fraud finding and actual damages award, though it reversed the punitive damages award due to limitation-of-liability clause. The Court first discussed a fraud by non-disclosure claim:
Fraud by non-disclosure, a subcategory of fraud, occurs when a party has a duty to disclose certain information and fails to disclose it. To establish fraud by non-disclosure, the plaintiff must show: (1) the defendant deliberately failed to disclose material facts; (2) the defendant had a duty to disclose such facts to the plaintiff; (3) the plaintiff was ignorant of the facts and did not have an equal opportunity to discover them; (4) the defendant intended the plaintiff to act or refrain from acting based on the nondisclosure; and (5) the plaintiff relied on the non-disclosure, which resulted in injury. In general, there is no duty to disclose without evidence of a confidential or fiduciary relationship. A fiduciary duty arises “as a matter of law in certain formal relationships, including attorney-client, partnership, and trustee relationships.” Id. (citations omitted). A confidential relationship is one in which the “parties have dealt with each other in such a manner for a long period of time that one party is justified in expecting the other to act in its best interest.” An informal relationship giving rise to a duty may also be formed from “a moral, social, domestic or purely personal relationship of trust and confidence.”
Id. The Court then described when such a claim could arise outside of a fiduciary or confidential relationship: “There may also be a duty to disclose when the defendant: (1) discovered new information that made its earlier representation untrue or misleading; (2) made a partial disclosure that created a false impression; or (3) voluntarily disclosed some information, creating a duty to disclose the whole truth.” Id. Accordingly, the Texas Supreme has not held that a party may have a duty to discuss information outside of a confidential relationship based on certain circumstances.
Oddly, the Court made this pronouncement where the defendant did not challenge the fraud finding and where the Court did not ultimately hold whether the defendant had a duty to disclose or not. This holding is simply dicta. Dictum is an observation or remark made concerning some rule, principle, or application of law suggested in a particular case, which observation or remark is not necessary to the determination of the case. BLACK’S LAW DICTIONARY 409 5th ed. (1979). Dictum is not binding as precedent under stare decisis. Lester v. First American Bank, Bryan Texas, 866 S.W.2d 361, 363 (Tex. App.—Waco 1993, writ denied). There is an exception to the precedential value of dictum depending on how it is classified, obiter dictum or judicial dictum. See Palestine Contractors, Inc. v. Perkins, 386 S.W.2d 764, 773 (Tex. 1973). Judicial dictum, a statement by the supreme court made very deliberately after mature consideration and for future guidance in the conduct of litigation, is “at least persuasive and should be followed unless found to be erroneous.” Id.
Interesting Note. This is a very significant holding because the Texas Supreme Court had never previously held that a party owed a duty to disclose outside of a confidential or fiduciary relationship. Generally, a duty to disclose arises only in confidential or fiduciary relationships. Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998). Whether a duty to disclose exists is a question of law. Bradford v. Vento, 48 S.W.3d 749, 755 (Tex. 2001); In re Int’l Profit Assocs., 274 S.W.3d 672, 678 (Tex. 2009). In Bradford, the Texas Supreme Court examined Texas law with regard to the duty to disclose in arm’s-length transactions. Id. The Texas Supreme Court noted that some courts required disclosure when a party makes a partial statement that is misleading and that the Restatement (Second) of Torts section 551 recognized a general duty to disclose facts in a commercial setting, but the Court clarified that “We have never adopted section 551.” Bradford, 48 S.W.3d at 755. Some courts held that Bradford confirmed that under Texas law, “a duty to disclose arises only where a fiduciary or confidential relationship exists.” Imperial Premium Finance, Inc. v. Khoury, 129 F.3d 347, 352 (5th Cir. 1997) (emphasis added); accord Coburn Supply, Co., Inc. v. Kohler Co., 342 F.3d 372, 378 (5th Cir. 2003) (holding under Texas law that, as a matter of law, an at-will, non-exclusive distributor relationship is not the kind of confidential or fiduciary relationship that would give rise to duty to disclose negotiations with another distributor or plans to terminate the distributor relationship); Bay Colony, Ltd. v. Trendmaker, Inc., 121 F.3d 998, 1004 (5th Cir. 1997) (“Texas law recognizes a duty to disclose only where a fiduciary or confidential relationship exists.”) (emphasis added). See also In re Longoria, 470 S.W.3d 616, 632 (Tex. App.—Houston [14th Dist.] July 16, 2015, original proceeding) (“No duty of disclosure arises without evidence of a confidential relationship.”); Bazan v. Muñoz, 444 S.W.3d 110, 117-18 (Tex. App.—San Antonio 2014, no pet.) (noting “[g]enerally, no duty of disclosure arises without evidence of a confidential or fiduciary relationship”).
For example, in Bay Colony, Ltd. v. Trendmaker, Inc., for example, the Fifth Circuit applying Texas law held there was no confidential or fiduciary relationship between the parties that would give rise to a duty to disclose. 121 F.3d 998, 1004 (5th Cir. 1997). In that case, Trendmaker and Bay Colony had entered into an arms-length transaction for the sale of the commercial reserves and the later modifications of real estate notes. The Fifth Circuit stated that the “fact that parties have entered into a contract does not create a confidential relationship.” Id. (citing Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594 (Tex. 1992) (emphasis added)). The court concluded that under Texas law the contract did not constitute the type of special relationship necessary to create a duty to disclose. Id.(citing Lee v. Wal-Mart Stores, Inc., 34 F.3d 285, 290 n. 5 (5th Cir. 1994) (the fact that people have had prior dealing with each other … does not establish a confidential relationship)).
Admittedly, there are intermediate courts of appeals that have held that a duty to disclose may arise in arms-length transactions where: (1) one voluntarily discloses partial information, but fails to disclose the whole truth; (2) one makes a representation and fails to disclose new information that makes the earlier representation misleading or untrue; and (3) where one makes a partial disclosure and conveys a false impression. But, importantly, a trial court or intermediate court of appeals cannot adopt a common-law cause of action that has not been expressly adopted by either the Texas Legislature or the Texas Supreme Court. Jackson Walker, LLP v. Kinsel, 518 S.W.3d 1 (Tex. App.—Amarillo April 10, 2015) (no tortious interference with inheritance claim in Texas because the Texas Supreme Court or Texas Legislature had not adopted such a claim), aff’d, 526 S.W.3d 411 (Tex. 2017). The Texas Supreme Court has recently succinctly stated that absent legislative enactment, “the question of whether the tort should exist under Texas law is ours to answer.” Jackson Walker, LLP, 526 S.W.3d at 434.
The duty to disclose based on new information derives from the Restatement (Second) of Torts, Section 551. Bradford, 48 S.W.3d at 755. This section expressly limits the expanded duty of disclosure to apply only “before the transaction is consummated.” Restatement (Second) of Torts, § 551. Thus, claims that are based on alleged nondisclosures made after the consummation of a transaction fall outside of Section 551’s scope. Purina Co. v. McKendrick, 850 S.W.2d 629, 633-34 (Tex. App.—San Antonio 1993, writ denied); Susanoil, Inc. v. Cont’l Oil Co., 519 S.W.2d 230, 236 (Tex. Civ. App.—San Antonio 1975, writ ref’d n.r.e.) (affirming fraud finding when a party failed to disclose information “before closing the transaction.”). Otherwise, a company’s employees would have a duty to disclose their employer’s breach of contract to third parties every time the employer breaches a contract. Texas law does not support such a broad duty of disclosure. See Oliver v. Rogers, 976 S.W.2d 792 (Tex. App.—Houston [1st Dist.] 1998, pet. denied) (holding that a contracting party has no duty to disclose changed circumstances that occur after a contract is formed). The Texas Supreme Court did not discuss this important limitation in it dicta in the Bombardier case.
It must be noted that motions for rehearing and a new amicus brief raising this issue was filed in the Bombardier case. The Texas Supreme Court may change its opinion.
Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.
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