Fraud Damages: Wrong Date = No Evidence

The Danger of Guessing Wrong on the Valuation Date for Fraud Damages

The First Court of Appeals (Houston) issued a new opinion yesterday highlighting the danger of getting the date wrong on your fraud measure of damages. The court held that proving up damages for the wrong date is the same thing as introducing no evidence of damages at all and reversed a $650,000 jury verdict and rendered a take nothing judgment. Plaintiffs need to be aware of this exceptionally harsh trap.

Fraud Damages

TAN DUC CONSTRUCTION LIMITED COMPANY, INC. AND HOANGYEN THI DANG, Appellants V. JIMMY TRAN, Appellee, 01-14-00539-CV, 2017 WL 491289 (Tex. App.—Houston [1st Dist.] Feb. 7, 2017, no. pet. h.), involved a fraud claim arising out of a divorce. The husband sued the wife and a company controlled by her for fraudulently inducing his transfer of his 25% interest in their home. The jury found that the defendants committed fraud and that the value of the lost interest in the real estate was $650,000. The court of appeals reversed the judgment for $650,000 in actual damages and $50,000 in punitive damages, and rendered a take nothing judgment in favor of the defendants on the ground of no legally sufficient evidence of damages.

Measure of Damages For Fraud

The court held that there are two measures of direct damages in a fraud case: out-of-pocket and benefit-of-the-bargain. "Out-of-pocket damages" measure the difference between the value paid and the value received. "Benefit-of-the-bargain damages" measure the difference between the value as represented and the value received. Both measures are determined at the time of the transfer of the interest induced by the fraud. Any additional losses may be recovered as consequential damages, which must be explicitly premised on findings that the losses were foreseeable and directly traceable to the misrepresentation.

Citing Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41 (Tex. 1998); Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812 (Tex. 1997); Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369 (Tex. 1984); Fazio v. Cypress/GR Houston I, L.P., 403 S.W.3d 390 (Tex. App.—Houston [1st Dist.] 2013, pet. denied).

No Evidence of Fraud Damages

In Tan Duc Construction v. Tran, the transfer of the interest occurred in March 2010. Therefore, the plaintiff had the burden to prove the value of the house as of that date. The plaintiff claimed that the value of the house as a whole exceeded $1 million and introduced evidence of the value of the house when the parties first married in 2007 (presumably the purchase price), when the house was foreclosed on in October 2011, and an expert appraisal of the house as of 2013. The court of appeals' opinion does not state the what the values were that were put into evidence, but it is a fair assumption that the values both before and after the date of the fraudulent transaction were consistent with a finding of $650,000 in fraud damages. Nevertheless, the court held: "But in order to show that he was damaged by the fraud, Tran was required to put on damages evidence regarding the value of the home in March 2010, when he was purportedly fraudulently induced to transfer his interest. Tran put on no such evidence. Neither Tran nor Lehrer [the expert] testified about the value of the house in 2010. Thus, Tran did not adduce any evidence to permit the jury to calculate damages based on the allegedly fraudulently induced transfer."

Because none of the evidence of damages valued the home on the correct date, the court held that there was no evidence of damages:

Viewing the evidence in a light most favorable to the jury's verdict, crediting favorable evidence if reasonable jurors could and disregarding contrary evidence unless reasonable jurors could not, there is no legally sufficient evidence of the value of the home in March 2010 at the time that Tran transferred his 25% interest. Accordingly, we hold that the evidence is legally insufficient to support the $650,000 fraud damages award. Because Tran did not adduce evidence regarding the value of the home at the time that he transferred his interest due to the alleged fraud, we will render judgment that Tran take nothing by his fraud claim.

Citing Guevara v. Ferrer, 247 S.W.3d 662, 669–70 (Tex. 2007); Fazio v. Cypress/GR Houston I, L.P., 403 S.W.3d 390, 395-96 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) (legally insufficient evidence supported damages award based upon evidence of property value three years after fraud, and trial court properly disregarded jury's finding and awarded $0 in fraud damages).

This is an exceptionally harsh result. "Legal sufficiency" is normally a very low standard. A jury finding usually passes the legal sufficiency test if there is more than a scintilla of evidence to support it. Here, we are dealing with a piece of real estate, which had an objectively ascertainable value before and after the fraud and no evidence to suggest that somehow the value of the house slipped down to zero in between. Common sense would dictate that there is more than a scintilla of evidence to support the jury's finding of fraud damages and that the case should be remanded for a new trial on damages with the proper date. The law regarding proof of damages, however, does not always follow common sense.

To be fair, the problem with the plaintiff's case could have been easily fixed. The law is clear on these facts what the correct valuation date should have been. Real estate appraisal experts have access to historic market values and can do an appraisal as of any date. Furthermore, the plaintiff had the ability to offer his own testimony as to the value of the house under the "property owner rule" and could easily have created a graph showing his opinion of the value of the house from 2007 through 2013, which would have provided some evidence in the record as of the appropriate date.

Litigation involving shareholder oppression and other disputes involving owners of closely-held businesses frequently involves valuation damages and sticky issues of valuation dates. Even after the demise of the shareholder oppression doctrine, minority shareholders may bring damages claims for fraud and stock conversion and may seek a buy-out under the breach of trust cause of action. Many times the appropriate valuation date is unclear and disputed. Plaintiffs must be aware that guessing wrong on the valuation date may result in a take-nothing judgment. Therefore, it is prudent to obtain and introduce evidence of values on all the possibilities. Parties may also seek a pretrial legal ruling as to the correct valuation date under Rule 166 prior to having their expert perform the valuation.