Opinion ID: 63256
Heading Depth: 2
Heading Rank: 3

Heading: Texas Statutory Fraud Claims

Text: Dorsey alleged in his complaint that H. Barnes, J. Barnes, and the corporations under their domination and control violated section 27.01 of the Texas Business and Commerce Code, entitled Fraud in Real Estate and Stock Transactions. That section states: Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a (1) false representation of a past or existing material fact, when the false representation is (A) made to a person for the purpose of inducting that person to enter into a contract; and (B) relied upon by that person in entering into that contract. TEX. BUS. & COM.CODE ANN. § 27.01(a)(1). That statute, by its own terms, applies only to fraud in real estate or stock transactions. See id.; Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex.App. 2000). A loan transaction, even if secured by land, is not considered to come under the statute. Burleson State Bank, 27 S.W.3d at 611; see also Greenway Bank & Trust of Houston v. Smith, 679 S.W.2d 592, 596 (Tex.App.1984) (The statute makes no mention of any application to guaranty agreements, secured by real estate, or to a party who `merely' loaned money for the purchase of real estate.). Because Dorsey did not allege facts to show that the Defendants induced him to participate in a transaction for the transfer of real estate or stock, his claims against all defendants fail as a matter of law.
Dorsey alleged in his complaint that H. Barnes and J. Barnes, acting individually and on behalf of PEI, CHF, CAM, and CEC, violated the anti-fraud provisions of the securities laws of Texas. The Texas Securities Act (the TSA) creates causes of action for securities fraud against various parties, including sellers of securities and aiders and abettors. TEX. REV.CIV. STAT. ANN. art. 581-1 to 581-39. Regarding sellers of securities, the TSA states: A person who offers or sells a security. . . by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, is liable to the person buying the security from him. . . . However, a person is not liable if he sustains the burden of proof that either (a) the buyer knew of the untruth or omission or (b) he (the offeror or seller) did not know, and in the exercise of reasonable care could not have known, of the untruth or omission. Id. art. 581-33(A)(2). The district court dismissed Dorsey's claims under Texas securities law for his purchases made in February 1998 for failure to plead scienter with particularity. But unlike a common law fraud cause of action, an article 581-33 claim does not require scienteri.e., proof that the speaker knew that the representation was false, or made it without regard to its truth or falsity. Herrmann Holdings Ltd. v. Lucent Technologies Inc., 302 F.3d 552, 563 (5th Cir.2002) (footnote omitted). [5] Because Dorsey was not required to plead scienter, and he alleged all of the elements of Texas securities fraud under the TSA with sufficient particularity, his claims against H. Barnes, acting as a seller, individually and on behalf of PEI and CHF, should not have been dismissed. The district court did not explicitly consider whether Dorsey had stated a claim against J. Barnes as an aider and abettor under the TSA. Regarding aiding and abetting, the TSA states: A person who directly or indirectly with intent to deceive or defraud or with reckless disregard for the truth or the law materially aids a seller, buyer, or issuer of a security is liable [under the TSA] jointly and severally with the seller, buyer, or issuer, and to the same extent as if he were the seller, buyer, or issuer. TEX.REV.CIV. STAT. ANN. art. 581-33(F)(2). To state a claim for aider and abettor liability under the TSA, a plaintiff must show (1) a primary violation of the securities laws, (2) that the aider and abettor has a general awareness of his role in the violation, (3) that he gave substantial assistance in the violation, and (4) that he intended to deceive the plaintiff or acted with reckless disregard for the truth of the primary violator's misrepresentations. Newby v. Enron Corp. (In re Enron Corp. Sec., Derivative & ERISA Litig.), 388 F.Supp.2d 780, 787 (S.D.Tex.2005). Unlike a claim for seller liability under the TSA, a claim for aider and abettor liability does require that a plaintiff plead and prove scienter. In his brief, however, Dorsey disavows any need to plead scienter. We therefore conclude that Dorsey relies solely on seller liability as a cause of action, which can only extend to H. Barnes, PEI, and CHF.