In CLC Roofing v. Helzer, a roofer purchased shingles from a seller and stored them on the seller’s property. No. 02-17-00229-CV, 2019 Tex. App. LEXIS 5927 (Tex. App.—Fort Worth July 11, 2019, no pet. history). Six months after the relevant purchase was consummated, the seller, who was in financial trouble, returned the buyer’s shingles to a manufacturer to pay down a debt owed by the seller. The seller then went into bankruptcy. The purchaser then sued several employees for fraud and fraud by omission. The jury found for the purchaser, awarding actual and punitive damages. The trial court entered judgment notwithstanding the verdict for an employee/salesman, but entered judgment against an employee/officer. The parties appealed.
The court of appeals first addressed the duty to disclose information in a commercial setting and held that any such duty arises before the transaction is consummated:
In general, there is no duty to disclose without evidence of a fiduciary or confidential (also referred to as “informal”) relationship. Section 551 of the Restatement (Second) of Torts—which the Supreme Court of Texas has neither expressly adopted nor rejected—recognizes a general duty of a party to a business transaction to disclose certain information in specific circumstances. Under Section 551, if a party to a business transaction has a duty to another party to disclose information, then the failure to disclose the information may be actionable for fraud to the same extent that an affirmative misrepresentation could be. Whether a party has a duty to disclose despite the absence of a confidential relationship is addressed in subsection (2) of Section 551. The duties it sets out all apply before the transaction is consummated.
Section 551 of the Restatement does not confer on parties to a transaction a duty to disclose information learned after the transaction is consummated. [N]umerous courts of appeals, including this court, have concluded that a duty to disclose may arise in the following circumstances: (1) when one voluntarily discloses information, the whole truth must be disclosed; (2) when one makes a representation, new information must be disclosed when that new information makes the earlier representation misleading or untrue; and (3) when one makes a partial disclosure and conveys a false impression. However, it is worth noting that the application of these duties to a business transaction in the absence of a confidential or fiduciary relationship traces back to Restatement Section 551.
Id. The court then affirmed the judgment for the employee/salesperson because there was no evidence that he had knowledge that his employer would breach the purchase agreement before it was entered into, i.e., no evidence that he knew that his employer would not segregate the shingles for the purchaser or would return them to a third party. The court explained:
What CLC essentially contends that Thompson failed to disclose after consummation of the June 2012 bulk buy was JEH’s breach of the Release or of its oral agreement with CLC. That, without more, is not a valid basis for a fraud by nondisclosure claim. To hold otherwise would compel any person with knowledge of their employer’s breach of contract to proactively disclose that breach to the other contracting party or be liable for fraud. This is not the law in Texas.
Regarding the employee/officer, he had signed a landlord’s release document that required the seller to segregate the shingles in the yard and maintain them for the purchaser. The court held that there was no evidence that the seller did not comply with those requirements before the transaction was consummated:
JEH’s failure to segregate CLC’s bulk buy shingles from JEH’s other inventory could support a fraud claim only if there was other circumstantial evidence of fraud. However, there is no evidence that JEH failed to segregate the shingles for bulk buys prior to the June 2012 bulk buy, and the only (albeit limited) evidence on this question is that until at least several months after the June 2012 bulk buy, JEH did segregate CLC’s shingles.
Id. With respect to the fraud by omission claim, it also failed:
[T]here is no evidence that E.G. failed to disclose JEH’s noncompliance with the Release because there is no evidence that JEH was prohibited from pulling the bulk buy shingles from its own inventory, and there is no evidence that prior to the June 2012 bulk buy, JEH failed to segregate the bulk buy shingles. Thus, at the time E.G. signed the Release, JEH’s promise to segregate the shingles was not a partial disclosure that conveyed a false impression or failed to disclose the whole truth. And when JEH made the December 2012 shingles return and stopped segregating CLC’s bulk buy shingles, the bulk buy transaction had already been consummated. Any disclosure after that time would have required E.G. to disclose JEH’s breach of its agreements, which he had no duty to do. Thus, E.G.’s failure to disclose the return cannot support a fraud by omission claim. And the record is devoid of any evidence establishing the existence of a confidential relationship between CLC and E.G. that would otherwise give E.G. a duty to disclose the information.
Id. The court affirmed the judgment for the employee/salesperson and reversed and rendered judgment for the employee/officer.
Interesting Note: As a matter of full disclosure, the author successfully represented the employee/officer on appeal in this case. This opinion is important precedent in Texas on the duty to disclose. The Texas Supreme Court recently held, for the first time, that a party can owe a duty to disclose information outside of a confidential or fiduciary relationship. Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, 572 S.W.3d 213, 219 (Tex. 2019). In doing so, the Court did not discuss the limitations on that principal as they were not raised in that opinion; indeed, the Court’s holding was dicta. Specifically, the Court did not address whether such a duty could survive after a transaction was consummated.
The CLC opinion is important precedent in Texas because it clearly limits a duty to disclose information to before a transaction is consummated. Claims that are based on alleged nondisclosures made after the consummation of a transaction fall outside of Section 551’s scope and are not actionable. 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.). This makes sense for many reasons. If it were 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). That would place an employee in a very difficult position with conflicting duties. An employee owes a fiduciary duty to its employer to not disclose confidential information. Should an employee have to disclose information to protect his or her self-interest where the disclosure would also violate a duty owed to his or her employer? That is an unfair position to place an employee. Moreover, a contrary argument would violate the concepts of the inducement and reliance elements of fraud by nondisclosure. If the plaintiff already entered into the transaction, the non-disclosing party could not have intended to induce anything regarding the subsequent nondisclosure. Also the plaintiff would not rely on anything more than what was represented prior to the transaction. The CLC opinion is very well reasoned and will assist parties in Texas in dealing with fraud by nondisclosure claims in commercial settings.