Fraud Is Now Legal in Texas (For Some People)

Abstract

Three intermediate appellate courts in Texas have held that corporate actors— directors, officers, managers, shareholders, and probably common employees and agents—are immune from personal liability for fraud that they themselves commit as long as their deceit relates to or arises from a contractual obligation of the corporation. Similar actors in limited liability companies also enjoy immunity. These courts do not require that the business entities themselves be liable for the fraud. When the entities are not liable, these new holdings leave fraud victims no remedy at all, even if a jury would find fraud. One (or maybe two) Texas appellate courts have held otherwise. The Supreme Court of Texas will probably decide the issue, and one justice has already signed on. To date, these decisions have only been noticed in print by a few practicing attorneys. No commentator has questioned them. But the decisions are wrong. These courts claim to be following a statute, but the statute does not support the courts’ analysis. Nor does the statute’s legislative history. Surprising (and probably unnoticed) results strongly suggest the legislature never intended this reading. And what rationale could justify it? Fraud is the economic equivalent of theft. Practitioner comments on the decisions suggest that the cost of litigating fraud is too high. Texas’s reputation for pro-business policies might suggest this move is just helpful de-regulation, but it is not. Policing fraud is the only way to make markets safe for freedom of contract, and litigating fraud claims is the courts’ role. These decisions should be abandoned before they become the law in all of Texas and elsewhere.