Texas Judiciary Online - HTML Opinion

This case arises out of the sale of real property under a contract that contains as-is and waiver-of-reliance provisions. After the sale, the buyer discovered asbestos in the soil on the property and brought suit against the seller and its employees alleging common law fraud, statutory fraud, and negligent misrepresentation. The main issue on appeal is whether the trial court correctly granted summary judgment based on the contract=s as-is and waiver-of-reliance provisions. We first discuss the effect of the Texas Supreme Court=s decision in Schlumberger Tech. Corp. v. Swanson on its prior opinion in Prudential Ins. Co. of America v. Jefferson Assocs., Ltd. We then conclude that the trial court erred in granting summary judgment as to the fraudulent-inducement exception to the enforceability of the as-is and waiver-of-reliance provisions because the summary-judgment evidence raises a fact issue as to whether the seller=s alleged fraudulent representations or concealment of information induced the buyer to enter into this contract. However, we also conclude that the summary-judgment evidence proves as a matter of law that the seller did not impair, obstruct, or interfere with the buyer=s inspection of the property, which, if proved, would have defeated enforceability of the as-is and waiver-of-reliance provisions in the sales contract. Because there is a fact issue as to the fraudulent-inducement exception, we reverse the trial court=s judgment and remand for further proceedings consistent with this opinion.

I. Factual and Procedural Background

This dispute between sophisticated parties involves approximately twelve acres of land at 1400 North Post Oak Road in Houston, Texas (the AProperty@). Appellee Celotex Corporation operated an asphalt shingle manufacturing plant on the Property for a number of years until 1998, when Celotex permanently closed the plant. Celotex decided to sell the Property and retained Cushman & Wakefield as its real-estate broker. While Cushman & Wakefield was entertaining bids for the Property, Warehouse Associates^{^[1]} asked Cushman & Wakefield for any documents that Celotex had regarding the Property. In response, Celotex forwarded part of a 1996 environmental report prepared for Celotex. The part of this report Celotex produced indicates that there had been asbestos issues relating to the buildings on the Property but indicates nothing about asbestos contamination in the soil or use of asbestos in the manufacturing process on the Property, as opposed to asbestos in building materials in the structures on the Property. Celotex did not give Warehouse Associates the part of the report stating that asbestos previously had been used in the manufacturing process at the plant on the Property.

Contract for the Sale of the Property

After receiving various offers and inquiries, on January 24, 2000, Celotex entered into a written contract with appellant Warehouse Associates Development, Inc. for the sale of the Property (the AContract@). The Contract provided for a purchase price of $3.25 per square foot, or a total of approximately $1.7 million. The Contract recited that Celotex had begun demolition of all existing structures on the Property down to the slab level and that Celotex would use its best efforts to cause such demolition work to be completed as soon as possible. Celotex agreed to send a notice to Warehouse Associates upon completion of this demolition work. Under the Contract, Warehouse Associates was allowed to inspect the Property within sixty days from the date Celotex gave notice that it had completed this demolition work. During this sixty-day inspection period, Warehouse Associates had the right to terminate the Contract by written notice if its inspections revealed conditions unsatisfactory to it in its sole discretion.

Seller=s Disclaimer of Warranties, Promises, Covenants, and Guaranties

In the Contract, the parties agreed that, other than the warranties of title contained in the deed, Celotex did not make and was specifically disclaiming any representations, warranties, promises, covenants, or guaranties of any kind. The Contract imposed no obligation on Celotex to provide documents or records relating to the Property=s condition. Warehouse Associates, however, was entitled to conduct inspections, tests, and investigations as it deemed necessary to determine the suitability of the Property for its intended use. Unless Warehouse Associates terminated the Contract before the inspection period expired, Warehouse Associates would be obligated to close the transaction, and, upon closing, Warehouse Associates would assume all existing and future liabilities associated with the ownership, use, and possession of the Property, including any liabilities imposed by local, state, or federal environmental laws or regulations.

Buyer=s Right to Inspect and Waiver of Reliance

In the Contract, Warehouse Associates, as the buyer, acknowledged that it had the opportunity to inspect the Property and agreed that it was relying solely on its own inspection and investigation of the Property and not on any information from Celotex. The parties also agreed that the sale of the Property at closing would be on an Aas is, where is@ condition and basis Awith all faults.@ On February 10, 2000, Celotex gave notice that it had completed demolition of the buildings down to the slabs, triggering the buyer=s sixty-day inspection period that ended on April 10, 2000.

Occurrences After Commencement of Inspection Period

On the day that the inspection period began, Celotex=s contractor was excavating soil on the Property and found what appeared to the contractor to be raw, friable asbestos buried in the ground. The contractor contacted appellee Lecil M. Colburn, Celotex=s Director of Environmental Affairs and chairman of a Celotex committee formed to sell various Celotex properties. The contractor asked Colburn what to do and Colburn instructed the contractor to leave that area of the Property alone and to backfill the excavated area, indicating the matter would be addressed at a later date. The contractor had one employee, wearing a respirator, backfill the excavation as quickly as possible.

During the relevant period, HBC Engineering, Inc. (AHBC@) inspected the Property and conducted a Phase I Environmental Site Assessment of the Property. HBC had discussions about the Property with Colburn and with David Murry, a shipping supervisor for Celotex. HBC did not specifically ask Colburn about asbestos, and Colburn said nothing to HBC about asbestos or the recent discovery of suspected asbestos-containing material buried in the ground on the Property. Colburn listed the major raw materials Celotex had used in its shingle-manufacturing process without mentioning asbestos. He also stated his belief that Celotex=s predecessor had used a similar shingle-manufacturing process. At the end of his interview with Colburn, an HBC representative asked Colburn if he was aware of any other environmental concerns, and Colburn said nothing about the suspected asbestos-containing material recently discovered on the Property or about the possibility of asbestos being buried in the soil on the Property. HBC also conducted an environmental site investigation that included analysis of soil and groundwater samples taken from the Property. HBC did not test the soil for the presence of asbestos. In its reports to the buyer, HBC did not mention anything about any contamination of the soil on the Property due to asbestos.

Buyer=s Discovery After the Sale

Warehouse Associates did not exercise its right to terminate the Contract during the inspection period. On May 24, 2000, the sale closed and Celotex conveyed title to the Property to appellant Warehouse Associates Corporate Centre Post Oak, Ltd. by a special warranty deed that contains the same waiver-of-reliance and as-is language as the Contract. In August 2000, a contractor demolishing the concrete slabs discovered asbestos-containing material in the soil on the Property. An expert analyzed soil borings and detected more than one percent asbestos in forty-four of seventy soil borings from sites across the Property. This expert concluded that the Property has extensive, widespread asbestos-containing material in the soil to a depth of at least thirteen feet below the ground surface.

Claims and Counterclaims

Appellants Warehouse Associates Corporate Centre II, Inc., Warehouse Associates Corporate Centre Post Oak, Ltd., and Warehouse Associates Development, Inc. (collectively referred to herein as AWarehouse Associates@) filed claims against appellees Celotex, Colburn, and Murry (the ACelotex Parties@), alleging damage claims for common law fraud, negligent misrepresentation, and statutory fraud under section 27.01 of the Texas Business and Commerce Code. Warehouse Associates also sought the equitable remedy of rescission of the transaction, as well as punitive damages and attorney=s fees. The Celotex Parties counterclaimed against Warehouse Associates asserting various claims.

Motions for Summary Judgment

Warehouse Associates filed a motion for summary judgment seeking dismissal of the Celotex Parties= counterclaims. The Celotex Parties filed a seventy-page traditional motion for summary judgment, as well as more than 1,700 pages of summary-judgment evidence. In their motion, the Celotex Parties asserted the following independent grounds in support of a take-nothing judgment in their favor:

(1) As a matter of law, Warehouse Associates may not assert it relied upon the Celotex Parties= representations because Warehouse Associates conducted its own independent investigation of the environmental condition of the Property and the Celotex Parties did not interfere with this investigation in any manner.

(2) The waiver-of-reliance and as-is language in the Contract and the deed negate the essential element of reliance as a matter of law.

(3) Warehouse Associates=s claims are barred by the doctrines of estoppel by contract and estoppel by deed.

The trial court granted a take-nothing summary judgment in favor of the Celotex Parties as to all of Warehouse Associates=s claims.^{^[2]} The trial court also granted Warehouse Associates=s motion for summary judgment and dismissed all of the Celotex Parties= counterclaims, except the counterclaim seeking attorney=s fees, expenses, and costs under a provision in the Contract allowing such recovery to the prevailing parties in any claim or controversy relating to the Contract.^{^[3]} Subsequently, the trial court granted summary judgment in favor of the Celotex Parties on this counterclaim, awarding them more than $2,000,000 in attorney=s fees, expenses, and costs. The trial court signed a final judgment setting out all of its summary-judgment rulings.

Although Warehouse Associates has appealed the dismissal of its claims, the Celotex Parties have not appealed the trial court=s dismissal of their counterclaims or the trial court=s denial of their request for summary judgment compelling Warehouse Associates to accept Celotex=s tender to buy back the Property.

II. Issues Presented

Warehouse Associates presents the following issues for appellate review:

(1) Is a seller of real property who (a) knowingly conceals and intentionally fails to disclose environmental hazards to a buyer and (b) interferes with the buyer=s investigation of the property nevertheless immunized from fraud and misrepresentation claims because the sales contract and warranty deed contain an Aas is B no reliance@ clause?

(2) Is a seller of real property who (a) actively conceals or purposefully fails to disclose material information about the environmental condition of the property or (b) provides misleading information to the buyer immunized from fraud and misrepresentation claims because the buyer undertook investigation of the Property?

(3) Does the doctrine of estoppel by contract or deed apply to a fraudulently induced contract or deed?

(4) May a buyer recover lost profits when a seller has fraudulently induced the sale of commercial property?

III. Standard of Review

In reviewing a traditional motion for summary judgment, we take as true all evidence favorable to the nonmovant, and we make all reasonable inferences in the nonmovant=s favor. Dolcefino v. Randolph, 19 S.W.3d 906, 916 (Tex. App.C Houston [14th Dist.] 2000, pet. denied). If the movant=s motion and summary-judgment evidence facially establish its right to judgment as a matter of law, the burden shifts to the nonmovant to raise a genuine, material fact issue sufficient to defeat summary judgment. Id. Because the trial court did not specify the grounds upon which it granted a take-nothing summary judgment in favor of the Celotex Parties, Warehouse Associates must show that each independent ground alleged in the motion for summary judgment is insufficient to support the judgment granted. See Caldwell v. Curioni, 125 S.W.3d 784, 789 (Tex. App.CDallas 2004, pet. denied).

IV. Analysis

A. To what extent, if any, did Schlumberger Technology Corp. v. Swanson change the legal standard used in Prudential Insurance Co. of America v. Jefferson Associates, Ltd. to determine whether the as-is and waiver-of-reliance language defeats the buyer=s fraud claims as a matter of law?

In Prudential Insurance Co. of America v. Jefferson Associates, Ltd., the Texas Supreme Court limited the enforceability of as-is and waiver-of-reliance language to exclude situations in which (1) the buyer was induced to enter into the contract containing that language by a fraudulent representation or concealment of information by the seller or (2) the seller engaged in conduct that impaired, obstructed, or interfered with the buyer=s inspection of the property being sold.^{^[4]} See 896 S.W.2d 156, 160B62 (Tex. 1995). In this opinion, we refer to these exceptions as the Afraudulent-inducement exception@ and the Aimpairment-of-inspection exception,@ respectively. Before determining if the summary-judgment evidence raises fact issues as to these APrudential exceptions,@ we address the Celotex Parties= argument under Schlumberger Technology Corp. v. Swanson that the as-is and waiver-of-reliance language in the Contract is enforceable even if such fact issues exist. 959 S.W.2d 171 (Tex. 1997). After carefully reviewing Schlumberger, we are compelled by the Texas Supreme Court=s analysis in that case to disagree with this argument. The Schlumberger court=s analysis leads us to conclude that the two Prudential exceptions still stand, subject to a small exception to the fraudulent-inducement exception carved out by Schlumberger, which does not apply in the instant case.

In Schlumberger, Schlumberger Technology Corporation wanted to buy the Swansons= interest in an underwater diamond mining operation. See id. at 173B74. After becoming embroiled in a dispute with Schlumberger over their interest=s value, the Swansons agreed to a price and sold their interest to Schlumberger. See id. at 174. As part of this sale, the Swansons executed a release specifically noting the dispute as to the interest=s value, providing for a release of all of the Swansons= claims regarding this interest, and containing a waiver-of-reliance provision. See id. at 180. The Swansons later sued Schlumberger, asserting that Schlumberger fraudulently induced them to enter into this transaction. See id. at 174.

In discussing the enforceability of the waiver-of-reliance provision, the Texas Supreme Court began with a presumption that, as found by the jury, Schlumberger had fraudulently induced the Swansons to enter into the transaction and sign the release. See id. at 174, 178. The Texas Supreme Court rejected Schlumberger=s argument that, as long as the releasing party was represented by counsel in an arms-length transaction, a waiver-of-reliance provision in a release bars a claim that the releasing party was fraudulently induced to sign the release. See id. at 175, 178. The Schlumberger court observed that some Texas Supreme Court precedents hold that a release can be set aside upon proof of fraudulent inducement, even if the release contains a waiver-of reliance provision. See id. at 178. However, the Schlumberger court also acknowledged that other cases reached the opposite result. See id. at 178B79. The Texas Supreme Court then stated that it resolved these two conflicting lines of authority in Dallas Farm Machinery Co. v. Reaves, a case decided four decades earlier, in which it adhered to the former line of cases that refuse to enforce fraudulently induced waiver-of-reliance provisions. See id. at 179 (discussing Dallas Farm Machinery Co. v. Reaves, 307 S.W.2d 233 (Tex. 1957)). The Schlumberger court observed that the holding in Dallas Farm Machinery brought Texas law into harmony with the great weight of authority, the Restatement of Contracts, and the views of eminent legal scholars. See id.

After seeming to embrace Dallas Farm Machinery Co., the Schlumberger court then stated that juxtaposed against this authority is a competing concernCthe ability of the parties to fully and finally resolve disputes between them. See id. Reasoning that parties should be able to bargain for and execute a release barring all further disputes, the Schlumberger court opined that circumstances should exist under which a contracting party can clearly and specifically disclaim reliance on misrepresentations of another party so as to defeat a claim of fraudulent inducement as a matter of law. See id. The Schlumberger court then gave as an example, a disclaimer of reliance conclusively negating the element of reliance, which is essential to a fraudulent inducement claim. To illustrate this example, the Schlumberger court cited Prudential Insurance Co., 896 S.W.2d at 161B62, and Estes v. Hartford Accident & Indemnity Co., 46 S.W.2d 413, 417B18 (Tex. Civ. App.CEl Paso 1932, writ ref=d). See id. Though the Prudential case did enforce waiver-of-reliance language in a contract, the part of that opinion cited by the Schlumberger court cites Dallas Farm Machinery Co. and notes that such language is not enforceable against a buyer induced to enter into the contract by the seller=s fraudulent representation or concealment of information. See Prudential Ins. Co., 896 S.W.2d at 161B62. The other Texas Supreme Court precedent cited by the Schlumberger court, Estes v. Hartford Accident & Indemnity Co., held that the record contained no evidence of reliance on the alleged fraudulent misrepresentation that allegedly induced a party to sign a release. See Estes, 46 S.W.2d at 417B18. However, there is no mention in Estes that the release contained a waiver-of-reliance clause, and the court states that the release would not be enforceable if the releasor had proved fraud upon which he relied in signing the release. See id. at 417.

The Schlumberger court described the circumstances in which waiver-of-reliance language would negate proof of fraudulent inducement as follows:

The contract and the circumstances surrounding its formation determine whether the disclaimer of reliance is binding. Because the parties were attempting to put an end to their deal, and had become embroiled in a dispute over the feasibility and value of the project, we conclude that the disclaimer of reliance the Swansons gave conclusively negates the element of reliance.

Schlumberger Tech. Corp., 959 S.W.2d at 179B80 (citations omitted).

The Schlumberger court found it significant that, throughout the negotiations that led to the execution of the release, the parties disagreed about the value of the Swansons= interest. See id. at 180. The Schlumberger court stated that the sole purpose of the release was to end the dispute as to the value of the commercial project once and for all. See id. Noting that the Swansons unequivocally disclaimed reliance upon representations by Schlumberger about the project=s value, the Schlumberger court concluded that, in light of this language and in this context, the Swansons must have intended to forego reliance on any representations about the value of the project, given that this was the very dispute the release was supposed to resolve. See id.

In concluding, the Schlumberger court emphasized that a waiver-of-reliance clause will not always bar a fraudulent-inducement claim and noted that the Prudential case had identified some circumstances in which an as-is clause would not preclude a fraudulent-inducement claim. See id. (citing Prudential Ins. Co., 896 S.W.2d at 162). Again, the part of Prudential cited by the Schlumberger court includes a citation to Dallas Farm Machinery Co. and states that the buyer would not have been bound by the as-is provision (which contained waiver-of-reliance language) if it had been induced to enter into the contract by the fraudulent representation or concealment of information by the seller. See id; Prudential Ins. Co. of Am., 896 S.W.2d at 162. After indicating that the Prudential exceptions are still valid, the Schlumberger court stated, AWe conclude only that on this record, the disclaimer of reliance conclusively negates as a matter of law the element of reliance on representations about the feasibility and value of the sea‑diamond mining project needed to support the Swansons= claim of fraudulent inducement.@ See id. at 181 (emphasis added).

The Prudential court set forth two exceptions to the enforceability of as-is or waiver-of-reliance language in a contract.^{^[5]} See Prudential Ins. Co. of Am., 896 S.W.2d at 162. One of these exceptions is inducement of the complaining party to enter into the contract by the fraudulent representation or concealment of information by the party seeking to enforce the contractual language. See id. The Schlumberger court indicated that both exceptions from Prudential are still valid but also held that under the circumstances shown by the record in Schlumberger, fraudulent inducement did not prevent enforcement of the waiver-of-reliance language in the release between Schlumberger and the Swansons. See Schlumberger Tech. Corp., 959 S.W.2d at 179B81.

Schlumberger allowed a party to enforce a waiver-of-reliance clause even though the court presumed, as found by the jury, that the party in question fraudulently induced the other parties to enter into the contract containing that clause. See id. at 175, 178B81. If we were to read Schlumberger broadly, this holding likely would be applied in many cases based on such commonly existing factors as (1) an arm=s length transaction between sophisticated parties represented by counsel and (2) waiver-of-reliance language that clearly and unequivocally covers the specific representations on which the complaining party allegedly relied. However, the Schlumberger court itself stated that an arm=s length transaction between parties represented by counsel is not enough to enforce a waiver-of-reliance clause. See id. at 175, 178. Furthermore, a broad reading of Schlumberger effectively would overrule the Prudential fraudulent-inducement exception that Schlumberger and many other authorities indicate is still good law. See Geodyne Energy Income Prod. P=ship I-E v. Newton Corp., 161 S.W.3d 482, 487, 490 & n.32 (Tex. 2005) (holding that quitclaim deed containing as-is language did not violate Texas Securities Act but citing the two Prudential exceptions and stating that analysis would be different if there were evidence of fraudulent inducement); Schlumberger Tech. Corp., 959 S.W.2d at 181; Kane v. Nxcess Motorcars, Inc., No. 01-04-00547-CV, 2005 WL 497484, at *6B7 (Tex. App.CHouston [1st Dist.] Mar. 3, 2005, no pet.) (holding in memorandum opinion that trial court erred in granting summary judgment based on as-is clause because of fact issues as to fraudulent-inducement exception under Prudential); Bynum v. Prudential Residential Services, Ltd. P=ship, 129 S.W.3d 781, 787B92 (Tex. App.CHouston [1st Dist.] 2004, pet. denied) (applying Prudential exceptions to contract containing both waiver-of-reliance and as-is language and determining that summary-judgment evidence did not raise a fact issue as to these exceptions); Nelson v. Najm, 127 S.W.3d 170, 173, 175B76 (Tex. App.CHouston [1st Dist.] 2003, pet. denied) (applying Prudential analysis to contract containing both waiver-of-reliance and as-is language and determining that such language did not bar fraud claims because there was evidence that seller fraudulently induced buyer to enter into contract by fraudulent concealment). Schlumberger expressly preserves the Prudential exceptions while, at the same time, on the facts Ain [the Schlumberger] record,@ it forecloses application of the fraudulent-inducement exception from Prudential. We must reconcile these two aspects of Schlumberger to discern its application in this case.

Upon careful consideration of the entire opinion in Schlumberger, we conclude that the decisive factor in the case was the contracting parties= mutual intent to definitively resolve a long-running dispute in which they had been embroiled.⁶ The Schlumberger court held that the fraudulent-inducement exception from Prudential does not apply to waiver-of-reliance language (1) that clearly and unequivocally disclaims reliance on the specific representations that are the basis of the claims in question, (2) in a contract whose purpose is to definitively end a dispute in which the contracting parties have been embroiled, (3) in an arm=s length transaction between sophisticated parties represented by counsel.⁷ See Schlumberger Tech. Corp., 959 S.W.2d at 179B81. Because the Contract=s purpose was not to definitively end a dispute in which Celotex and Warehouse Associates had been embroiled, this case does not fall within the scope of Schlumberger, and therefore, the two Prudential exceptions provide the legal standard.⁸

B. Is there a genuine issue of material fact as to the two Prudential exceptions?

In their traditional motion for summary judgment, the Celotex Parties asserted that the following waiver-of-reliance and as-is language in the Contract and the deed negates reliance by Warehouse Associates as a matter of law:

OTHER THAN THE WARRANTIES OF TITLE CONTAINED IN THE DEED, PURCHASER ACKNOWLEDGES AND AGREES THAT SELLER HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO (A) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY, INCLUDING WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY, (B) THE INCOME TO BE DERIVED FROM THE PROPERTY, (C) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH PURCHASER MAY CONDUCT THEREON, (D) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY. . . (E) THE HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY, OR (F) ANY OTHER MATTER WITH RESPECT TO THE PROPERTY, AND SPECIFICALLY THAT SELLER HAS NOT MADE, AND DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS REGARDING SOLID WASTE, AS DEFINED BY THE U.S. ENVIRONMENTAL PROTECTION AGENCY REGULATIONS AT 40 C.F.R., PART 261, OR THE DISPOSAL OR EXISTENCE, IN OR ON THE PROPERTY, OF ANY HAZARDOUS SUBSTANCE, AS DEFINED BY THE COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED, AND APPLICABLE STATE LAWS, AND REGULATIONS PROMULGATED THEREUNDER.