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Sherman v. Elkowitz: No Duty to Disclose Prior Litigation

A Texas court has considered whether a listing broker could be liable for failing to disclose to the buyer that the seller had sued the previous owner for undisclosed defects on the property.

In 1998, Michael J. and Lori A. Sherman (“Buyers”) purchased a home from Patrick and Amy Shields (“Sellers”). The Sellers hired Richard Elkowitz (“Salesperson”) as the listing broker for the property, and he helped the Sellers complete a property condition disclosure form required by Texas law. On the disclosure form, the Sellers disclosed cracks in the driveway and stated that the property had been treated for termites in 1990.

Following the closing, the Buyers discovered defects on the property which they learned had been the subject of a lawsuit brought by the Sellers against the previous owner of the premises. As part of the earlier lawsuit, the Seller had identified the Salesperson as having knowledge of the relevant facts. One of the Sellers had testified that she had questioned the Salesperson about whether the earlier lawsuit needed to be disclosed, and he told her it did not if the defects had been repaired. The Sellers then stated that the defects had been repaired except for the driveway cracks, following which the Salesperson then advised the Sellers the driveway cracks needed to be disclosed.

The Buyers filed a lawsuit against the Sellers and the Salesperson with numerous allegations. At the close of the Buyers’ evidence, the trial court entered a directed verdict in favor of the Salesperson. The jury entered a verdict in favor of the Buyers and awarded them damages from the Sellers. The Buyers appealed the trial court’s ruling in favor of the Salesperson.

The Court of Appeals of Texas affirmed the ruling of the trial court. The Buyers argued that the Salesperson had to disclose the prior litigation for the following reasons: first, the Salesperson knew that the settlement amount from the earlier lawsuit was insufficient to pay for the necessary repairs; second, the Salesperson had been identified in the earlier lawsuit as having knowledge of the defects which were the subject of the litigation; third, an expert for the Buyers found an attempt to conceal the defect; and finally, the Salesperson testified that he was required to disclose all defects related to the property.

The court considered the Buyers’ arguments and rejected them. First, there was no showing by the Buyers that the Salesperson had any knowledge of the defects. He had asked the Sellers if the prior defects had been repaired, and the Sellers had told him that they had been. Texas law only requires a real estate professional to make additional disclosures if he or she believes the seller’s disclosures were false or inaccurate, and there was no evidence showing the Salesperson had such information. The fact that the settlement amount may not have covered the costs of repairs was irrelevant, as the Sellers had told him that they had repaired the earlier defects.

The court also found that the question on the disclosure form requesting information on “lawsuits (or all other legal proceedings) directly or indirectly affecting the property” only required disclosure of pending litigation, not prior litigation. Since the Salesperson was not required to disclose a resolved lawsuit and there was no evidence demonstrating that the Salesperson knew of the alleged defects on the property, the court affirmed the trial court’s judgment in favor of the Salesperson.

Sherman v. Elkowitz, 130 S.W.3d 316 (Tex. App. 2004).

Editor’s Note: Special thanks to Ron Walker of the Texas Association of REALTORS® for alerting Legal Affairs to this decision.