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Stigma Damages: Can a Real Property’s “Bad Reputation” Result in Damages?

Real Estate Lawyer San AntonioWHAT ARE STIGMA DAMAGES?

Sometimes a property’s history or other outside influence creates an  adverse public perception. This negative impact translates to diminished value or marketability based upon perceived risk or other emotion.

Classic examples are homes where grisly murder has occurred, commercial warehouses where hazardous chemicals were once stored, or residences with prior foundation repairs. In each of these cases, the condition giving rise to the the negative perception has been cured; yet, the property still suffers from a “bad reputation.”Negative public perception about a property is  referred to as “stigma damage.”

Stigma damages essentially constitute “damage to the reputation of the realty.” Smith v. Carbide & Chems. Corp., 226 S.W.3d 52, 55 (Ky.2007). They “represent[] the market’s perception of the decrease in property value caused by the injury to the property.” Jennifer L. Young, Stigma Damages: Defining the Appropriate Balance Between Full Compensation and Reasonable Certainty, 52 S.C. L. REV. 409, 424 (2001).

More simply, the concept of stigma damages relates to the decreased desirability of a property due to a condition that no longer exists.  It is the unquantified potential that subjective purchasers will be less willing to buy the property (or unwilling to pay fair market value) even after the an adverse condition has been repaired or remedied.

STIGMA DAMAGES CAN BE RECOVERABLE

Texas courts have allowed stigma-damage awards in real estate cases. See Country Village Homes, Inc. v. Patterson, 236 S.W.3d 413, 443-44 (Tex.App.-Houston [1st Dist.] 2007, pet. filed) (construction defects); Perry Homes v. Alwattari, 33 S.W.3d 376, 385-86 (Tex. App.-Fort Worth 2000, pet. denied) (defective foundation); Smith v. Levine, 911 S.W.2d 427, 434 (Tex.App.-San Antonio 1995, writ denied) (defective foundation); Terminix Int’l v. Lucci, 670 S.W.2d 657 (Tex.App.-San Antonio 1984, writ ref’d n.r.e.) (termite damage).

Generally, these stigma damages are  characterized as part of a claim for “diminished value.” However, diminished value and stigma damage are interrelated but not identical concepts. This is primarily because stigma damages are intangible and will continue as a “tarnish” on a property

QUANTIFYING STIGMA DAMAGES IS COMPLEX

Texas courts struggle with awarding and quantifying sigma damages.  This struggle arises primarily from the “conflicting goals of fully compensating the plaintiff for her injury while only awarding those damages that can be proven with reasonable certainty.” Young, Stigma Damages: Defining the Appropriate Balance, 52 S.C. L. REV. at 410-11. The Texas Supreme Court has held that “[e]ven when it is legally possible to recover stigma damages, it is often legally impossible to prove them.  This is so because “evidence based on ‘conjecture, guess or speculation’ is inadequate to prove stigma damages.”  Gray v. Southern Facilities, Inc.,256 S.C. 558, 183 S.E.2d 438, 444 (1971)

Proof of stigma damages almost always requires reliable expert testimony. Key word:  RELIABLE.

The Texas Supreme Court recently affirmed that stigma damages are recoverable in Texas.  See Houston Unlimited, Inc. Metal Processing v. Mel Acres Ranch, No. 13-0084 (Tex. Aug. 22, 2014).  However, expert appraisal testimony must be sufficiently reliable in its methodology to support and sustain such an award.  In Mel Acres, the Court performed a careful analysis of the appraiser’s method of employing the sales-comparison approach. This analysis determined that the expert misapplied the approach, and therefore rendered unreliable testimony.  Mel Acres is a great starting point for understanding how Texas courts will consider evidence supporting a claim for stigma damages.