Texas law prohibits any person from selling, offering for sale, leasing, or offering to lease any vehicle not equipped with all emission control systems or devices in good operable condition. Violators are subject to penalties under the Texas Clean Air Act of up to $25,000 per violation. Buyers are advised to have the vehicle checked for all required emission control devices prior to purchasing a new or used vehicle.
A vehicle may not be legally sold if its original engine has been replaced with another certified engine but without the related emission control components. Tampering includes the failure to install the emission controls associated with an engine configuration.
http://www.tceq.state.tx.us/airquali...tampering.html
the above is directly from the Texas Commision on Environmental Quality website, so it looks like the OP's friend is in a bit of a bind as technically when he traded his Z in it qualifies as him selling the car to the dealer. the dealer themselves might not win the case, but the state of texas WILL go after the OP once the dealer notifies them of the sale, of which im sure they already have. Also, it sounds to me like the dealer gave him a couple of oppurtunities to correct the issue before they took legal action, im not sure why the OP's friend just didnt put the stock catalytic converter back on before he made the decision to trade in the car or if he didnt have them anymore, but to me at least....OP's friend sounds like he is screwed