In a surprise New Year’s Eve ruling, the Eleventh Court of Appeals placed a coda on 2018 by tossing out $43.1 million of a nearly $50 million West Texas jury award against a group of oil and gas investors accused of violating a handshake partnership agreement.
In a complex 64-page opinion released Monday, the Eastland-based appeals court ruled, in essence, that there was no evidence of a viable handshake agreement, no evidence of a partnership and that extremely specific language in a written agreement between the investors left each of the investors on their own.
The legal dispute grew out of a 2011 participation agreement among eight investors and investor companies who had pooled their resources to purchase and “flip” oil and gas leases in Fisher County, which lies between Abilene and Midland.
The agreement included a provision that came to haunt several members of the group on appeal: “It is not intended and it is agreed that the parties have not entered into and do not enter into any partnership, joint venture or agency relationship. None of the parties owe a fiduciary duty or obligation to the other…”
The group included a medical doctor, a lawyer and several experienced oil and gas investors, and came to include West Texas oil and gas veteran Tom Taylor and his company, Paradigm Petroleum Corporation. Although the group bought and sold some 30,000 acres, initially without complaint, disagreement arose when it became known that several of the investors were making their own investments, allegedly using cash derived from the group’s investment pool.
Two of the parties – together known as Three Finger Black Shale Partnership – filed suit accusing Taylor (who died in 2014) and two other investors of keeping, in effect, two sets of books. They were subsequently joined by several other parties who, together, argued that Paradigm and the others had failed to provide promised funding, charged the group for expenses for their other projects and excluded them from the subsequent deals.
In August 2015, a Fisher County jury decided in favor of the two groups of plaintiffs and awarded a total of $96 million in actual and punitive damages. That total was subsequently reduced by the trial judge to approximately $50 million, $43.1 million of which was awarded to Three Finger, represented by Frank Branson.
The core issue on appeal was whether Three Finger was actually a partner in the original 2011 agreement. Though the agreement was signed by two parties that later identified themselves as the Three Finger Black Shale partnership, the court of appeals ruled that the agreement was signed by individual investors and that Three Finger had no standing within the original agreement.
Writing on behalf of a three-judge panel, Senior Chief Justice Jim R. Wright notes: “There is no evidence of an agreement to share in the losses that might arise in connection with the project. There is no evidence that the parties ever discussed liability to third parties, and the subject is not covered in the participation agreements. These considerations do not assist [Three Finger] in meeting their burden to establish the existence of a partnership.”
Because no partnership existed, the court reasoned, neither did a fiduciary obligation, ruling that the Three Finger Black Shale Partnership take nothing from in its lawsuit. Approximately $6.2 million awarded to the second group of plaintiffs, including a $1.6 million disgorgement against the West Texas law firm of Stephens & Myers, was affirmed.
Kerwin Stephens, et al v. Three Finger Black Shale Partnership et al: No. 11-16-00177-CV.