© 2017 The Texas Lawbook.
By Janet Elliott
(AUSTIN) – (June 13) – The Texas Supreme Court Friday threw out a $95.5 million judgment against two energy company directors, finding insufficient evidence to support allegations they breached their fiduciary duties when they made an outside deal for Eagle Ford land the company had researched.
The court said evidence of large “blobs” of land circled on a map was not sufficient proof that the directors of Longview Energy Co. used that information to purchase specific oil-shale leases within the blobs for a separate entity.
In affirming the 2012 decision against Longview by San Antonio’s 4th Court of Appeals, the Supreme Court sidestepped warnings from several interested parties that the court of appeals ruling gutted principles of corporate director responsibility. An amicus letter from the Texas Independent Producers & Royalty Owners Association said the court of appeals decision “has the potential to turn an officer or director into a competitor of the very entity whose financial well-being he or she is charged with safeguarding.”
Longview is an oil and gas exploration and production company incorporated in Delaware and headquartered in Dallas. Huff Energy Fund, a Delaware limited partnership that invests in energy companies, became Longview’s major shareholder in 2007. HEF chief executive Bill Huff and lead investment evaluator Rick D’Angelo served on Longview’s nine-member board of directors.
Anticipating drilling opportunities in South Texas, HEF and Bobby Riley in September 2009 purchased some mineral leases in the Eagle Ford. The next month, unbeknownst to Longview, they created Riley-Huff Energy Group to continue investigating the shale play.
Also in September 2009, HEF representatives, including Huff and D’Angelo, met with Longview and encouraged the company to consider making Eagle Ford investments. Longview claims that Huff promised that HEF would fund investments in suitable land.
A geologist consulting for Longview gave the company a map with circles marking general areas of available acreage called “blobs.” The amount of acreage within the blobs ranged from 235,000 to 254,000 acres.
At a Jan. 28, 2010 board of directors meeting, Longview considered investing up to $40 million to lease 7,000 acres in each of three different locations. The company’s proposal was to drill one well per lease tract to prove production capability and then sell packages of leases. The proposal did not identify specific acreage or leases in the blobs.
After the proposal was presented, D’Angelo announced that HEF would not support an investment in Eagle Ford acreage. The board did not vote and a Longview representative later informed the geologist and a lease broker that the board had decided not to invest. When asked, Longview did not object to the lease broker pursing deals with other HEF portfolio companies.
At the next meeting on Feb. 1, 2010, the Longview board discussed the possibility of using other funding sources, including the sale of assets that Longview owned in Oklahoma. Longview claims that D’Angelo strongly objected to the sale, later explaining that his opposition was due to the lack of a formal process for appraising the assets before offering them for sale.
Longview did not pursue an Eagle Ford investment and later learned about the existence of Riley-Huff, which was 99 percent owned by HEF. Longview also learned that three days before its January board meeting, Riley-Huff had agreed to purchase Eagle Ford leases from one of the brokers consulted by Longview.
Riley-Huff eventually acquired mineral leases to about 50,000 acres, of which about 5,200 were within the blobs on the map Longview had considered.
In September 2011, Longview sued the parties involved in Riley-Huff’s Eagle Ford acquisitions, alleging fraud, breach of fiduciary duty, usurpation of corporate opportunity, and other causes of action. A Zavala County jury found that Huff and D’Angelo had breached their fiduciary duties to Longview by taking a corporate opportunity. The trial court judgment awarded Longview $95.5 million.
The 4th Court of Appeals in 2012 reversed and rendered a take-nothing judgment. The Supreme Court agreed, although it based its conclusion that the evidence was legally insufficient on a new appellate issue raised by the Huff defendants, that there was no evidence tracing Riley-Huff’s acquisition of any specific leases to breaches of fiduciary duties.
The Supreme Court, in an opinion by Justice Phil Johnson, said the blobs on Longview’s map did not prove that Riley-Huff acquired any specific lease as a result of their fiduciary duties.
“The court of appeals noted, and we agree, that there is no evidence any specific leases or acreage for leasing were identified by the brokers as possible targets for Longview to purchase or lease, nor is there evidence that any specific leases or acreage for leasing were recommended to or selected by Longview or its board for pursuit or purchase,” said Johnson.
Craig Florence, a litigation partner at Gardere in Dallas, represented Longview. Sharon Callaway of San Antonio’s Crofts & Callaway represented Huff and Pamela Stanton Baron represented D’Angelo.
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