AUSTIN – In the rush to snap up mineral leases during the frenzied Eagle Ford Shale play of 2010, it was not uncommon for different parties to end up claiming leases for the same property. A dispute over one of those troubled leases, involving $400 million in claimed lost profits, reached the Texas Supreme Court this week.
Orca Assets wants a jury to hear its case that JPMorgan Chase Bank committed fraud and negligent misrepresentation when it accepted payment of $3.2 million for six leases in DeWitt County that had already been leased to another party. The bank says that it has no liability because Orca agreed to explicit language in the contract negating any warranty in the event of a title problem.
Evan Young, an Austin partner at Baker Botts, represents JPMorgan Chase. Young said Tuesday that Orca could have walked away from the “unusually beefed-up warranty disclaimer” in the lease but did not. He said Orca recognized the language as a “red flag” but wanted the lease opportunity, and even took an extra 30 days to research the property.
Now, Young said, the court is being asked to enforce an agreement in which Orca accepted all the risk, yet simultaneously requests “recourse to the tune of $400 million for the failure of title.”
“Those two things cannot happen. You cannot rely on some prior oral misrepresentation when the contract you’ve entered into says that all of the risk about title is on me,” Young said.
Orca’s lawyer, David Gaultney, said the bank, as agent for a trust that owned the mineral rights, misrepresented the property as being open for lease when it actually had been leased six months earlier to GeoSouthern Energy Corp. Gaultner said the original purchaser of the Red Crest properties, a colorful figure with a history of oil and gas fraud litigation in the 1960s, knew the property was not available but “instead of disclosing that to Orca, he drafted this language” in order to earn a bonus.
“There’s kind of an underlying theme to the bank’s position that somehow a target of fraud should have a duty to discover the fraud. The court has never said that,” said Gaultney, of counsel to the Austin office of MehaffyWeber.
A few days after Orca recorded its leases, GeoSouthern contacted JPMorgan about the duplication and the bank attempted to return Orca’s $3.2 million. Orca refused payment and filed suit.
The trial court issued a summary judgment against Orca. In 2015, the 5th Court of Appeals in Dallas said that JPMorgan was not entitled to judgment as a matter of law on Orca’s fraud and negligent misrepresentation claims and remanded the case. The court of appeals affirmed the trial court’s judgment on Orca’s claims for breach of contract, which Orca did not appeal.
Writing for a three-judge panel, 5th Court of Appeals Justice David Schenck said, “In all events, we do not believe the disclaimer of warranty here was sufficiently specific to re-assign that risk from a seller, with obviously superior knowledge of its own actions, to a buyer who is groping for the same information in the face of what a reasonable jury might find as an assurance from the seller that he had not already sold the property to someone else.”
Watch the Texas Supreme Court arguments in JPMorgan Chase Bank v. Orca Assets, No. 15-0712, at this link.