AUSTIN – The Texas Supreme Court Friday ended Orca Asset’s $400 million claim against JPMorgan Chase Bank over disputed titles to mineral leases in the Eagle Ford Shale.
The court said that Orca ignored “red flags” that warned of cloudy title when it signed a letter of intent to lease mineral rights to 919 acres in DeWitt County from JPMorgan, an agent for the trust that owned the rights. The warnings included the bank’s strict negation-of-warranty language in the lease and Orca’s knowledge that competitors might delay recording their leases.
In ignoring these and other red flags, the court said Orca couldn’t maintain a legal claim that it justifiably relied on JPMorgan’s acceptance of $3.2 million in payment for the six leases as evidence of clear title.
The dispute began in 2010 during a frenzied rush to snap up mineral leases in the Eagle Ford. The land in question was leased by a JPMorgan lease agent to GeoSouthern Energy Corp., which did not record the leases in the county’s property records until six months after closing the deal.
It was during this time that Orca, a newly formed company, became focused on the same tracts. The lease agent who had negotiated the GeoSouthern lease was also involved in the negotiations with Orca. He notified Orca that JP Morgan would require new language expressly shifting the risk of title failure to Orca, explaining that the stricter wording was in response to the high volume of leasing activity in the region.
Before signing the lease, Orca had been checking the county property records almost daily, but failed to continue those reviews during the thirty-day option period. Just three days into the option period, GeoSouthern finally recorded the leases it had obtained from the trust six months earlier, but the filing went unnoticed by Orca.
In January 2011 Orca handed the lease agent $3.2 million in bonus checks and asked him again if he was sure the leases were all open. After receiving his assurance, Orca recorded the leases in the DeWitt county property records the next day.
Two weeks later, GeoSouthern notified the agent that it had leases on the acreage. The agent immediately informed Orca of the title defect and JP Morgan sent Orca a check refunding the bonus payments. Orca rejected the offer and sued JPMorgan and its employee for $400 million in lost profits.
The trial court directed verdict against Orca’s contract, fraud and negligent-misrepresentation claims.
In 2015, the 5th Court of Appeals in Dallas affirmed the trial court’s contract ruling but reversed on the fraud and negligent-misrepresentation claims. The court of appeals said the warranty disclaimer was not sufficiently specific to re-assign the risk from a seller with superior knowledge of its own actions to a buyer “groping for the same information.”
Writing for the court, Justice Jeff Brown said that although Orca was a newly founded company, its key players were sophisticated oil-and-gas businesspeople.
“Such world-savvy participants entering into a complicated, multi-million dollar transaction should be expected to recognize ‘red flags’ that the less experienced may overlook,” said Brown.
“Orca needed to protect its own interest through the exercise of ordinary care and reasonable diligence rather than blindly relying upon another party’s vague assurances,” said Brown. “Its failure to do so precludes its claim of justifiable reliance as a matter of law.”
Evan Young, an Austin partner at Baker Botts, represents JP Morgan. David Gaultney, of counsel to the Austin office of MehaffyWeber, represents Orca.
Justice Jimmy Blacklock did not participate in the decision.
The case is JPMorgan Chase Bank v. Orca Assets, No. 15-072.