© 2015 The Texas Lawbook.
By Janet Elliott
AUSTIN (March 11) – Royalty owners’ allegations of self-dealing by executive mineral right-holders who negotiate drilling agreements may receive greater scrutiny following a recent Texas Supreme Court ruling.
The state’s highest court ruled March 6 that an executive’s failure to obtain a market-rate royalty does not, by itself, constitute a breach of the good faith duty owed to a non-participating royalty owner. But, the court said, there was some evidence that the mineral lease was the product of self-dealing.
The court sent a portion of a long-running dispute over an 1800-acre tract in the Barnett Shale back for trial.
Additionally, the court threw out a conspiracy claim the royalty owner had made against the drilling operator, finding no evidence to support the charge.
In its opinion, the court recognized it had created a “conundrum” for trial courts trying to balance the duties of various parties involved in dividing royalty interests.
“Obviously, obtaining the same royalty in a mineral lease does not automatically equate to acquiring the same benefit from the mineral lease,” said Justice Eva Guzman for the unanimous court. “Other the other hand, the executive here indisputably holds the right to obtain benefits, such as bonuses and delay rentals, in which the non-executive has absolutely no interest.
“This situation thus presents a conundrum that requires balancing the bundle of rights that comprise a mineral estate.”
Craig Enoch, who represents executive rights owner KCM Financial, had argued that the fact that KCM obtained the prevailing market royalty should have been sufficient to uphold the trial court’s summary judgment. But the high court refused to draw that bright line.
“Even if we go back and have to have a trial on surface prices and royalty interests and bonuses and that sort of thing, we’re very comfortable that there isn’t going to be the outlandish types of things that the court was saying would have to be considered,” said Enoch, a member of Austin’s Enoch Kever.
Without a bright-line test for determining what constitutes breaching the good faith duty, the practical result could be more litigation filed by dissatisfied royalty owners, said Charles “Skip” Watson, who represented the oil and gas operator in the case.
Mineral Rights Inherited
Betty Lou Bradshaw inherited her mineral rights to the Mitchell Ranch in Hood County from her parents, who reserved a royalty interest of one-half when they sold the land in 1960. As a “non-participating royalty owner” Bradshaw has no right to lease the mineral estate or receive any bonus for a lease.
In 2006, Steadfast Financial purchased the surface and remaining one-half of the mineral rights. On the same day, Steadfast sold the surface to Range Resources and leased Bradshaw’s minerals for a one-eighth royalty and a lease bonus payable to Steadfast.
Bradshaw sued Steadfast, claiming breach of fiduciary duty for failing to obtain a higher royalty, and Range for conspiracy.
The Supreme Court dismissed Bradshaw’s claims against Range, finding that Range “properly sought to extract the best deal it could on the most favorable terms.”
Watson, who represented Range, said the opinion “means that arms-length lessees like Range do not have to negotiate against their best interests for fear of being sued by nonparticipating royalty interest owners dissatisfied with the royalty negotiated by the executive that made the lease.”
The Texas Oil & Gas Association, in an amicus brief, had urged the court to reach that conclusion. It warned that a ruling by Fort Worth’s 2nd Court of Appeals recognizing Range’s potential liability had the potential to disrupt the industry.
“The result will be harm to the kind of negotiated trade-offs involved in the negotiation of oil and gas leases that are often necessary for efficient development, as lessees and lessors fear judicial second-guessing through litigation,” the association said.
The court agreed.
“We agree with the Association that ‘in negotiating with the executive, a lessee should not fear liability for doing nothing more than getting a good deal closed,’” said Guzman.
Enoch said the court did provide some guidance for parties working on drilling contracts by making clear that the executive has no duty to sell its other interests for less just to make sure the royalty owners are taken care of.
“We felt good about the court really narrowing the duties that are out there on behalf of the executive,” Enoch said. “We think that’s a benefit to people in the oil and gas industry contracting over these various deeds, making it very clear that the items Ms. Bradshaw is complaining about were simply a factor to be considered. If that’s all it is, that’s not sufficient to show a breach of the duty of good faith and fair dealing.”
Daniel Bates, a shareholder in Fort Worth’s Decker Jones, who represented Bradshaw, said his client is disappointed in parts of the ruling but that the legal team is still reviewing the decision in trying to determine how to proceed with the litigation.
“For 8 years Betty Bradshaw has fought hard for her day in court to enforce her royalty rights,” Bates said in a statement issued Wednesday. “The opinion of the Supreme Court of Texas partially vindicates her by holding that she has a jury case to present against the mineral owner that converted a portion her royalty to cash by calling it lease bonus.
“That mineral owners, leasing minerals in a manner abusive of royalty owners, may have to face a jury hopefully will deter such conduct,” he said. “Bradshaw is disappointed, however, at the Court’s holding that an oil and gas operator cannot be liable even though it leases minerals under terms that the operator knows violates the duty of utmost good faith the mineral owner/lessor owes to a royalty owner like Bradshaw. We are studying the opinion just issued. At this time no decision has been made concerning further action.”
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