© 2015 The Texas Lawbook.
By Natalie Posgate
(July 31) – XTO Energy and Bank of America scored a win this week in a Dallas appellate court when a three-judge panel ruled that a trial court abused its discretion by allowing a derivative action lawsuit to continue with an investor of XTO’s publicly-traded royalty trust.
In a 17-page mandamus ruling, the judges from the Fifth Court of Appeals dismissed the breach of fiduciary claims that trust investor Sandra Goebel brought against Fort Worth-based XTO and subsidiary Timberland Gathering & Processing Company for allegedly misappropriating $60 million in royalties that should have been paid to the Hugoton Royalty Trust.
Goebel had asked Bank of America, the trustee, to sue the companies in order to correct XTO’s alleged overpayment to Timberland. But the bank refused to sue after conducting an investigation and finding that XTO had no duty to renegotiate the existing sales contracts with Timberland to work out more favorable terms.
When the bank didn’t bring a lawsuit, Goebel brought one in 2014 on behalf of the trust against XTO and Timberland, as well as Bank of America for knowingly failing to object to XTO’s alleged self-dealing.
In Monday’s ruling, which legal experts say is the first appeals decision in Texas to involve a publicly-traded royalty trust, Justices David Evans, David Bridges and Bob Fillmore determined that Goebel had no right to file suit because it is at the trustee’s discretion on whether to bring litigation on behalf of the trust it administers, not a beneficiary’s.
Lawyers for XTO, Timberland and Bank of America declined to comment on the ruling, as did BofA spokesman Bill Halldin. Goebel’s lead lawyer, Roger Mandel of Lackey Hershman, could not be reached for comment.
A lawyer close to the case said Goebel’s only options at this point in the litigation would be to move for rehearing in the court of appeals or seek to mandamus the court of appeals in the Supreme Court of Texas.
The opinion ordered the trial court judge to remand her May 22, 2014 judgment, which denied certain pleas by XTO, Timberland and Bank of America as well as their motions to dismiss Goebel’s lawsuit.
“Under Texas law, a court may not interfere with the exercise of a trustee’s discretionary powers and substitute its discretion for that of the trustee except in cases of fraud, misconduct or a clear abuse of discretion,” Justice Evans wrote. “Allowing a beneficiary to bring suit on behalf of a trust when the trustee has declined to do so amounts to the type of substitution of judgment that this rule was designed to prevent.”
According to court documents, the trial, which was scheduled for April 2016 in Dallas County District Judge Phyllis Lister Brown’s court, has already been cancelled.
The appeals decision is mixed, however. It only calls for Judge Lister Brown to dismiss XTO and Timberland from the lawsuit because it declined to dismiss the claims against Bank of America and instead ordered Goebel to replead them.
“Allowing Goebel to proceed with her claims on her own behalf does not interfere with Bank of America’s authority to control litigation on behalf of the Trust,” Justice Evans wrote.
XTO and Timberland were represented by partner Charles Schwartz, counsel Wallis Hampton and associate Heather Lohman of Skadden, Arps, Slate, Meagher & Flom in Houston. Dallas shareholders Victor Vital and Peter Wahby of Greenberg Traurig served as local counsel.
Bank of America’s lawyers were partners David Levy and Charles Moore and associate Ryan Wooten of Morgan Lewis’ Houston office, as well as Craig Haynes of Thompson & Knight in Dallas.
Mandel was joined by Lackey Hershman colleagues Bruce Bagelman and Scott Hershman in representing Goebel.
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