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Energy & the Law

Executive Right Owner Could Be Liable for Failing to Forward Royalty Payments

Posted in Land Titles, Lease Disputes, Litigation

The ghosts of Clinton Manges and people like him continue to haunt executive right owners in Texas. In the 1980’s, Mr. Manges’ abuse of his non-participating royalty owner inspired the Texas Supreme Court to re-affirm the obligations of an executive right owner to the NPRI owner: “utmost fair dealing” and a fiduciary duty.

In Friddle v. Fisher an appellate court went further and imposed on the executive right owner the duty to hold funds belonging to the NPRI owner in a constructive trust for the benefit of the NPRI owner.  The court considered this result to be a remedy for the executive’s breaches and not a duty in and of itself.

Friddle owned a 3/4ths NPRI in the mineral estate in an 84.7 acre tract of land in Hopkins County. Fisher, the owner of the executive right, leased the property. Valence Operating Company drilled an off-site well and pooled the tract into a unit. For nine years, the lessee paid Fisher the entire one-eighth royalty called for in the lease.

Friddle sued, alleging breach of fiduciary duty, unjust enrichment, and conversion. The court ruled in favor of Friddle, holding that Texas law imposes a duty of “utmost fair dealing” on the owner of the executive rights.

But there’s more! The executive owner’s traditional duty to acquire the same benefits for the non-executive interest that he acquires for himself is not his only duty. If he receives royalties rightfully belonging to the NPRI owner, he will be deemed to be acting as a constructive trustee with a duty to hold the funds which would be payable to the NPRI holder for the use and benefit of the NPRI holder.

The court also held that if the executive owner knows the NPRI holder’s name and whereabouts, the executive owner has a duty to notify the NPRI holder of any lease or any other agreement that affects the NPRI holder’s rights. The court did not go so far as to impose a duty on the executive holder to take steps to find the NPRI owner.

Based on the record before it, the court did not impose this liability on Fisher. There was conflicting evidence about whether Fisher knew Friddle’s identity or how to contact him or his predecessors in title. Accordingly, the court ordered a trial so that a jury could make that determination.

What about the NPRI owner’s duty to use reasonable diligence in protecting his interests, as expressed by the Supreme Court in 1998 in HECI v. Neel and its wicked spawn?  That duty was trumped by the executive-right owner’s fiduciary duty. (It’s not the concept in Neel that is odious; rather its application to the royalty owners under those facts was seen by many as unduly harsh). 

Based only on what the court said in this decision, at trial Fisher should be worried about the extent of his obligations, and Fiddle should be concerned about the statute of limitations.