The duty owed by the executive right holder to its non-participating royalty interest holder in Texas, long haunted by the ghost of Clinton Manges, is again examined. From KCM Financial, et al. v. Bradshaw and its precursors …
We Know This:
- The executive owes the NPRI owner a duty of utmost good and fair dealing.
- It is not a typical fiduciary relationship, in that the executive is not required to wholly subordinate its interests in favor of the non-executive.
- The duty is one of autonomy, but not absolute discretion, to determine the value of the non-executive interest.
- There is no bright line rule to comprehensively or completely delineate the boundaries of the executive’s duty.
- The executive’s duty is to acquire for the non–executive every benefit that he exacts for himself. That is not the same as putting the interests of the beneficiary ahead of the executive.
- In evaluating whether an executive breached the duty, evidence of self-dealing can be pivotal. In the absence of self-dealing this court is not likely to find a breach of the duty.
The executive – KCM – granted an oil and gas lease with a below-market royalty shared equally by the executive and Ms. Bradshaw, the NPRI owner, in exchange for an above-market bonus payable only to KCM. A 1960 deed creating the interest referenced reservation of an undivided one-half royalty, tied to the “customary“ 1/8th royalty. The parties agreed that the NPRI is a fraction of the royalty that could float above the floor specified in the lease.
As we know, the customary royalty in the mid-2000’s was closer to a 1/4th than 1/8th. KCM granted a lease reserving a 1/8th royalty and a bonus of $7,505 per acre. Bradshaw was entitled to 1/16th (half of the 1/8th), but none of the bonus.
As is usual in these cases, Manges v. Guerra came into play. That case is worth reading to see just how brazen and despicable an executive right holder can be and to see what “pervasive self-dealing “ looks like.
The Court’s Rationale:
Without the duty of good faith and fair dealing the actions of the executive could be exercised arbitrarily to in effect destroy all value of the non-executive’s interest, appropriating its benefit to the executive.
The court refused to conclude that the availability of a higher royalty rate could be categorically included in or excluded from the scope of the executive’s duty. This is due to the myriad components of any given arrangement that could affect the overall value of any lease, including royalties, delay rentals, bonuses and other provisions. Acquiring the same royalty in a lease does not automatically equate to acquiring the same benefit because of the bonus, in which the executive had no interest.
To the court, it will come down to whether the executive misappropriated what would have been a shared benefit (market value royalty) and converted it into a benefit reserved only to himself (an enhanced bonus).
There was enough evidence that could be self-dealing to return the case to the trial court.
What about the Lessee?
Out of space; tune in next week.
See our musical interlude for what every executive right holder should embrace.