Co-author Brooke Sizer
You are in Louisiana and are described as having a “lesion beyond moiety”. What do you do?
A. Contact your primary care physician for an appointment;
B. Be relieved that the blessed end is near and you won’t have to endure another season of inferior quarterback play;
C. Recall that Jesus healed the leper. Everything will be alright;
D. Proceed directly to the court of appeal.
- Lessees who buy minerals and royalties from your lessor: Be aware that when you use your superior knowledge of what’s coming, your duties to your lessee can cause problems.
- Mineral and royalty buyers who are not lessees: This case should not affect you.
- Don’t panic. There has not been a trial. This decision is about claims a plaintiff should be allowed to bring.
In McCarthy v. Evolution Petroleum Corp., the McCarthys owned mineral interests that had been leased and operated continuously for 60 years. Evolution, the current operator, agreed to sell its working interest to Denbury Resources for $50 million. Denbury had estimated that by a CO2 flood they could recover an additional 30 to 40 million barrels. Evolution then made unsolicited offers to the McCarthys to purchase their royalty rights. Evolution did not mention the agreement with Denbury, but instead used figures from the past 16 years to propose a selling price, not taking into account the enhanced value.
The McCarthys alleged:
- Evolution’s ownership and operation of the leases led to knowledge that Evolution used to obtain an advantage over them;
- Evolution knew that the price offered was substantially below the true value;
- Evolution ceased to operate in good faith;
- Evolution breached its obligation under Mineral Code Article 122, allowing for rescission of the lease.
Civil Code Art 1953: “Fraud is a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. Fraud may also result from silence or inactions.”
Civil Code Art. 1954: Fraud does not vitiate consent when the party against whom the fraud was directed could have ascertained the truth without difficulty, inconvenience, or special skill. This exception does not apply when a relation of confidence has reasonably induced a party to rely on the other’s assertions or representations.
Mineral Code §122: A mineral lessee is not under a fiduciary obligation to his lessor, but he is bound to perform the contract in good faith and to develop and operate the property as a reasonably prudent operator for the mutual benefit of himself and his lessor.
What the Court Said
The trial court stated that this case was ultimately a claim of “lesion beyond moiety” and rescission in the sale of mineral rights is prohibited by Mineral Code §17. But the trial court failed to distinguish between rescission based on fraud (a vice of consent) and rescission based on deficiency as related to market price.
Factors That Count
- The McCarthys had no expertise concerning evaluation of proven and undeveloped resources,
- They were not aware of the proposed Denbury project
- They did not have the skills or knowledge as landowners.
- Evolution as the mineral lessee gained special knowledge about the property.
- There was a great disparity in the bargaining position of the parties.
Fraud by Misrepresentation
Evolution’s price for the royalty interest emphasized past production, the only numbers the McCarthys had access to. The speculative nature of minerals generally does not cause legal error, but here Evolution had knowledge that gave it access to determination of future reserves and values.
Fraud by Silence
Louisiana law views the refusal to speak in the face of an obligation to do so as not only unfair, but fraudulent.
Evolution had a duty under Mineral Code §122 to further develop. The McCarthys could not be precluded from asserting a claim of fraud by silence. They had a right to prove that Evolution carried a duty to reasonably develop, and remaining silent may breach its obligation to be a reasonably prudent operator. What’s worse, Evolution was not completely silent but was misleading.
Answer to the Quiz: D, but if Jesus would only heal the quarterbacks …