Co-author Chance Decker

You are selling properties. The buyer thinks you own the deep rights but you know your long-time partner owns them. You attend the closing. You don’t tell the buyer that he’s got the ownership wrong. You are protected by a contract. Do you fess up? What if it means $6.8 million?

In Freeman, et al v. Harleton Oil & Gas Chesapeake agreed to buy three-year term assignments of Buffco’s and Twin Eagle Resources’ interest in 14,000 acres in East Texas for $232 million.

Under the letter agreement for the transaction, Chesapeake would make the same per acre offer to other non-op owners.

Chesapeake assumed the risk of title defects. Chesapeake hired a landman for title diligence, who concluded (correctly) that Buffco and Twin Eagle owned a 50 percent operating interest in the Geisler Unit and (incorrectly) that Freeman Resources owned a 50 percent non-op interest in the deep rights.

Chesapeake paid $6.8 million to Buffco and Twin and $6.8 million to Freeman Resources for their interests in the unit, believing it acquired all of the deep rights.

In the agreement the sellers expressly disclaimed representations about ownership. Chesapeake never talked directly to Buffco’s owner Bufkin. Freeman Resources’ owner Wayne Freeman attended the closing.

Title bust!

Turns out Harleton owned a 50 percent non-op interest in the deep rights in the Geisler Unit. So, Chesapeake’s $13.6 million only bought 47 percent of the deep rights.

Harleton sued Buffco, its president, and Freeman Resources for, among other claims, unjust enrichment for the $6.8 million CHK paid Buffco/Freeman Resources.

Harleton also sued Chesapeake for the $6.8 million as a third party beneficiary of the Chesapeake/Buffco/Twin letter agreement, and for breach of the non-ops clause for not offering to buy Harleton’s deep rights.

Chesapeake sued Buffco, Freeman Resources, and their presidents for breach of contract, fraud, etc. to recover the overpayments. Chesapeake settled with the Buffco defendants, and went to trial with the Freeman defendants.

The trial 

After trial, the court:

  • dismissed Harleton’s claims against Chesapeake; it was not a third party beneficiary,
  • dismissed all of Harleton’s claims against Buffco and Freeman except unjust enrichment,
  • denied Chesapeake’s request for a refund of the money paid to Buffco/Freeman for Harleton’s interest; the agreement allocated the risk of title defects to Chesapeake,
  • imposed a constructive trust on the $6.8 million Chesapeake paid to Buffco/Freeman Resources for the benefit of Harleton,
  • ordered Harleton to assign its 50 percent interest in the Unit to Chesapeake, and
  • ordered Buffco and Freeman Resources to pay Harleton $6.8 million. 

On appeal

Harleton’s unjust enrichment claim was barred by limitations.  Because that was the only cause of action that supported the constructive trust and specific performance remedies, those remedies were improper. Affirmed the trial court in all other respects

What does this mean?

  • Freeman comes out like a bandit (so to speak).  It keeps the money it was paid for Harleton’s interest.
  • Harleton gets nothing from the transaction but keeps its deep rights (which within six months were worth $2,500 per acre, not the $20,000 Chesapeake paid.)
  • Chesapeake pays the wrong seller for all deep rights and gets 47 percent.

Coming soon: Part 2 for more “interesting” facts.

A musical interlude.