Co-author Chance Decker

The ruling from the Supreme Court of Texas in JP Morgan Chase Bank, N.A., et al v. Orca Assets, G.P., L.L.C. was foreseeable. Experienced energy professionals who pass on the opportunity to examine title for themselves are not sympathetic plaintiffs in a suit claiming reliance on oral statements of the lessor.

How did this happen? 

Trustee JPM signed a letter of intent to lease 1,800 acres in DeWitt and Gonzales Counties to Orca. What Orca didn’t discover until it was too late was that JPM had leased that acreage to GeoSouthern six months before. GeoSouthern recorded the leases after the Orca LOI was signed and before the leases were signed. Orca did its diligence before the LOI, but chose not to confirm title between the date of the LOI and the date of the leases.

Orca sued JPM for $400 million (the alleged profits to be earned from the leases), claiming that it relied upon JPM’s representations that the tracts were open for lease.

The explicit disclaimer

Disclaimers of warranty are not out of the ordinary in oil and gas leases. This one went farther than usual:

Negation of Warranty.  This lease is made without warranties of any kind, either express or implied, and without recourse against Lessor in the event of a failure of title, not even for the return of the bonus consideration paid for the granting of the lease or for any rental, royalty, shut-in payment, or any other payment now or hereafter made by Lessee to Lessor under the terms of this lease.

The trial court held the clause barred Orca’s claims as a matter of law.  The Dallas Court of Appeals reversed, holding:

  • The clause did not unequivocally disclaim reliance on JPM’s statements that the tracts were open (reasonable reliance is a necessary element of a fraud claim), and
  • The disclaimer did not directly contradict JPM’s statement the tracts were open for lease (one cannot base a fraud claim on misrepresentation that directly contradicts the unambiguous terms of a written agreement).

The Supreme Court reversed and dismissed Orca’s claims:

  • There were too many “red flags” indicating the tracts might not be open for Orca to have relied on JPM’s statements. For example, the JPM employee was equivocal about whether the tracts were, in fact, unleased. (What would you conclude from “I’ll have to check”?)
  • The disclaimer was so explicit and non-standard that it should have put Orca on notice it needed to confirm title before closing. Orca’s own landman deemed the disclaimer “unusually explicit”.
  • Even though the disclaimer did not directly contradict JPM’s representation, it was close enough. The Court held that no reasonable person could read the clause and still rely on JPM’s vague statement that the tracts were open. (By the way, JPM voluntarily refunded the $3.2 million bonus).

Where was the jury?

Reasonableness is ordinarily a question for a jury. But the trial court relied on Rule 166g, which authorizes trial courts to decide matters that, though ordinarily fact questions, become questions of law because “reasonable minds cannot differ on the outcome.”

Note: This is not an Italian Cowboy type of case where the question is whether a contract disclaimer explicitly addresses fraudulent inducement.

Was anybody hurt?

Other than Orca’s pride? Not really. They got their money back. And the profits were probably speculative anyway.

Rangers open at home with the Astros this week. Is an 0-4 start possible?