Co-author Blake Bryan *
Tips on litigation avoidance: Not making promises you don’t intend to keep is easy enough. Stating a fact or making a promise and things change, you could be a fraudster if you don’t come clean before closing.That’s the takeaway in Baxsto, LLC v. Roxo Energy Co., a Texas Court of Appeals reversed a summary judgment dismissing fraud claims by a mineral owner-lessor against defendants the lessee and its financier. For details we refer you to the 47-page fact-intensive opinion.
Mineral owner Baxsto negotiated with Roxo and Vortus for a lease and potential sale of its minerals in Howard and Borden Counties.
After the transaction Baxsto discovered actions and statements by Roxo and Vortus that conflicted with representations in negotiations and promises in the parties’ letter of intent. Baxsto sued asserting fraud and derivative claims, alleging they locked it into a lease and an agreement to sell the minerals at a price lower than the true market value. The trial court granted summary judgment in favor of the defendants on all claims. Baxsto appealed.
For simplicity we combine the allegations and findings in no-evidence and traditional summary judgment motions. The questions of fact were about knowledge of falsity, intent to induce, and duty to disclose. The court of appeal ruled that at least a scintilla of evidence raised a genuine issue of material fact on all three elements.
Knowledge of falsity
- Defendants knew their representations about a most-favored-nations clause for lease bonuses were false because they paid a lease bonus to a third party that exceeded Baxsto’s.
- Roxo knew that it never intended to drill and develop the interests it acquired.
- Defendants knew that their funding commitment of $200–250 million was false when made.
- Roxo knew that its promise not to record the lease until after the lease bonus was paid was false.
Intent to induce
- Knowledge of the falsity of representations was enough evidence to create a fact issue on intent to induce.
Duty to disclose
- The defendants had a duty to disclose that several representations that might have been true when made were no longer true.
The issue was whether Baxsto could have plausibly relied on defendants’ representations. Three clauses in the contract relied upon by the defendants did not directly contradict their oral representations. Thus, they failed to meet their burden of identifying conditions in the contracts. The Court also determined that there were no red flags making reliance unwarranted.
Statute of frauds
Defendants’ duty to Baxsto arose independent of the parties’ contract regardless of whether the damages sought were solely for economic losses. The economic lass doctrine did not bar the claims.
The recovery that Baxsto sought was akin to a claim for out-of-pocket damages for being induced to part with its mineral interests at a price lower than their true value. Fraud claims seeking out-of-pocket damages—the difference between the value parted with and the value received—are not barred by the statute of frauds, unlike benefit-of-the-bargain damages.
Derivative fraud claims
Evidence was sufficient to create genuine issue of material fact on Baxto’s claims for
- Beneficiaries of fraud,
- Civil conspiracy,
- Constructive trust, and
- Joint enterprise.
The facts are complicated, there are lots of them, and they will be hotly contested (A sham affidavit claim was overruled). Who knows if Baxsto can prove its claims to a jury. The parties will return to the district court for a trial.
Your musical interlude, new band, ancient theme.
*Blake is a Baylor Law 2-L and a summer associate at Gray Reed.