Sewak v. Sutherland Energy Co. Ltd. is of interest for how the court defined terms commonly used in consulting contracts in the oil and gas industry, and how difficult it is to foresee all contingencies when negotiating a contract for services.

The agreement

Sewak agreed to provide geophysicist services to Sutherland Energy (SEC) in conjunction with a seismic survey in Hardeman County. The parties’ agreement provided,

  • The scope of the relationship was “concerning the subject seismic survey and potential drilling and development.”
  • Sewak’s responsibilities “will include but not be limited to design, bidding, contracting, overseeing data acquisition and processing, and interpretation of all of the data. … You will invoice SEC at a rate of $600/ day (or $75/hr)”. Costs of acquiring the survey would be paid by SEC.
  • In a later paragraph, SEC will “ … give [Sewak] an option to invest in drilling opportunities within the subject survey on a ground floor basis for up to 20% of the working interest available to SEC.” The agreement mentioned the Hamrick #3 well.

What happened

By January 2015 the survey data was completed to a point that Sewak and SEC could begin to identify prospects for drilling. Sewak continued providing services through the first half of 2017. SEC failed to pay three invoices, maintaining that after January 2015 Sewak was not acquiring the subject seismic survey but was “prospecting for drilling opportunities within the survey”, which was a separate part of their agreement.

SEC did not give Sewak the opportunity to invest in the Hamrick #3 and #5 wells. Sewak sued for breach of contract for failure to pay his final three invoices and denying him the option to participate in drilling opportunities. SEC prevailed on dueling motions for summary judgment.

Because the agreement was sui generis, little would be gained by a discussion here of the details of the parties’ obligations and performance. The opinion is worth a read if your livelihood depends on services agreements. The court reversed the trial court on payment of the three invoices, rendering judgment in Sewak’s favor.

This court’s definition of a “drilling opportunity”

SEC asserted that the agreement did not give Sewak the right to participate in the Hamrick #3. The court defined a “drilling opportunity” as the opportunity to participate in the drilling of a well. The acquisition of an interest in an oil and gas lease that already had existing production (as was the case here) is not the same as the drilling of a well. To construe the agreement as creating an interest in lease acquisitions would read into the agreement words that did not exist. This, the court declined to do. SEC did not breach the agreement regarding the Hamrick #3.

This court’s definition of a “ground floor basis”

The court agreed that the Hamrick #5 was a drilling opportunity. SEC argued that an investment on a ground floor basis excluded operations within an existing production unit because the owners of the unit would have already incurred substantial expenses of developing the unit. The 160-acre Hamrick Unit had been designated before the agreement at issue and was subject to restrictions in an exploration and farmout agreement between SEC and Dimock, the original owner of the lease.

The court, siding with SEC, construed the term to reflect the intent for Sewak to participate in a new drilling venture at the beginning stages, not an existing production unit.

The court gave the terms “their plain, ordinary, and generally accepted meaning”. I imagine there are industry players who would disagree with the court’s understanding of the generally accepted meaning of those terms.

Your musical interlude

The category is “terms that confuse us” for one hundred dollars. Without resorting to your favorite legal dictionary or lawyer, explain the difference between a reservation and an exception in a Texas warranty deed. Stumped? Valence Operating v. Davidson answers the question.

The deeds

1956: Myrtle and grandson Jackie Ray Briggs conveyed to Edmond and Mildred Coleman the surface in fee of a 64.5 acre tract in Panola County, and 1/2 interest in the minerals, reserving a life estate in the mineral interest to Myrtle.

1964: The Colemans conveyed the tract to the Carters. The warranty deed stipulated, “… all Oil, Gas and other Minerals have been excepted and reserved by former owners.” This is the interest claimed by Valence.

2012: Mildred Coleman conveyed to Dickerson by mineral deed all of her right, title and interest in all of the oil, gas and liquid and gaseous hydrocarbons.

2013: Dickerson conveyed to Smith 1/2 of the minerals. This is the interest Davidson claims.

Valence argued that the provision in the 1964 deed was an exception to both the conveyance and the warranty but only to the extent of the exception and reservation in the 1956 deed.  As a result, the 1964 grantors conveyed all they had gotten in 1956.

Davidson/Smith argued that the 1964 Coleman-to-Carter deed was a reservation to Mildred to which they eventually succeeded.  

The court

The trial court quieted title in favor of Davidson/ Smith. The court of appeals reversed and remanded.  Davidson/Smith could not prove superior title through a chain of title in their trespass to try title claim.

The question for the court of appeals: Whether the grantors in the 1964 Coleman deed reserved an interest in the minerals for themselves or excepted any portion of the mineral estate from the conveyances.

The court explained the difference between exceptions and reservations: “The words ‘exception’ and ‘reservation,’ though at times used interchangeably, each has its own separate meaning.”  … “A reservation is the creation of a new right in favor of the grantor.” … “An exception, by contrast, operates to exclude some interest from the grant.”). …  “[A]ny ‘reservation’ must be ‘by clear language’ and cannot be implied, and a reservation is a form of ‘exception’ through which the grantor excludes for itself a portion of that which would otherwise fall within the deed’s description of the interest granted.”

The Colemans did not reserve ay mineral interest in the 1964 deed; they merely recited that mineral interests were reserved and excepted in the past. The effect was to notify the Carters of the existence of a prior reservation and exempt the Colemans from liability on their warranty of title had there been a previous reservation an exception (which, of course, there was.)

Your musical interlude

Co-author Gunner West

In Bush v. Yarborough Oil & Gas, LP a decades-old tax foreclosure judgment did not affect a previously severed mineral interest not owned by the delinquent taxpayer. The mineral owners were neither named nor served in the foreclosure suit, and the judgment and sheriff’s deed expressly limited the scope to the taxpayer’s interest.

In 1937 property owner Piercy conveyed an undivided 1/2 mineral interest to Vaughn, who later conveyed his interest to Johnson, who conveyed fractional interests to the Vaughn Successors.

Severance and competing claims

Years later, a tax foreclosure suit was filed against Piercy. Some of the taxes had accrued before the 1937 severance. Tax liens attached to her property. Johnson and his grantees were not sued or served.

A default judgment was rendered, and the sheriff executed a tax deed conveying the tract to taxing entities, who later quitclaimed their interest to Bush, whose interest passed to the Bush Successors.

The issue was dormant until 2014, when oil production began on leases from the Bush Successors. Yarborough, a Vaughn Successor, sued for trespass-to-try-title, claiming ownership of a fractional share of the minerals.

Interpreting the scope of the judgment

The court focused on three elements to determine the scope of the judgment: the language of the judgment itself, the contemporary legal context, and corroborating evidence.

According to the decretal language, the tax lien was “foreclosed on each tract of said land against the rights, titles, liens and claims of each and all of the said defendants herein.” The sheriff’s deed conveyed “all the right, title and interest of the said Mrs. M.A. Piercy, … .”

The Bush Successors argued that references to “tract of said land” encompassed the entire mineral estate. But the court found that the express limitation to Piercy’s interest in the judgment and deed could not be disregarded.

The court also rejected arguments that contemporary statutes created a presumption that the judgment foreclosed on the Vaughn Successors’ interest. The Delinquent Tax Act of 1895 speaks in terms of owners being served with process, reflecting its purpose to ensure due process.

The court also cited Texas Supreme Court decisions establishing that a title-based judgment “does not conclude” the interests of owners not joined in the suit.

Extrinsic evidence corroborated the limited scope of the foreclosure. Property records showed that no mineral owners were sued. Bush purchased a fractional mineral interest two months after the tax sale, and the quitclaim deed expressly limited the conveyance to Piercy’s interest only.

Limitations and standing

The court rejected arguments that the Vaughn Successors’ claims were barred by the Tax Code’s one-year limitations period for actions “relating to the title to property . . . against the purchaser of the property at a tax sale.” The court distinguished between a title challenge—covered by the statute—and this case, which sought a declaratory judgment clarifying the scope of a deed. It found no procedural bar to suit.

The court rejected arguments that the Vaughn Successors lacked standing or that policy considerations weighed against allowing title claims after decades. Recording statutes enable owners to prove ownership back to the sovereign, while adverse possession statutes address concerns about endless claims. Further, property owners are on notice of prior claims in their chain of title but not deeds recorded after conveyance to a predecessor.

The judgment did not affect the severed mineral interest, which remained undisturbed due to the interest owners’ absence from the suit and the express limitations in the judgment and sheriff’s deed.

Your two-fer musical interlude: funky/reggaeish, not funky/reggaeish.

Co-author Gunner West

We begin with a word from your sponsor. After enduring several generative AI tutorials, we urge you to keep on reading Energy and the Law. Why? Our blog is more accurate, at least a little “fun”, offers insightful musical interludes to distract you from your daily burdens, it’s free, and we “hallucinate” on our own time. Thank you for reading.

Water is everywhere in current Texas jurisprudence.  A court of appeals overturned a $13 million judgment against a disposal well operator found negligent for drowning out producing oil wells with produced from nearby injection wells.

Basic Energy Services, LP v. PPC Energy LLP, held:

  • The statutory prohibition against waste in the “production, storage, or transportation” of oil and gas applies to disposal well operators, and
  • The operator is entitled to rely on the Natural Resources Code’s reasonably prudent operator standard as a defense when supported by evidence.

The facts

PPC operated nine oil wells in the Matthews Consolidated Field in Reeves County, Texas, producing from the Delaware Mountain Group. These low-volume wells generated significant wastewater. Basic operated a commercial disposal well approximately 6,300 feet from PPC’s nearest well.

PPC’s wells experienced a sudden surge in reservoir pressure and produced, which eventually caused the wells to drop out of production. PPC filed a complaint with the Texas Railroad Commission, which investigated but was “unable to attribute the increased pressure to local commercial disposal operations.”

PPC sued Basic and other disposal well operators. After PPC settled with all defendants except Basic, the jury found Basic negligent and attributed 60% of the fault to Basic, with a judgment for PPC of $13 million.

The jury charge

On appeal Basic challenged the jury charge, arguing the trial court committed two related errors: first by defining negligence to include committing statutory “waste” and then by refusing to include the corresponding statutory “reasonably prudent operator” defense.

In the charge, “negligence” was defined as failure to use ordinary care; that is, failing to do that which a person of ordinary prudence would have done under the same or similar circumstances or doing that which a person of ordinary prudence would not have done under the same or similar circumstances.

The instruction went further: It is negligence to commit “waste.”, which means the drowning with water a stratum or part of a stratum that is capable of producing oil or gas or both in paying quantities or underground loss, however caused.

Waste provisions apply to disposal wells

Basic argued that the Natural Resources Code’s prohibition against “waste” should not apply because its operations are not part of the “production, storage, and transportation of oil and gas” as specified in § 85.045.

The court rejected this narrow interpretation. “Production” in the context of § 85.045 includes the handling of wastewater from oil and gas production. The court reasoned that wastewater is “inherent to the production process” and flooding of producing strata is a “long-recognized form of waste.”

Reasonably prudent operator instruction required

The court also determined that Basic was entitled to an instruction on the reasonably prudent operator defense provided by § 85.321. Pages 17-19 of the opinion cite evidence in the record for Basic’s actions that supported the defense.

The trial court erred by omitting the reasonably prudent operator instruction from the jury charge. The appellate court reversed and remanded the case for a new trial.

The case featured a split between the majority and dissent over whether a defendant can assert the reasonably prudent operator defense by relying solely on the opposing party’s expert testimony to establish the standard of care. We won’t discuss that portion of the opinion.

Your musical interlude

An understanding of Willis v. Barry Graham Oil Service LLC requires knowledge of two principles underlying the Louisiana Anti-Oilfield Indemnity Act:

  • The LOAIA bars an oilfield agreement to the extent that the agreement contains provisions for indemnification for losses caused by the negligence or fault of the indemnitee.  
  • There is the Marcel exception: The prohibition does not apply when an indemnitee fully pays the indemnitor’s insurance premiums for the indemnitee’s coverage.

The contracts

Barry Graham operates vessels in the Gulf of Mexico America MAGA off the coast of Louisiana. There were three contracts:

  • A Marine Services brokerage agreement for Kilgore Marine Services to market Barry Graham’s services.
  • A Master Time Charter Agreement between Kilgore and Fieldwood Energy for Kilgore to provide vessel services to Fieldwood.
  • A Master Services Contract by which Shamrock would perform work as a contractor on Fieldwood’s offshore platform.

The facts

Shamrock employee Willis was injured while working and sued Barry Graham for his injury. Barry Graham third-partied against Shamrock for contractual defense, indemnification and insurance coverage. The MSC committed Shamrock, the “Contractor”, to release and indemnify the “Third-Party Contractor Group” from claims by any member of the “Contractor Group” which included Shamrock/Willis. The MSC defined a “Third-Party Contractor” as “any other contractor used or employed by Fieldwood in connection with the Work”.  Shamrock agreed to support its mutual indemnity obligations with insurance. Kilgore paid Barry Graham’s insurance premium.

If Kilgore was a Third-Party Contractor, by definition Barry Graham would be part of the Third-Party Contractor Group. Willis was working as a crane rigger on Fieldwood’s platform when he was injured. Because Shamrock’s work involved crane rigging and those services were used in offloading the vessel chartered by Kilgore for Fieldwood, Fieldwood used Kilgore “in connection with” Shamrock’s work. Kilgore was plainly a Third Party Contractor under the MSC, rendering Barry Graham just as plainly part of Kilgore’s Third Party Contractor Group.

The insurance puzzle

Shamrock’s obligations applied only to the extent that Third-Party Contractors executed substantially similar indemnifications. That condition was met. To satisfy the reciprocity requirement the Third-Party Contractors must also execute cross-indemnification substantially similar to Shamrock’s. If that happened, then Shamrock’s obligations reached both the Third-Party Contractor and its Group. That included Graham. The Kilgore/Fieldwood Master Charter Agreement’s obligations were essentially identical to Shamrock’s. Kilgore agreed to defend and indemnify Third Party Contractors and Third Party Contractor Group for injuries to members of the Owner Group. Kilgore obtained insurance coverage to that end.

Two questions:

  • Was Kilgore’s payment of Barry Graham’s Marcel premium intended to cover Shamrock’s indemnity obligations to Barry Graham? Yes.
  • Can a third-party contractor that does not itself pay the Marcel premium avail itself of its principal’s payment of a Marcel premium made with the intent to cover the third-party contractor? Yes.

Holding

A third-party contractor (Barry Graham) that does not itself pay the Marcel premium can rely on the premium paid by its principal (Kilgore) to cover the third-party contractor’s indemnity obligations. There is no shifting of the economic burden under the LOAIA when the principal pays the premium for his contractor so long as the indemnitor bears no part of that cost. Shamrock loses. Case remanded

Your musical interlude.  

Co-author Gunner West

The growling and barking presented by a claim for tortious interference is often far worse than the bite. Consider Segundo Navarro Drilling, Ltd. v. Chilton , which is a good example of that phenomenon in an oil and gas transaction. The Dallas Court of Appeals affirmed summary judgment for defendants, holding that:

  • a letter of intent with an at-will termination clause is not “subject to interference” in a claim for interference with an existing contract because the contract was not legally binding and obligatory; and
  • breach of contract does not constitute an “independently tortious or unlawful act” necessary for interference with prospective business relationships. There must be an independently tortious or unlawful act—which breach of contract is not.

The Relationship and Failed Assignment

In 2018, San Roman Ranch Mineral Partners entered into an oil and gas lease in favor of Arkoma Drilling. When Arkoma couldn’t meet drilling requirements it attempted to assign the lease to Segundo. The assignment required San Roman’s prior written consent—not to be “unreasonably withheld or delayed.”

Arkoma and Segundo signed a letter of intent (LOI) that contained a termination clause allowing either party to terminate at-will without further obligations. When Arkoma sought San Roman’s consent, Chilton (San Roman’s president) declined, citing prior litigation with Segundo. Arkoma terminated the LOI.

Segundo sued San Roman and Chilton for tortious interference with an existing contract, tortious interference with a prospective business relationship and civil conspiracy. The trial court granted summary judgment for the defendants on all three claims. Segundo appealed.

No Interference of a Non-Obligatory LOI

Segundo’s tortious interference with existing contract claim failed because the LOI wasn’t subject to the alleged interference. The critical aspect of the LOI: Neither party was obligated to perform. Either party could terminate the LOI at will, at which point the LOI would “have no force and effect” and the parties would “have no further obligations”.

Non-obligatory contract provisions are not subject to interference. Because no provision required either side to proceed with the assignment, it could not be “subject to interference” as a matter of law.

This conclusion negated this essential element of the claim, making judgment appropriate without analysis of the remaining elements.

Contract Breach is Not an “Unlawful” Act

Segundo contended that San Roman’s withholding of consent was a breach of contract that constituted an “unlawful” act, satisfying the dispositive element of the prospective business relationships claim.

Rejecting this argument, the court held that tortious interference with prospective business relationships is limited to a violation of tort or statutory duty. Said the court, “breach of contract is not illegal” and “not necessarily blameworthy.”

The court cited extensive authority establishing that breaching a contract is neither wrongful nor unlawful. A contractual promise simply creates a right to either performance or damages—not a guarantee the promised performance will occur. This distinction delineates the boundary between contract law (where breach of contractual obligations gives rise to remedies in law or equity) and tort law (where breach of legal duties gives rise to liability for damages).

Thus, even if San Roman breached the lease by unreasonably withholding consent—an issue the court did not need to decide—such breach alone could not establish the “independently tortious or unlawful” element required for Segundo’s second claim.

Lastly, Segundo’s civil conspiracy claim necessarily failed when the court dismissed the two underlying claims, as “there can be no independent liability for civil conspiracy” without an underlying tort.

Your musical interlude: Big band C&W? Or a fiddle?

Texas Crude v. Burlington Resources Oil and Gas considers the relationship between the operator and non-operators under Articles V and VI of the 1982 Model Form Joint Operating Agreement.

Burlington owed 87.5.% of a prospect and was the operator. Texas Crude owned 12.5. Warwick acquired a 10% working interest from Texas Crude. That interest was later acquired by Burlington.

The JOA provisions (summarized):

V.A:  Burlington as operator shall conduct all such operations in a “good and workmanlike manner” but would have no liability “ … for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.”

V.B.1: Authorizes removal of the operator by the affirmative vote of 2 or more non-operators owning a majority interest if operator fails or refuses to carry out his duties.

VI.B.1: The operator shall commence a proposed operation within 90 days if all parties elect to participate. If the operation is not commenced by then, any party desiring to conduct the operation must resubmit the proposal.

What happened

Warwick proposed drilling a total of 39 wells and Burlington and Texas Crude elected to participate. Shortly before expiration of the 90 days, Burlington said it would not be drilling the wells because it would be imprudent to do so.

Warwick and Texas Crude sued for breach of contract and sought a declaration that:

  • Burlington’s refusal to drill was a breach of the JOA,
  • The JOA’s other provisions did not apply and did not excuse Burlington’s breach, and
  • Burlington’s failure to commence subjected Burlington to removal as operator.  

Burlington said it was not required to drill wells a reasonably prudent operator would not drill and any party still desiring to conduct the operation must resubmit the proposal under VI.B.1.

Texas Crude said the resubmittal requirement does not provide a remedy for Burlington’s failure, and the VI.A exculpatory clause does not apply to Burlington’s obligations under VI.B.1.

After several rounds of motions, the trial court ruled:

  • The JOA did not require Burlington to conduct operations in any way other than in a good and workmanlike manner,
  • The JOA required Burlington to commence the proposed operation within the deadline but the resubmittal process gives direction to any party wishing to proceed with a proposed operation that has not been properly commenced.
  • Burlington’s failure to timely commence the operation was not a breach of JOA .

On appeal

 Burlington breached the JOA. “May” is permissive, while the common meaning of “shall” is mandatory. The JOA uses “shall” in VI.B.1.

The exculpatory clause

“Good and workmanlike manner” means an operator owes a duty to perform as a reasonably prudent operator. Burlington contended that that standard applies to decisions whether, when and how to drill. Texas Crude maintained that the clause did not apply to Burlington’s refusal to conduct proposed drilling operations.

In Reeder v. Wood County Energy the Supreme Court held that the exculpatory clause in the 1989 form protects operators from “activities”, which is broader than “operations”. Lower courts have declined to extend Reeder so that the exculpatory clause in the 1982 form excused the operator who failed or refused to perform a mandatory contractual duty.   

The result

The court concluded:

  • The trial court erred in concluding that an operator cannot breach the JOA by failing to timely commence a proposed drilling operation.
  • The resubmittal requirement is not a remedy for an operator’s breach of the JOA; nor does it excuse an operator from fulfilling its contractual duty to commence a well. It does not eliminate a party’s ability to pursue legal remedies for an operator’s breach, such as monetary damages, instead of proceeding with the operation.
  • The case was remanded for the trial court to consider removal of Burlington as operator. (Good luck with that now that Burlington owns Warwick’s interest.)

Jesse Colin Young RIP

Co-author Gunner West

In Steelhead Midstream Partners, LLC v. CL III Funding Holding Company, LLC, the Texas Supreme Court authorized a pipeline owner’s breach-of-contract claim—alleging a co-owner used foreclosure to avoid cost-sharing obligations under a joint operating agreement. The claim was not an impermissible collateral attack against a judgment allowing a foreclosure because the foreclosure suit did not adjudicate the parties’ contractual cost-sharing obligations.

Cost-Sharing, Foreclosure, and Breach of Contract

Steelhead and CLIII each owned an interest in an oil and gas pipeline project, subject to a JOA with a 50/50 cost-sharing arrangement. CL III’s predecessor-in-interest defaulted on its share of construction costs, resulting in a mineral contractor’s lien. CL III purchased the lien, becoming both a 50% owner of the pipeline and the lienholder against it.

CL III sued to foreclose on the lien and to compel Steelhead to pay the outstanding construction debt. Steelhead counterclaimed, asserting CL III breached the JOA by failing to pay its share of the construction costs that gave rise to the lien. In Steelhead’s view, CL III owed the remaining construction debt inherited from its predecessor and could not collect that debt from Steelhead, whose predecessor had already paid its share of the construction costs.

CL III moved to dismiss Steelhead’s counterclaim for lack of jurisdiction due to related bankruptcy proceedings. The court granted the motion and ordered foreclosure of Steelhead’s interest. Steelhead paid the judgment and did not appeal.

Prior to final judgment in the foreclosure suit, Steelhead filed a separate breach of contract suit, alleging that CL III’s failure to pay its share of the construction debt resulted in the foreclosure of Steelhead’s interest in the pipeline.

The court of appeals concluded that the contract claim constituted an impermissible collateral attack on the foreclosure judgment, which had definitively determined the status of the debt and the parties’ rights under the JOA.  The Texas Supreme Court granted review to address the collateral attack issue.

The Supreme Court: No Impermissible Collateral Attack

The Court reversed. Steelhead’s breach of contract claim was not an impermissible collateral attack on the final judgment in the foreclosure suit.

The foreclosure proceedings focused exclusively on the construction debt and the lien’s enforceability. The Court reasoned that determining who owed the construction debt, to whom it was owed, and whether a lien securing the debt is enforceable, is conceptually and legally distinct from determining the parties’ contractual cost-sharing obligations under the JOA (the contractual debt). As such, Steelhead’s breach of contract claim could be litigated independently.

“Properly understood,” the Court explained, “Steelhead’s [breach-of-contract] lawsuit seeks to establish not that the result of the foreclosure litigation was incorrect, but that the result of the foreclosure litigation triggers contractual obligations CL III owes to Steelhead.”

The Court also noted that Steelhead attempted to raise its breach-of-contract claim as a counterclaim in the foreclosure suit, but CL III successfully argued the foreclosure court lacked jurisdiction. Thus, the Supreme Court concluded, it would be unfair to bar Steelhead from litigating its breach of contract claim in a separate action after CL III had prevented it from doing so in the foreclosure suit.

Your musical interludes: fiddles, pipes banjos … reels, jigs, and two steps … from all over.

Scotland

South Carolina (my guess)

Ireland (or Scotland?)

Ireland

Mamou

Co-author Gunner West

DALF Energy, LLC v. GS Oilfield Services addresses a fiduciary’s deceptive actions in oil and gas transactions. The Fifth Circuit held:

  • self-dealing may constitute a breach of fiduciary duty even when the principal is not a direct party to the transaction;
  • uncertainty in the amount of damages does not bar recovery when injury is evident; and
  • opinions about profitability can be actionable as fraud.

The relationship

DALF Energy hired Jeffrey Scribner to identify oil and gas investment opportunities in Texas. Scribner identified old wells that he claimed could be returned to production with “virtually no risk.” Relying on Scribner’s advice, DALF’s parent company, TitanUrbi21, LLC (“TU”), purchased several oil and gas leases.

However, Scribner had falsified production reports, misled DALF about the risks involved, and failed to disclose his personal interests in some of the acquired leases. Some leases were owned by his father’s company and in some, royalties were assigned to Scribner’s own company—all without DALF or TU’s knowledge.

When DALF and TU grew suspicious of Scribner’s production reports and requested information about a key subcontractor—GS Oilfield Services, LLC—Scribner claimed he could not contact its owners or managers. DALF later discovered Scribner was GSOS’s manager.

DALF and TU sued for, among other claims, breach of fiduciary duty and fraudulent inducement. After unsuccessful proceedings in bankruptcy and district courts, they appealed.

Fiduciary duty extends beyond direct transactions

A fiduciary’s duty to fully disclose matters affecting the principal’s interest and to refrain from self-dealing applies even when the principal is not a direct party to the transaction.

Scribner was DALF’s agent and owed a fiduciary duty to DALF but not to TU.

Under Texas law, a fiduciary must fully disclose matters affecting the principal’s interests and is prohibited from using the relationship to benefit his personal interest without full knowledge and consent of the principal. 

After TU purchased the leases DALF began operating the wells. Scribner breached his duty by not disclosing his personal interest in the leases and by using his relationship with DALF to influence TU to sign contracts that assigned royalties to Scribner’s company.

Scribner breached his fiduciary duty, even though DALF was not a party to the lease, by:

  • falsifying production volumes, violating his duty of full disclosure;
  • self-dealing, by not disclosing his or his father’s interest in entities involved in the transactions;
  • claiming “virtually no risk” despite knowing there was always some risk;
  • falsely claiming professional credentials by using “P.E.” after his name without certification; and
  • concealing his relationship with a subcontractor while financially benefiting from its work.

Uncertainty in damage amount is not fatal

The bankruptcy court’s dismissal was based on a lack of specific evidence regarding the extent of DALF’s losses. However, the Fifth Circuit emphasized that while “uncertainty as to the fact of legal damages is fatal to recovery, … uncertainty as to the amount will not defeat recovery.”

The fact of injury was evident. Payments made before Scribner’s confession, based on falsified reports, constituted a tangible loss. The bankruptcy court’s dismissal of the claims was error.

The Court remanded to the bankruptcy court to calculate damages for certain actions and to determine whether DALF suffered injury from others.

Actionable Fraud For Opinions

DALF argued that Scribner’s profitability opinions in prospectuses were fraudulent. While Texas law generally exempts “pure expressions of opinion” from fraud claims, it recognizes exceptions when the speaker knows the opinion is false, claims special knowledge of future events, or bases the opinion on past/present facts.

The bankruptcy court failed to consider these exceptions and erred in concluding that Scribner’s opinions about profitability were not actionable solely because they were “statement[s] of belief about the future earnings or profitability of a business.”

Your musical interlude.

Patch LLC et al v. Indio Minerals LLC et al  was a dispute over title to a 1/8th NPRI in land in Midland County. Viola Ash, an Illinois resident, executed a warranty deed in 1932 for land in Midland County, reserving a 1/8 NPRI. Viola died in 1974 leaving no children.

Due diligence

Patch’s due diligence concluded that Viola died without a will and Patch purchased mineral interests from most of her living heirs. Patch made offers to other heirs but Indio had already purchased those interests.

In its own due diligence, Indio found Viola’s will that had been filed in the probate records of Macon County, Illinois, three days after her death. Her interest was devised to ancestors of Ms. Shook and others who had conveyed to Indio.

in order to establish its title, Indio filed a small estate affidavit in Midland County in 2020 and initiated the probate of Viola’s will in Macon County. The will was filed in the Deed Records of Midland County in 2021 and admitted to ancillary probate in 2022.

When did title vest?   

In Texas if a person dies leaving a lawful will, all of the estate that is devised by the will vests immediately in the devisees. A a copy of a foreign will takes effect as a conveyance beginning at the time the instrument is delivered to the Clerk in Texas to be recorded.

So, which is it here?  It depends on whether the will is a foreign will.  Viola’s will that was probated in Illinois had the same effect as a domestic will and transferred title to her devisees on the date of her death.

Patch was not a bona fide purchaser

When Patch acquired its interest Viola’s will was on deposit in Illinois. The Estates Code regarding the deposit of a will only pertains to a deposit in Texas. The will of a testator not domiciled in Texas may be admitted to probate at any time in Texas if proof is presented that the will was probated in another state.

In Illinois, there is no limitations period following the testator’s death in which a will may be admitted to probate. Patch, contended it was a bona fide purchaser, which it could have been if it had purchased the property from the decedent’s heirs after the fourth anniversary of the decedent’s death.  But that rule does not apply to foreign wills.

Patch’s misery was compounded by the admission by a Patch witness that before Patch purchased the interests, the Clerk of Macon County informed him that Viola had a will on file.

The court relied on several sections of the Estates Code and the Property Code to arrive at these conclusions. It’s worth a read if this is an immediate issue for you. 

What does your mineral deed convey?

Patch acquired its interests by both a “Quitclaim Deed” and a “Mineral and Royalty Deed”. A party that acquires a real property interest in a quitclaim deed cannot be an innocent purchaser for value because the grantee receives only whatever right, title, interest or claim the grantor has, not the property itself. The grantee is on notice of legal or equitable claims in favor of a third person.

Patch’s Mineral and Royalty Deed granted “all right, title and interest that grantor may own”. The court agreed with Indio: that language indicated a quitclaim deed.

The result

Indio acquired its interest from Viola’s devisees under her duly probated Illinois will, and Patch was not a bona fide purchaser.

Your musical interlude. Muddy probably was not thinking about Lent.