26Aug

Texas Supreme Court: Executive Duty Breached by Refusing to Lease

Texas Outfitters, Ltd., LLC v. Nicholson, 572 S.W.3d 647 (Tex. 2019)

The Texas Supreme Court recently issued its opinion in Texas Outfitters v. Nicholson, addressing the duties an executive mineral owner owes to non-executive owners. The case focused on when an executive owner has a duty to sign a lease and to what extent efforts to protect or benefit the surface estate can impact this duty. The Court affirmed the trial court’s judgment holding that the executive breached its duty and affirmed the trial court’s award of $867,654.32 plus interest and costs.

The Essential Facts

The Carters owned the surface estate and a 50% mineral interest in the Derby Ranch in Frio County. The Hindeses owned the other 50% of the mineral estate. In 2002, for $1 million, the Carters sold the surface estate to Texas Outfitters, along with a 4.16% mineral interest and all executive rights. The Carters retained a 45.84% non-executive mineral interest.

Texas Outfitters’ sole owner, Fackovec, testified that he intended to use the Derby Ranch as his residence and for his hunting business. The trial court found that Fackovec would not have purchased the ranch without the executive rights and corresponding control over future mineral development.

In 2010, El Paso offered to purchase a lease from Texas Outfitters. The Carters wanted Fackovec to accept that offer. Fackovec refused to accept that offer, testifying that he wanted to wait to try to get more money once the play matured. The trial court found that Fackovec “chose to gamble” with its interest and the Carters’ much larger interest, despite knowing the Carters did not want to take that gamble, and despite knowing that additional offers were unlikely since the Hindeses had already signed a lease with El Paso.

At one point the parties reached a tentative settlement where, among other things, the Carters would agree to unspecified restrictive covenants burdening the mineral estate. These settlement negotiations ultimately failed.

Prior to trial, Texas Outfitters reaped substantial benefits from its refusal to lease, because it was able to sell the ranch free of an oil and gas lease to the tune of $3.5 million – $2.5 million more than Texas Outfitters purchased the ranch from the Carters.

At a bench trial, the trial court determined that Texas Outfitters refused the lease in order to benefit its surface estate, and that its refusal constituted a breach of duties owed to the Carters.

Summary and Synthesis of Executive Rights Law

The Texas Supreme Court gave a thorough discussion of the nature of the duties owed by the holder of executive rights, and provided a comprehensive overview of standards and guiding principles. The Court explained that, in determining whether the executive has breached its duty in leasing or refusing to lease, “the controlling inquiry” is whether the executive engaged in acts of self-dealing that unfairly diminished the value of the nonexecutive interest. The Court clarified that this “controlling inquiry” applies to whether the challenged conduct consists of leasing or refusing to lease. This inquiry is “heavily dependent on the facts and circumstances.”

The Court acknowledged that the parameters of this inquiry are “rarely straightforward,” “difficult to determine,” “imprecise,” and “unsusceptible to a bright line rule.” The Court discussed several prior decisions as providing “guiding principles” in the analysis. For instance, the “equal-benefits” principle holds that the executive must acquire for the non-executive every benefit that he exacts for himself. Conversely, the “no-subjugation” principle holds that an executive is not always required to subjugate the executive interest to the non-executive interest.

While these guiding principles are helpful in analyzing the “controlling inquiry,” the Court explained that they “cannot be applied in a vacuum and must account for the fact that executives and non-executives often do not share in all the same economic benefits that might be derived from a mineral lease.” For instance, executives often hold the exclusive right to bonus payments and/or the surface estate.

Analysis of Texas Outfitters

The Texas Supreme Court affirmed the trial court’s judgment, finding that Texas Outfitters breached its duty to the Carters by refusing to lease under these circumstances.

Texas Outfitters argued that it could not have engaged in self-dealing by trying to obtain better lease terms that did not materialize. The Texas Supreme Court acknowledged that an executive generally does not breach his duty by declining a lease in honest anticipation of obtaining better terms for all (analogizing this to the “business judgment rule”). However, the trial court found that Texas Outfitters “cross[ed] the line from lawfully promoting his own surface interest to unlawfully doing so at the expense of the non-executive interest, thereby engaging in self-dealing that unfairly diminishes the value of that interest.” The Court emphasized that the gamble was much larger for the Carters’ interest, the Carters did not want to take that gamble, the pool of potential lessees was diminished by that time, and the trial court found that Texas Outfitters refused the El Paso lease in order to benefit its surface interest.

The Court also analogized the case with Lesley v. Veterans Land Board, 352 S.W.3d 479, 480-81 (Tex. 2011). In Lesley, a developer with executive rights entered into restrictive covenants constraining mineral development in a subdivision to protect future lot owners. The Court held that the restrictions breached the executive duties owner because the restrictions benefited the surface estate to the detriment of the nonexecutives, despite the fact the accommodation doctrine already provided “appropriate protection” to the surface estate. Similarly, the Carters presented evidence that other commercial hunting outfits in the area “commonly” entered into oil and gas leases with operators, and that those operators accommodated those surface uses. Another similarity is that Texas Outfitters chose to reap the benefits of an unburdened surface estate to the detriment of the Carters.

Texas Outfitters pointed to the 2003 case In re Bass, and argued that it should not be “forced” to lease its own interest to avoid a breach of its executive duty. In what some have interpreted as a departure from the Bass decision, the Court explained “We certainly do not hold that an executive must always accept an offer…But we also do not hold than an executive is never required to accept such an offer.”

Austin Brister
Austin represents oil and gas exploration and production companies and landowners in a wide variety of complex commercial litigation matters, including contract and property disputes, royalty disputes, breach of lease cases, lease termination/perpetuation disputes, and an array of other issues in the upstream oil and gas sector. Austin has prosecuted and defended claims in state courts and federal courts. Austin strives to find practical business solutions to complex issues, but if necessary, he works hard to implement effective strategies in the courthouse.
Austin Brister

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