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Texas Outfitters Limited, LLC v. Nicholson

Court of Appeals of Texas, Fourth District, San Antonio

May 17, 2017

Carolyn Grace NICHOLSON, William Luther Carter, Jr., and Dora Jo Carter, Individually and as General Partner of Carter Ranch, Ltd., Appellees

         From the 81st Judicial District Court, Frio County, Texas Trial Court No. 11-06-00215-CVF Honorable Donna S. Rayes, Judge Presiding

          Sitting: Rebeca C. Martinez, Justice Patricia O. Alvarez, Justice Luz Elena D. Chapa, Justice


          Luz Elena D. Chapa, Justice

         Texas Outfitters appeals a money judgment the trial court rendered in favor of appellees, the Carters. Texas Outfitters, which held the executive rights regarding the Carters' mineral interest, argues it did not breach its fiduciary duty of utmost good faith and fair dealing by refusing to lease the Carters' mineral interest. We conclude the trial court, as the factfinder, made reasonable credibility determinations based on conflicting evidence and did not err in awarding damages to the Carters based on its findings. We therefore affirm the trial court's judgment.


         Before 2002, the Carters owned a 1, 082-acre tract known as Derby Ranch in Frio County. The Carters owned 50% of the mineral interest, and their relatives, the Hindeses, owned the other 50%. In 2002, Texas Outfitters, through its sole owner Frank Fackovec, offered to buy the surface estate for the purpose of operating a hunting business. Texas Outfitters also sought the executive rights to the Carters' 50% mineral interest. Dora Jo Carter, who owned the surface individually, sought and obtained the executive rights from her children, Carolyn and William. Dora Jo then sold the surface, the executive rights, and a 4.16% royalty interest to Texas Outfitters for $1 million. Dora Jo partially owner-financed the sale.

         Texas Outfitters received two offers to lease its and the Carters' mineral interest in 2010. In March 2010, it received and rejected an offer to execute a lease with a 22% landowner's royalty and a $450 per-acre bonus. In June 2010, El Paso Exploration & Production Company offered a mineral lease with a primary term of three years with a 25% landowner royalty and a $1, 750 per-acre bonus. El Paso extended the same lease offer to the Hindeses, who within sixty days of receiving the offer executed a lease with El Paso covering their 50% mineral interest.

         According to Dora Jo and Carolyn, Fackovec visited Dora Jo at her home to discuss leasing the Carters' mineral interest. Dora Jo and Fackovec did not discuss any lease offer specifically, but Fackovec told Dora Jo "there would be no lease" because he wanted to protect his hunting business, which he had developed into a deer breeding operation. Dora Jo "took it from him that he was not planning to lease."

         The Carters, through their attorney, arranged a meeting in August 2010 with Texas Outfitters. The meeting was held at a mediation center in San Antonio, but a mediator did not participate in the meeting. The Carters, their attorney, Fackovec, and his attorney Richard Butler attended the meeting. Although the meeting was not a mediation, Fackovec sat in another room by himself most of the day while Butler met with the Carters and their attorney. According to the Carters, the parties had reached an agreement that Dora Jo would forgive $263, 000 on the note for Derby Ranch in exchange for Texas Outfitters executing a lease with El Paso. According to Texas Outfitters, the Carters wanted to buy back their executive rights in exchange for forgiving part of the note, and Texas Outfitters asked the Carters to consider agreeing to include surface protections in the executive-rights deed. The parties agreed to finalize an agreement by October 15, 2010.

         After the meeting, the parties corresponded through emails and letters. On September 11, 2010, Butler emailed the Carters' attorney, stating:

Take a look at this draft settlement agreement and the surface protection clauses that will be incorporated into the executive rights conveyance document and the leases our clients will be signing. These surface protection clauses are taken from the leases that have been signed with El Paso by some of the neighboring ranchers, with some additions. Also attached is a[n] amortization schedule for the amended note to be signed by the parties. Please review these with your clients and let me know if you have aqny [sic] problems or questions.

         On October 28, 2010, Butler sent another email to the Carters' attorney, stating:

We have failed to reach agreement on several points of our attempted resolution of the mineral interest issues by the October 15th deadline the parties had agreed to. I have visited with [Fackovec] and we have determined that the resolution we had attempted was, by its very nature too complicated and likely to lead to further conflicts, so we are going to employ a completely different approach. The settlement we propose is as follows:
1. Texas Outfitters will be conveyed 25% of the minerals in fee simple under the Ranch (which will replace, not be in addition to his presently held mineral interest);
2. Texas Outfitters will hold no executive rights to the Carter mineral interests, freeing the Carters to lease their interests at any time, as the Hindes[es] did. [Fackovec] will, likewise, be able to negotiate leases of his mineral interests as he wishes;
3. The Texas Outfitters-Carter promissory note will remain as is-no reduction;
4. If and when Texas Outfitters leases its mineral interests (which it will have strong financial incentive to do), it will make a loan payment of $275, 000 of accrued interest and principal upon closing of the lease. This payment would be in addition to, not in lieu of the regular scheduled loan payments.

         On March 22, 2011, the Carters' attorney sent a letter to Texas Outfitters. The March 22, 2011 letter states:

You . . . know that my clients have requested that you execute the Oil and Gas Lease, which has been presented to you for development of the oil and gas minerals beneath the surface of such acreage.
Additionally, you also know that they have made many concerted efforts towards persuading you to sign such Lease regarding their interests in such minerals, in accordance with your fiduciary responsibility to them. However, you have persisted in refusing to sign the Oil and Gas Lease, which would permit the development of their mineral interests beneath the land sold to you.

         The Carters' attorney sent another letter on April 27, 2011, noting Texas Outfitters' continued refusal to lease and that "[t]his matter has been talked out."

         And on May 11, 2011, Butler sent the Carters' attorney another settlement offer on behalf of Texas Outfitters, stating:

[Texas Outfitters] will sell the ranch it purchased from the Carters, including all of [Texas Outfitters'] mineral interests, for the sales price of $4, 200, 000. In the alternative, if the Carter Family will convey to [Texas Outfitters] 25% of the minerals in and under the [Derby] Ranch, [Texas Outfitters] will convey to the Carter Family all of the executive rights [Texas Outfitters] owns in the mineral interests the Carter Family retains.

         The parties did not reach a settlement agreement. The Carters sued Texas Outfitters, alleging it breached its duty of utmost good faith and fair dealing by refusing to lease. After the Carters filed suit, Texas Outfitters received two lease offers from other companies, but no lease was executed. One of these lease offers included a $2, 000 per-acre bonus, but the offer was withdrawn when the company learned of the Hindeses' lease with El Paso. Texas Outfitters thereafter sold the surface and its executive rights to a third party for $4.5 million.

         The case proceeded to a bench trial, at which Carolyn, Dora Jo, Fackovec, Butler, and Pamela Hindes testified. The trial court also admitted the parties' correspondence without objection, the Hindeses' mineral lease with El Paso, and the mineral deed by which Dora Jo conveyed the executive rights and a royalty interest to Texas Outfitters. Following a bench trial, the trial court awarded $867, 654.32 in damages to the Carters. The trial court also made findings of fact and conclusions of law, finding Texas Outfitters breached its duty to the Carters by refusing to lease their mineral interest. In addition to finding Texas Outfitters breached its duty, the trial court made several specific fact-findings regarding the factual background of the case. Texas Outfitters appeals, arguing it did not breach its executive duty to the Carters.

         The Executive Duty

         "The right to lease minerals-the executive right-is one 'stick' in the bundle of . . . real property rights that comprise a mineral estate." Lesley v. Veterans Land Bd. of Tex., 352 S.W.3d 479, 480-81 (Tex. 2011). "The executive right is the right to make decisions affecting the exploration and development of the mineral estate" and includes the right to decide whether to execute a mineral lease. Id. at 487. However, "[t]he law has never left non-executive interest owners wholly at the mercy of the executive." Id. "[W]hile an executive may be understood to have considerable latitude, the executive lacks unbridled discretion. Our jurisprudence in this area of the law emerged in recognition of the potential for abuse inherent in this division of rights." KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 81-82 (Tex. 2015). "Thus, while an executive has a largely unfettered hand in negotiating and structuring a mineral lease, that discretion is circumscribed by the duty owed to a non-executive." Id. at 82.

         The supreme court "held long ago that the executive owes other owners of the mineral interest a duty of 'utmost fair dealing.'" Lesley, 352 S.W.3d at 481. Although the supreme court "ha[s] characterized an executive[] duty of utmost fair dealing as fiduciary in nature, " id. at 488, the supreme court recently clarified the executive's fiduciary duty does not incorporate the traditional fiduciary obligation to place the interest of the other party before its own. KCM Fin., 457 S.W.3d at 81. "This limitation distinguishes the executive duty from a more paradigmatic fiduciary relationship, like principal and agent." Id. The executive's fiduciary duty of utmost good faith and fair dealing does not require the executive "to wholly subordinate its interests in favor of the non-executive if their interests conflict" or "to grant priority to the ...

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