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Texas Outfitters Limited, LLC v. Nicholson

Supreme Court of Texas

April 12, 2019

Texas Outfitters Limited, LLC, Petitioner,
v.
Carolyn Grace Nicholson, William Luther Carter, Jr., and Dora Jo Carter, Individually and as General Partner of Carter Ranch, Ltd., Respondents

          Argued October 10, 2018

          On Petition for Review from the Court of Appeals for the Fourth District of Texas

          Justice Busby did not participate in the decision.

          OPINION

          DEBRA H. LEHRMANN JUSTICE

         The holder of the executive right to lease a mineral estate owes non-participating mineral- and royalty-interest owners a duty of utmost good faith and fair dealing. We recently examined the scope of this duty and concluded that, while its parameters "are imprecise, at bottom, the executive is prohibited from engaging in acts of self-dealing that unfairly diminish the value of the non-executive interest." KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 74 (Tex. 2015). In this case, we are asked to apply the duty in the context of an executive's refusal to lease in contravention of the non-executive's known wishes. The trial court found that the executive violated its duty, and the court of appeals affirmed. Under the facts and circumstances of this case, we hold that legally sufficient evidence supports the trial court's finding and therefore affirm the court of appeals' judgment.

         I. Background

         Dora Jo Carter owned the surface estate of a 1, 082-acre tract in Frio County known as Derby Ranch. She and her two children, Carolyn Nicholson and William Carter, Jr., collectively owned an undivided 50% interest in the mineral estate. The Hindes family, relatives of the Carters, owned the other 50% mineral interest. In 2002, the Carters sold the surface estate to Texas Outfitters Limited, LLC, along with a 4.16% mineral interest and the executive rights to the 45.84% mineral interest retained by the Carters. Frank Fackovec, Texas Outfitters' sole owner, intended to use the ranch as his residence as well as to operate a hunting business. He testified at trial that he would not have purchased the property without the executive rights and the corresponding control over future mineral development. The Carters partially financed the approximately $1 million purchase price.

         In March 2010, Texas Outfitters received and rejected an offer to lease its and the Carters' mineral interest. Fackovec testified that he believed the offer, which included a $450-per-acre bonus and a 22% royalty, was too low. The record does not reflect when the Carters learned about this offer, and they do not complain in these proceedings about Texas Outfitters' rejection of it.

         In June 2010, the Hindeses leased their 50% mineral interest in the ranch to El Paso Oil Exploration & Production Company for a $1, 750-per-acre bonus and a 25% royalty. El Paso made the same offer to Texas Outfitters for the remaining 50% interest, and the Carters wanted Fackovec to accept it.[1] Fackovec was aware of the Carters' position but rejected the offer. At trial, the parties presented competing testimony regarding the reason for the rejection. Fackovec testified he thought the bonus was too low and wanted to wait for prices to go up as the oil play matured. Dora Jo Carter testified that, although she and Fackovec did not specifically discuss the El Paso lease, Fackovec had told her he "planned not to lease because of his business."

         The Carters requested a meeting with Fackovec, which took place in August 2010 and involved both the parties and their attorneys. The bulk of the negotiations appears to have centered on an arrangement for the Carters to buy back their executive rights. At the conclusion of the meeting, the parties had reached an agreement in principle whereby: (1) Texas Outfitters would convey to the Carters the executive rights on their retained mineral interest; (2) the deed conveying those rights would include as-yet unspecified surface protections to be included in the El Paso lease and any future lease; (3) Texas Outfitters would execute the lease as to its own 4.16% mineral interest; (4) the Carters would forgive $263, 000 of the owner-financed note on the ranch (approximately half of what was still owed); and (5) El Paso would prepay Texas Outfitters a negotiated amount for surface damages and water usage. However, the agreement was never finalized because the parties were unable to agree on the scope of the additional surface protections, which the Carters concluded were too onerous and would unduly restrict their ability to lease the minerals in the future. Texas Outfitters, through its attorney, made alternative settlement offers to the Carters in October 2010 and May 2011.[2] Neither was accepted.

         The Carters sued Texas Outfitters and Fackovec in June 2011. They alleged that Texas Outfitters, as holder of the executive rights to the Carters' mineral interests, breached the duty of utmost good faith and fair dealing by refusing to enter the El Paso lease. After the Carters filed suit, Texas Outfitters received two more offers to lease the ranch's minerals. The first included a larger bonus than the El Paso offer-$2, 000 per acre-but was withdrawn when the lessee learned El Paso had already leased the Hindeses' interest. The second included a $1, 500-per-acre bonus and was also withdrawn by the lessee.

         Ultimately, drilling in the area revealed that the land was not as productive as anticipated, and Texas Outfitters received no further lease offers. In 2012, Texas Outfitters sold the ranch for approximately $3.5 million, [3] retaining a portion of the mineral interest.

         After a bench trial, the trial court rendered judgment for the Carters and against Texas Outfitters, awarding damages of $867, 654.32-the amount the Carters would have received in bonuses from El Paso had its lease offer been accepted-plus interest and costs.[4] The trial court made numerous findings of fact and conclusions of law, including the following:

• Texas Outfitters exercised its executive rights to both its own mineral interest and the Carters' mineral interests in refusing to enter a lease with El Paso.
• Fackovec's "stated reason for refusing the lease was because he wanted to see how the play matured and try to get more money."
• "Dora Jo Carter testified that [Fackovec] told her that he planned not to lease because of his business of a hunting lease for bringing in hunters."
• After suit was filed, Texas Outfitters received a subsequently withdrawn lease offer that included a bonus of $250 more per acre than the El Paso lease. This would have amounted to $11, 252.80 more for Texas Outfitters, while refusing the El Paso lease caused the Carters to lose $867, 654.18.
• Texas Outfitters' "willingness to gamble its 4.16% [mineral interest] also resulted in a gamble for the Carter Family of their 45.84%."
• Texas Outfitters would not have purchased the ranch without the executive rights.
• Texas Outfitters sold the ranch "free of the encumbrance of any oil and gas lease" for $2.5 million over the purchase price.
• A holder of executive rights owes a "duty of utmost fair dealing" to the non-executive, and the "duty is breached by ...

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