Allen v. Devon Energy Holdings, L.L.C.
| Decision Date | 28 July 2011 |
| Docket Number | NO. 01-09-00643-CV,01-09-00643-CV |
| Parties | ROBERT B. ALLEN, Appellant v. DEVON ENERGY HOLDINGS, L.L.C. F/K/A CHIEF HOLDINGS, L.L.C. AND TREVOR REES-JONES, Appellees |
| Court | Texas Court of Appeals |
This appeal is from a traditional summary judgment in a securities fraud lawsuit. The dispute arises out of the redemption of a minority interest owned by Robert Allen in a closely-held natural gas exploration and development company,Chief Holdings, LLC. Allen claims that Chief and Trevor Rees-Jones, Chief's manager and majority owner, fraudulently induced him to redeem his interest two years before the company sold for almost 20 times the redemption sales price. Allen also sued Devon Energy Holdings, L.L.C.1 In addition to his claims for fraud, Allen brought claims for breach of fiduciary duty, violations of the Texas Securities Act, and shareholder oppression.
Rees-Jones and Devon filed traditional motions for summary judgment asserting a variety of defenses. Their motions attacked both Allen's liability theories and his claimed damages. On the liability issues, Rees-Jones and Devon focused their defense on disclaimers and other provisions in the redemption agreement, and contended that the agreement barred Allen's fraud claims by negating reliance or materiality as a matter of law. They further contended that no fraud occurred and that no fiduciary relationship existed between the parties. On the damages issues, Rees-Jones contended that Allen's damage claims were impermissibly speculative. The trial court granted the motions, and Allen appealed.
We hold that the redemption agreement does not bar Allen's claims, a fact issue exists as to fraud and the existence of a fiduciary relationship, and the damages are not impermissibly speculative. We also hold the trial court properly granted summary judgment on Allen's shareholder oppression claim and on three specific alleged misrepresentations discussed below. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.
Chief experienced phenomenal growth from its start-up to its sale for $2.6 billion. Both Rees-Jones and Allen became millionaires as a result of that growth.
Allen asserts that Rees-Jones, his former law partner and Chief's manager and majority owner, induced him to sell his ownership interest in Chief by making misrepresentations and failing to disclose material information. He primarily claims that Rees-Jones withheld information concerning technological advances in horizontal drilling and Chief's significant lease acquisitions in an expanded area of an existing field. This technology increased the likelihood of successful drilling in the expansion area. Allen asserts that these undisclosed facts directly impacted Chief's future business prospects and would have caused him to reject Chief's redemption offer. If he had not sold his interest at the redemption price and had held it until Chief was purchased by Devon Energy in 2006, his interest would have been worth over $100 million more than he was paid.
Rees-Jones asserts that Chief's success was a result of his efforts. He built Chief from scratch and assumed all the risks when he left the practice of law to seek his fortune in the oil and gas industry. According to Rees-Jones, the sale price two years after the redemption reflects changing market conditions and improvements in technology that were speculative at the time of the redemption. Allen, as a sophisticated investor and oil and gas lawyer, knew these changes were possible and was given the opportunity to obtain any additional information he needed to make an informed decision. Rees-Jones further asserts Allen preferred not to assume these risks and instead cashed in his modest investment in Chief into a lottery-size windfall that paid him over $8 million.
Allen and Rees-Jones first became acquainted while they were partners at a law firm. Allen is an oil and gas transactions lawyer and Rees-Jones formerly practiced as a bankruptcy lawyer. They were casual friends. In 1984, approximately two years after Allen and Rees-Jones first met, Rees-Jones left his legal practice and went into the oil and gas industry.
In 1994, Rees-Jones formed a predecessor to Chief to pursue natural gas exploration and production in North Texas. He solicited Allen to invest in the company. Allen became an 8% equity owner in return for an investment of $700 and putting-up a $34,300 certificate of deposit as collateral for a line of credit. Itwas the single largest investment he had ever made. Three other individuals also invested in Chief. Rees-Jones invested $6,000 and his "sweat equity" as the sole manager in return for an ownership interest of over 50%.
Chief became successful under Rees-Jones's management due to its success in the Barnett Shale, a geological formation near Fort Worth. Chief drilled over 100 wells in the area and become the second largest operator in the field based on daily gas production. By July 2001, its fair market value had grown to an estimated $8.5 million. Chief offered its investors the opportunity for a partial buyout of their membership interests so two key employees could participate in a stock ownership incentive plan. Allen accepted the company's offer to redeem 10% of his investment, reducing his interest to 7.2% in exchange for over $62,000.
In November 2003, Rees-Jones called Allen to inform him that Chief was offering to redeem the investors' remaining stock. In a follow-up letter dated November 20, 2003, Rees-Jones, on behalf of Chief, explained the reasons for and terms of the redemption offer. Rees-Jones attached two documents to his letter: (1) a letter by Phalon George Capital Advisors opining on Chief's market value and (2) an appraisal of Chief's existing gas reserves and future drilling prospects by Haas Petroleum Engineering Services, Inc., effective as of October 1, 2003. The Phalon report included discounts for the sale of a minority interest and for lack ofmarketability. Phalon estimated that Chief had a net asset value of $138.3 million, after subtracting liabilities, and the minority members' interests were worth approximately $1.13 million per 1% interest after discounts. The Haas reserve analysis included a table of Chief's undeveloped acreage, including leases located in the expansion area outside the Barnett Shale's main core, but did not assign a value to reserves in the expansion area because production was considered too speculative.
Based on these evaluations, Chief offered Allen approximately $8.2 million for his 7.2% interest in the company. The November 2003 letter also included Rees-Jones's pessimistic assessment of a number of facts and events that could negatively impact Chief's value in the future, including its shift from known production in the Barnett Shale's "core" area to less-certain production in the outer boundaries of the core in the "expansion" or "non-core" areas.
Rees-Jones also stated that Chief's first "expansion-area" well appeared to be a dry hole drilled at a cost of $1.4 million. The dozen or so wells drilled by other companies in the expansion area "when taking into consideration the total capital expended in drilling and completing these wells, would show to be non-economic." Rees-Jones stated these wells indicated that "further technological advancement needs to be made in order for the Barnett Shale in the 'expansion' area to become economic," specifically advancements in horizontal drilling.
Allen asserts that a series of events occurred in the seven months between the November 2003 offer and the June 2004 redemption that were not disclosed by Rees-Jones and Chief, but would have materially impacted his decision to redeem his interest. According to Allen, Rees-Jones should have disclosed the following events and information:
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