Allen v. Devon Energy Holdings, L.L.C.

• Decision Date: 09 March 2012
• Docket Number: No. 01–09–00643–CV.,01–09–00643–CV.
• Citation: 367 S.W.3d 355
• 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

367 S.W.3d 355

Robert B. ALLEN, Appellant,

v.DEVON ENERGY HOLDINGS, L.L.C. f/k/a Chief Holdings, L.L.C. and Trevor Rees–Jones, Appellees.

No. 01–09–00643–CV.

Court of Appeals of Texas,

Houston (1st Dist.).

March 9, 2012.

Gregg C. Laswell, J. Stephen Barrick, Hicks Thomas, LLP, Justin Brett Busby, Bracewell & Giuliani LLP, Houston, TX, for Appellant.

Roger D. Townsend, Alexander, Dubose & Townsend, LLP, Wallis M. Hampton, Charles W. Schwartz, Skadden, Arps, Slate, Meagher & Flom, LLP, David Michael Gunn, Beck, Redden & Secrest LLP, Robert M. Roach Jr., Roach & Newton, L.L.P., Houston, TX, Carrie T. Carter, Craig A. Haynes, Michael Stockham, Scott P. Stolley, Thompson & Knight LLP, Dallas, TX, Scott Brister, Andrews & Kurth, Austin, TX, for Appellees.

Panel consists of Justices HIGLEY, BROWN, and HALBACH.^*

OPINION ON REHEARING ¹

HARVEY BROWN, Justice.

In this securities action, Robert Allen appeals from the trial court's summary judgment in favor of Devon Energy Holdings, L.L.C. formerly known as Chief Holdings, L.L.C. (Chief) ² and its manager and majority owner, Trevor Rees–Jones.

Introduction

Two years after Allen redeemed his minority interest in Chief, Chief sold for almost twenty times the value used to calculation the redemption price. Alleging that Rees–Jones fraudulently induced him to redeem his shares, Allen sued Chief and Rees–Jones for violation of the Texas Securities Act (TSA), statutory and common law fraud, breach of fiduciary duty, and shareholder oppression. Allen asserts that Rees–Jones induced him to sell his ownership interest in Chief by making representations in a November 2003 letter and failing to disclose material changes that rendered those representations untrue or misleading in the intervening eight months between the date of the letter and his June 2004 redemption. 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 natural gas field, the Barnett Shale, both of which occurred after the redemption offer but before the redemption. Allen asserts that these undisclosed facts directly impacted Chief's future business prospects and would have caused him to reject Chief's redemption offer.

Rees–Jones and Chief contend that, cognizant of the fast-changing nature of Chief's uncertain oil and gas investments, the parties contractually allocated to Allen the risk for any changes in Chief's value for the months between the redemption offer and the sale. They assert that, when Allen cashed in his modest investment in Chief for a lottery-size windfall of over $8 million, he voluntarily assumed all responsibility for investigating and evaluating his decision to redeem his shares—therefore he cannot claim now that he based his decision on Rees–Jones's analysis rather than his own. They further maintain that Rees–Jones's statements constituted opinion statements, which are not actionable in fraud, and that Allen's damages model is an impermissibly speculative attempt to recover the maximum payoff on a gamble Allen declined to take. They moved for summary judgment on these grounds, which the trial court granted. Allen appealed.

With respect to Allen's fraud claims, we hold that several, but not all, of the statements in Rees–Jones's November 2003 letter are actionable and that the redemption agreement does not bar Allen's fraud claims based on those statements. We decline to recognize a shareholder oppression claim but hold that Rees–Jones did not negate fiduciary duty claim. We hold that Chief conclusively established that Allen had certain knowledge that bars his TSA, common law, and statutory fraud claims based on misrepresentation of the value of Chief or its assets at the time of the redemption or the appropriateness of the redemption price, but Chief did not otherwise disprove justified reliance or establish its “knowledge” defense under the TSA. Nor did Chief prove that Allen's TSA claims are barred by limitations or that Allen has no recoverable damages. We affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

Factual Background

Allen and Rees–Jones became acquainted as partners at a law firm. Two years after they met, Rees–Jones left the firm to be an entrepreneur in the oil and gas industry. Ten years later, Rees–Jones solicited Allen to invest in a new oil and gas company, which eventually became Chief. Allen became an 8% equity owner in return for investing $700 and pledging a $34,300 certificate of deposit as collateral for a line of credit. Rees–Jones invested $6,000 and his “sweat equity” as the sole manager in return for a 60% ownership interest. Chief experienced phenomenal growth, due largely to its success in the Barnett Shale. By July 2001, Chief's fair market value had grown to an estimated $8.5 million. Chief offered a partial buyout of its members to facilitate an ownership incentive plan for two key employees. Allen accepted the offer, reducing his interest to 7.2%.

Chief continued to have success, and its value continued to increase. By Fall 2003, Chief was preparing to shift its resources toward production in the “expansion” area of the Barnett Shale, where prospects were less certain than they had been in the “core” area. Rees–Jones decided to offer to redeem the other investors' remaining interests. Chief hired Haas Petroleum Engineering Services to perform an appraisal of Chief's oil and gas reserves, and it hired Phalon George Capital Advisors to assess Chief's market value based on the Haas reserve report. The Phalon report estimated Chief's net asset value at $138.3 million, after subtracting liabilities, and the minority members' interests at approximately $1.13 million per 1% interest after discounts for the sale of a minority interest and for lack of marketability.

In November 2003, Rees–Jones sent Chief's members a letter regarding his intent to make a redemption offer and attaching the Haas and Phalon reports. The letter contained 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 proven production in the Barnett Shale's core area to less-certain production in the expansion area. Rees–Jones also stated that Chief's first horizontal well appeared to be a dry hole drilled at a cost of $1.4 million, the approximately dozen wells drilled by other companies in the expansion area “would show to be non-economic,” and “further technological advancement needs to be made in order for the Barnett Shale in the ‘expansion’ area to become economic.”

The closing was delayed until June 2004. According to Allen, a number of events occurred in the eight months between Rees–Jones's November 2003 letter and the June 2004 closing that rendered some of Rees–Jones's statements in the letter misleading or no longer true. Among these events were: reports of successes in the development of horizontal drilling—a technology perceived as vital to profitable development of the expansion area of the Barnett Shale; considerable acquisitions by Chief and its competitors in the expansion area; optimistic statements by industry insiders about the expansion area's potential profitability; and an estimated increase in Chief's value. In his affidavit, Allen asserts that he asked Rees–Jones whether the valuations needed to be updated and Rees–Jones responded that it “was not necessary.”

Chief did not update the Haas or Phalon report after the initial redemption offer. Instead, Chief based the redemption price on the Haas and Phalon reports and included in the redemption agreement an “Independent Investigation” clause under which the seller recognized that the reports were not up-to-date and might not accurately reflect Chief's current value. The redemption agreement also contained a “Mutual Releases” clause and a general merger clause. Three of Chief's owners decided to redeem their interests; four owners retained their interests. Allen was among the sellers; Rees–Jones was among the remaining owners. Allen redeemed his interest in Chief for approximately $8.2 million.

Approximately one and a half years after the redemption, Chief's management put Chief on the market. Six months later, Devon purchased Chief for $2.6 billion—nearly twenty times the value used to determine the redemption price. Rees–Jones told Allen after the 2006 sale that “the change in value was attributable to the advent of horizontal drilling,” that horizontal drilling was the key that “unlocked” the expansion area, and that horizontal drilling had made the expansion area “worth more than he ever conceived.” Allen denied knowledge of the advancements in horizontal drilling or the extent of Chief's post-November 2003 leasehold acquisitions.

Allen sued Chief and Rees–Jones. After some limited discovery, Chief and Rees–Jones moved for traditional summaryjudgment, which the trial court granted.

Standard of Review

We review a trial court's summary judgment de novo. Travelers Ins. Co. v. Joachim, 315 S.W.3d 860, 862 (Tex.2010). Under the standard for traditional summary judgment, the movant has the burden to show that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. SeeTex.R. Civ. P. 166a(c); KPMG Peat Marwick v. Harrison Cnty. Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex.1999). A defendant moving for traditional summary judgment must negate at least one essential element of each of the plaintiff's causes of action or conclusively establish each element of an affirmative defense. Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex.1997).

Release

Chief ³ sought summary judgment on the affirmative defense of “release,” based on the provisions of the redemption agreement. The redemption agreement contains mutual releases under which Allen and Chief “fully and finally and forever settle, release...