Arkoma Basin Expl. v. Fmf Associates 1990-a

• Decision Date: 25 January 2008
• Docket Number: No. 03-1066.,03-1066.
• Citation: 249 S.W.3d 380
• Parties: ARKOMA BASIN EXPLORATION COMPANY, INC., et al., Petitioners, v. FMF ASSOCIATES 1990-A, LTD., et al., Respondents.
• Court: Texas Supreme Court

249 S.W.3d 380

ARKOMA BASIN EXPLORATION COMPANY, INC., et al., Petitioners, v. FMF ASSOCIATES 1990-A, LTD., et al., Respondents.

No. 03-1066.

Supreme Court of Texas.

Argued December 1, 2005.

Decided January 25, 2008.

Rehearing Denied May 2, 2008.

P. Michael Jung, Kenneth S. Beat, Strasburger & Price, L.L.P., David M. Gunn, C. Gregory Shamoun, Howard Jay Klatsky, Shamoun & Klatsky, P.C., Dallas, TX, for Petitioners.

Brian Paul Sanford, Sheils, Winnubst, Sanford & Bethune, P.C., Richardson, Cynthia Hollingsworth, Gardere Wynne Sewell LLP, Dallas, Jeremy C. Martin, Irving, TX, for Respondents.

Jack Crichton, Crichton & Associates, Dallas, Aaron Cawley, Cawley Gillespie & Associates, Fort Worth, Lance Holland, Rockwall, B. Charles Spradlin, Larry T. Long, Kilgore, H.J. Gruy, Houston, Alex Mills, Wichita Falls, TX, for Amicus Curiae.

Justice BRISTER delivered the opinion of the Court in which Chief Justice JEFFERSON, Justice HECHT, Justice WAINWRIGHT, Justice GREEN, Justice MEDINA, Justice JOHNSON, and Justice WILLETT joined.

Eight Virginia limited partnerships hired Arkoma Basin Exploration Company¹ to estimate production from mineral properties in the Arkoma Basin in southeastern Oklahoma. When the properties failed to produce as predicted, they sued.

Based on Virginia law, a Texas jury found clear and convincing evidence of fraud and awarded $5.5 million in damages. The trial court signed a judgment reducing the verdict to $4.7 million, and later reduced that further by remittitur to about $2.9 million. When Arkoma appealed the judgment and the partnerships cross-appealed the remittitur, the court of appeals affirmed in all respects but one, holding part of the remittitur improper and restoring about $1.5 million of the jury's verdict.²

We granted Arkoma's petition to consider whether there was legally sufficient evidence of fraud under Virginia law, or of damages under Texas law. Finding that only two of the eight limited partnerships met these standards, we affirm the court of appeals' judgment as to FMF Associates 1988-B, Ltd. and FMF Lazare, Ltd., and reverse the remainder.

I. Evidence of Fraud: Statement of Fact or Opinion?

Arkoma argues that its reserve estimates are immune from any fraud claim under Virginia law. The parties agree that Virginia law governs this issue, and requires clear and convincing evidence to establish liability.³ As this heightened standard is more substantive than procedural, we apply it in our legal sufficiency review.⁴

The parties agree that reserve estimates do not attempt to calculate the volume of gas underground, but the volume that can be economically produced from a reservoir in the future.⁵ As a result, reserve estimates inherently include analysis and assumptions about future events.

Virginia law draws a line between statements of opinion and of fact: "[t]he mere expression of an opinion, however strong and positive the language may be, is no fraud."⁶ Additionally, Virginia law distinguishes between statements of existing and future facts: "fraud must relate to a present or a pre-existing fact, and cannot ordinarily be predicated on unfulfilled promises or statements as to future events."⁷

But the line between these categories is not as clear as one might expect from these statements. Virginia specifically eschews a bright-line test, judging each case on its facts, and considering the nature of the representation, the relative knowledge of the parties, their intentions, and all of the surrounding circumstances before deciding whether a statement could constitute fraud:

We have not, however, established a bright line test to ascertain whether false representations constitute matters of opinion or statements of fact. Rather, each case must in a large measure be adjudged upon its own facts, taking into consideration the nature of the representation and the meaning of the language used as applied to the subject matter and as interpreted by the surrounding circumstances.... It is not always an easy matter to determine whether a given statement is one of fact or opinion. The relative knowledge of the parties' dealing, their intentions and all of the surrounding circumstances, which can only be gathered from the evidence, affect the interpretation which the courts put upon the representations in determining whether they be of fact or opinion.⁸

Thus, in some circumstances Virginia law allows fraud claims based on what might otherwise appear to be opinions. For example, the Virginia Supreme Court has held that a consultant who reported "nothing to indicate that wetlands are present," but also warned that this was a matter of opinion, could nevertheless be liable for fraud when 80% of a property was later designated as wetlands.⁹ The same court held a fraud claim could be based on a realtor's opinion that there was no termite damage, when in fact he had in hand a report suggesting the opposite.¹⁰ And a builder's opinion that a house was "free from structural defects" could support a fraud claim, but his opinion that "no significant work would be required" could not.¹¹ In each of these cases, the nature of the statement, the relative knowledge of the parties, and all the surrounding circumstances were taken into account in deciding whether a statement that appeared to be an "opinion" was nevertheless actionable as fraud.

Similarly, statements about future events may constitute fraud under Virginia law in some circumstances. Thus, for example, a sales agent's assurance that the woods behind a condominium would never be cleared constituted fraud when she knew about plans to build a playground there in the future.¹² And the Fourth Circuit has held that a doctor stated a fraud claim under Virginia law by alleging his malpractice insurer falsely assured him that a settlement would not affect his future ability to obtain coverage.¹³ Here again, in each case the nature of the statement, the parties' relative knowledge, and all the surrounding circumstances were considered before deciding whether a statement about future events was nevertheless actionable.

Applying these principles to this case, there is no question Arkoma had superior knowledge about likely reserves, as it was hired for precisely that reason. Arkoma represented that its database was "without equal" and "unique" in its ability to combine geologic, engineering, and economic data to assess the potential value of mineral properties.

But Arkoma's reserve estimates cannot all be treated alike because their nature and the circumstances surrounding them were very different. The reserves prepared for two partnerships — 1988-B and Lazare — concerned mineral interests in the Wilburton field, a mature field where scores of wells had been producing natural gas since 1960. Here, Arkoma estimated production from anticipated "infill" wells drilled between existing wells for which there was a long track record of production. Experts testified that these wells could reasonably be expected to produce from the same strata at similar historical rates, and that reserve estimates in this area could not reasonably vary by more than 10 or 15 percent. Yet there was clear and convincing evidence that Arkoma's estimates assumed that infill wells would last far longer, be much more productive, and yield 200 to 300 percent more than nearby existing wells had ever produced.

By contrast, Arkoma's reserve estimates for the remaining six partnerships concerned mineral interests in the South Panola field, a new field in which there had been little drilling or production. Interests here were purchased "ahead of the play" — in areas where minerals had not yet been found, but might be. The plaintiffs' own expert conceded there was less than a year of production history anywhere in this field, and that an entirely different method of calculating reserves had to be used because no one knew how much wells in this area might eventually produce. Further, while he characterized drilling in the Wilburton field as "low risk," he characterized that in South Panola as "definitely high" risk, which can only mean that reserve estimates in the latter were much more speculative. There was also undisputed evidence that in the decade after Arkoma's estimates, major oil companies had drilled very expensive wells (at $4 million or more each) unsuccessfully looking for the same reserves in the same places that Arkoma had predicted. Viewing all the surrounding circumstances, there was no clear and convincing evidence that Arkoma's estimates in South Panola should be treated as statements of fact rather than of opinion.

Our conclusion that reserve estimates in these two fields must be treated differently is supported by DeJarnette v. Thomas M. Brooks Lumber Co., in which a seller's estimate that standing timber would produce three million board feet of lumber was held to be a statement of opinion rather than fact.¹⁴ The opinion did not suggest that estimates of natural resources must always be one or the other; to the contrary, it turned on specific evidence in that case that the buyer knew the seller's estimate was not based on a detailed survey, and had made his own inspection with an experienced "timber cruiser" before buying. By focusing on how rough or specific the parties thought the defendant's estimate was, Virginia law would appear to require different treatment for estimates in mature and immature gas fields like those here.

We disagree with the dissent that Virginia law exonerates opinions only if they are "good-faith opinions." Because Virginia law requires proof of scienter in every fraud case,¹⁵ honest statements are never actionable whether they are opinions or not. In affirming the fraud verdict as to both fields and all eight partnerships, the court of appeals pointed to evidence suggesting Arkoma's engineer was pressured to inflate some reserve estimates, and may have manipulated some spreadsheet calculations to reach a predetermined...