Arkoma Basin Exploration v. Fmf Associates

• Decision Date: 21 August 2003
• Docket Number: No. 05-02-00669-CV.,05-02-00669-CV.
• Citation: 118 S.W.3d 445
• Parties: ARKOMA BASIN EXPLORATION COMPANY, INC., Arkoma Basin Minerals, Inc., and Mark S. Kelldorf, Appellants, v. FMF ASSOCIATES 1990-A, LTD., FMF Associates 1988-B, Ltd., FMF Lazare, Ltd., FMF HMY, Ltd., FMF Kahn, Ltd., FMF Friedman, Ltd., FMF Greenwald, Ltd., and FMF Smallwood, Ltd., Appellees.
• Court: Texas Court of Appeals

118 S.W.3d 445

ARKOMA BASIN EXPLORATION COMPANY, INC., Arkoma Basin Minerals, Inc., and Mark S. Kelldorf, Appellants, v. FMF ASSOCIATES 1990-A, LTD., FMF Associates 1988-B, Ltd., FMF Lazare, Ltd., FMF HMY, Ltd., FMF Kahn, Ltd., FMF Friedman, Ltd., FMF Greenwald, Ltd., and FMF Smallwood, Ltd., Appellees.

No. 05-02-00669-CV.

Court of Appeals of Texas, Dallas.

August 21, 2003.

Rehearing Overruled November 6, 2003.

P. Michael Jung, Strasburger & Price, L.L.P., Dallas, for appellants.

Cynthia Hollingsworth, Jeremy Martin, Gardere, Wynne, Sewell, L.L.P., Dallas, Brian P. Sanford, Sheils Winnubst Sanford & Bethune, Richardson, for appellees.

Before Justices MORRIS, JAMES, and FITZGERALD.

OPINION

Opinion by Justice FITZGERALD.

Arkoma Basin Exploration Company, Inc., Arkoma Basin Minerals, Inc., and Mark S. Kelldorf appeal the trial court's judgment following a jury trial in this fraud action awarding $2,936,952.01 to FMF Associates 1990-A, Ltd., FMF Associates 1988-B, Ltd., FMF Lazare, Ltd., FMF HMY, Ltd., FMF Kahn, Ltd., FMF Friedman, Ltd., FMF Greenwald, Ltd., and FMF Smallwood, Ltd. Appellants assert on appeal that the trial court erred in entering judgment for the partnerships because: (1) there is no evidence appellants misrepresented any present or existing fact; (2) there is no evidence the partnerships reasonably relied on the alleged misrepresentations by appellants; (3) there is no evidence of privity between appellants and the partnerships as required to prove benefit-of-the-bargain damages; and (4) there is no evidence of the difference between the value of the property as represented and delivered. The partnerships bring a cross appeal asserting the trial court erred by reducing the amount of damages the jury found and then remitting a portion of the damages found by the jury. The partnerships bring a second cross-issue conditioned on our remanding the cause on other grounds and asserting the trial court erred by applying Virginia law and not Texas law. We set aside part of the trial court's suggestion of remittitur and part of appellees' remittitur, and we otherwise affirm the trial court's judgment.

BACKGROUND

Frank Foley and his company, FMF Oil and Gas Properties, Inc., put together limited partnerships to fund oil and gas ventures. In 1986, Foley met Mark Kelldorf, president and owner of Arkoma Basin Exploration Co. (ABE). Kelldorf told Foley that ABE had a large, unique database for the Arkoma Basin, a large natural gas producing field in Oklahoma and Arkansas. Kelldorf told Foley that the database could locate the owners of mineral rights in the Arkoma Basin, analyze the mineral rights, compute the remaining reserves, and estimate "a definitive cash flow" for existing wells and wells expected to be drilled in an area. Foley was impressed by ABE's database.

Between 1988 and 1991, Foley formed the limited partnerships, appellees, and used ABE to select and obtain the mineral rights to acreage in the Arkoma Basin that would be held by the partnerships. In the private placement memorandum sent to potential investors, Foley included information obtained from ABE about the reserves remaining in the properties to be purchased by the partnerships. For ABE's services, Foley paid ABE a "double commission" of seven to ten percent of the money Foley paid for the mineral rights and a ten-percent share of the mineral rights. According to the partnerships' witnesses to justify a higher price for the mineral rights, ABE stated the reserves were much higher than the wells' history and the scientific data indicated was appropriate.¹ The partnerships' witnesses also testified ABE increased the length of time the wells would be producing, estimating the life span of some of the wells at nearly 250 years. Foley gave ABE's projections of gas production and estimations of reserves to Hunter Herron, who converted ABE's information into the amount of cash investors in the partnerships could expect to receive. Based on all this information, investors bought into the eight limited partnerships, which acquired the mineral rights from ABE for approximately $1.6 million. When the properties failed to produce the amount of gas ABE had predicted, Foley hired Michael Harper to investigate whether ABE had misrepresented the reserves.

The limited partnerships sued ABE for actual and constructive fraud, negligent misrepresentation, and violations of the Texas Deceptive Trade Practice-Consumer Protection Act. On ABE's motion, the trial court determined Virginia law applied to the case. The trial court submitted the actual and constructive fraud causes of action to the jury, which found for the partnerships and determined their combined damages from the fraud totaled $5.5 million. The trial court's judgment reduced some of the damages found by the jury and subsequently suggested a remittitur, reducing the partnerships' total damages to $2,936,952.01.

FRAUD

In their first issue, appellants assert the evidence does not support the jury's answers to the questions about actual and constructive fraud. To prove actual fraud under Virginia law, a party must prove: (1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled. Prospect Dev. Co. v. Bershader, 258 Va. 75, 515 S.E.2d 291, 297 (1999). Constructive fraud requires a party show "that a false representation of a material fact was made innocently or negligently, and the injured party was damaged as a result of his reliance upon the misrepresentation." Mortarino v. Consultant Eng'g, 251 Va. 289, 467 S.E.2d 778, 782 (1996). Thus, the principal difference between the two causes of action is the intent with which the misrepresentation is made. Blair Constr., Inc. v. Weatherford, 253 Va. 343, 485 S.E.2d 137, 139 (1997). Under Virginia law, both actual and constructive fraud must be proved by clear and convincing evidence. Prospect Dev. Co., 515 S.E.2d at 297; Mortarino, 467 S.E.2d at 782.

Standard of Review

In determining the legal sufficiency of evidence to support a finding under the clear and convincing evidence standard, the reviewing court examines all the evidence in the light most favorable to the finding. In re J.F.C., 96 S.W.3d 256, 266 (Tex.2002). The court does not disregard all evidence not supporting the finding, but it disregards all evidence contrary to the finding that a reasonable factfinder could have disbelieved or found to be incredible. Id. If, under this standard, the court determines a reasonable trier of fact could have formed a firm belief or conviction that its finding was true, the evidence is legally sufficient. Id.

Actionable Misrepresentation

In their issue 1a, appellants argue there is not legally sufficient clear and convincing evidence appellants made a misrepresentation to the partnerships subject to an action for fraud. Appellants argue they provided only opinions, predictions, and projections to the partnerships concerning the production of the wells. Appellants assert a claim for fraud or constructive fraud must be based on a misrepresentation of present or pre-existing facts, not opinions or statements of future events.

Under Virginia law, "It is well settled that a misrepresentation, the falsity of which will afford ground for an action for damages, must be of an existing fact, and not the mere expression of an opinion. The mere expression of an opinion, however strong and positive the language may be, is no fraud." Lambert v. Downtown Garage, Inc., 262 Va. 707, 553 S.E.2d 714, 717 (2001) (quoting Yuzefovsky v. St. John's Wood Apartments, 261 Va. 97, 540 S.E.2d 134, 142 (2001) (quoting Saxby v. S. Land Co., 109 Va. 196, 63 S.E. 423, 424 (1909))). The Virginia courts have not "established a bright line test to ascertain whether false representations constitute matters of opinion or statements of fact." Lambert, 553 S.E.2d at 717 (quoting Yuzefovsky, 540 S.E.2d at 142 (quoting Mortarino, 467 S.E.2d at 781)). Instead, each case is judged on 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." Yuzefovsky, 540 S.E.2d at 142 (quoting Mortarino, 467 S.E.2d at 781 (quoting Packard Norfolk, Inc. v. Miller, 198 Va. 557, 95 S.E.2d 207, 211 (1956))). However, the Virginia courts recognize that "commendatory statements, trade talk, or puffing do not constitute fraud because statements of this nature are generally regarded as mere expressions of opinion which cannot rightfully be relied upon, at least where the parties deal on equal terms." Lambert, 553 S.E.2d at 717 (quoting Tate v. Colony House Builders, 257 Va. 78, 508 S.E.2d 597, 600 (1999)).

In this case, Foley hired appellants to identify, evaluate, and aid in the acquisition of mineral rights in the Arkoma Basin. Appellants held themselves out as having superior knowledge in the Arkoma Basin. However, the partnerships presented evidence that appellants did not deal honestly with Foley in making their evaluation of the gas reserves. Sonia Horton, petroleum landman for appellants, testified Kelldorf would have his engineer, Levent Kecik, determine the reserves for the mineral interests. If Kecik's calculation of the reserves did not show the reserves were as high as Kelldorf had hoped, Kelldorf would be displeased. On one occasion, Kelldorf told Kecik, "you're killing me, man. I can't do anything with these." Kecik would then "rerun the projections," and he would return with increased reserves. Harper testified about numerous ways appellants manipulated the data to increase their determination of the gas reserves of the mineral interests. For example, Harper testified that appellants' estimates included the production of wells to be drilled between existing wells, but they did not take into consideration the fact...