KCM Fin. LLC v. Bradshaw

• Decision Date: 06 March 2015
• Docket Number: No. 13-0199,13-0199
• Parties: KCM Financial LLC, R.J. Sikes, Roger Sikes, Kathy Sikes, Greg Louvier, Pam Louvier, Christy Rome, R. Crist Vial, Dacota Investment Holdings, L.L.P. a/k/a Dacota Investment Holdings, L.P., Range Resources Corporation, and Range Production I, L.P, Petitioners, v. Betty Lou Bradshaw, Respondent
• Court: Texas Supreme Court

457 S.W.3d 70

KCM Financial LLC, R.J. Sikes, Roger Sikes, Kathy Sikes, Greg Louvier, Pam Louvier, Christy Rome, R. Crist Vial, Dacota Investment Holdings, L.L.P. a/k/a Dacota Investment Holdings, L.P., Range Resources Corporation, and Range Production I, L.P, Petitioners

v.Betty Lou Bradshaw, Respondent

No. 13-0199

Supreme Court of Texas.

Argued October 15, 2014

OPINION DELIVERED: March 6, 2015

Kurt Howard Kuhn, Lisa Bowlin Hobbs, Kuhn Hobbs PLLC, Austin, for Amicus Curiae Texas Oil & Gas Association.

Paige A. Lueking, Cooper & Scully, P.C., Dallas, for Other interested party Peter G. Bennis.

Graigory Fancher, William R. Korb, Bourland, Wall & Wenzel, P.C., Fort Worth, for Other interested party Ronny D. Korb.

Andrew D. Sims, Harris Finley & Bogle, P.C., Fort Worth, Charles R. ‘Skip’ Watson Jr., Mike A. Hatchell, Locke Lord LLP, Austin, Russell R. Barton, Harris Finley & Bogle PC, Fort Worth, for Petitioners Range Resources Corporation and Range Production I, L.P.

Craig T. Enoch, Enoch Kever PLLC, Austin, Edwin J. Seilheimer, Edwin J. Seilheimer, P.C., Granbury, Melissa Prentice Lorber, Enoch Kever PLLC, Austin, R. Crist Vial, Law Offices of R. Crist Vial, Dallas, for Petitioners KMC Financial

LLC, R.J. Sikes, Roger Sikes, Kathy Sikes, Greg Louvier, Pam Louvier, Christy Rome, R. Crist Vial, and Dacota Investment Holdings, LLP a/k/a Dacota Investment Holdings, LP. (a/k/a Royalty Owners).

Daniel L. Bates, Gary M. Moates, Raymond B. Kelly III, Decker Jones McMackin McClane Hall & Bates PC, Fort Worth, Robert J. Glasgow, Glasgow, Taylor, Isham & Glasgow, P.C., Granbury, for Respondent Betty Lou Bradshaw.

Opinion

Justice Guzman delivered the opinion of the Court

This oil and gas dispute involves a challenge to the validity of a mineral lease and requires that we once again examine the contours of the duty the executive-right holder (executive) owes to a non-participating royalty interest holder (non-executive). Here, the non-executive claims the executive procured a mineral lease in derogation of a duty of good faith owed to her. Although we recognize an executive has broad discretion in negotiating the terms of a mineral lease, we have long held that, in doing so, the executive owes the non-executive a duty of utmost good faith and fair dealing. Though we have rarely had occasion to explore the scope of this duty, we have explained that, unlike a typical fiduciary relationship, the executive is not required to wholly subordinate its interests in favor of the non-executive if their interests conflict. As we have articulated the duty, the executive has autonomy in negotiating the terms of a mineral lease but does not have absolute discretion to determine the value of the non-executive interest. In this way, the duty imposed on the executive strikes a balance between the parties' bargained-for rights. Although the parameters of the duty 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.

In the present case, which involves an oil and gas lease on nearly two-thousand acres of land in north Texas, the non-executive contends that the executive breached its duty by executing a mineral lease on terms that included a sub-market royalty rate, which the executive and non-executive would share equally, in exchange for an above-market bonus payable only to the executive. The non-executive further alleges that the lessee acted in concert with the executive in facilitating the breach and that the executive's ill-gotten gains were fraudulently transferred to third parties. The trial court granted a take-nothing summary judgment on all claims, but the court of appeals reversed the judgment in significant part based on the existence of fact issues.

On appeal to this Court, the parties seek a definitive articulation of the executive's duty as it pertains to any obligation to maximize the royalty terms in a mineral lease. Given the relative rights and interests at play, no bright line rule can comprehensively or completely delineate the boundaries of the executive's duty. Rather, in determining whether an executive has fulfilled its duty of utmost good faith and fair dealing in executing a mineral lease, the lease and the circumstances of its execution must be considered as a whole, and the failure to negotiate a market-rate royalty is but one relevant factor. Simply put, the executive's failure to obtain a market-rate royalty does not conclusively establish a breach of duty, nor is it totally irrelevant. On the record before the Court, we hold that fact questions preclude summary judgment as to the non-executive's breach-of-duty claim against the executive. We therefore affirm that portion of the court of appeals' judgment and remand the breach-of-duty claim to the trial court. We further conclude, however, that summary judgment was proper as to the claims against the remaining defendants and therefore reverse that portion of the court of appeals' judgment and render judgment that the non-executive take nothing on those claims.

I. Factual and Procedural Background

Betty Lou Bradshaw holds a non-participating royalty interest in approximately 1,773 acres of a nearly 2,000 acre parcel of land in Hood County, Texas known as the Mitchell Ranch. A non-participating royalty interest is

an interest in the gross production of oil, gas, and other minerals carved out of the mineral fee estate as a free royalty, which does not carry with it the right to participate in the execution of, the [b]onus payable for, or the delay rentals to accrue under oil, gas, and mineral leases executed by the owner of the mineral fee estate.

Lee Jones, Jr., Non–Participating Royalty, 26 Tex. L. Rev. 569, 569 (1948) (footnote omitted); see also Plainsman Trading Co. v. Crews, 898 S.W.2d 786, 789–90 (Tex.1995). In oil and gas parlance, the owner of a non-participating royalty interest is referred to as a non-executive interest holder, while the holder of the leasing privilege, typically the mineral fee owner, is the executive interest holder.¹ In this division of rights, the executive has the power to make and amend leases affecting the enjoyment of the non-executive's interests.

Bradshaw inherited her royalty interest from her parents, J.A. and Lota Fay Driskill, who had reserved the interest in two deeds that were executed in 1960 to convey the surface and all mineral interests, including leasing privileges, to third parties. The deeds described the reserved royalty interest as an undivided one-half of any future royalty and limited the executive right by mandating that any such royalty be “not less than” one-eighth.² Thus, under the 1960 deeds, the reserved interest was not capped, and the minimum interest the Driskills reserved was a one-sixteenth share of gross production.

A one-eighth royalty appears to have been commonplace in the general era in which the 1960 deeds were executed. As one commentator wrote in a well-regarded article, “The usual royalty is 1/8, and this fact is so generally known that judicial knowledge may be taken of it.” Jones, 26 Tex. L. Rev. at 575–76 (citations omitted); see also Schlittler v. Smith, 128 Tex. 628, 101 S.W.2d 543, 544–45 (Tex.Com.App.1937) (suggesting that one-eighth royalty was typical at that time). Indeed, so standard was a one-eighth royalty that it was assumed to be the default minimum: “If the grant or reservation is silent as to the minimum royalty to be reserved in subsequent leases, utmost fair dealing would seem to require the reservation of a royalty of at least the usual 1/8.” Jones, 26 Tex. L. Rev. at 575–76. However, it was not unusual to reserve an interest in a royalty of “not less than” the customary one-eighth to allow the non-executive to share in enhanced royalties secured by the executive:

The common practice ... is to include an express provision in the grant or reservation of non-participating royalty to the effect that subsequent leases shall provide for a royalty of not less than the usual 1/8. Such a provision would seem to afford the non-participating owner ample protection and entitle him to a share in any royalty, as such, in excess of the usual 1/8.

Id. at 576. Thus, the language and structure employed in the 1960 deeds was neither unusual nor particularly idiosyncratic.

As it happens, Bradshaw alleges that, as a result of market trends and larger economic forces, the customary royalty had increased to one-fourth by July 2005. At that time, Wise Asset held the surface and mineral estate interests in the Mitchell Ranch but no development had commenced. Bradshaw claims that at least one company had approached her during that time period and offered to pay a one-fourth royalty to lease and develop the property. As a non-executive, Bradshaw had no authority to develop the property or negotiate the terms of a mineral lease, and the record does not disclose whether this putative offer was ultimately communicated to Wise Asset or what otherwise became of it.

However, a few months later, an individual named Gary Humphreys contracted with Wise Asset to purchase the entire Mitchell Ranch tract, including the mineral estate, for $18,943,000. No royalty appears to have been a part of that contract. The contract permitted Humphreys to extend the 90–day termination option three times by paying Wise Asset $100,000 for each 30–day extension.

On February 14, 2006, after having exercised all three extension opportunities, Humphreys assigned his interest in the Mitchell Ranch contract to Texas Shepco, LP, a limited partnership managed by R.J. Sikes. In an agreement dated the same day, Humphreys executed a contract with Peter Bennis, president of a bank in Keene, to jointly develop the Mitchell Ranch.³ Humphreys agreed to pay Bennis 40% of any royalty interests and also assigned 40% of his interest in the Mitchell Ranch contract to Bennis. Bennis thereafter negotiated with Chesapeake Energy to sell the Mitchell Ranch and...