State v. Durham

• Decision Date: 31 March 1993
• Docket Number: No. D-0992,D-0992
• Citation: 860 S.W.2d 63
• Parties: STATE of Texas, Petitioner, v. Lynn D. DURHAM and Clarence Scharbauer, Trustees Under the Will of Fred Turner, Respondents.
• Court: Texas Supreme Court

Page 63

860 S.W.2d 63

STATE of Texas, Petitioner, v. Lynn D. DURHAM and Clarence Scharbauer, Trustees Under the Will of Fred Turner, Respondents.

No. D-0992.

Supreme Court of Texas.

March 31, 1993.

Dan Morales, Jose Manuel Rangel, David R. Richards, Philip Durst, Priscilla M. Hubenak, Liz Bills, Austin, for petitioner.

Cecil E. Munn, Fort Worth, Barry N. Beck, Midland, Ed Small, Austin, H. Carter Burdette, Fort Worth, Robert C. Bledsoe, Midland, Sloan B. Blair, Fort Worth, Gene McCoy, Fletcher L. Yarbrough, Dallas, Jack D. Maroney, Austin, Charles L. Tighe, Corby Considing, Julia E. Vaughan, Midland, and C.C. Small, Jr., Austin, for respondents.

OPINION

GONZALEZ, Justice.

In this oil and gas case, the State seeks to impose fiduciary duties on surface owners of permanent school fund lands. The State filed suit against several individuals and entities seeking damages and a constructive trust under the Relinquishment Act of 1934. ¹ It alleged that there existed a conspiracy to defraud the State of its share of royalties from oil and gas deposits which underlie permanent school fund lands. We review whether the respondents have established their entitlement to their take-nothing summary judgment against the State. The court of appeals affirmed the summary judgment. 804 S.W.2d 312. We reverse the judgment of the court of appeals and remand to the trial court for further proceedings.

The Relinquishment Act of 1934 applies to all land dedicated to the Permanent School Fund. Under this Act, the State retains ownership of the minerals underlying permanent school fund property, while the surface owner becomes the State's agent with the sole authority to negotiate and execute oil and gas leases on said lands. ² The surface owner gets to keep one-half of the lease consideration for compensation for his or her services and for damages to the surface estate. Scott v. Exxon Corp., 763 S.W.2d 764, 766 (Tex.1988). ³

On March 5, 1930, the General Land office awarded Bob Reid a 101.35 acre tract of land in Pecos County, in what is known as the Yates Oil Field. Pursuant to the Relinquishment Act, Reid became the surface owner and the oil and gas was reserved to the State. The same day, Reid conveyed 3.97 acres of the tract to Fred Turner, Jr.; Turner did not file the deed until June 1933.

On May 18, 1933, Reid executed an oil and gas lease on the entire 101.35 acre tract, including the 3.97 acres, to M.D. Bryant. On November 4, 1933, the State filed a trespass to try title suit against Reid, Bryant, Turner and others who claimed an interest in the tract. The State also sought the appointment of a receiver, alleging drainage from oil and gas wells on adjacent tracts.

The trial court appointed a receiver. On March 26, 1934, Turner executed an oil and gas lease to A. Fasken which provided for a $20,000 bonus, $2 per acre annual rental and a one-eighth royalty to be shared equally by the State and Turner. The lease also stated that any party could assign his interest at any time. Fasken intervened in the 1933 lawsuit asserting his interest in the property under the lease.

On April 3, 1934, the trial court rendered judgment that Turner held fee simple title to the 3.97 acres subject to the mineral interest of the State. The judgment also confirmed that Fasken had "a valid and subsisting oil and gas lease executed by Fred Turner, Jr. individually and as agent of the State of Texas, as lessor....," set aside conflicting interests, discharged the receiver, and denied all other relief. The lease gave a 1/8th royalty to Turner and the State and provided a $20,000 bonus payment. On the same day as the judgment, Fasken transferred the east half of the lease to M.D. Bryant, reserving a 3/16ths overriding royalty interest.

Turner, Fasken, Brian Hunt, and the law firm of Cantey, Hanger & McMahon entered into an agreement dated April 14, 1934, to form a corporation, to be named Midland Producing Company, for the purpose of drilling on the west half of the lease. In short, the incorporation agreement called for Turner and Fasken to convey their oil and gas mineral interests in the tract to the company, which was to redistribute mineral interests along with company stock to the signatories of the agreement. Turner received a 10-year management services contract with Midland. ⁴

On November 27, 1937, Fasken conveyed his entire remaining interest to Turner. Thus, three years after the judgment in State v. Reid, Turner owned nearly fifty-percent of Midland's interest in the tract. Meanwhile, Midland completed two wells on the tract, both of which were major producers. It is undisputed that the additional interest acquired by Turner was not shared with the State.

In the early 1960's a former employee of Turner, Andrew Knickerbocker, wrote the Attorney General of Texas claiming knowledge of irregularities regarding the transactions. A first assistant Attorney General reviewed the information and concluded that there was "no basis under law" for pursuing the alleged cause of action.

Twenty-five years later, the State brought this suit against Lynn D. Durham et al., and three other groups of defendants alleging that the Turner-Fasken lease approved by the court in 1934 was a sham transaction as part of a conspiracy to defraud the State of its share of Turner's interest under the Relinquishment Act. The State filed a suit against successors to the interests of Turner and the other original shareholders of Midland Corporation, seeking an accounting, past damages, and to impose a constructive trust. The State requested $162 million in actual and punitive damages, plus interest and attorney's fees. Each of the four groups of defendants moved for a take-nothing summary judgment.

In addition to the above facts, the State's summary judgment evidence included the testimony of Andrew Knickerbocker, to the effect that the lease between Turner and Fasken was a sham, and that Fasken was a strawman through which Turner could obtain an interest in excess of that provided for by the Relinquishment Act. The respondents presented evidence of previous claims Knickerbocker had brought against Turner and his estate, characterizing him as a disgruntled former employee pursuing a vendetta. The respondents also offered their interpretation of the transactions by which Turner acquired an additional interest in the lease as ordinary business developments, not a preconceived plan as argued by the State. Well-established rules of summary judgment preclude consideration of this evidence and arguments offered by the respondents. The weight to be given a witness's testimony is a matter for the trier of fact, and a summary judgment cannot be based on an attack of a witness's credibility. Great Am. R. Ins. Co. v. San Antonio Plumbing Supply Co., 391 S.W.2d 41, 47 (Tex.1965). Evidence favoring the non-movant must be taken as true, and all reasonable inferences must be indulged in the non-movant's favor. Nixon v. Mr. Property Mgm't, 690 S.W.2d 546, 549 (Tex.1985). Thus summary judgment cannot be based on the inferences that respondents would have us draw from the evidence. Great American, 391 S.W.2d at 47. ⁵

The court of appeals rested its decision on the scope and duration of the duties owed by the surface owner to the State, concluding that Turner owed no fiduciary duty, or if he did it terminated upon either the occurrence of drainage, the appointment of the receiver, or execution of the lease. 804 S.W.2d at 315.

We agree with the court of appeals that the surface owner is not the State's general agent for all purposes. Within the scope of the Relinquishment Act, however, the surface owner is the State's agent to the extent that the State's assets are entrusted to the control of the surface owner, who must not abuse that trust. It is well settled that an agent charged with selling an asset for the owner owes a fiduciary duty to the owner, and that the agent violates this duty by acquiring the asset for his own benefit. Shannon v. Marmaduke, 14 Tex. 109 (1855). ⁶ Also, without regard to any common-law agency duty, we have held that the Relinquishment Act prohibits the surface owner from acquiring a working interest in the permanent school fund minerals underlying his property. State v. Standard, 414 S.W.2d 148, 152 (Tex.1967). In Standard, the surface owner negotiated a Relinquishment Act lease which gave the surface owner (but not the State) an option to acquire a working interest. The Court held the lease was invalid because it provided for substantial consideration in which the State could not participate. Id. at 153. If the Turner-Fasken lease was intended as a vehicle to give Turner additional consideration not available to him under the Act, then he breached his duty to obtain fair compensation for the State.

The court of appeals concluded that the occurrence of drainage and the appointment of a receiver terminated Turner's status as the State's leasing agent. 804 S.W.2d at 318-19. In the State v. Reid litigation, the State obtained temporary orders appointing a receiver based on allegations of the failure to offset drainage. The court of appeals in the present case concluded Turner owed no duties because of our holding in Norman v. Giles, that should the surface owner allow drainage to continue for 100 days without beginning an offset well, the agency and any existing lease terminates, and the State may undertake to re-lease the property. Norman v. Giles, 148 Tex. 21, 219 S.W.2d 678, 684-85 (1949). This reasoning overlooks the fact that Turner in fact continued to act as an agent, and he, not the receiver, executed the lease on behalf of himself and the State, acknowledged and incorporated in the 1934 judgment. Furthermore, while temporary orders were obtained based on the allegation of drainage, the final judgment makes no determinations that conditions existed for the termination of the agency; to the contrary, the judgment expressly recognizes...