Texas
Texas Outfitters v. Nicholson
On April 12, 2019, the Texas Supreme Court handed down its opinion in Texas Outfitters Limited, LLC v. Nicholson , No. 17-0509, addressing the duty of the holder of executive rights to minerals owned by another. The Court affirmed the trial court and court of appeals decisions in a judgment against Texas Outfitters for breaching that duty. Finding against Texas Outfitters, the courts agreed that the holder of the executive right to lease a mineral estate violated its duty of utmost good faith and fair dealing by refusing to lease in violation of the non-executive’s known wishes to enter a lease. The executive was found to have engaged in acts of self-dealing that unfairly diminished the value of the non-executive interest. Dora Jo Carter owned the surface estate of 1,082 acres of land in Frio County. She and her two children collectively owned an undivided 50% of the minerals; the other 50% were owned by the Hindes family. The Carters sold the land to Texas Outfitters, owned solely by Frank Fackovec, for about $1 million in 2002, partially financing the purchase price. Fackovec intended to reside on the ranch and operate a hunting business. The Carters sold Texas Outfitters 1/24 of the minerals along with the land, also conveying to Texas Outfitters the exclusive right to lease the 11/24 mineral interest retained by the Carters. Fackovec wanted the right to lease the entire 50% mineral interest to be sure his surface estate was protected should oil and gas development take place. This executive right to lease the Carters’ minerals became the source of the subsequent litigation. In June 2010, the Hindes family leased their 50% mineral interest to El Paso Exploration for $1,750 per acre and 25% royalty. El Paso made the same offer to Fackovec, which he declined, despite the Carters’ request that he accept. The Carters and Fackovec entered settlement negotiations that resulted in an agreement in principle whereby (1) Texas Outfitters would convey to the Carters the executive rights on their retained mineral interest; (2) the deed conveying those rights would include as- The facts:
yet unspecified surface protections to be included in the El Paso lease and any future lease; (3) Texas Outfitters would execute the lease as to its own 1/24 mineral interest; (4) the Carters would forgive $263,000 of the owner-financed note on the ranch. This agreement never finalized due to failure of the parties to agree on the scope of the additional surface protections. The Carters sued Texas Outfitters and Fackovec in June 2011, alleging that Texas Outfitters, as holder of their executive rights, had breached the duty of “utmost good faith and fair dealing” by refusing to lease to El Paso. Subsequent drilling in the area established that the ranch did not have as much potential for oil and gas production as had been believed and no further lease offers were received by Texas Outfitters. In 2012, Texas Outfitters sold the ranch for approximately $3.5 million, retaining a portion of the mineral interest. Following a bench trial, the trial court found that Texas Outfitters had breached its duty to the Carters, awarding them the amount they would have received in bonus if the lease to El Paso had been granted. The trial court made extensive findings of fact, the only one of which Texas Outfitters challenged on appeal being the critical fact that Texas Outfitters had breached its duty. The court of appeals in San Antonio affirmed. In its opinion, the Court reviewed prior cases on the duty of the holder of the executive right: Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984), Lesley v. Veterans Land Bd. of State, 352 S.W.3d 479 (Tex. 2011), and KCM Financial LLC v. Bradshaw, 457 S.W.3d 70 (Tex. 2015). Based on these prior cases, most recently Bradshaw, the court provides “the ‘controlling inquiry’ in ascertaining whether an executive breached his duty to a non- executive: ‘ whether the executive engaged in acts of self-dealing that unfairly diminished the value of the non-executive interest. ’” Stating that this “controlling inquiry” test applies whether the challenged conduct by the executive consists of leasing or refusal to lease, the Court further noted “we continue to recognize that evaluating compliance with the executive duty is rarely
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