Texas Outfitters Limited, LLC v. Nicholson When does the refusal to lease violate the executive rights holder’s duty to the non-executive mineral owner?
1. Background In 2002, Texas Outfitters offered to buy the
On appeal, Texas Outfitters argued that its discretion in executing was subject only to the rule that it not engage in self-dealing that unfairly diminishes the value of the non-executive’s interest. The appellate court rejected this argument, stating that this standard applies in the context of the execution of a lease, not the refusal to execute a lease. The appellate court agreed with the trial court’s application of the Lesley standard in a refusal- to-lease context: whether the executive rights holder’s refusal to lease was arbitrary or motivated by self-interest to the non-executive’s detriment. Id . at 73. Texas Outfitters also argued that the trial court’s specific findings were insufficient to support its judgment and that there was insufficient evidence to support that Texas Outfitters’ refusal to lease breached its executive duty. The appellate court held that the trial court’s specific fact-findings did not contradict its judgment. In determining whether sufficient evidence supports the finding of a breach of duty, the appellate court considered whether there was evidence that Texas Outfitters (1) refused to lease and (2) its refusal to lease was arbitrary or motivated by self-interest, (3) to the non-executive’s detriment. The appellate court pointed out that Texas Outfitters never sought surface protections from any potential lessee and never made a settlement offer without seeking a reduction in amounts owed to the non- executive. Texas Outfitters’ testimony that it was holding out for a higher bonus was disputed by testimony of the non-executives as well as evidence that even after a year of not receiving a better bonus offer, Texas Outfitters refused to accept a pending lease offer. Accordingly, the appellate court held that the evidence established Texas Outfitters’ refusal to lease was arbitrary or motivated by self-interest to the non-executive’s detriment. Id . at 74-78. The appellate court was careful to make clear that it did not address whether the executive’s failure to execute any lease the non-executive desired is a breach of the executive duty. Id . at 80. 3. The Texas Supreme Court On June 15, 2018, the Supreme Court of Texas granted Texas Outfitters’ petition for review. Oral argument was heard October 10, 2018.
surface estate of the 1,082-acre Derby Ranch (the “Ranch”) in Frio County. The Carters owned 50% of the mineral interest and the Hindeses owned the other 50%. Dora Jo Carter sold the surface, which she owned individually, the executive rights associated with the Carters 50% mineral interest, which she acquired from her children, and a 4.16% royalty interest to Texas Outfitters. Texas Outfitters received two offers to lease: (1) in March 2010, it rejected a lease offer for 22% royalty and a $450 per acre bonus and (2) in June 2010, it received an offer for 25% royalty and a $1,750 per acre bonus. The Hindeses received and accepted the second offer to lease their 50% mineral interest. The owner of Texas Outfitters met with the Carters and told them that in the interest of protecting his hunting business on the Ranch, he would not lease their mineral interest. After a year of back and forth attempting to negotiate a settlement of the issue, the Carters sued Texas Outfitters alleging it breached its duty of utmost good faith and fair dealing by refusing to lease the Ranch. Texas Outfitters received two additional offers to lease before selling the surface and executive rights to a third party. The trial court awarded $867,654.32 in damages to the Carters and found that Texas Outfitters breached its duty to the Carters. Texas Outfitters Limited, LLC v. Nicholson , 534 S.W.3d 65, 66-69 (Tex. App.—San Antonio 2017, pet. granted). 2. The Court of Appeals The appellate court identified two recent cases addressing the executive duty and refusal to lease: In re Bass and Lesley v. Veterans Land Board of the State of Texas . In Bass , the supreme court held the executive did not breach its duty to lease because the executive had not executed a lease and thus had not exercised its right to lease. In Lesley , the supreme court held that an executive rights holder breached its duty when it filed restrictive covenants limiting development of the mineral estate. The supreme court, in Lesley , distinguished the case from Bass stating that an executive may not be liable to the non-executive for failing to lease when it had not been requested to lease, but an executive’s refusal to lease must be examined. Id . at 70-72.
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