Texas Outfitters Limited, Llc. v. Nicholson

Facts

Dora Jo Carter (P) owned the surface estate of a 1,082-acre tract. She and her two children (Ps), Carolyn Nicholson and William Carter, Jr., collectively owned an undivided 50% interest in the mineral estate. The Hindes family, relatives of Ps, owned the other 50% mineral interest. In 2002, Ps sold the surface estate to D, along with a 4.16% mineral interest and the executive rights to the 45.84% mineral interest retained by P. Frank Fackovec, D's sole owner, intended to use the ranch as his residence as well as to operate a hunting business. He testified at trial that he would not have purchased the property without the executive rights and the corresponding control over future mineral development. Ps partially financed the approximately $1 million purchase price. In March 2010, D received and rejected an offer to lease its and Ps' mineral interest. Fackovec testified that he believed the offer, which included a $450-per-acre bonus and a 22% royalty, was too low. In June 2010, the Hindeses leased their 50% mineral interest in the ranch to El Paso Oil Exploration & Production Company for a $1,750-per-acre bonus and a 25% royalty. El Paso made the same offer to D for the remaining 50%  interest, and Ps wanted Fackovec to accept it. Fackovec was aware of Ps' position but rejected the offer. Fackovec testified he thought the bonus was too low and wanted to wait for prices to go up as the oil play matured. P testified that, although she and Fackovec did not specifically discuss the El Paso lease, Fackovec had told her he 'planned not to lease because of his business.' In August 2010 Ps sought to buy back their executive rights. At the conclusion of the meeting, the parties had reached an agreement in principle whereby: (1) D would convey to Ps the executive rights on their retained mineral interest; (2) the deed conveying those rights would include as-yet unspecified surface protections to be included in the El Paso lease and any future lease; (3) D would execute the lease as to its own 4.16% mineral interest; (4) Ps would forgive $263,000 of the owner-financed note on the ranch (approximately half of what was still owed); and (5) El Paso would prepay D a negotiated amount for surface damages and water usage. the agreement was never finalized because the parties were unable to agree on the scope of the additional surface protections, which Ps concluded were too onerous and would unduly restrict their ability to lease the minerals in the future. D made alternative settlement offers but none were accepted. Ps sued D in June 2011 claiming that D breached the duty of utmost good faith and fair dealing by refusing to enter the El Paso lease. D received two more offers to lease the ranch's minerals. The first included a larger bonus than the El Paso offer-$2,000 per acre-but was withdrawn when the lessee learned El Paso had already leased the Hindeses' interest. The second included a $1,500-per-acre bonus and was also withdrawn by the lessee. Drilling revealed that the land was not as productive as anticipated, and D received no further lease offers. In 2012, D sold the ranch for approximately $3.5 million retaining a portion of the mineral interest. The trial court rendered judgment for Ps awarding damages of $867,654.32-the amount the Carters would have received in bonuses from El Paso had its lease offer been accepted-plus interest and costs. The court held in part that D breached its duty of utmost fair dealing to Ps in refusing to enter the lease offered by El Paso. The court of appeals affirmed, holding that 'the evidence supports a finding that D refused to execute the El Paso lease based on its arbitrary and self-motivated refusal to permit any lease for the purpose of protecting its use of the surface and to exact a benefit from Ps [e.g., the note reduction and deed restrictions] to their detriment.' D appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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