The Texas Supreme Court recently heard oral argument on a suit brought by the owner of a non-participating royalty interest owner against the owner of the executive rights. The facts of the case are as follows: Ms. Betty Lou Bradshaw was the owner of an NPRI by virtue of her parents reserving a one-half of royalty in the Mitchell Ranch. Steadfast Financial, LLC, the owner of the executive rights, leased the minerals to Range Production I, LP, in 2006. The lease was taken with a one-eighth (1/8) royalty, lower than the average lease royalty, and a lease bonus that was arguably higher than the market price at the time.

Bradshaw sued Steadfast, claiming Steadfast “owed her a fiduciary-like duty of utmost good faith in the manner in which it exercised its executive mineral rights, including leasing the minerals.” Bradshaw argued that the this duty arises “because Bradshaw’s royalty is non-participating in that Bradshaw has no right to develop the minerals, no right to participate in leasing the minerals, and no right to participate in receiving any lease bonus or delay rentals.” Bradhsaw claimed that Steadfast should have negotiated for a one-fourth (1/4) royalty, and self-dealt by taking the lower 1/8 royalty, but a higher bonus that it did not have to share with Bradshaw. Steadfast, meanwhile, argued that it had no duty to Bradshaw to obtain the highest royalty it could for her benefit, and to create such a duty would be contrary to established case law.

At trial, the court dismissed all of Bradhsaw’s claims. On appeal, though, the Fort Worth Court of Appeal remanded the case, ordering the trial court to allow a trial on Bradhsaw’s claims. Steadfast appealed the Court of Appeals decision to the Texas Supreme Court.

What will be interesting to watch on this is how, or even if, the Supreme Court will further define the issue. The Texas Supreme Court has historically struggled with fully defining the duties owed by the executive rights holder to non-executives. We do know that recently, the Supreme Court determined that although traditionally there had been no duty to enter into an oil and gas, there are some circumstances that require such. However, despite a duty of the utmost good faith owed by the executive rights holder, it is unclear if accepting a higher bonus and a lower royalty would constitute a breach of that duty. Operators, too, have the potential of being dragged into the fray, as they were here, for either conspiring to beach the executive right holder’s duty or for paying out royalty on an alleged improper royalty percentage. The Supreme Court may not reach the issue involving the existence of certain duties, but this is one to watch, as it has the potential of changing many relationships in the oilfield.