In a much awaited oil and gas decision from the Texas Supreme Court, the court ruled on whether an executive rights owner owes a duty to the owner of a non-executive interest to lease minerals. The Court previously held that the duty of the executive to the non-executive is “fiduciary”, and has identified the relationship as one “of trust”, with a duty of “utmost fair dealing”. However, the Court acknowledged in Betty Yvon Lesley, et al., v. Veterans Land Board of the State of Texas, et al., issued August 26, 2001, that “the variety of non-executive interests and the reasons for their creation, and the effects of changing circumstances, make it difficult to determine precisely what duty the executive owes the non-executive interest.”

Betty Yvon Lesley and others conveyed approximately 4,100 acres of land near Fort Worth, Texas to the predecessor of Bluegreen Southwest One, L.P., reserving a portion of their one-half undivided mineral interest, but conveying the “full, complete and sole right to execute oil, gas and mineral leases covering all the oil, gas and other minerals in the following described land”. Bluegreen developed a subdivision, and filed restrictive covenants that forbade “commercial oil drilling, oil development operations, oil refining, quarrying or mining operation”. Bluegreen’s later deeds to lot owners included a conveyance of the mineral interest, and excepted the restrictive covenants.

Of course, this area is engulfed by the Barnett Shale, and the areas surrounding the subdivision were very heavily leased. According to the Court, the evidence showed that the subdivision “is sitting on $610 million worth of minerals that, in large part, cannot be reached from outside the subdivision.” Yet due to the restrictive covenants, the lot owners were prohibited from leasing the land for development.

In 2005, Lesley, along with the Richard H. Coffey, Sr., Singin’ Hills Minerals, Ltd., and JP Morgan Chase Bank, N.A., as trustee of several trusts (successors of Wyatt and Mildred Hedrick who owned the remaining one-half mineral interest), (collectively “Lesley”), sued Bluegreen and the lot owners. One claim was that that the owners of the executive right breached their duty to Lesley and the others by imposing restrictive covenants limiting oil and gas development and by failing to lease the minerals and failing to give notice of the filing of the restrictive covenants. The trial court agreed with Lesley and held that the restrictive covenants were unenforceable.

Bluegreen and some lot owners appealed, and the Eastland Court of Appeals reversed the trial court’s decision entirely. The Court of Appeals held that “the owner of an executive right owes a mineral interest owner no duty until the right is exercised by leasing the minerals, and then its duty is only to acquire for the mineral interest owner every benefit it acquires for itself. An executive has no duty to lease minerals. Because Bluegreen never exercised the executive right, it had no duty to […] Lesley.”

In examining the duties owed by the executive, the Texas Supreme Court analyzed the various non-executive interests, and its previous decisions regarding duties owed. The Court acknowledged that an “executive right is the right to make decisions affecting the exploration and development of the mineral estate, but it is most commonly exercised . . . by executing oil and gas leases. Executive rights are frequently severed from other incidents of mineral ownership […]. The non-executive mineral interest owner owns the minerals in place but does not have the right to lease them. The non-executive royalty interest owner owns an interest in the royalty when the executive leases the minerals. […] For most mineral interest owners, revenue comes through leasing. If the exclusive right to lease the minerals could be exercised arbitrarily or to the non-executive's detriment, the executive power could destroy all value in the non-executive interest, appropriating its benefits for himself or others. The law has never left non-executive interest owners wholly at the mercy of the executive.”

The Court, in examining previous decisions, restated that “an executive’s duty of utmost fair dealing [is] fiduciary in nature”, and that it is a relationship “of trust”, which can be breached by self-dealing. “[T]he executive's duty is to ‘acquire for the non-executive every benefit that he exacts for himself.’” Previously, the Court held that until benefits are acquired by the executive, the executive rights have not been exercised and the executive cannot have breached any duty.

Bluegreen and the lot owners focused on that holding, and claimed that in this case, the executive right had not been exercised, and thus there could be no breach of duty to the non-executives. The Court, however, refused to announce a general rule that would “shield the executive from liability for all inaction.” The Court went on to say that “[i]t may be that an executive cannot be liable to the non-executive for failing to lease minerals when never requested to do so, but an executive’s refusal to lease must be examined more carefully. If the refusal is arbitrary or motivated by self-interest to the non-executive's detriment, the executive may have breached his duty.”

Despite this language, the Court did not (in this instance) examine the issue of an executive’s inaction equaling breach of duty. Instead, the Court found that Bluegreen had acted by the imposition of restrictive covenants limiting leasing. Bluegreen argued that the restrictive covenants benefitted only its interest in the surface estate, and no duty was breached as its mineral interests were treated the same as Lesley’s. Following a previous decision, the Court found that even though Bluegreen limited its own mineral interest as well as Lesley’s, Bluegren’s filing the restrictive covenants was for its own benefit, an therefore, it breached its duty to Lesley. As a result, the Texas Supreme Court cancelled the restrictive covenants.

As a result of this decision, we must assume that the courts will take executive rights’ fiduciary duties issues on a case-by-case basis. Those who hoped for a bright-line ruling will be disappointed, but this ruling does offer further clarity and definition to a complicated oil and gas issue.