Executive Rights Holder May Have Engaged in Self-Dealing.

In this case, a holder of a 1/2 royalty interest in 1,773 acres of land who obtained the interest via inheritance sued the executive rights holder for breach of duty of good faith.  The plaintiff acquired the right to buy the land, acquired the right to negotiate and sign oil and gas leases for others, and later made a deal with another party under which the plaintiff exercised its right to buy the land, sold the land to the third party, reserving all minerals, and then leased the minerals to the third party for a 1/8th royalty and a $7,505 per acre bonus payment.  The holder of the 1/2 royalty sued both parties claiming they conspired to limit her royalty on production from the lease to 1/16 (1/2 of 1/8) when it otherwise should have been 1/8 (1/2 of 1/4).  The holder of the 1/2 interest produced evidence that the going rate for lease royalties in the county was 1/4 and claimed that the third party had agreed to a lower royalty to get an above-market bonus.  As such, the holder of the 1/2 interest claimed that the executive rights holder breached the duty of good faith with respect to her.  The trial court ruled for the executive rights holder and dismissed the case.  The Court of Appeals reversed, determining that factual issues remained for trial.  On further review, the Supreme Court affirmed.  While there is a duty of utmost good faith and dealing that an executive rights holder owes to a non-participating royalty owner, the Court said the executive rights holder did not have to wholly subordinate its interests in favor of the non-participating royalty owners.  However, the executive rights holder cannot engage in self-dealing.  The Court said that factual issues remained  and that a trial was needed to determine if the executive rights holder misappropriated what would have been a shared benefit ( market-rate royalty interest) and converted it into a benefit reserved only unto itself (an enhanced bonus), with the intent to diminish the value of the complainant's royalty interest. If established, that would show self-dealing.  KCM Financial LLC, et al. v. Bradshaw, No. 13-0199, 2015 Tex. LEXIS 220 (Tex. Sup. Ct. Mar. 6, 2015).  

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

RSS​ Facebook Twitter