189 GP II Energy, Inc. v. Chamberlain

Tuesday, September 8th, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
GP II Energy, Inc. v. Chamberlain, Hrdlicka, White, Williams & Martin, No. 14-07- 00237-CV, 2008 WL 4354931 (Tex. App.—Houston [14th Dist.] August 26, 2008, no pet.), illustrates the risks for an attorney acting as escrow agent in the closing of an oil and gas purchase and sale agreement. Range Energy Finance Corporation provided the funds for Square Lake Partners, L.L.C. to acquire oil and gas leases in New Mexico which were operated by GP II Energy, Inc. The prospect did not do well, and the parties and principals of the parties all brought claims against each other. The parties entered into an agreement (the “July Agreement”) which effectively delegated to Range the authority to sell all of the interests of all of the parties to an interested buyer. To clean up all the pending claims and counterclaims, the July Agreement provided for various assignments and releases to be escrowed with Range’s attorney (“Chamberlain”). One of the documents central to this litigation was a Release and Confidentiality Agreement (“Release”), which was effectively a global release among the parties.
The closing with the buyer occurred, and Chamberlain released all of the documents necessary for the closing. At about the same time, Range discovered an additional possible claim against GP II, the operator. Although Range had previously signed an unconditional Release and delivered it to Chamberlain, after closing, Range signed a new version with conditions and delivered it to Chamberlain. Chamberlain did not deliver the unconditional version of the Release. After the closing, there were additional claims and litigation between the parties as to rights to the proceeds of the sale and additional liabilities.
The operator group sued Chamberlain as escrow agent for delivering the documents at closing, not delivering Range’s unconditional Release, failing to disclose the new controversy, and breach of fiduciary duty. In Texas, an escrow agent has a duty of loyalty, a duty to make full disclosure, and the duty to exercise a high degree of care to conserve the escrow and deliver it only to those persons entitled to receive it. However, in this case, there was no separate escrow agreement; rather, the escrow agreement was subsumed within the July Agreement, which adopted New Mexico law. Under New Mexico law, an escrow agent’s liability is fixed and limited by the terms of the escrow agreement.
The only provision in the July Agreement which directly addressed the duties of the escrow agent provided:

Upon the Closing of the sale of the Square Lake Project, the Escrow Agent shall be authorized to deliver to the appropriate parties all original documents referred to in Sections 4. through 9. above in order to accomplish the objectives set forth in this Agreement, without the necessity of any further written instructions from any party hereto.

The court strictly construed these duties to affirm a summary judgment dismissing all claims against Chamberlain. It was uncontroverted that closing occurred, and the escrow agent was authorized, but not required, to deliver the escrowed documents. Therefore, Chamberlain was authorized to deliver all the documents which effectively conveyed away at closing all of the operator group’s liens and claims on the properties. Chamberlain was not required to deliver to the operator group the signature page from Range’s unconditional Release. Chamberlain was not required to inquire into the enforceability of the Release or to wait for a determination of the enforceability of the Release.  Chamberlain was under no duty of disclosure.
The case turns on New Mexico law, but its significance is in highlighting the comparable risks of escrow under Texas law. The case also highlights the possibly unintended significance of choice of law provisions on ancillary provisions of an agreement. The location of the properties is frequently picked as the governing law under the choice-of-law clause in oil and gas transactions because the primary focus of the parties is on the purchase and sale and conveyance of real properties. Those issues are almost always governed by the law of the State where the properties are located, regardless of the parties’ choice of law. Therefore, the parties select that State’s law to govern. This case illustrates the significance of that choice on the ancillary issue of the law governing the duties of escrow agents, which was almost certainly not even considered when the July Agreement in this case was signed.