Face Challenges Confidently

276 Kerlin v. Sauceda, 263 S.W.3d 920 (Tex. 2008)

Monday, August 31st, 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.
Kerlin v. Sauceda, 263 S.W.3d 920 (Tex. 2008) holds that claims of breach of contract, breach of fiduciary duty, and fraud by a non-participating royalty owner against the mineral owner based on a mineral deed were all barred by limitations. The court of appeals’ opinion published more complete facts in Sauceda v. Kerlin. The case involved a lengthy and complicated fact pattern bearing on the ownership of Padre Island. Simplified, immediately after the Mexican land grant to Padre Nicolas Balli in 1829, there was a deed and rescission involving Padre Balli’s nephew, Juan Jose Balli, and Santiago Morales. Title to Padre Island, or parts of it, was repeatedly disputed by lawsuits principally in 1902, 1923, and in 1940. The 1923 lawsuit was re-opened by motion for new trial in 1938, and the resolution of the 1940 case and the settlement of the claims raised in the 1938 case resulted in the filing of this suit in 1993. Lawyer Kerlin was a 1936 Harvard graduate working for his uncle at Sherman & Sterling in New York City. In 1937, his uncle sent him to Texas to purchase the Juan Jose Balli title to Padre Island from Balli’s heirs and devisees. Lawyer Kerlin hired local lawyer  F. W. Seabury from Brownsville to help him with acquiring the deeds and in the litigatio Kerlin represented to the Balli heirs that if Kerlin received something through the deeds, each Balli heir would receive a 1/64 royalty. Kerlin acquired eleven deeds from various Balli heirs. Seabury drafted the deeds. Each deed reserved a 1/64 non-participating royalty.
Lawyer Seabury took the lead in handling complicated and protracted litigation for the next six years. Seabury represented multiple parties with conflicting claims to title, and he eventually engineered a global settlement that resulted in acquiring 21,000 acres for Kerlin. During the settlement negotiations and other related litigation, Kerlin or Seabury relied on the underlying claim of the Balli heirs and the deeds from the Balli heirs. The claim of the Balli heirs was subsumed within a group of claims, but a tract of approximately 7,500 acres was repeatedly identified as tied to the claim of the Balli heirs.
In November 1942, lawyer Kerlin, who was then in the Army, came to Texas on a three-day pass to settle the case. At a scheduled hearing on November 9, on a motion for new trial, a stipulation was filed that all matters had been settled (and later all claims were dismissed) On that same day, Kerlin met with his uncle and lawyer Seabury. Seabury recommended abandonment of the Balli claim. Kerlin then executed reconveyance deeds to the Balli heirs which recited that the Balli heirs were advised of the reconveyance. However I the Balli heirs were never told of the reconveyance deeds they were never delivered and they were never recorded. On that same day Kerlin visited one of the Balli heirs and in describing the purpose of his visit to Brownsville he did not mention the settlement of the case nor were the Balli heirs ever told by Kerlin about the settlement. A month after the settlement Seabury promised counsel for some of the parties in the settled litigation that no deed would be given to the Balli heirs to cloud the title to the clients lands and that the Balli interest would “die in Kerlin.
In 1946, Seabury died. In 1953 and in 1954, Kerlin told the Balli heirs that he acquired no title under the Balli deeds and that he was unable to establish the Juan Jose Balli title. In 1961, Kerlin sold the surface of the land he acquired for  As part of the 1942 settlement Kerlin released any interest he had in the minerals in the lands claimed by the Balli heirs.  Apparently, by 1961, Kerlin had conveyed all of his minerals in all of his lands to affiliated companies.
The jury verdict generally found that Kerlin acquired 7,500 acres for the benefit of the Balli heirs, that Kerlin failed to comply with the fiduciary duty to each of the Balli heirs with respect to the royalty interest reserved in the eleven deeds, that Kerlin and Seabury committed fraud and breached Seabury’s fiduciary duty in the settlement, and that Kerlin was estopped to deny the validity of the deeds from the Balli heirs.
The Supreme Court first considered whether Kerlin’s fraudulent concealment of the Balli heirs’ entitlement to royalty payments and the details of the 1942 settlement prevented the statute of limitations from running. Kerlin argued the breach of contract, fraud, and breach of fiduciary duty claims were all barred by the four-year statute of limitations, and that the two-year statute barred the related conspiracy claims. Kerlin also claimed that the Balli heirs could have timely discovered the existence of their claims through the exercise of reasonable diligence. The Supreme Court agreed with Kerlin’s position because fraudulent concealment will not toll limitations when a party discovers the wrong committed or could have discovered it through the exercise of reasonable diligence.
In evaluating whether the claims could have been discovered, the court reasoned by analogy from its opinion in HECI Exploration Co. v. Neal. In HECI, oil and gas royalty owners sued their lessee for failing to advise them of the lessee’s successful suit against an adjoining operator for damages to the common field. In that case, the Texas Supreme Court’s opinion was somewhat vague, but found that the royalty owners could have discovered their possible claim by Railroad Commission records or visible operations on the adjoining property. In Kerlin, the Texas Supreme Court carefully noted that the application of the discovery rule was “categorical,” while the effect of fraudulent concealment in tolling limitations was not, but that HECI was “instructive.”  The dismissal in 1942 and Kerlin’s receipt of more than 20,000 acres in fee simple and 1,000 mineral acres were a matter of public record for more than forty years before the Balli heirs filed their lawsuit. The Balli heirs knew they were not getting any royalty, and they could have exercised reasonable diligence, thus allowing them to discover the existence of any claims before their claims were barred. The court said, “royalty owners are not entitled to ‘make [ ] no inquiry for years on end’…
The Supreme Court then reviewed whether the statute of limitations should be tolled by statute. The Texas Civil Practice and Remedies Code provides: “The absence from this state of a person against whom a cause of action may be maintained suspends the running of the applicable statute of limitations for the period of the person’s absence. The general long arm statute provides: “The secretary of state is an agent for service of process on a non-resident who engages in business in this state… in any proceeding that arises out of the business done in this state….”
The general long arm statute specifically addresses a non-resident defendant’s presence within the state’s territorial limits for purposes of personal jurisdiction, stating that a non-resident does business “in this state” if, among other acts, the non-resident contracts with a Texas resident and either party is to perform part or all of the contract in the state or the non-resident commits a tort in whole or in part in the state. The Supreme Court could not discern a reason why a nonresident’s “presence” in Texas would not be established for purposes of the tolling statute if a non-resident is amenable to service of process under the long arm statute and has contacts with the state sufficient to afford personal jurisdiction, which was the scenario with Kerlin. The Supreme Court found that because Kerlin was doing business in Texas and was therefore not absent, the tolling statute did not apply and limitations barred the claims made by the Balli heirs.
The significance of the case is the holding that the tolling of the statute by fraudulent concealment with respect to a mineral deed is essentially resolved by the same inquiry that is required under the discovery rule. All of the other issues in the case simply disappeared with the dispositive ruling on limitations.
Four of the justices were not content to let it go with that. In the concurring opinion, they wrote that the court of appeals opinion generated ninety-five headnotes, and everyone of the legal concepts was misapplied. The concurring opinion then briefly addresses a number of interesting oil and gas issues with ethical implications. First, the concurring opinion notes that the transaction involving the mineral deeds was a sale, and Kerlin did not represent the Balli heirs, nor did Seabury. “Like any other buyer, Kerlin owed his sellers (the heirs) no fiduciary duty after buying their interests. Moreover, the court of appeals’ fiduciary duty was derived from the duty owed by the holder of executive rights to nonparticipating royalty owners in executing an oil and gas lease, but Kerlin sold his interest and owed no duty to account for the sale of his own interest.
The court of appeals was also in error by applying estoppel by deed. Estoppel by deed only applies to the grantor, only as to after-acquired title, and does not apply to quitclaim deeds.28  In the concurring opinion, the justices clearly expressed their concern at the number of lawsuits being filed to upset South Texas land titles and the court’s intent to discourage that trend.