Face Challenges Confidently

500 Thompson & Knight LLP v. Patriot Exploration, LLC

Thursday, September 3rd, 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.
Thompson & Knight LLP v. Patriot Exploration, LLC  held that expert testimony on the effect of declining gas prices on the price a buyer would pay was insufficient to overcome the buyer’s testimony that declining prices had no effect on what the buyer did pay.  Thompson and Knight (“T&K”) represented Patriot Exploration, LLC (“Patriot”) in forming a partnership with Apollo Resources International, Inc. (“Apollo”) for the purpose of acquiring leases held by Apollo and to conduct an extensive development program through the partnership with MexTex Operating Company (“MexTex”) as the operator.  Early drilling results were poor, and the partnership was liquidated.  However, in the course of liquidating the partnership, it was discovered that the leases “acquired” by the partnership from Apollo were owned of record not by Apollo, but by one of Apollo’s subsidiaries.  To cover this “Title Gap,” T&K prepared correction assignments, but T&K could not get them signed.  T&K withdrew, and Patriot’s new lawyer sued all the necessary parties to correct the Title Gap and to remove MexTex as operator.  The Title Gap was cured by a default judgment, MexTex bought the partnership properties, and the rest of the lawsuit was dismissed.
Time was lost curing the Title Gap from April 1, 2008, to September 18, 2008 (a period of rapidly declining natural gas prices).  Patriot sued T&K for legal malpractice claiming that Patriot was entitled to damages equal to the decline in the selling price caused by the delay of the sale to MexTex.  T&K stipulated to liability for purposes of the bench trial, but contested causation and contended that Patriot was not entitled to recover any economic damages.
Patriot’s expert testified that he prepared an economic model based on spot and futures pricing to arrive at the $5.5 million MexTex actually paid in September 2008, and then he applied the same model to a hypothetical April 1, 2008 sale, when gas prices were higher.  The expert assumed Patriot would have had a buyer on that date.  The expert concluded that the five-month delay resulted in approximately $960,000 in “reduced sale proceeds to Patriot compared to what they would have been expected to receive in April 1, 2008.”   The trial court rendered judgment awarding Patriot economic damages in the amount of $960,000.
To prevail in a legal malpractice action, a plaintiff must prove that the defendant owed a duty to the plaintiff, the defendant breached the duty, the breach proximately caused the plaintiff’s injury, and the plaintiff suffered damages.   Because breach of the standard of care and causation are separate inquiries, even when negligence is admitted, causation is not presumed.   The general measure of damages is the difference between the amount the plaintiff probably would have recovered absent malpractice, and the amount received.   However, in cases that do not involve malpractice in the handling of litigation, the measure of damages may be generalized to the difference between the result obtained for the client and the result that would have been obtained but for the attorney’s negligence.
According to the court, Patriot “suffered malpractice damages only if, absent malpractice, it probably would have received more in an earlier transaction.”   Because the record contained no direct evidence of a buyer other than MexTex, the issue was “whether there is any evidence that MexTex would have paid more for the Patriot Interests in April than it paid in September.”
Mark Wiggins, who was a principal of both MexTex and the company that originally sold the leases to Apollo, testified that MexTex would not have paid more for the properties in April 2008 than it did in September 2008.   Wiggins also testified that MexTex’s offer to Patriot was based on what Patriot had invested in the property, not on what the price of the product was going to be.   The court held that there was no reasonable basis for the trial court to disregard Wiggins’ testimony that MexTex would not have paid more for the properties in April 2008 than it did in September 2008, noting that just because spot market prices may be an important factor does not necessarily mean a buyer will pay more.  Wiggins’ testimony showed he considered other factors.   As a result, there was no evidence T&K’s negligence proximately caused any damages.
The court also rejected the expert’s opinion on other grounds.  The expert assumed the September 2008 transaction was a simple asset sale and did not account for the effect of Patriot’s suit against MexTex on the price MexTex was willing to pay to get the properties and get out of the lawsuit.   The court also found that the expert’s assumptions about future production and drilling costs were incorrect because they were based on a 2006 reserve report that ignored Patriot’s actual experiences in 2007.   According to the court, in either April or September 2008, a buyer would have had Patriot’s actual drilling experience in 2007 available, including both the production results and costs incurred.  The court concluded that there was nothing to support the expert’s assumption that a buyer would have ignored that information and instead utilized a prospective analysis from the year before drilling had begun.   According to the court, the expert’s assumption – that “the Patriot Interests were equivalent to a pool of natural gas ready to be marketed instantly” – ignored the actual transaction involved, i.e., “a transfer of ownership of working interests in largely undeveloped mineral leases covering thousands of acres of land.”
The case turned on causation in a legal malpractice claim, but its significance is the discussion and analysis of expert testimony and the effect of declining gas prices in proving damages related to a purchase and sale agreement.