028 Hawkins v. Twin Montana, Inc.

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of some significance to you.
 
In Hawkins v. Twin Montana. Inc., No. 02-88-240-CV (Tex. App.–Fort Worth, September 26, 1990, n.w.h.), Hawkins owned the surface and all of the executive rights. Elliott owned all of the royalty interest. Hawkins turned down a lease with Twin Montana. Elliott brought suit requesting the trial court to appoint a receiver to execute an oil and gas lease. After Elliott filed suit but before the trial court appointed a receiver, Hawkins executed an oil and gas lease with Jones.
 
Elliott alleged that Hawkins breached his duty as the holder of the executive right by executing the Jones lease after refusing the “better” lease previously offered by Twin Montana. The terms of the leases were as follows:
 

Twin Montana Lease                           Jones Lease

 
Hawkins argued that he satisfied his duty by executing a lease with a one-eighth royalty because the deed that established him as executive owner provided that any lease executed “shall always provide for mineral rights of at least one-eighth.”
 
Held: The Jones Lease was thrown out and the appointment of a receiver over the executive rights was affirmed. The trial court found that the Jones Lease failed to adequately protect Elliott and that Hawkins breached his fiduciary duty by entering into that lease. On appeal, the Court noted that there is some confusion and controversy as to whether the duty owed to the nonexecutive mineral owner is a “fiduciary” duty, a duty of “utmost good faith,” or merely a duty of good faith. The Court refused to be drawn into that argument, holding that, in any event, Hawkins’ conduct breached the duty of good faith.
 
The Court noted that Hawkins and the surface-right owners were not required to sacrifice their desire to protect the surface of the land, and that “they would be entitled to negotiate the best surface protection possible as long as they maintained good faith in their consideration of the royalty owners.” The Court then apparently concluded that determining “good faith” was discretionary with the trial court, and that the trial court’s decision would not be reversed on appeal. There is no guidance as to how the competing interests are to be balanced, and the Court summarily rejected Hawkins’ argument that the limits of his duty were defined by the original deed provision calling for at least a one-eighth royalty. The Court said that “circumstances may require more than the minimum provided, to be acting in good faith.”
 
The significance of this case is that the holder of the executive right is now at substantial risk any time he executes a lease. “Good faith” can be very subjective, there are no clear guidelines, and, if “circumstances” can require more than the minimum, no lessee can ever be sure of his lease. It is easy to conclude that all leases should routinely be ratified by all owners of any outstanding nonexecutive mineral interests, but there is no lever to compel such ratifications.