Face Challenges Confidently

159 Sauceda v. Kerlin

Friday, September 4th, 2015

Richard F. Brown

Sauceda v. Kerlin, 164 S.W.3d 892 (Tex. App.—Corpus Christi 2005, pet. filed), considers the duty owed by the holder of the executive right to a non-participating royalty owner. 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. Because of that deed, 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 litigation. 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 in 1942. 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 for part of Kerlin’s claim. 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. Kerlin never told the Balli heirs about the settlement or paid them anything.
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 he owed to each of the Balli heirs with respect to the royalty interest reserved in the eleven deeds, that Kerlin and Seabury in conspiracy 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.
Although the case is complicated by the other breaches of fiduciary duty, the opinion in one section clearly focuses on the breach of fiduciary duty based on the deeds and the duty imposed on the holder of the executive right. The court first recognizes that “Texas courts generally have applied a standard of ‘utmost good faith’ to one who exercises executive rights to lease or develop minerals.” But then the court concludes that under Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984), the Texas Supreme Court has created a fiduciary duty between executive and non-executive interest owners in mineral deeds, when the executive executes an oil and gas lease. “[T]hat duty requires the holder of the executive right to acquire for the non- executive every benefit that he exacts for himself.” Because Kerlin attempted to eliminate or circumvent the royalty interests reserved by the Balli heirs, he breached his fiduciary duty. This supported as remedies an accounting, profit disgorgement and a constructive trust.
The significance of the case is that it reinforces existing caselaw that the holder of the executive right must acquire for the non-executive every benefit that he exacts for himself. Although the description of the nature of the relationship giving rise to the duty may be a little confused, the general nature of the conduct that is required is clear.