Face Challenges Confidently

204 Robertson v. ADJ P’ship, Ltd.

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.
Robertson v. ADJ Partnership, Ltd., 204 S.W.3d 484 (Tex. App.—Beaumont 2007, pet. denied), holds that an attorney and landman must disgorge profits in the form of money and overriding royalties obtained in breach of fiduciary duty. Attorney Bill McGraw had a long history of representing his wife’s family and doing deals with his wife’s family. This included representing and doing various oil and gas deals with his father-in-law David Henderson and brother-in-law Abel Adams, eventually probating his father-in-law and mother-in-law’s estates, and representing his sister-in-law Virginia Adams after she was widowed. The family had a history of keeping their properties together in partnerships. This suit complaining of seven specific transactions was brought by Virginia Adams and a related partnership against her brother-in-law attorney Bill McGraw, landman John L. Robertson, and McGraw and Robertson’s affiliated entity, Sibling A, Inc.
Lawyer McGraw and landman Robertson had known each other for a long time. In 1993, McGraw helped Robertson form several entities that Robertson could use to conceal his entity when acquiring leases for clients who wanted to conceal their involvement. One of those entities formed was the defendant Sibling A. McGraw was the president of Sibling A, and no leases were ever run through Sibling A, except the Henderson Family leases involved in this suit.
Landman Robertson was leasing independently as a broker for Marathon Oil Company. His supervisor at Marathon was Wayland Crawley. Robertson sometimes paid Crawley for Crawley to make it appear Marathon was interested in a lease, when Marathon was not, which assisted Robertson in selling the lease to another party. Some of the money was paid to Crawley’s teen-aged daughter, who did nothing for the money.
The series of transactions involved in this case began with a Marathon deal and varied in the details, but followed a similar pattern. The general pattern was that McGraw secured his sister-in-law Adams’ commitment to a specific bonus and royalty. Robertson then found a better deal. The Henderson Family leases were then run through Sibling A at the lower consideration, and McGraw and Robertson captured the higher bonus and overriding royalties through Sibling A. McGraw did not disclose to Adams that he was the president of Sibling A or that he was receiving more than Adams. The transactions included a “commission” to Wayland Crawley and the redacting of documents and manipulating of documents to conceal the relationships of the parties. Crawley’s daughter eventually received some of the funds, and when the transactions moved on from Marathon to other oil companies, Crawley continued to get a cut. For example, in a transaction involving CG Operating, McGraw received $191,400.00 in his escrow account. Those proceeds were distributed as follows: Adams ($19,937.50), Adams’ marital deduction trust ($19,937.50), McGraw ($119,226.25), Robertson (23,526.25), and Crawley ($8,772.50).
Adams sued for fraud and breach of fiduciary duty and won a jury verdict. Lawyer McGraw settled. Landman Robertson appealed. Robertson contended that there was insufficient evidence to support the jury’s finding that a relationship of trust existed between McGraw and Adams. He contended that Adams’ 1990 letter to McGraw (after a fee dispute) that McGraw must notify her in advance of any fees to be charged and Adams’ limited use of McGraw after Abel’s death on a few unrelated matters, showed that there was no fiduciary relationship. The court first noted that a fiduciary duty arises as a matter of law in formal attorney-client and trustee relationships. Therefore, to the extent McGraw represented Adams on these transactions, a fiduciary relationship existed, and to the extent McGraw acted as escrow agent, a formal duty of disclosure arose. The court did not seem to be sure whether McGraw did or did not represent Adams, but Adams had no other counsel, and McGraw made it appear their interests were identical. It was clear on the record that the funds were generally run through McGraw’s escrow account.
Moreover, the court was strongly persuaded that the evidence supported a finding of a fiduciary relationship based on personal relationships. The court found that the relationship in this case met the test that “the special relationship of trust and confidence must exist prior to, and apart from, the agreement made the basis of the suit.” The court pointed to McGraw’s own perception of the relationship by referring to a letter McGraw wrote. The letter referred to McGraw’s promise that he made to his father-in-law Henderson, on Henderson’s death bed, invoking the promise made by Henderson to Henderson’s own father, ”that I would, as he did, look after the family properties to the benefit of all concerns. This I have done.”
The court also summarily dismissed Robertson’s contention that the evidence was insufficient to show that Robertson and Sibling A aided and abetted McGraw in the breach of fiduciary duty. Likewise, the court rejected Robertson’s contention that he could not have committed fraud because he never had any direct communication with Adams. The court cited to the recent well-known case of In re Arthur Anderson LLP for the principle that each party to a fraudulent scheme is responsible for the acts of the other participants done in furtherance of the scheme and liable for fraud.
The court confirmed that disgorgement of profits was the appropriate remedy for fraud and breach of fiduciary duty. Robertson was required to give up his cash compensation and his overriding royalties.
The significance of the case is that, notwithstanding the egregious facts of this particular case, the lawyer who represents family members always assumes a larger risk, and a lawyer who uses his escrow account to facilitate a transaction assumes a duty of disclosure. For a landman working with an attorney, the case illustrates how the attorney’s more onerous duty may extend to the landman who knowingly works with the attorney on a transaction ultimately found to be in breach of that duty.