350 Paradigm Oil, Inc. v. Retamco Operating, Inc.

Richard F. Brown

 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
Paradigm Oil, Inc. v. Retamco Operating Inc., 330 S.W.3d 342 (Tex. App.—San Antonio 2010, pet. granted) (Fraud based on concealment of payout); Paradigm Oil, Inc. v. Retamco Operating, Inc., 330 S.W.3d 342 (Tex. App.–San Antonio 2010) rev’d, 372 S.W.3d 177 (Tex. June 22, 2012), affirmed an award of compensatory damages for fraud and exemplary damages for concealing payout under a Purchase Agreement.  In 1984, Retamco Operating, Inc. (“Retamco”) sold a number of oil and gas leases, retaining overriding royalty interests in subsequently drilled producing wells and the option to take after-payout working interests when the revenue from subsequently drilled wells exceeded drilling and operating expenses.  Under the terms of the purchase agreement, the purchaser was required to notify Retamco when a well reached payout, record Retamco’s interests in all applicable counties, and inform every purchaser and assignor of leases covered by the purchase agreement of Retamco’s rights and interests.  The original purchaser transferred several of the covered leases to Paradigm Oil, Inc. (“Paradigm”) in 1993 without informing Paradigm of Retamco’s interests, but Paradigm assumed all of the original purchaser’s obligations.
 
In 1999, Retamco sued the original purchaser and all assignees, including Paradigm, for breach of contract and fraud, claiming it had been denied the option to convert its overriding royalty interests into after-payout working interests and had not been paid its overriding royalties and working interests.  After numerous motions for sanctions, the trial court imposed death penalty sanctions and entered a default judgment against Paradigm, conclusively establishing Paradigm’s liability for breach of contract and fraud.  On remand from a previous appeal regarding sufficiency of the evidence on damages, the trial court awarded Retamco $3,782,049.00 in compensatory damages for breach of contract; $7,312,548.00 in compensatory damages for fraud; and $7,500,000.00 in exemplary damages against Paradigm.
 
In this appeal, Paradigm argued the trial court abused its discretion in awarding damages for fraud and exemplary damages because Retamco’s claim for fraud was, in reality, a breach of contract claim, and such damages are precluded by the economic loss rule.  In considering this argument, the court cited the trial court’s finding that Retamco’s fraud damages were caused by Paradigm (i) failing to record and provide notice of Retamco’s rights under the purchase agreement; (ii) overstating costs or understating revenue on wells; (iii) deducting operating expenses not actually incurred; (iv) retaining proceeds due to Retamco; and (v) overcharging monthly overhead expenses for producing wells.
 
The court considered Cass v. Stephens, a similar case in which the plaintiff alleged claims for breach of contract and fraud, including allegations that the defendant operator overcharged expenses, made unauthorized expense deductions, and charged expenses for wells owned by the operator.  The Cass court “reject[ed] the contention that [plaintiff’s] injury is contractual because she recovered economic damages . . . ,” stating “[the operator’s] fraud caused the joint interest owners to pay for goods and services they never received.  Logically, their damages are economic—fraudulently induced payments of money results in money damages” and holding the injury was tortious, not contractual, in nature.  The court concluded, “Cass clearly held that an agreement can create ‘a conduit for committing the torts, but the duty breached exists independent from the agreements.’” The court held that Retamco’s fraud and breach of contract claims were independent causes of action that supported independent damages and upheld the trial court’s award of compensatory damages for breach of contract, compensatory damages for fraud, and exemplary damages.
 
There was evidence of Paradigm’s knowledge and that Paradigm took affirmative steps to conceal and manipulate the status of payout.  This included forging check endorsements, deducting costs for plugging wells not actually plugged, charging expenses not incurred, and charging unreasonable and unconscionable monthly producing well rates and other similar acts which supported the court’s conclusion that Paradigm created a scheme to defraud Retamco.
 
The significance of this case is the court’s holding that a party’s concealment of payout of producing properties in order to avoid paying overriding royalties and conversions to working interests may constitute fraud and support the award of independent compensatory damages and exemplary damages.  Because the case was based on death penalty sanctions for discovery abuse, there was essentially no opportunity to put on a defense.  A case fully tried on the merits could produce different results.  This case and its prior history does include detailed discussions of the proof necessary to establish payout and damages.