Face Challenges Confidently

101 Luecke v. Wallace

Friday, September 4th, 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.
Luecke v. Wallace, 951 S.W.2d 267 (Tex. App.–Austin 1997) discusses the duty owed by an executive to a non-participating royalty interest owner. In 1984, Plaintiff and her then husband divorced. As part of the property settlement agreement, Plaintiff executed a deed conveying her interest in a tract of land to her ex-husband. Plaintiff reserved (1) an “undivided one-half non- participating interest in any and all oil, gas and mineral royalties reserved by” her ex-husband, his heirs and assigns, and she reserved (2) “an undivided one-half interest in any bonus money exceeding $50.00 per acre received by” her ex-husband, his heirs and assigns. Defendant purchased the ex- husband’s interest in the tract obtaining all remaining interests in the mineral estate, including the executive right.
In 1992, Defendant negotiated an agreement to lease the tract to an oil company in exchange for a 1/5 royalty and a $150.00 per acre bonus. Upon performing a title examination, the oil company discovered Plaintiff’s mineral interest in the tract. The oil company informed Defendant that he had to provide the oil company with evidence of payment of ½ of excess bonus money above $50.00 per acre and a Ratification and Rental Division Order setting forth the division of interests. At Defendant’s request, the transaction was restructured. Defendant first leased the tract to his wholly owned company for a 1/8 royalty and a bonus that was less than $50.00 per acre. Defendant’s company then sold the lease to the oil company for a 1/5 overriding royalty and a bonus of $150.00 per acre. Defendant received a 1/8 royalty outright and his wholly owned company received a 1/5 royalty less Plaintiff’s interest in the base lease.
Plaintiff brought suit alleging that Defendant breached his duty of utmost good faith and fair dealing to her. The trial court granted Plaintiff’s partial motion for summary judgment, and Defendant appealed.
Held: As a matter of law, Defendant breached his duty of utmost good faith and fair dealing to Plaintiff. Relying on Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984), the Court ruled that Defendant owed Plaintiff a duty to obtain for her every benefit he obtained for himself or his wholly owned company. The Court reiterated that an executive owes non-participating royalty interest owners a duty of utmost good faith. This duty is fiduciary in nature, and the breach of this duty may result in both compensatory and exemplary damages. Further, the Court rejected Defendant’s argument that Plaintiff had to establish a breach of this duty on summary judgment by proving that she could have made a better deal than what Defendant made. To show a breach of utmost good faith and fair dealing, Plaintiff only needed to prove that Defendant obtained benefits for himself that he did not obtain for Plaintiff.
The significance of this case is that the duty of utmost good faith and fair dealing is rarely imposed, but is made applicable to the holder of the executive rights. Executives must ensure that every benefit that they obtain for themselves is also obtained for any non-participating royalty interest owner.