Face Challenges Confidently

297 Aurora Petroleum, Inc. v. Newton

Tuesday, September 8th, 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.
Aurora Petroleum, Inc. v. Newton, 287 S.W.3d 373 (Tex. App.—Amarillo, May 22, 2009, no pet.), held that the owner of executive rights has no duty to lease. Newton owned all of the surface rights, an undivided one-fourth (1/4) mineral interest, and all of the executive rights for an entire tract of land. Aurora sought to lease Newton’s tract of land. When Newton refused to lease, Aurora filed suit on behalf of all of the non-participating mineral owners seeking to force Newton to enter into a lease. Aurora claimed that Newton, as the holder of the executive right, had a duty to lease.
In Manges v. Guerra, the holder of the executive right (Manges) leased the property to himself at terms that were more advantageous to him than the non-participating mineral owners. The Texas Supreme Court did hold that Manges breached a fiduciary duty owed to the non- participating mineral owners. The Amarillo Court of Appeals distinguished Manges because the duty of the executive right owner could only arise after the oil and gas lease was granted. There was no lease in this case, so the Manges fiduciary duty was not applicable.
The Amarillo Court of Appeals equated the duty to lease with the duty to develop. In the case of In re Bass, the Texas Supreme Court stated the following: “a duty to develop a mineral estate arises not from a fiduciary relationship, but from the implied covenant doctrine of contracts law in which courts read a duty to develop into an oil and gas lease when necessary to effectuate the parties intent.” The Amarillo court concluded that the duty to lease (develop) could not be based on a fiduciary duty, but only on an implied contractual covenant. Under the facts of the case, the non-participating mineral interests were apparently subject to a reversion to the fee owner (Newton), if production was not obtained. The opinion is silent on this point, but it clearly suggests that Newton’s interests were not aligned with the non-participating owners. It is also arguably implied in the creation of a term interest that some effort will be made to obtain production.
Nevertheless, the court of appeals held that because Newton never entered into an oil and gas lease, there could not be an implied duty to develop. Newton’s obligation to the non- participating mineral interest owners was to secure for the non-participating mineral owners the right to share in the same benefits Newton acquired for Newton. Because Newton did not lease their interest or acquire any benefit for himself, there was not a breach of fiduciary duty to the non-participating mineral interest owners.
The significance of this case is the holding that the owner of the executive rights has no duty to lease.