Opinion ID: 6108626
Heading Depth: 3
Heading Rank: 1

Heading: Red flags

Text: In Grant Thornton, LLP v. Prospect High Income Fund , we held that a person may not justifiably rely on a misrepresentation if 'there are red flags indicating such reliance is unwarranted.'  314 S.W.3d at 923 (quoting Lewis v. Bank of Am. NA , 343 F.3d 540 , 546 (5th Cir. 2003) ). In that case, investors claimed to have justifiably relied on certain representations when purchasing bonds from a corporation. Id. We held they could not have justifiably relied because before the acquisition, the investors' senior portfolio manager learned the corporation had lost its primary source of funding and was financially at risk. Id. Before reaching this conclusion, we noted that the portfolio manager was an experienced bond investor who held a finance degree and an MBA and who ultimately admitted the purchases reflected a substantial risk. Id. In adopting the red flags impediment to justifiable reliance in Grant Thornton , we were persuaded by the Fifth Circuit's decision in Lewis v. Bank of America NA, 343 F.3d at 540 . The Fifth Circuit analyzed the justifiable-reliance element as follows: Lewis, an individual with both a business background and familiarity with retirement accounts, should have viewed this series of events as a red flag warranting further investigation of the tax consequences of the loan transaction. Viewing the circumstances in their entirety, including Lewis's access to professional accountants, the amount of money involved in the transaction, and the ambiguous nature of [the defendant's] assurance, Lewis's decision to enter into the transaction without undertaking additional investigation into its tax consequences was not justifiable. Id. at 547 (footnote omitted). JPMorgan argues the following red flags preclude Orca's justifiable reliance: (1) Mettham's statement that he would have to check whether the property was open for lease; (2) JPMorgan's insistence on the stricter negation-of-warranty provision; (3) JPMorgan's refusal to accept responsibility for verifying title; (4) the letter of intent itself; (5) Mettham's statement that other lessees were not doing careful title work; (6) Orca's knowledge that competitors might delay recording their leases; (7) Orca's knowledge that it ceased checking property records after signing the letter of intent; and (8) Orca's landman's doubts at the closing, manifested by her request that Mettham confirm once more whether the property was open. We are not prepared to say that any single one of these factors could preclude justifiable reliance on its own and as a matter of law. We especially reject the notion that the mere use of the negation-of-warranty and no-recourse provision in the letter of intent and the leases could  wholly negate justifiable reliance. Oil-and-gas leases, like other instruments of conveyance, often negate warranties of title. As the courts did in Grant Thornton and Lewis , we must instead view the circumstances in their entirety while accounting for the parties' relative levels of sophistication. We will explore the latter first. JPMorgan concedes that it is a sophisticated business entity. And why wouldn't it? JPMorgan is one of the largest banks in the world. Donna Fuscaldo, The Largest Banks in the World , BANKRATE (Dec. 12, 2017), http://www.bankrate.com/finance/banking/largest-banks-in-the-world-1.aspx. The record also reflects that its employee, Mettham, was heavily experienced in oil-and-gas transactions. It was his responsibility to lease the trust's mineral assets, which spanned approximately 40,000 acres in the Eagle Ford alone. In 2010, Mettham executed between fifty and one hundred leases for the trust and other clients. And though Orca was a newly founded company, its key players were also sophisticated oil-and-gas businesspeople. Berry and Ellis were both richly experienced in negotiating and acquiring oil-and-gas leases. Villalon had practiced law and worked as a landman for many years. And Orca had at its disposal a passel of other experienced landmen, including Stewart. Both JPMorgan and Orca are sophisticated business entities, composed of knowledgeable, skilled, and experienced people who were more than capable of overseeing the negotiation and execution of the oil-and-gas deal at issue in this case. And the transaction at the heart of this case was no small deal. The six leases Orca ultimately received, after weeks of intense, detail-oriented negotiation, covered 919 acres and came at a cost of $3.2 million. Such world-savvy participants entering into a complicated, multi-million-dollar transaction should be expected to recognize red flags that the less experienced may overlook. See Grant Thornton , 314 S.W.3d at 923 (noting the justifiable reliance inquiry requires consideration of whether, 'given a fraud plaintiff's individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[,] it is extremely unlikely that there is actual reliance on the plaintiff's part'  (alteration in original) (quoting Haralson v. E.F. Hutton Group, Inc. , 919 F.2d 1014 , 1026 (5th Cir. 1990), overruled on other grounds as recognized in Lewis v. Fresne , 252 F.3d 352 , 358 n.5 (5th Cir. 2001) ) ). We turn now to the red flags peculiar to this bargain. I'll have to check. JPMorgan argues that Mettham's initial representation that the tracts were open to leasing was so ambiguous as to be undependable. Only one of the supposed witnesses to the November 2010 statement-Berry, who admits he was in and out of the meeting-testified that Mettham spoke in absolutes. He claims Mettham definitively stated the tracts were open. But the other two witnesses to the statement concede the representation was equivocal. One testified that Mettham stated, [Y]es, but I'll have to[ ] ... check. And the other indicated Mettham said, I'm not sure of that. I'll have to check. Such equivocation should caution one against reliance. Cf. Lewis , 343 F.3d at 547 (noting one of the red flags precluding justifiable reliance was the ambiguous nature of the representations); Simpson v. Woodridge Props., L.L.C. , 153 S.W.3d 682 , 684 (Tex. App.-Dallas 2004, no pet.) (affirming summary judgment where a fraud plaintiff could not rely on vague references attributable to the defendant when the contract specified the opposite and disclaimed reliance). Stewart's doubts at the closing Orca claims in its brief, and repeated at argument, that Mettham did check and  later confirmed the properties were available when he spoke with Stewart at the closing of the transaction. According to Stewart, Mettham's confirmation came as an answer to her last-minute, at-the-closing oral request for a verification that the tracts were open. JPMorgan maintains that the fact that Stewart would even ask such a question, knowing that Orca had undertaken its own title examination, indicates that she and Orca harbored doubts as to title. At that point, the parties had spent two months working toward executing the leases and closing the deal-including Orca's limited reexamination of title that it had requested and obtained extra time to conduct. Now it was turning over checks amounting to 3.2 million dollars. Particularly if it remained skeptical about the availability of the tracts, Orca could not blindly rely on JPMorgan's representations-both at the outset of the transaction and at its closing-when its knowledge, experience, and background called for further investigation. See Grant Thornton , 314 S.W.3d at 923 (measuring justifiable reliance based on a specific plaintiff's individual characteristics, abilities, and appreciation of facts and circumstances); Shafipour , 2015 WL 3454219 , at  (stating a party cannot blindly rely on a representation by a defendant where the plaintiff's knowledge, experience, and background warrant investigation into any representations before the plaintiff acts in reliance upon those representations). A party must protect its own interests through the exercise of reasonable diligence, which is not excused by mere confidence in the honesty and integrity of the other party. Westergren , 453 S.W.3d at 425 . The letter of intent Mettham's statements at the initial meeting in November 2010 and at the closing in January 2011 were his only representations concerning who held title to the acreage. Orca describes the letter of intent as an implicit representation that the trust held good title to the tracts. But the letter's explicit terms show otherwise. The only indication in the letter that the trust holds title provides: Orca has caused a search to be made of [the county] records ... and has preliminarily determined that [the trust] is the owner and holder of the mineral estate .... JPMorgan made no assurance in the letter of intent that the trust had title. Orca would be paying millions to lease whatever the trust owned, which Villalon, its landman and a former practicing attorney, conceded could have been nothing at all. And by the very terms of the letter, Orca had taken upon itself to verify exactly what the trust owned. The new negation-of-warranty language The letter of intent not only placed the onus on Orca to investigate title, it included a new, non-standard negation-of-warranty provision that expressly provided no recourse. One of Orca's landmen, Ellis, regarded the clause as a curveball that raised a red flag-something he had never seen before in any lease. Because of the clause, Ellis advised Orca to make absolutely sure that [the trust] owned the minerals by obtaining a solid outside legal opinion. He later stated:  We would never -that I would never look to JPMorgan to tell me whether or not [the trust] owned the minerals. (emphasis added). By Orca's team's own admissions, the negation of warranty itself amounts to a red flag. See Grant Thornton , 314 S.W.3d at 923-24 (concluding that when an experienced senior portfolio manager recognized the substantial risk in acquiring certain bonds because of red flags, the funds' reliance would not have been justifiable). Orca stopped checking the records Leading up to the execution of the letter of intent, Orca had been regularly consulting  the county property records to check for newly filed leases. But it stopped once the letter of intent was signed. And three days after it stopped, GeoSouthern recorded its lease. According to Orca's landman's estimate, Orca could have discovered GeoSouthern's interest for a cost of just $600 to $800. Concededly, Texas courts have never held that a purchaser's failure to search the deed records would bar his fraud action against the seller. Ojeda de Toca v. Wise , 748 S.W.2d 449 , 451 (Tex. 1988). But that does not absolve a sophisticated business plaintiff of its duty to exercise ordinary care. See Westergren , 453 S.W.3d at 424-25 (In an arm's-length transaction the defrauded party must exercise ordinary care for the protection of his own interests. ... [A] failure to exercise reasonable diligence is not excused by mere confidence in the honesty and integrity of the other party. (alteration in original) (quoting Thigpen , 363 S.W.2d at 251 ) ); AKB , 380 S.W.3d at 232 (recognizing that when a party fails to exercise reasonable diligence and ordinary care to protect its own interest in an arm's-length transaction, it is charged with knowledge of all facts that would have been discovered by a reasonably prudent person similarly situated).