Opinion ID: 2831465
Heading Depth: 2
Heading Rank: 2

Heading: Substantive Law on Duty

Text: The threshold issue in this case is whether evidence exists from which a jury could conclude that Steadfast breached a duty to Bradshaw in negotiating the terms of the mineral lease with Range. Among other arguments, Steadfast contends that there is no per se duty to obtain the highest possible royalty and that, as a matter of law, it properly discharged its duty to Bradshaw by obtaining the minimum royalty required by the 1960 deeds. Bradshaw responds, however, that there is at least some evidence Steadfast engaged in self-dealing to her detriment by securing a large bonus for itself in exchange for a below-market royalty. In Bradshaw’s view, Steadfast’s actions are repugnant to the spirit and intent of the royalty reservation in the 1960 deeds, which she alleges expressly contemplate the non-participating royalty interest holder sharing in market increases. The relationship between an executive and a non-executive was first described in a 1937 commission of appeals decision adopted by this Court, Schlittler v. Smith, 101 S.W.2d 543 (Tex. 1937). With respect to the relationship between the executive-rights holder and the non-executive, we observed in Schlittler that “self-interest on the part of the grantee may be trusted to protect the grantor as to the amount of royalty reserved.” Id. at 545. Importantly, we added, “Of course, there should be the utmost fair dealing on the part of the grantee in this regard.” Id. Thirty years later, we specifically addressed the close and dependent nature of the relationship. In Andretta v. West, the executive had amended the mineral lease to permit a compensatory royalty, but neither notified the non-participating royalty interest holder about the amendment nor shared the proceeds. 415 S.W.2d 638, 641 (Tex. 1967). We acknowledged that an 12 executive “has the power to make and amend leases affecting the enjoyment of a non-participating royalty interest owned by another,” but said that this power gives rise to a “confidential relationship” between them. Id. In view of that relationship, the executive was held to be accountable to the non-executive for the latter’s one-fourth share of the compensatory royalty payments. Id. The executive’s duty took center stage in Manges v. Guerra, a case involving particularly egregious acts of self-dealing by the executive. 673 S.W.2d 180, 182-84 (Tex. 1984). In Manges, the Guerra family owned a mineral interest in co-tenancy with Clinton Manges, who held the executive rights. Manges exercised his authority as executive to execute mineral leases on terms that were highly unfavorable to his co-tenants. Specifically, Manges made the lease with himself, agreed to a $5 nominal bonus for nearly 26,000 acres of land, and dealt with the entire mineral interest so that he received benefits that the non-executives did not receive. Id. The Guerras sued, arguing that Manges breached his duty to them. We agreed, observing that “[t]he duty of utmost good faith owed by an executive has been settled since Schlittler.” Id. at 183. We further elaborated that “[the] duty [of utmost good faith] requires the holder of the executive right, Manges in this case, to acquire for the non-executive every benefit that he exacts for himself.” Id. at 183-84. In HECI Exploration Co. v. Neel, we described Andretta as having recognized a type of fiduciary relationship between an executive and a non-executive. 982 S.W.2d 881, 888 (Tex. 1998). We explained that Andretta held that “a fiduciary relationship exists between an owner of the executive rights and nonparticipating royalty owners in Andretta’s position” because the executive has the power to make and amend the lease and thereby affect the latter’s rights. Id. In a more recent discussion of the issue, we reiterated that the executive owes the 13 non-executive a fiduciary duty and, relying on Manges, defined that duty as an obligation to “acquire every benefit” for the non-executive that the executive “would acquire for himself.” In re Bass, 113 S.W.3d 735, 745 (Tex. 2003). Importantly, though the relationship between an executive and a non-executive has been described as fiduciary in nature, the executive is not required to grant priority to the non-executive’s interest. Although “[a] fiduciary duty often . . . requires a [fiduciary] to place the interest of the other party before his own,” we have clarified that our precedent in Andretta, HECI, and Manges did not incorporate this requirement as part of the executive’s duty. Lesley v. Veterans Land Bd. of State, 352 S.W.3d 479, 490 (Tex. 2011). Rather, as stated in Manges, “the executive’s duty is to ‘acquire for the non-executive every benefit that he exacts for himself.’” Id. (quoting Manges, 673 S.W.2d at 183). This limitation distinguishes the executive’s duty from a more paradigmatic fiduciary relationship, like principal and agent. See Floors Unlimited, Inc. v. Fieldcrest Cannon, Inc., 55 F.3d 181, 188 (5th Cir. 1995) (“Under Texas law, a fiduciary duty will not be lightly created, as it imposes extraordinary duties. The party owing the duty in a fiduciary relationship must put the interests of the beneficiary ahead of its own if the need arises.”). In evaluating whether an executive has breached a duty owed to a non-executive, evidence of self-dealing can be pivotal. See, e.g., Lesley, 352 S.W.3d at 491 (recounting the “pervasive self-dealing” involved in Manges). When we have declined to find a breach of the duty, we have generally observed the absence of self-dealing. See In re Bass, 113 S.W.3d at 745 (“What differentiates this case from Manges, however, is that no evidence of self-dealing exists here.”). The intermediate appellate courts have proceeded similarly. See, e.g., Hlavinka v. Hancock, 116 S.W.3d 14 412, 421 (Tex. App.—Corpus Christi 2003, pet. denied) (finding no breach due to the absence of self-dealing), disapproved of on other grounds by Lesley, 352 S.W.3d at 491 & n.78 (observing that executive may be liable for refusal to lease minerals “[i]f the refusal is arbitrary or motivated by selfinterest to the non-executive’s detriment”). Self-dealing has most commonly been observed in situations where the executive employs a legal contrivance to benefit himself, a close familial relation, or both. This was most readily apparent in Manges, but it has also been a feature of a multitude of other Texas cases.7 As the foregoing discussion alludes, the value of a non-participating royalty interest is not left exclusively to the whims of the executive. Lesley, 352 S.W.3d at 487 (“The law has never left non-executive interest owners wholly at the mercy of the executive.”). To the contrary, while an executive may be understood to have considerable latitude, the executive lacks unbridled discretion. Our jurisprudence in this area of the law emerged in recognition of the potential for abuse inherent in this division of rights. In the absence of a fiduciary-like duty of utmost good faith and fair dealing, an ill-intentioned or indifferent executive holder could significantly compromise or extinguish the value of a non-executive interest. Id. (“If the exclusive right to lease the minerals could be exercised arbitrarily or to the non-executive’s detriment, the executive power could destroy all value in the non-executive interest, appropriating its benefits for himself or others.”). Thus, while 7 See, e.g., Dearing, Inc. v. Spiller, 824 S.W .2d 728, 730, 733 (Tex. App.— Fort W orth 1992, writ denied) (finding similarly); Mims v. Beall, 810 S.W .2d 876, 880 (Tex. App.— Texarkana 1991, no writ) (finding that self-dealing occurred when the executive entered into leases with family members or family-owned companies, at inferior terms than could be obtained through arm’s-length transactions); Portwood v. Buckalew, 521 S.W .2d 904, 909-10 (Tex. Civ. App.— Tyler 1975, writ ref’d n.r.e.) (finding self-dealing when the executive kept overriding royalties and bonuses for itself instead of distributing them to non-executives). 15 an executive has a largely unfettered hand in negotiating and structuring a mineral lease, that discretion is circumscribed by the duty owed to a non-executive. See Manges, 673 S.W.2d at 183. If the semantics surrounding the nature of this duty have shifted subtly over the years, this much is clear: An executive owes a non-executive a duty that prohibits self-dealing but does not require the executive to subjugate its interests to those of the non-executive. Thus, in ascertaining whether the executive breached its duty to the non-executive, the controlling inquiry is whether the executive engaged in acts of self-dealing that unfairly diminished the value of the non-executive interest. Although the contours of the duty remain somewhat indistinct, these tenets guide our analysis of the claims before us.8