JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546 S.W.3d 648 (Tex. 2018) is another reminder that operators are expected to perform due diligence before entering into a transaction. It is also, possibly, a reminder that an oil company is an unsympathetic Plaintiff.
Orca entered into negotiations with The Red Crest Trust to lease 40,000 acres of land in the Eagle Ford Shale. The Trustee of the Red Crest Trust was JPMorgan. During the negotiations, Orca was told by JPMorgan that the 40,000 acres were open and unleased. However, some of the acreage had been leased to Geosouthern who had not yet recorded the lease in the public records. Before finalizing the deal, Orca did review the public records and did not see a lease from Geosouthern. However, after Orca had reviewed the records, Geosouthern filed their lease of record (thus giving Orca constructive notice).
After a successful negotiation, Orca and the Red Crest Trust entered into an oil and gas lease with the following clause:
Negation of Warranty. This lease is made without warranties of any kind, either express or implied, and without recourse against Lessor in the event of a failure of title, not even for the return of the bonus consideration paid for the granting of the lease or for any rental, royalty, shut-in payment, or any other payment now or hereafter made by Lessee to Lessor under the terms of this lease.
After entering into the contract, Orca discovered Geosouthern's lease. Orca filed suit against JPMorgan alleging fraud. In order to succeed on a claim for fraud, Orca must, among other things, show that it justifiably relied on a misrepresentation. The Supreme Court dismissed Orca's claims holding that, as a matter of law, Orca's claims failed because:
There were too many "red flags" to warrant justifiable reliance. These red flags included a strict negation of warranty provision, a statement from JPMorgan they were not sure whether the land was leased, and the express terms of the letter of intent.
The negation of warranty provision was in direct contradiction to the oral statement by JPMorgan such that no reasonable person could rely on a statement by JPMorgan that the tracts were open acreage.
This case highlights the burden of proving fraud or negligent misrepresentation when there is a complete disclaimer of title warranty. It also highlights the importance of determining, on an ongoing basis, whether there have been changes in a tract's ownership prior to money changing hands.
Edward Wilhelm and Jack Wilhelm provide assistance to royalty owners, working interest owners, and operators with oil and gas properties. Call us today at 512-236-8400.