IN THE SUPREME COURT OF TEXAS
444444444444
NO. 09-0306
444444444444
BETTY YVON LESLEY, ET AL., PETITIONERS,
v.
VETERANS LAND BOARD
OF THE STATE OF TEXAS, ET AL., RESPONDENTS
4444444444444444444444444444444444444444444444444444
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE ELEVENTH DISTRICT OF TEXAS
4444444444444444444444444444444444444444444444444444
Argued September 15, 2010
JUSTICE HECHT delivered the opinion of the Court, in which JUSTICE WAINWRIGHT, JUSTICE
MEDINA, JUSTICE GREEN, JUSTICE JOHNSON, JUSTICE WILLETT, JUSTICE GUZMAN, and JUSTICE
LEHRMANN joined.
CHIEF JUSTICE JEFFERSON did not participate in the decision.
The right to lease minerals — the executive right — is one “stick” in the bundle of five real
property rights that comprise a mineral estate.1 We held long ago that the executive owes other
owners of the mineral interest a duty of “utmost fair dealing”,2 but we have seldom had occasion to
1
Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986) (“There are five essential attributes of a severed mineral
estate: (1) the right to develop (the right of ingress and egress), (2) the right to lease (the executive right), (3) the right
to receive bonus payments, (4) the right to receive delay rentals, (5) the right to receive royalty payments.” (citation
omitted)), cited in French v. Chevron U.S.A. Inc., 896 S.W.2d 795, 797 (Tex. 1995) ; see alsoDay & Co., Inc. v. Texland
Petroleum, Inc. 786 S.W.2d 667, 669 (Tex. 1990) (“[T]he executive right is an interest in property, an incident and part
of the mineral estate like the other attributes such as bonus, royalty and delay rentals.”).
2
Schlittler v. Smith, 101 S.W.2d 543, 545 (Tex. 1937).
elaborate. In this case, a land developer, who also owned part of the mineral estate and all of the
executive right, imposed restrictive covenants on a subdivision, limiting oil and gas development
in order to protect lot owners from intrusive exploratory, drilling, and production activities. The
non-participating mineral interest owners complain that the developer, as the executive, breached
its duty to them. The court of appeals held that the developer, never having undertaken to lease the
minerals, had not exercised the executive right and therefore owed no duty to the other mineral
interest owners.3 We disagree, and accordingly, reverse and remand the case to the trial court.
I
In 1998, Bluegreen Southwest One, L.P. acquired about 4,100 acres of land southwest of Fort
Worth, which Betty Yvon Lesley and others (collectively, “Lesley”)4 had conveyed to its
predecessor.5 Lesley’s deeds6 reserved part of her undivided half interest in the minerals. The other
half is owned by the successors of Wyatt and Mildred Hedrick (collectively, “Hedrick”),7 the couple
who once owned all the property. Bluegreen also acquired from Lesley the executive right in the
entire 4,100-acre mineral estate — that is, in the words of Hedrick’s original deed, the “full,
3
281 S.W.3d 602 (Tex. App.–Eastland 2009).
4
The others were Lesley’s husband, Kenneth, and her brother, Bobby John Foster. Foster died shortly before
this suit was filed. The Lesleys and the independent executors of Foster’s estate are petitioners here.
5
At the time Bluegreen acquired the property, its name was Properties of the Southwest, L.P. Its predecessor
was Bluff Dale Development Corporation.
6
There were two deeds conveying the property in two separate tracts, both containing the same reservation.
Our description of the conveyances that have led to the present controversy is greatly simplified so as not to distract from
the issues before us. More detail is provided in the court of appeals’ opinion. See 281 S.W.2d at 608-610.
7
The successors, also petitioners here, are Richard H. Coffey, Sr., Singin’ Hills Minerals, Ltd., and JP Morgan
Chase Bank, N.A., as trustee of several trusts.
2
complete and sole right to execute oil, gas and mineral leases covering all the oil, gas and other
minerals in the following described land”.
Bluegreen developed the property into “Mountain Lakes,” a subdivision of over 1,200 lots,
adding restrictive covenants to “enhance[] and protect[] the value, desirability and attractiveness”
of the subdivision. These included a provision forbidding “commercial oil drilling, oil development
operations, oil refining, quarrying or mining operation”. The covenants provide that they can be
modified or abrogated “by the written agreement or signed ballot of two-thirds . . . of the Owners
(including the Developer) entitled to vote.” Bluegreen’s deeds conveying the lots to some 1,700
owners included the mineral interest, excepting only the restrictive covenants and the mineral
interests previously reserved to Hedrick and Lesley. The deeds did not mention the executive right.
While Mountain Lakes was being developed, so was the Barnett Shale, a
hydrocarbon-producing geological formation underlying this part of North Texas and possibly this
subdivision. Almost all the surrounding area came under lease for oil and gas production. There
is evidence that Mountain Lakes is sitting on $610 million worth of minerals that, in large part,
cannot be reached from outside the subdivision.
In 2005, Hedrick and Lesley sued Bluegreen and the Mountain Lakes lot owners, one of
whom is the Texas Veterans Land Board,8 complaining under various theories of the restrictive
covenants limiting mineral development. On the parties’ multiple motions for summary judgment
8
Plaintiffs also sued the Property Owners’ Association of Mountain Lakes Ranch. The trial court granted
summary judgment in its favor. It is not a party on appeal.
3
and the VLB’s plea to the jurisdiction, the trial court issued an order making declarations which we
organize and summarize as follows:
• Conveyances:
• Lesley’s deeds should be reformed to reserve a one-fourth mineral interest in the
entire 4,100-acre tract as the parties undisputedly intended, rather than only one-
fourth of Lesley’s one-half interest (one-eighth of the entire minerals) as stated in the
deeds. Reformation will not affect the reasonable expectations of the lot owners,
who will receive all they bargained for.
• Bluegreen’s deeds to the lot owners did not convey the executive right, and it
remains the sole and exclusive owner of the executive right.
• The executive right:
• Bluegreen, as owner of the executive right, breached its duty to Hedrick and Lesley
by imposing restrictive covenants limiting oil and gas development and by failing to
lease the minerals. Bluegreen also breached a requirement in the Lesley deeds by
failing to give notice of its filing of the restrictive covenants. For these reasons, the
covenants are unenforceable.
• Irrespective of the executive right, Hedrick and Lesley have the right to develop their
mineral interests themselves.
• Immunity: The VLB is not immune from Hedrick and Lesley’s suit.
The trial court severed its order from other claims in the case to make it final and appealable.
Bluegreen and some, but not all, of the individual lot owners (about 460 altogether), including the
VLB, appealed.9
The court of appeals reversed the trial court’s order in its entirety. Specifically, it held:
• Conveyances:
9
281 S.W.3d at 608.
4
• The Lesley deeds were so clear, Lesley should have known of the asserted mistake
when she executed them, and because she did not sue within four years, her claim for
reformation is barred by limitations.10
• Bluegreen’s deeds to the lot owners did not expressly reserve the executive right, and
it could not be excepted by implication with the restrictive covenant, so it passed to
the lot owners.11
• The executive right:
• The owner of an executive right owes a mineral interest owner no duty until the right
is exercised by leasing the minerals, and then its duty is only to acquire for the
mineral interest owner every benefit it acquires for itself. An executive has no duty
to lease minerals. Because Bluegreen never exercised the executive right, it had no
duty to Hedrick and Lesley.12 Bluegreen was not bound by the notice requirement
in the Lesley deeds because Bluegreen was not in privity with Lesley and the
requirement did not run with the land.13
• Hedrick and Lesley’s right to develop their minerals passed to Bluegreen with the
executive right, leaving them no right to develop their minerals themselves.14
• Immunity: The VLB is immune from Hedrick and Lesley’s suit.15
The court of appeals remanded the case for further proceedings.16
10
Id. at 623-625.
11
Id. at 616-617.
12
Id. at 618-619.
13
Id. at 621-622.
14
Id. at 620.
15
Id. at 625-629.
16
Id. at 629.
5
We granted the petitions for review of Bluegreen, the lot owners, and the VLB.17 We begin
with the issue of the VLB’s immunity, because it is jurisdictional, and then turn to the deed
construction issues, before coming finally to the issues concerning the executive right. We refer to
Hedrick and Lesley collectively as petitioners.
II
The Veterans Land Board was created by the Texas Constitution to administer programs
providing assistance to veterans, including the purchase of land for sale to veterans.18 Petitioners
sued the VLB as the owner of lots in the Mountain Lakes subdivision.
As a state agency,19 the VLB generally has immunity from certain suits to which the
Legislature has not consented.20 Petitioners acknowledge that they sued the VLB and other lot
owners for damages, but only for breaching the executive right in the minerals. Petitioners contend
that because they also sought and obtained a declaration that Bluegreen owned the executive right,
their damage claims against the lot owners no longer have merit and should therefore be irrelevant
17
53 Tex. Sup. Ct. J. 911 (July 2, 2010).
18
TEX. CONST. art. III, § 49-b(g)-(h); see also TEX. NAT. RES. CODE §§ 161.001-.515, 162.001-.019, & 164.001-
.019.
19
Id. § 161.011 (“The Veterans Land Board is a state agency designated to perform the governmental functions
authorized in Article III, Section 49-b of the Texas Constitution.”).
20
Fed. Sign v. Tex. S. Univ., 951 S.W.2d 401, 405 (Tex. 1997) (“This Court has long recognized that sovereign
immunity, unless waived, protects the State of Texas, its agencies and its officials from lawsuits for damages, absent
legislative consent to sue the State.”); State v. Lain, 349 S.W.2d 579, 582 (Tex. 1961) (“When in this state the sovereign
is made a party defendant to a suit for land, without legislative consent, its plea to the jurisdiction of the court based on
sovereign immunity should be sustained in limine.”); but see TEX. NAT. RES. CODE §164.019 (“A writ of mandamus and
all other legal and equitable remedies are available to a party in interest to require the board and any other party to carry
out agreements and to perform functions and duties under this chapter, the Texas Constitution, or the board's bond
resolutions or orders.”).
6
in determining VLB’s immunity. Petitioners argue that by asserting Bluegreen’s ownership of the
executive right, they asserted the VLB’s non-liability for breach of that right: “the declaratory
judgment ultimately sought and obtained”, petitioners insist, “is the opposite of attempting to impose
liability”.21
Petitioners’ argument amounts to this: a suit against a state agency for a declaration that it
does not own an interest in property is barred only if the agency prevails on the merits of the claim.
If it turns out, after a full hearing, that the plaintiff is correct and the agency does not own the
interest, the suit is not barred. The agency is not entitled to dismissal unless it wins on the merits.
This is not immunity from suit; it is immunity from victory.
Petitioners also argue that the VLB should not be immune from their suit because they do
not seek the executive right for themselves. But petitioners do seek to establish that the VLB and
other lot owners do not have the executive right,22 that restrictive covenants imposed for the lot
owners’ benefit are unenforceable, and that petitioners have a right to develop their own mineral
interests irrespective of the executive right. By each of these claims, petitioners have sued to
determine the VLB’s real property interests. This is clearly a “suit for land” from which the VLB
is immune.23
21
Petitioners’ Brief on the Merits 41; see also Petitioners’ Reply Brief to Veterans Land Board 8 (citing Tex.
Parks & Wildlife Dept. v. Sawyer Trust, No. 07-06-0487-CV, 2007 Tex. App. LEXIS 8165, 2007 WL 2390434 (Tex.
App.–Amarillo, August 22, 2007, pet. granted).
22
The VLB has asserted only its immunity from suit and has not taken a position on the merits of petitioners’
claims.
23
See Lain, 349 S.W.2d at 582. Petitioners do not argue that they could maintain their suit against the VLB’s
officers or that they have some other action not barred by immunity, and therefore we do not address these issues.
7
III
Next, we consider the conveyance issues regarding the mineral interest reserved by the
Lesley deeds and whether the executive right was conveyed by Bluegreen’s deeds to the lot owners.
A
When Lesley conveyed the 4,100-acre tract to Bluegreen’s predecessor, she owned an
undivided half interest in the minerals, the other half having been previously reserved to Hedrick.
Besides reserving the Hedrick interest, the Lesley deeds contained the following provision:
Grantors will be reserving unto themselves, their heirs and assigns, one-fourth
(1/4) of the oil, gas, sulphur and other minerals to which Grantors are now
entitled to in all of the lands covered by this conveyance. It is understood and
agreed, however, that Grantee, his heirs, successors and assigns, shall have full
rights to execute all future oil, gas, sulphur and other mineral leases for such
bonuses, such delay rentals and for such terms as Buyers may think proper, but
Grantors shall not be required to execute any such leases, but shall be entitled to
receive one-fourth (1/4) of all bonuses and delay rentals, whether the same be
paid in cash, by overriding royalties, production payments or in any other manner.
(Emphasis added.) Lesley concedes that since she owned one-half of the minerals in the 4,100 acres
“covered by [the] conveyance”, the reservation of one-fourth of the “minerals to which [she was]
entitled” amounted to only one-eighth of the entire mineral estate. But she argues that this misstated
the parties’ agreement, as shown by the inconsistent reservation of “one-fourth (1/4) of all bonuses
and delay rentals” (emphasis added), not just one-eighth. And she points out that Bluegreen itself
appears to have shared her understanding, reserving in many of its own deeds to lot owners the
8
“undivided one-fourth of all . . . minerals . . . reserved by [the Lesley deed]” (emphasis added).
Lesley contends that the deeds should be reformed because of mutual mistake.24
In Brown v. Havard, we held that “a suit for reformation of a deed is governed by the four
year statute of limitations” which runs from the date “the mistake was or, in the exercise of
reasonable diligence, should have been discovered.”25 Lesley contends that she did not realize the
mistake until long after the date the deeds were executed and within four years of bringing suit.
Relying on Brown, the court of appeals rejected her argument, concluding that the alleged mistakes
in the deeds were so plain “‘as to charge [Lesley] with the legal effect of the words used.’”26
But in Brown, we held that the deed language at issue was not so plain as to call a later-
asserted mistake to the grantees’ attention. The Browns had deeded property to the Kings, reserving
“an undivided one-half non-participating royalty (Being equal to, not less than an undivided 1/16th)
of all the oil, gas and other minerals, in, to and under or that may be produced from said land”.27
The Kings had conveyed the property to Havard and others (collectively, Havard), who leased the
property for a three-eighths royalty, except for acreage including a shut-in well that they then
developed themselves.28 The Browns claimed one-half of the production from Havard’s well and
24
Lesley does not contend for a favorable construction of the reservation according to its terms, taking into
account the inconsistency she asserts. Cf. Concord Oil Co. v. Pennzoil Exploration and Prod. Co., 966 S.W.2d 451, 457-
458 (Tex. 1998) (plurality op.) (construing a deed with inconsistent fractions by determining the parties’ intent from
the terms).
25
593 S.W.2d 939, 943-944 (Tex. 1980) (citing Miles v. Martin, 321 S.W.2d 62 (Tex. 1959)).
26
281 S.W.3d 602, 625 (Tex. App.–Eastland 2009) (quoting Brown v. Havard 593 S.W.2d at 944).
27
Brown, 593 S.W.2d at 940 (emphasis omitted).
28
Id. at 940-941.
9
one-half of Havard’s three-eighths royalty from the lease.29 Havard sued for reformation,
contending that the Browns’ agreement was for a one-sixteenth royalty.30 The jury returned a
verdict supporting Havard’s claim for reformation, but the trial court held that the claim was barred
by limitations as a matter of law because the Kings were charged with knowledge of the deed’s
language.31 We disagreed, holding that when the Kings should have realized the mistake Havard
asserted was a factual issue because any “mistake [was not] so plainly evident as to charge King
with the legal effect of the words used.”32
The reservation in the Lesley deeds may not be as opaque as the one in Brown, but its
reservation of one-fourth the delay and bonus payments is twice the amount to which a one-eighth
mineral interest would be entitled. “Commentators have . . . observed that most grantors do not
intend to convey interests of different magnitudes”, but “[w]e cannot say categorically that no
conveyance with differing fractions” does so.33 Still, Bluegreen itself, in repeating the reservation
in its own deeds to the lot owners, appears to have shared Lesley’s understanding that she had
reserved one-fourth of the entire minerals. In these circumstances, it cannot be said that, as a matter
29
Id. at 941.
30
Id.
31
Id.
32
Id. at 944.
33
Concord Oil Co. v. Pennzoil Exploration and Prod. Co., 966 S.W.2d 451, 460 (Tex. 1998).
10
of law, Lesley knew or should have known of the mistake in her deed when she executed it.
Whether her claim for reformation is barred by limitations involves disputed facts.34
B
The parties agree that Bluegreen owned the executive right in the 4,100-acre mineral estate
when it implemented the restrictive covenants for the subdivision, but they dispute whether the right
was included in Bluegreen’s deeds to the lot owners. Each deed to a lot conveyed the land and
Bluegreen’s mineral interest, excepting Hedrick’s and Lesley’s interests, without mentioning the
executive right.
Very similar circumstances were presented in Day & Co., Inc. v. Texland Petroleum, Inc.
There, Keaton and Young deeded an 80-acre tract to Day, Inc., reserving an undivided one-half
interest in the minerals, but expressly conveying the entire executive right.35 Day, Inc., in turn,
deeded ten acres to the Shoafs, reserving an undivided one-fourth interest in the minerals and
making no mention of the executive right.36 We held that the one-fourth mineral interest conveyed
by Day to the Shoafs and the one-fourth mineral interest reserved to Day were each accompanied
by the executive right covering that interest, explaining:
When an undivided mineral interest is conveyed, reserved or excepted, it is presumed
that all attributes remain with the mineral interest unless a contrary intention is
expressed. Therefore, when a mineral interest is reserved or excepted in a deed, the
executive right covering that interest is also retained unless specifically conveyed.
34
Bluegreen and the lot owners have not challenged the trial court’s declaration that reformation will not
deprive them of their bargain, and we express no view of the matter.
35
786 S.W.2d 667, 668 (Tex. 1990).
36
Id.
11
Likewise, when a mineral interest is conveyed, the executive right incident to that
interest passes to the grantee unless specifically reserved.37
But the executive right, expressly conveyed to Day, covering the one-half mineral interest reserved
by Keaton and Young, passed from Day to the Shoafs because it was not reserved or excepted in
Day, Inc.’s deed to them.38
By the rules of Day & Co., Bluegreen’s deed to each lot conveyed the executive right
covering both the lot owner’s mineral interest and Hedrick’s and Lesley’s mineral interests, unless
the right was reserved or excepted. Hedrick and Lesley argue that an exception in each deed for the
restrictive covenant limiting development of the minerals effectively reserved the executive right
to Bluegreen because the covenant prohibited the lot owners from developing the minerals, and thus
from leasing them. But the argument overlooks the provision of the covenant allowing modification
or abrogation by a two-thirds vote of the owners. The exception did not withdraw the executive
right from the conveyances in the lot owners’ deeds but merely subjected the exercise of the right
to the covenant’s limitations.39 Thus restricted, the right was conveyed by each lot owner’s deed.
IV
We come now to the principal issues in the case: the nature of the duty that the owner of the
executive right owes to the non-executive interest owner, and whether that duty has been breached.
37
Id. at 669 n.1 (citations omitted).
38
Id. at 669.
39
The parties have argued here only that the executive right in Hedrick’s and Lesley’s minerals is owned either
by Bluegreen or by the lot owners. The parties have not addressed the effect of the conveyances of the right covering
Hedrick’s and Lesley’s minerals to multiple lot owners.
12
“The executive right is the right to make decisions affecting the exploration and development
of the mineral estate”, but it is “most commonly exercised . . . by executing oil and gas
leases”.40Executive rights are frequently severed from other incidents of mineral ownership,41 as they
were from the mineral interests reserved to Hedrick and Leslie. The non-executive mineral interest
owner owns the minerals in place but does not have the right to lease them. The non-executive
royalty interest owner owns an interest in the royalty when the executive leases the minerals.42 Non-
executive interests may be perpetual or only for a term.43 They are created for many different
reasons, among them the simple convenience of reserving the power to make leasing decisions in
one person. And because executive and non-executive interests are real rather than personal, they
survive the parties who created them and persist long after circumstances have changed. The
Hedricks conveyed the executive right to their reserved one-half interest in their 4,100 acres decades
before anyone contemplated developing a residential subdivision on the property or producing
natural gas from the Barnett Shale beneath it.
For most mineral interest owners, revenue comes through leasing. 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
40
Ernest E. Smith, Implications of a Fiduciary Standard of Conduct for the Holder of the Executive Right, 64
TEX. L. REV. 371, 372 (1985).
41
Id.
42
See generally 2 H. WILLIAMS & C. MEYERS, OIL AND GAS LAW § 338 (1985) (the executive power to make
leases remains with an owner of the mineral estate, generally speaking, after the owner grants a royalty interest).
43
Smith, 64 TEX. L. REV. at 380-381.
13
others. The law has never left non-executive interest owners wholly at the mercy of the executive.44
But the variety of non-executive interests and the reasons for their creation, and the effects of
changing circumstances, make it difficult to determine precisely what duty the executive owes the
non-executive interest.
We first addressed the issue in 1937 in Schlittler v. Smith.45 Smith conveyed a tract of land
to Schlittler, reserving only a one-half term interest in “the royalty rights [on all minerals] that may
be produced”.46 The trial court held that Smith had conveyed the executive right in the entire tract
to Schlittler and by his reservation “was to receive one-half of not less than the usual one-eighth
royalty reserved by lessors in oil and gas leases.”47 We disagreed that the reservation required a
lease for at least a one-eighth royalty. There was “nothing whatever to indicate that the royalty to
be reserved was the usual one-eighth, although very likely neither of the parties thought it would be
less.”48 Since the parties were to share equally in the royalty, we thought Schlittler’s “self-interest
. . . may be trusted to protect [Smith] as to the amount of royalty reserved”,49 but added, “[o]f course,
there should be the utmost fair dealing on the part of the grantee in this regard.”50
44
See Lee Jones, Jr., Non-Participating Royalty, 26 TEX. L. REV. 569, 573 (1948) (“It seems clear that the Texas
courts will not leave the royalty owner completely at the mercy of the holder of the exclusive-leasing privilege.”).
45
101 S.W.2d 543 (Tex. 1937).
46
Id. at 544.
47
Id.
48
Id. at 544-545.
49
Id. at 545.
50
Id.
14
Though the duty described in Schlittler was narrow — to negotiate a fair royalty — another
case decided the same day, Wintermann v. McDonald, suggested a broader principle at work.51
Wintermann involved the construction of a 1931 enactment and the Texas Relinquishment Act,52
which authorized the owners of the soil of certain formerly public lands to act as the agent of the
State in making oil and gas leases.”53 This statutory right was similar to the common-law executive
right. Consistent with our view of the executive right in Schlittler, we held that under these statutes,
“[t]he landowner owes to the State good faith in the performance of a duty which he has assumed,
and he should discharge that duty with prudence and good faith, and with ordinary care and
diligence.”54
We have characterized an executive’s duty of utmost fair dealing as fiduciary in nature, so
that the discovery rule is invoked in determining when a claim against the executive accrues. In
Andretta v. West, the Wests leased their property to Superior Oil Co.’s predecessor and later
conveyed a one-fourth non-participating interest in their one-eighth royalty to Andretta’s
predecessor.55 A dispute arose between the Wests and Superior over whether Superior should have
drilled an offset well, and the Wests settled by accepting payment of a one-eighth royalty on
51
102 S.W.2d 167 (Tex. 1937).
52
Act approved May 29, 1931, 42nd Leg., R.S., ch. 271, 1931 Tex. Gen. Laws 452.
53
Wintermann, 102 S.W.2d at 170.
54
Id. at 173.
55
415 S.W.2d 638, 639 (Tex. 1967).
15
Superior’s well on the adjoining tract.56 We held that Andretta was entitled to one-fourth of the
substitute royalty and that limitations on his claim did not begin to run until he knew or should have
known of the royalty because he and the Wests were in a confidential relationship, given the power
“entrusted” to the Wests by the executive right and their superior knowledge.57 In HECI Exploration
Co. v. Neel, we spoke more broadly of our decision in Andretta:
We held that a fiduciary relationship exists between an owner of the executive rights
and nonparticipating royalty owners in Andretta’s position because the former has
the power to make and amend the lease and thereby affect the latter’s rights.
Because of that fiduciary duty, an amendment to a lease executed and recorded after
Andretta acquired his interest was not constructive notice because there was no
occasion for him to search the records when he had no reason to know or suspect that
West had agreed to a payment in lieu of royalty. We further held that limitations did
not commence running until Andretta learned or should have learned of the wrong.
That decision is consistent with other Texas decisions in which there was a breach
of fiduciary duty.58
We again characterized the executive’s duty as fiduciary in Manges v. Guerra,59 a complex
case60 involving various dealings between Clinton Manges and his grantors, to whom we will refer
for simplicity as Guerra. Manges had acquired, roughly speaking, 93,000 acres of land, together
with one-half of Guerra’s mineral interest in the property and the executive right in Guerra’s
retained interest.61 He first executed a deed of trust covering all the mineral interest to secure a $7
56
Id.
57
Id. at 641.
58
982 S.W.2d 881, 888 (Tex. 1998) (citations omitted).
59
673 S.W.2d 180 (Tex. 1984).
60
The case was also one of some notoriety. See Ken Case, Blind Justice, TEXAS MONTHLY, May 1987, at 136.
61
Id. at 181-182.
16
million loan from a bank.62 He then contracted with an entity, GPE,, giving GPE an option to buy
production from all properties to which Manges held executive rights, for a loan to use in drilling
and developing the mineral interests.63 In essence, the GPE contracts gave Manges the ability to
develop the minerals without leasing them. After Guerra sued, contending that the GPE contracts
effectively withdrew the minerals from the lease market, Manges leased a large part of the minerals
to himself for a nominal bonus of $5, asserting that Guerra’s lawsuit had made it impossible to lease
the minerals to anyone else.64
Without objection, the jury was instructed:
[T]he possessor of an [executive right] owes to the co-mineral owners the same
degree of diligence and discretion in exercising the rights and powers granted under
such [e]xecutive [r]ights as would be expected of the average land owner who
because of self-interest is normally willing to take affirmative steps to seek or to
cooperate with prospective lessees . . . that in the exercise of the executive rights, the
holder thereof is required to use utmost good faith and fair dealing as to the interest
of the non-executive mineral interest owners. You are further instructed that the
holder of the executive rights has a duty to prevent drainage of oil or gas from any
lands covered by the executive rights. In any lease executed by the holder of the
executive rights, the holder thereof is required to obtain all benefits that could be
reasonably obtained from a disinterested third party.65
62
Id. at 182.
63
Id. (neither contract required Manges to develop the Guerra lands in particular).
64
Id.
65
Id. at 183. The first sentence of the instruction appears to have been based on a law review article. See Lee
Jones, Jr., Non-Participating Royalty, 26 TEX. L. REV. 569, 581 (1948).
17
The jury found that Manges had violated his duty to Guerra.66 The trial court rendered judgment on
the verdict, canceling, in relevant part, the deed of trust, the GPE contracts, and Manges’s lease to
himself, and awarding Guerra actual and punitive damages.67
We agreed that Manges had breached his duty as executive. The duty of the executive to the
non-executive is “fiduciary”, we explained, citing cases that have long characterized this relationship
as one “of trust”,68 with a duty of “utmost fair dealing”.69 We held that Manges had breached this
duty by self-dealing — “in making the lease to himself, in agreeing upon a $5 nominal bonus for
25,911.62 acres of land, and in dealing with the entire mineral interest so that he received benefits
that the non-executives did not receive.”70 We affirmed the judgment canceling the lease and deed
of trust and awarding punitive damages against Manges for his willful “failure to negotiate for
mineral leases with third persons”.71
A fiduciary duty often, as it would for principle and agent, “requires a party to place the
interest of the other party before his own”,72 but we did not suggest in Andretta, HECI, or Manges
66
Manges, 673 S.W.2d at 183.
67
Id.
68
Id.
69
Manges, 673 S.W.2d at 183 (citing Schlittler v. Smith, 101 S.W.2d 543, 544 (Tex. 1937))and First Nat’l Bank
of Snyder v. Evans, 169 S.W.2d 754, 757 (Tex. Civ. App.–Eastland 1943, writ ref’d)).
70
Id. at 184.
71
Id. at 184-185.
72
Crim Truck & Tractor Co. v. Navistar Int’l Transp. Corp., 823 S.W.2d 591, 594 (Tex. 1992) (superseded by
statute on other grounds as noted in Subaru of Am., Inc. v. David McDavid Nissan, Inc., 84 S.W.3d 212, 225-26
(Tex.2002)); see also National Plan Adm'rs, Inc. v. National Health Ins. Co., 235 S.W.3d 695, 700 (Tex. 2007).
18
that this requirement was part of the executive’s duty. Rather, we stated in Manges that the
executive’s duty is to “acquire for the non-executive every benefit that he exacts for himself.”73
We revisited the issue of the executive’s duty to the non-executive most recently in In re
Bass.74 Bass owned a tract of some 20,000 acres, burdened by a 2/24ths non-participating royalty.
The McGills, heirs of 1/3 of that royalty (2/72nds of the whole), sued Bass, alleging that he had
breached his fiduciary duty to them by refusing to lease the minerals in order to force them to sell
him their interest.75 They sought discovery from Bass of privileged seismic data to support their
claim that the minerals should be leased.76 We held that the trial court had abused its discretion in
compelling discovery because the McGills had failed to show that they had a valid claim for breach
of fiduciary duty:
Because Manges held that the executive owes the non-executive a fiduciary duty, the
McGills correctly state that Bass owes them a duty to acquire every benefit for the
McGills that Bass would acquire for himself. What differentiates this case from
Manges, however, is that no evidence of self-dealing exists here. Bass has not leased
his land to himself or anyone else. Bass has yet to exercise his rights as the
executive. Because Bass has not acquired any benefits for himself, through
executing a lease, no duty has been breached. Thus, the present facts are
distinguishable from Manges. . . . [W]ithout exercising his power as an executive,
Bass has not breached a fiduciary duty to the McGills as non-executives. . . . [T]he
record . . . fails to show that Bass has breached his duty as the executive . . . .77
73
Manges, 673 S.W.2d at 183.
74
113 S.W.3d 735 (Tex. 2003).
75
iId. at 738.
76
Id. at 743.
77
Id. at 745 (citations omitted).
19
Pointing to the penultimate sentence, Bluegreen and the lot owners argue that the executive
cannot breach his duty to the non-executive until the executive power is actually exercised. Hedrick
and Lesley counter that this reading of Bass places it in tension with Manges, which upheld a
damage award for a failure to lease — a non-exercise of the executive right. We disagree with
Hedrick and Lesley. The tension they see in Bass and Manges is relieved by the fact that Manges’
finding of breach was in the context of pervasive self-dealing. In other words, Manges breached his
duty not merely because he failed to lease to third parties as opposed to no one at all, but because
he failed to lease to third parties as opposed to himself. The tacit assumption in Manges was that
the minerals would be leased to someone. That was not the assumption in Bass, where the parties
disputed whether the minerals should be leased at all.
Nevertheless, we do not agree with Bluegreen and the land owners that Bass can be read to
shield the executive from liability for all inaction. It may be that an executive cannot be liable to
the non-executive for failing to lease minerals when never requested to do so, but an executive’s
refusal to lease must be examined more carefully. If the refusal is arbitrary or motivated by self-
interest to the non-executive’s detriment, the executive may have breached his duty.78 While there
was an allegation of self-interest in Bass, we concluded that it was not sufficiently supported by the
record to warranty compelling discovery of privileged information.
But we need not decide here whether as a general rule an executive is liable to a non-
executive for refusing to lease minerals, if indeed a general rule can be stated, given the widely
78
To the extent Aurora Petroleum, Inc. v. Newton, 287 S.W.3d 373, 376-377 (Tex. App.—Amarillo 2009), and
Hlavinka v. Hancock, 116 S.W.3d 412, 419-420 (Tex. App.—Corpus Christi 2003), hold differently, we disapprove
them.
20
differing circumstances in which the issue arises. Bluegreen did not simply refuse to lease the
minerals in the 4,100 acres; it exercised its executive right to limit future leasing by imposing
restrictive covenants on the subdivision. This was no less an exercise of the executive right than
Manges’s execution of a deed of trust covering Guerra’s mineral interest. Bluegreen argues that it
did not breach its duty as executive because the restrictive covenants benefitted only its interest in
the surface estate, and its mineral interest was treated the same as Hedrick’s and Lesley’s. But
Manges’s deed of trust secured loans for his personal benefit and encumbered his mineral interest
as well as Guerra’s, yet we held that he breached his duty. Following Manges, we hold that
Bluegreen breached its duty to Hedrick and Lesley by filing the restrictive covenants. The remedy,
we think, should be the same as in Manges: cancellation of the restrictive covenants.
We recognize that Bluegreen as a land developer acquired the executive right for the specific
purpose of protecting the subdivision from intrusive and potentially disruptive activities related to
developing the minerals. But the common law provides appropriate protection to the surface owner
through the accommodation doctrine.79
V
Three issues remain.
79
Tarrant Cnty. Water Control & Imp. Dist. v. Haupt, Inc., 854 S.W.2d 909, 911 (Tex. 1993) (“The
accommodation doctrine, also known as the ‘alternative means’ doctrine, was first articulated . . . as a means to balance
the rights of the surface owner and the mineral owner in the use of the surface: ‘Where there is an existing use by the
surface owner which would otherwise be precluded or impaired, and where under established practices in the industry
there are alternatives available to the lessee whereby minerals can be recovered, the rules of reasonable usage of the
surface may require the adoption of an alternative by the lessee.’” (quoting Getty Oil Co. v. Jones, 470 S.W.2d 618
(Tex.1971))).
21
First: Petitioners, joined by the General Land Office as amicus curiae, argue that if the
executive owes them no duty to lease their minerals, they retain the right of development —
sometimes referred to as the right of ingress and egress — another “stick” in the bundle of
independent property rights comprising the mineral estate.80 They contend that they may engage in
self-development of their minerals, even if the executive refuses to lease.81 We have stated that “the
right to develop is a correlative right and passes with the executive rights.”82 By this rule, petitioners
have no right to develop. Having rejected the premise of their argument, and holding instead that
they are owed a duty by the executive, we decline to reconsider the relation between the right to
develop and the executive right.
Second: Petitioners contend that by filing the restrictive covenants without notice to them,
Bluegreen breached a provision in the Lesley deeds. The court of appeals held that Bluegreen was
not bound by the provision because it was contractual between Lesley and Bluegreen’s predecessor
and not a covenant running with the land.83 We agree with the court of appeals’ reasoning and its
conclusion.
Third: Although not all of the lot owners appealed the trial court’s judgment, the court of
appeals concluded that the rights of the parties were so interwoven that its decision should apply to
80
Supra note 1.
81
See also Christopher Kulander, Big Money vs. Grand Designs: Revisiting the Executive Right to Lease Oil
& Gas Interests, 42 TEX. TECH. L. REV. 33, 73-74 (2009) (discussing possible benefits from separating the executive
right from the right to self-develop).
82
French v. Chevron U.S.A. Inc., 896 S.W.2d 795, 797 n.1 (Tex. 1995) (citing Day & Co. v. Texland Petroleum,
Inc., 786 S.W.2d 667, 669 n.1 (Tex. 1990)).
83
281 S.W.3d at 621-622.
22
all the parties in the trial court.84 No one has raised the issue here, and we likewise conclude that
our decision should apply to all parties in the trial court.
* * *
The judgment of the court of appeals is affirmed in part and reversed in part, and the case
is remanded to the trial court for further proceedings in accordance with our opinion
Nathan L. Hecht
Justice
Opinion delivered: August 26, 2011
84
281 S.W.3d at 617 n.5.
23