A January 2018 case from the Texas Supreme Court, JP Morgan Chase Bank, N.A. v. Orca Assets GP, LLC, the Court dealt with justifiable reliance which is an element of a common law fraud and negligent misrepresentation claim. In this case, there were too many “red flags” for the plaintiff to show justifiable reliance with respect to certain oil and gas leases.
This case involved mineral interests in various tracts throughout the Eagle Ford Shale adding up to about 40,000 acres owned by The Red Crest Trust. JP Morgan Chase Bank was the trustee. A JP Morgan employee, Phillip Mettham, was responsible for leasing the trust’s Eagle Ford interests.
In May 2010, Mettham leased about 1,800 acres of the trust’s Eagle Ford tracts in DeWitt and Gonzales counties to GeoSouthern Energy Corporation. GeoSouthern waited about six months until December 9, 2010 before recording the leases with the respective counties. On December 6, 2010, Mettham signed a letter of intent with Orca Assets GP, LLC to lease it certain of the trust’s tracts in Karnes and DeWitt counties. As it turns out, many of the tracts that Orca wanted to lease had already been leased to GeoSouthern. Up until December 6, 2010, Orca had been checking the county records and had not found evidence of the GeoSouthern leases. At a meeting with Orca in November 2010, Mettham has said the tracts were “open” but may have also said he “needed to check” to see if they were open. Orca did not learn of the GeoSouthern leases until late January 2011. By that time, they had already signed leases with Mettham and had remitted a check for over $3.2 million in bonus payments.
In mid-February, Mettham returned the $3.2 million in bonus payments, but Orca sued a week later claiming $400 million in lost profits. The suit alleged breach of contract, fraud and negligent misrepresentation. The trial court ruled against Orca on all its claims. The Court of Appeals affirmed with respect to the breach of contract claim which was thereafter abandoned by Orca. The Court of Appeals reversed as to the fraud and negligent misrepresentation claims. For the reasons discussed below, the Texas Supreme Court reversed and reinstated the trial court’s dismissal of all claims.
Fraud And Negligent Misrepresentation Law in Texas
To prevail on a fraud claim, a plaintiff must show:
- The defendant “made a material representation that was false”;
- The defendant “knew the representation was false or made it recklessly as a positive assertion without any knowledge of its truth”;
- The defendant intended to induce the plaintiff to act upon the representation; and
- The plaintiff actually and justifiably relied upon the representation and suffered injury as a result.
The fourth element has two requirements: the plaintiff must show that it actually relied on the defendant’s representation and also the reliance was justifiable.
To prevail on a negligent misrepresentation claim, a plaintiff must show:
- A representation made by a defendant in the course of its business or in a transaction in which it has a pecuniary interest;
- The representation conveyed “false information” for the guidance of others in their business;
- The defendant did not exercise reasonable care or competence in obtaining or communicating the information; and
- The plaintiff suffered pecuniary loss by justifiably relying on the representation.
Both of these claims involve proving justifiable reliance.
No Justifiable Reliance by Orca
Orca’s claim for fraud and negligent misrepresentation was based on statements allegedly made by Mettham that the tracts Orca leased “were open.” Mettham allegedly said so twice – once at the initial meeting in November 2010 and once at the closing in January 2011. Everyone agreed that “open” meant that the tracts had not been previously leased. However, based on the facts of the case, the Texas Supreme Court held that Orca could not have justifiably relied on Mettham’s statements that the lease tracts were “open.” The facts that precluded Orca from justifiably relying were these:
- Two Orca employees stated that, at the November 2010 meeting, Mettham was not absolute about whether the tracts were “open;” according to those employees, he said “[Y]es, but I’ll have to . . . check” or “I’m not sure of that. I’ll have to check”.
- The letter of intent contradicted Mettham’s statement that the tracts were “open” because JP Morgan insisted on changing the letter of intent to make no guarantees pertaining to title with a negation-of-warranty clause.
- Mettham and JP Morgan also insisted on changing language in the letter of intent specifically shifting to Orca the responsibility for verifying title.
- The changed negation-of-warranty language was non-standard and expressly provided no recourse if the trust did not hold title.
- One of Orca’s landmen regarded the negation-of-warranty clause as a “curveball” that “raised a red flag”.
- Orca’s principals were sophisticated and experienced in the oil-and-gas industry — the Orca employees understood the implications of the language in the letter of intent.
- Orca’s owners and its landmen conceded, that based on the language of the letter of intent.
- Orca was only leasing what the trust had, which could have been “nothing at all”.
- Orca was fully aware that competitors might delay recording their leases.
- Orca was aware that that it stopped checking property records after signing the letter of intent on December 6, 2010 and did not check them again until after signing the leases in early January 2011.
- Orca’s own landman had “doubts” at the January 2011 closing and she tried to reassure herself by asking Mettham to confirm once more that the tracts were “open”.
Based on these facts, the Texas Supreme Court held that as a matter of law Orca could not have justifiably relied on Mettham’s statements that the tracts were “open.” As the Court concluded, Orca “… needed to protect its own interests through the exercise of ordinary care and reasonable diligence rather than blindly relying upon another party’s vague assurances. Its failure to do so precludes its claim of justifiable reliance as a matter of law.” In other words, the Court was not going to let Orca recover from someone else for its own lack of diligence.