The primary issue was whether a lessee justifiably relied on an oral misrepresentation by the lessor’s agent when “red flags” were present and the agreements included a negation of warranty clause that explicitly placed the risk of title failure on the lessee.63 This case demonstrates the importance of obtaining a proper title opinion prior to entering an oil and gas lease and the consequences of blind trust.
JPMorgan Chase Bank, N.A. (“JPMorgan”) acted as trustee for the Red Crest Trust (“the Trust”). They employed Phillip Mettham whose responsibility was to lease the Trust’s interests in the Eagle Ford Shale. On November 11, 2010, Mettham held a meeting with John Ellis, Joan Stewart and Lawrence Berry, employees of Orca Assets G.P., L.L.C. (“Orca”), to negotiate the possibility of leasing acreage from the Trust. At this meeting, Ellis inquired about whether certain acreage owned by the Trust was open. Mettham’s response is disputed by the Orca employees who were present with two employees recalling an uncertain response and one employee asserting that Mettham unequivocally suggested that the lands were “open.”64
Shortly after the November 11 meeting, Mettham notified Orca employees that JPMorgan would be implementing a new negation of warranty clause in their mineral leases.65 The new clause shifted the burden to the lessee to ensure mineral ownership, while the previously used clause placed the responsibility of ensuring title on no one, stating, “this lease is made without warranties of any kind, either express or implied.”66 Orca identified this as a “red flag” but nevertheless proceeded to sign the letter of intent on December 6, 2010, entitling them to a 30-day option period to decide whether to lease the land owned by the Trust.
Three days later, GeoSouthern Energy Corporation (“GeoSouthern”) recorded leases that had been negotiated with Mettham in early 2010. The acreage covered by Orca’s Letter of Intent included several tracts identified in GeoSouthern’s recorded leases. During the 30-day option period, Orca conducted no new title searches. On January 11, 2011, Orca leased 919 acres owned by the Trust, and handed Mettham the bonus checks for a total of $3,217,585. Soon after Orca recorded their leases in the county property records, GeoSouthern notified Mettham that the Orca leases covered acreage already leased by GeoSouthern. This prompted JPMorgan to immediately inform Orca of the title issues and return the bonus money. Orca refused to accept the return and subsequently sued Mettham and JPMorgan for breach of contract, fraud, and negligent misrepresentation.67
At the trial level, Orca failed to satisfy the justifiable-reliance element for the fraud and negligent misrepresentation claims. As a result, the court issued a final judgment in favor of JPMorgan. Thereafter, the court of appeals reversed the trial court’s decision regarding the fraud and negligence misrepresentation claims. JPMorgan and Mettham responded by filing a petition for review, which was granted by the Supreme Court of Texas. The court acknowledged the only element in question for Orca to be successful on their fraud and negligent misrepresentation claims was justifiable reliance. JPMorgan attempted to discredit this possibility by asserting two arguments, which the court addressed separately.
First, JPMorgan argued that Orca was put on notice by eight “red flags” that took place during the negotiation process, which negates justifiable reliance altogether.68 The court agreed all eight events were red flags that indicate Orca’s reliance was unwarranted. Great consideration was given to the fact that Orca employed a variety of professionals who were experienced, sophisticated and knowledgeable in the oil and gas industry.69 Instead of acting with caution as multiple red flags came up, Orca blindly relied on JPMorgan’s representation of the title to the tracts.70
Secondly, Orca could not rely on Mettham’s oral representation that the tracts had good title because “a party to a written contract cannot justifiably rely on misrepresentations regarding the contract’s unambiguous terms.” 71 Orca accepted the unambiguous negation of warranty clause, the primary purpose of which was to absolve the lessor of liability in the case of bad title. It is therefore irrelevant that Mettham gave Orca the impression that the tracts had good title.
In conclusion, the court determined the transaction between JPMorgan and Orca did not constitute fraud nor negligent misrepresentation because Orca could not have justifiably relied on Mettham’s statements considering the surrounding circumstances of the transaction. The appellate court’s decision was reversed, and the trial court’s decision in favor of JPMorgan and Mettham was upheld. This outcome should encourage all lessees to diligently track title to subject lands, especially when their leases have clauses that negate the lessor’s liability for title failure. Put differently, lessees must protect their own interest through the exercise of ordinary care and reasonable diligence rather than blindly relying upon another party’s vague assurances.
62 JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C. , No. 15-0712, 2018 WL 1440625 (Tex. March 23, 2018).
63 Id. at *1.
64 Id .
65 Id. at *1 -*2.
66Id. at *1.
67 Id. at *3.
68 Id. at *6.
69 Id. at *7.
71 Id . at *8, quoting National Property Holdings, L.P. v. Westergren , 453 S.W.3d 419, 424-25 (Tex. 2015).