From Bob Fairey--
Buddy, as usual you are right. Your memory is good, despite the pain you’re enduring and the great difficulty your wife suffers.
While the holder of an executive interest who obtains a bonus for himself has the responsibility to obtain (or share) the same bonus for a non-executive interest is not specifically discussed in the cases referred to in the excerpt of cases below, that responsibility, I believe, is emphatically supported by those Texas cases, including the decisions of the Texas Supreme Court.
Following are excerpts from Section 5 of a paper presented by J. Steven Stewart presented at the 34th Annual Ernest E. Smith Oil, Gas & Mineral Law Institute, April 3 – 4, 2008, Houston, Texas. (Since including the entire paper here would have required many pages, relevant excerpts are repeated here, with emphasis supplied by me in bold or colors.The entire paper is at http://www.jstevenstewart.com/uploads/1/2/3/0/12303218/the_duties_owed_ty_the_executive_rights_owner_and_the_oper.pdf Read Section 5. (Stewart is a Houston lawyer with office at 5353 West Alabama, zip 77056, Suite 605. Phone 713-977-3447. He specializes in oil and gas and construction law. Unfortunately, I don’t know him.)
Here are the brief excerpts from Section 5:
Section 5 – Duty of the Executive to the Non-Participating Royalty Interest
The duty of utmost good faith owed by an executive to the NPRI has been settled since Schlittler v. Smith, 128 Tex. 628, 101 S.W.2d 543, 545 (1937). The question that has remained is what does the duty entail and when does it arise.
In Portwood v. Buckalew, 521 S.W.2d 904 (Tex. Civ. App. – Tyler 1975, writ ref’d n.r.e.), the Tyler Court of Appeals citing Schlittler v. Smith, 101 S.W.2d 543 (Tex. 1937) held that an executive owes an implied covenant of utmost fair dealing so as to protect the interest of the non-participating royalty owner . The court stated that the executive “must exact for the non-executive every benefit that he exacts for himself” Id.at 911.
This brings us to perhaps the seminal case defining g the duty of the executive right Holder, Manges v. Guerra, 673 S.W.2d 180 (Tex. 1984). In that case, Guerra
and Manges were mineral co-tenants under a 72,000-acre ranch.
Manges owned one-half of the minerals, all of the surface, and all of the executive rights. Guerra participated in bonus, delay rentals, and royalty. Manges leased a portion of the property to himself for a 10-year primary term and a 1/8 royalty. The lease further provided for a $2 per acre delay rental. After leasing, Manges farmed out the lease reserving a 50% working interest free of any drilling cost. The Texas Supreme Court noted that “The duty of utmost good faith owed by an executive has been settled since Schlittler v. Smith, 101 S.W.2d 543, 545 (1937).” That duty 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. This was the first instance in which the duty of utmost good faith had been
equated to a fiduciary duty.
That concludes the excerpts, obtained after a fairly exhaustive search. There are many more cases discussed in the paper, into the 2Ist Century, but none depart from the position stated above. I hope this will be helpful. Robert A. (Bob) Fairey