pjc-oil-and-gas-2022-lib

E XECUTIVE R IGHTS

PJC 304.1

PJC 304.1 Breach of Executive Rights Duty (Comment) The executive right is one of the real property rights incident to the mineral estate. It includes the exclusive right to explore for and develop the minerals as well as the exclusive right to execute mineral leases and other written agreements concerning the mineral estate. Lesley v. Veterans Land Board , 352 S.W.3d 479, 487 (Tex. 2011); French v. Chevron U.S.A., Inc. , 896 S.W.2d 795, 797 n.1 (Tex. 1995); Altman v. Blake , 712 S.W.2d 117, 118 (Tex. 1986). The executive right can be severed and owned sepa rately from other incidents of mineral ownership in various ways and for a variety of reasons. Lesley , 352 S.W.3d at 487. It remains a property interest even if severed by conveyance from other interests in the minerals. Day & Co. v. Texland Petroleum, Inc. , 786 S.W.2d 667, 669 (Tex. 1990). An interest in the minerals severed from the execu tive right is a non-executive interest. A non-executive interest can be in the form of a nonparticipating mineral interest, as in Lesley , or a nonparticipating royalty interest, as in KCM Financial LLC v. Bradshaw , 457 S.W.3d 70 (Tex. 2015), and In re Bass , 113 S.W.3d 735, 745 (Tex. 2002). The Texas Supreme Court has imposed a duty on the owner of the executive rights in favor of the holders of non-executive interests. Because of the various transactions that can arise affecting non-executive mineral or royalty interests, as well as the different ways conflicts can arise, the court has stated that it is “difficult to determine precisely what duty the executive owes the non-execu tive interest.” Lesley , 352 S.W.3d at 487–88. The court has described the duty of the executive as “fiduciary,” and it has long been characterized as a relationship “of trust,” with a duty of “utmost fair dealing.” Lesley , 352 S.W.3d at 490 (citing Manges v. Guerra , 673 S.W.2d 180, 183 (Tex. 1984)); see also HECI Exploration Co. v. Neel , 982 S.W.2d 881, 888 (Tex. 1998); Andretta v. West , 415 S.W.2d 638, 641 (Tex. 1967); Schlittler v. Smith , 101 S.W.2d 543, 544 (Tex. 1937). However, the executive’s duty to the non-executive is not that of a true fiduciary. In Texas Outfitters Limited, LLC v. Nicholson , 572 S.W.3d 647 (Tex. 2019), the court described the executive rights duty as a “duty of utmost good faith and fair dealing” that does not require the executive to “subjugate his interests to those of the non-executive” but requires the executive to “acquire for the non-executive every benefit that he exacts for himself.” Texas Outfitters Limited, LLC , 572 S.W.3d at 649, 652 (citing KCM Financial LLC , 457 S.W.3d at 81). While a traditional fiduciary is required to subordinate his interest to that of another, “the executive is not required to grant priority to the non-executive’s interest.” KCM Financial LLC , 457 S.W.3d at 81. The complex nature of the executive’s relationship to the non-executive often leads to conflict between their separate interests. The executive is allowed to resolve these conflicts without subordinating his rights to the non-executive but is prohibited from engaging in acts of self-dealing that “unfairly diminish[] the value of the non-execu tive interest.” KCM Financial LLC , 457 S.W.3d at 82. “Thus, in ascertaining whether the executive breached its duty to the non-executive, the controlling inquiry is whether

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