As a result, the Corpus Christi/Edinburg court reversed the trial court's directed verdict. It found that the lessee's representations could form the basis of a fraud claim because they were based on past and present facts and the lessee had special knowledge of facts that would occur in the future.
Other cases demonstrate the flip side of this scenario, finding that representations concerning the prospects of production are mere opinions or predictions when the underlying data is disclosed or publicly available.
In Paull v. Capital Resource Management (1999), Austin's 3rd Court of Appeals applied this reasoning to a field summary containing predictions of future production, payout and rates of return. The 3rd Court found that those could not form the basis of a fraud claim when the wells at issue failed to produce as predicted, because the parties had equal access to the underlying information such as projected future costs, past production and production of analogous fields.
El Paso's 8th Court of Appeals also took this approach in Holland v. Thompson (2010), when it found that a fraud claim could not be based on a buyer's general statements to a mineral interest owner indicating that the wells at issue were "old" and "playing out," there was "no reason" to begin new production and he did not "foresee" any, and the field was "drained" or "used up."
Although the buyer had filed an application with the Texas Railroad Commission the year before, indicating that the buyer planned to drill additional wells in the field, the 8th Court found that the buyer did not have special knowledge concerning future drilling plans because the Railroad Commission records were equally available to both the buyer and seller.
Words to the Wise
Given these principles, here are some considerations for in-house counsel for buyers and sellers of energy assets. These may be helpful to keep in mind when company employees or contractors make representations concerning the prospects of production.
• Make available relevant data to support opinions or projections concerning future production. This, of course, is easier said than done, depending on the circumstances the buyer creates, including timing, level of sophistication and other variables.
The seller in Paull avoided a fraud claim on the ground that it based its estimate of future production on information either provided to the buyer or accessible through public records. But a seller of properties might be able to pre-empt misrepresentation claims or more easily defeat them by providing all key data underlying the production estimate.
• Conflicts between general value statements and data about past or present production can bolster fraud claims. Generalizations are subject to interpretation and misinterpretation. Thus, specificity and supporting data may derail later claims.
Data may conflict with subjective value statements about the prospects of production. That's why it's best to avoid generalized value statements, such as the field is "played out" or "used up." These could give rise to a fraud claim if an opposing expert uses past production data to show a possibility of future production.
