The Texas Supreme Court has held that a California company that allegedly received an affiliate’s fraudulent assignment of oil and gas leases located in this state subjected itself to Texas courts’ jurisdiction, even though the transaction occurred outside the state.

Justice Paul Green, author of the Feb. 27 opinion in Retamco Operating Inc. v. Republic Drilling Co. , wrote:

Republic is alleged to have received transfer of Texas real property from a Texas resident, during the pendency of a Texas suit, for the purpose of defrauding a Texas resident. As a result of this transaction, assets ROI [Retamco Operating Inc.]may have recovered from Paradigm [Oil Inc.] are now in the possession of Republic. These contacts are sufficient to demonstrate that this alleged tort occurred at least, in part, in Texas.

James L. Drought, ROI’s attorney and a partner in San Antonio’s Drought, Drought & Bobbitt, says, “What this case involves is an alleged fraudulent conveyance of oil and gas leases from a Texas company to an affiliated nonresident company.”

The unanimous decision in Republic is important, Drought says, because a company allegedly defrauded by a foreign corporation can sue the nonresident corporation in Texas rather than in the state where the transaction occurred. [See the court's opinon.]

Charles “Rocky” Rhodes, a South Texas College of Law professor who teaches civil procedure and writes on jurisdictional issues, says Republic is significant because the state Supreme Court unanimously found personal jurisdiction over a nonresident defendant despite its previous decisions reining in what the court saw as overexpansive jurisdictional assertion against out-of-state entities. Rhodes says he identified seven prior cases, beginning in 2002, in which the Supreme Court found Texas courts had no jurisdiction over a nonresident defendant.

Drought also researched the issue and found that the last time the Supreme Court ruled in favor of a Texas resident over a nonresident in a jurisdictional challenge was 1990′s Schlobohm v. Schapiro. In an e-mail,Drought lists 13 cases since 1991 in which the Supreme Court favored a nonresident defendant on the jurisdictional issue.

Doug Alexander, a partner in Alexander Dubose & Townsend in Austin who argued Republic at the Supreme Court on behalf of Republic, says the significance of the case is not so much whether the high court previously ruled for or against nonresident defendants.

“The question is when does a case cross the line, such that a passive investment in Texas property by a nonresident can give rise to personal jurisdiction in Texas?” Alexander says.

Alexander says Republic has a working interest in the Texas oil and gas wells, meaning that the company contributes to payments for drilling and operating a well, but, unlike the operating party, does not call any of the shots for the well. The person with a working interest is merely a passive investor, he says.

Rhodes says the passive investment is what this suit is about, in that ROI alleges that the passive investment was fraudulently transferred from one company to another.

“To me it doesn’t matter that the investment is passive or active,” he says. “The key is that there’s property here in the state that gave the benefits and protections of Texas law.”

Alexander says, “The concern is that, in making the jurisdictional analysis, the court must assume the allegations are true, whether or not they in fact are true. At the end of the day, the concern is whether a nonresident who did not engage in actionable conduct in Texas can be haled into a Texas court based on naked allegations regarding property in Texas.”

San Antonio solo Jeffrey D. Small, who also represents Republic, says, “We’re obviously disappointed in the result. We’re considering whether to file a motion for rehearing.”

Texas Leases

According to the Supreme Court’s opinion, ROI, a Texas corporation, sued Paradigm Oil Inc., another Texas corporation, alleging unpaid royalties related to oil and gas leases in several Texas counties. ROI filed Retamco Operating Inc. v. Paradigm Oil Inc., et al. in 1999 in San Antonio’s 131st District Court, alleging fraud and breach of contract. After finding discovery abuse and assessing sanctions against Paradigm, the trial court entered a $16 million default judgment against Paradigm.

In its 2007 petition to the Supreme Court, ROI alleges that it learned during the course of discovery in 2000 that Paradigm had transferred Paradigm’sinterest in oil and gas leases in Fayette, Dimmit and Webb counties to affiliated companies.

According to the Supreme Court’s opinion, Paradigm appealed to San Antonio’s 4th Court of Appeals, which in 2004 affirmed the default judgment but remanded the case to the 131st District Court for a hearing on damages. On remand, the trial court found actual damages of $5.6 million, as well as attorneys’ fees and exemplary damages against Paradigm, which again appealed to the 4th Court. In 2007, the 4th Court reversed the finding on damages and again remanded the case to the trial court.

Prior to Paradigm’s appeals to the 4th Court, ROI added Republic as a defendant in the suit in 2004, alleging Republic had violated the Uniform Fraudulent Transfer Act (UFTA), Texas Business & Commerce Code §§24.001-.013. In the high court’s Republic opinion , Green noted ROI’s allegation that the transfer of 72 percent of Paradigm’s oil and gas interests during the pendency of the litigation was fraudulent and had left Paradigm insolvent and unable to satisfy ROI’s claims.

But, according to the Supreme Court’s opinion, Republic filed a special appearance, arguing, among other things, that the allegedly fraudulent assignment of the leases occurred entirely in California and that the Texas trial court did not have personal jurisdiction over Republic. After the trial judge denied the special appearance in 2006, Republic filed an interlocutory appeal with the 4th Court.

In 2007, the 4th Court reversed the trial court, holding that Republic is not subject to personal jurisdiction in Texas, according to the 4th Court’s opinion, which was written by Justice Karen Angelini and joined by then-Chief Justice Alma Lopez and Justice Steven Hilbig.

Acting on the 4th Court’s 2004 remand, the 131st District Court conducted a new trial on damages in Retamco Operating Inc. v. Paradigm Oil Inc., et al. in January. On Feb. 9, the trial judge signed an approximately $38 million judgment in the case. The allegations of UFTA violations against Republic have not yet gone to trial.

At issue before the Supreme Court was whether Republic, by its actions, has subjected itself to the jurisdiction of Texas courts. According to the Supreme Court’s opinion, ROI argued that Republic is subject to personal jurisdiction in Texas courts because Republic received the fraudulent transfer of Texas real property — oil and gas interests. However, Republic argued that jurisdiction is negated because the transaction causing the transfer occurred in California. The Supreme Court disagreed.

As noted in the opinion, Republic argued that ROI did not allege acts that constitute “doing business” under the Texas long-arm statute, Texas Civil Practice & Remedies Code §17.042. But Green wrote that the long-arm statute’s broad doing-business language “allows the statute to reach as far as the federal constitutional requirements of due process will allow.” Green further noted that, under constitutional due-process analysis, personal jurisdiction is achieved when the nonresident defendant has established minimum contacts with the forum state and the assertion of jurisdiction complies with “traditional notions of fair play and substantial justice.”

Key to the Supreme Court’s decision is whether Republic “purposely availed” itself of the privilege of conducting activities in Texas. Unlike the 4th Court, the Supreme Court found that Republic meets the purposeful-availment standard.

The 4th Court’s opinion noted that the Supreme Court held in 2005′s Michiana Easy Livin’ Inc. v. Holten that in some circumstances a single contact may meet the purposeful-availment standard, but not when it involves a single contact taking place outside the forum state. However, the Supreme Court’s opinion in Republic pointed out that Michiana involved the sale of a recreational vehicle in Texas, while Republic involves the purchase and ownership of real property that could involve many contacts over a long period of time.

“Should Republic ever wish to enforce rights under its interest in Texas oil and gas leases and wells, it is this state where those rights can be enforced, not California,” Green wrote.

Green also noted in the opinion that Republic willingly participated in the transaction with an affiliated Texas company and has benefited from owning the oil and gas interests, reaping about $1.2 million in revenues from them and also selling some of the property.

Under the Supreme Court’s 2007 decision in Moki Mac River Expeditions v. Drugg, purposeful availment alone will not support a Texas court’s specific jurisdiction over a nonresident defendant unless the defendant’s liability arises from or relates to contacts with Texas. As Green noted in Republic , Republic argued that the focus of the litigation will be on the assignment that took place in California, because the operative facts involved will be whether Republic took the leases in good faith and gave reasonable equivalent value for them. But, according to the opinion, the real property also will be an operative fact or will have a substantial connection to the operative facts. “Without an asset, no fraudulent transfer can occur under the UFTA,” Green wrote.

Professor Rhodes says he is not surprised by the Republic decision, even though the Supreme Court’s prior decisions on Texas courts’ jurisdiction favored nonresident defendants. Republic involves a fundamental jurisdictional principle, he says.

“If you have property in a state and your dispute is in part about that property, that state has jurisdiction,” Rhodes says. “That principle goes back 150 or more years.”

Silver Lining?

The Supreme Court applied its reasoning in Retamco Operating Inc. v. Republic Drilling Co. to another case involving almost identical issues, Retamco Operating Inc. v. McCallum, which the court also decided Feb. 27.

A footnote in Green’s opinion provides the following background on the second case: ROI sued Douglas McCallum LLC, a Colorado company, alleging fraudulent transfer. McCallum received 28 percent of Paradigm’s oil and gas interests.

According to the Supreme Court’s opinion in McCallum , McCallum also filed a special appearance, arguing that because the parties executed the contract in Colorado, exercising personal jurisdiction over McCallum was unwarranted.

According to Green’s footnote, the trial court granted the special appearance after the 4th Court ruled in favor of Republic. ROI appealed the trial court’s decision to the 4th Court, which affirmed. ROI then appealed to the Supreme Court.

In McCallum the Supreme Court reversed the 4th Court’s decision and remanded the case for trial.

Jesse R. Castillo, McCallum’s attorney and a shareholder in Castillo Snyder in San Antonio, says he is disappointed that the Supreme Court did not give his client an opportunity to present oral argument in its case. But Castillo, who frequently represents plaintiffs, says he sees “a silver lining” in the high court’s decision.

“I see that Supreme Court ruling to reach non-operating working interest owners outside the state of Texas and fix jurisdiction against them,” Castillo says of Republic.

That is a potentially big issue, Castillo says. He says, for example, that out-of-state investors who buy a working interest in a Texas well may be liable if the well blows up and causes physical injuries or property damages.

However, Rhodes says he would be cautious about trying to extend the Supreme Court’s ruling in Republic to other circumstances.

Notes Rhodes, “The Supreme Court has cautioned that you have to look at each situation [based] on its particular facts. So you have to be careful about extending this principle to other situations, without looking at what’s involved.”