Texas has had a lot of oil booms over the years, some driven by wildly successful wildcatters, others by international oil shortages and cartels. Every time these things happen there are those, unburdened by scruples, who find ways to swindle mineral owners who lack the knowhow to deal with con artists. One example is when mineral owners receive offers of buyout through the mail, unsolicited. Such offers usually forward bank drafts in different amounts, attached to unsigned mineral deeds to all the minerals the recipient owns in a particular county. These scams are traps for the unwary, or unsophisticated.

There are many scenarios which may bring about transfers of mineral interests through execution of such papers, including (among others) hard up mineral owners so desperate they are not properly looking out for themselves. The victim acts, the deed is executed, the draft is cashed, and later, the owner finds he has sold a valuable property for a “mess of pottage.” The light usually goes on when neighboring mineral owners start getting royalty checks.

Although at first blush, the chances of undoing the deal may seem unlikely, there are possible rescues, assuming facts not too heavily tilted against the seller. The seller may sue, under statute and common law, for fraud, for rescission, and for damages.

Statutorily, these flim flams have become so familiar that the legislature, becoming aware of their unfairness in many cases, has tried to do something about it. Texas courts have also used the doctrine of mistake, even unilateral mistake, as a way to relief. We shall take a look at some of these authorities.

Statutory disclosures are required in mailed offers to purchase minerals

Section 5.151 of the Texas Property Code (“the Code”) deals specifically with a mailed offer to purchase only the mineral or royalty interest. Letter offers that include an instrument of conveyance and providing payment for that interest “shall [also] include in the offer a conspicuous statement printed in a type style that is approximately the same size as 14- point type style or larger and is in substantially the following form:”

BY EXECUTING AND DELIVERING THIS INSTRUMENT YOU ARE SELLING ALL OR A PORTION OF YOUR MINERAL OR ROYALTY INTEREST IN (DESCRIPTION OF PROPERTY BEING CONVEYED).1

This section of the Code may not be too widely known and many pursuing this kind of shell game may not know about it. Even if they do, they might not want to follow the statutory requirement for fear of alerting their mark. Regardless, it appears that there are many such offers still mailed out without this required warning.

Assuming the warning is not placed on the offer, the seller may bring suit after first giving 30 days written notice to the purchaser that a suit will be filed unless the matter is otherwise resolved.2 The measure of damages in such a suit is the greater of $100 or the difference between the amounts paid by the purchaser and the fair market value of the mineral or royalty interest at the time of the transaction.3 The prevailing party (which could be the purchaser) also may recover court costs and reasonable attorneys fees, as well as prejudgment interest.4

This remedy (barred after two years from the execution of the mineral or royalty conveyance5) is in addition to any other existing remedies provided by law, excluding rescission or any other remedy “that would void the original conveyance or cause it to be void or of no force and effect.”6

A reasonable interpretation of this last item would allow a suit in the alternative for rescission, alleging fraud or mistake, based on other facts than the failure to warn, with claims for punitive damages for fraud and statutory attorneys fees under §27.01 of the Texas Business and Commerce Code (statutory fraud involved in a purchase or sale of real estate) being possible additional remedies. This would allow a choice of remedies, depending on what facts could be established.

The claim for failure to warn, however, has the merit of easy proof if the warning is not given, with the other claims alternatively available if the other (more difficult) proof is there, whichever is the more rewarding outcome.

The required warning under § 5.151 went into effect as of September 1, 1999. There are no cases reported construing the Statute, so far, or even mentioning it.

Construing the notice requirement with other remedies

At least one commentator, Justin Fambrough, a senior lecturer and attorney for the Real Estate Center at Texas A&M University, has construed the Statute as excluding the seller from seeking rescission or voiding of the transaction.7 Since this is clearly a remedial statute designed to protect a seller in these cases, not the purchaser, this author does not believe it makes sense to bar other remedies such as a rescission or avoidance based on fraud, which can be both a statutory and common law remedy based upon mistake.

The more reasonable construction would be that the seller could not both recover damages under the Statute and, at the same time recover rescission or void the transaction. Otherwise, simply by violating the Statute the purchaser could immunize himself from a suit for rescission based on actual fraud committed in the course of the transaction. With the help of the two year limitations period from date of conveyance provided in the Statute, any fraud involved would be quickly barred from retribution, instead of extended to the four year period from time of discovery now available. Pooley v. Seal, 802 S.W.2d 390, 393 (Tex.App. Corpus Christi 1990, writ denied).

A very practical reason, if the facts justify it, for suing in the alternative for rescission involves the ability to collect judgments rendered against the purchaser. With a suit for rescission in the alternative, even if damages could make the seller whole, a lis pendens on file could prevent the purchaser from selling the minerals until after the judgment was rendered, thus making collection of a money judgment more likely, through a post-judgment levy on the conveyed minerals.

Remedies under statutory fraud

Assuming the seller brings timely suit for damages under the Statute, and can also make a case for statutory fraud under the facts (Tex. Bus. & Comm. Code, §27.01), he might be able to obtain a recovery of treble damages under statutory fraud based upon explicit misrepresentations or implied misrepresentations, even under Fambrough’s interpretation

Rescission for unilateral mistake

Rescission for mistake, however, might be an easier case to allege and prove. In the seminal case of James T. Taylor and Son, Inc. v. Arlington Independent School District,8 the Texas Supreme Court effectively lowered the bar for rescission based on unilateral mistake. In Taylor, the plaintiff, Taylor, sued the defendant District, to rescind an accepted construction bid, mistakenly low by $100,000, “due to a failure to carry a digit.” The trial court granted Taylor’s motion for summary judgment and the District appealed. The Court of Civil Appeals reversed, and remanded, requiring Taylor to prove its unilateral mistake was not due to Taylor’s negligence and that the District knew or had reason to know of the mistake prior to acceptance of the bid.

The Supreme Court granted writ of error and wrote an opinion affirming the remand, but expressly disapproving of the requirement in the lower court’s opinion that Taylor prove no negligence on its part and that the District knew or should have known of the mistake. The Taylor opinion stated:

Of course each of the elements of the test applicable to a remediable, unilateral mistake is a fact issue to be submitted to a jury unless it can be resolved by the court under the undisputed evidence. We have said that every negligence will not necessarily bar equitable relief in a case of this kind. It follows, therefore, that the trial court, guided by the principles herein stated, should determine from the facts and circumstances under which the mistake was made whether there is raised such an issue of negligence that should be submitted to a jury.9

The case was remanded to the trial court for a trial on that issue, thereby affirming the rule that rescission may be granted where the mistake may be remedied, i.e. where the defending party has not been placed in a changed position which could not be ordered reversed without significant prejudice.

In Hayes v. E.T.S.Enterprises,Inc.,10 an oil and gas lease executed by the owners was ultimately assigned to Pogo Producing Company (“Pogo”) who executed a “farmout” to appellee (“ETS”), obligating ETS to drill a test well. While ETS was in the process of drilling, Pogo executed a release of the lease. Following this Pogo executed an instrument purporting to rescind and revoke the lease. Later, Pogo assigned the lease to ETS. ETS sued to declare the release ineffective because it was a mistake. The trial court granted a judgment in favor of ETS, and owners appealed, claiming fact issues and citing Roland v. McCullough11 for support.

In Roland, the purchaser appealed a summary judgment on the grounds he had bought property under the mistaken belief it had access to an interstate highway. The Roland court held that the purchaser was not entitled to equitable relief on the ground of unilateral mistake, because (1) the mistake must be of so great consequences as to make enforcement of the contract unconscionable, (2) the mistake relates to a material feature of the contract, (3) mistake made regardless of the exercise of ordinary care; and (4) the parties must be placed in status quo, in the equity sense (no prejudice to the opposing party other than the loss of his bargain).

Citing Taylor for the premise that “ordinary negligence will not necessarily bar the granting of equitable relief,” the Hayes court rejected Roland’s four-prong negligence test. It distinguished Roland by noting that it relied on cases which were “instances arising out of contracts based upon an offer and acceptance, a negotiation, mutuality of consideration, and performance.” The Hayes court affirmed summary judgment because, under the undisputed facts, there was no detrimental reliance by owners. Other cases citing and following Taylor include B.D. Holt Co. v. OCE, Inc12 and Cigna Insurance Company of America v. Rubalcavada.13

Conclusion

In suing to set aside a transaction involving assignment of minerals or royalties, based on a mail solicitation, there are several possible remedies, including (1) a statutory remedy of damages, attorneys fees and interest, where statutory required notice has not been given; (2) a suit for fraud, statutory and common law where the facts will support it; and (3) a suit for rescission based on remediable, unilateral mistake of fact by seller as to the effect of the assignment. The courts have tended in cases like this to favor such suits, but all available proof of the basic elements of each cause of action must be carefully presented.

Edmund L. Cogburn (cogburn@pdq.net) has been practicing law for more than 55 years and is board certified in Civil Litigation and Commercial Real Estate Law. He is past president of the Texas Association of Civil Trial and Appellate Specialists and a former adjunct professor at the University of Houston Law Center, where he taught courses in bankruptcy, civil procedure and marital property rights.

Charles H. Mansour (charles@mansourtitle.com)has been practicing law for more than 20 years in the areas of real estate and taxation. He has an LL.M. in Taxation and is a fee attorney with Fidelity National Title. The story told in this article was based on Mansour’s client; thankfully, his mineral interest was returned.

Endnotes

1.Tex. Prop. Code Ann. § 5.151(a) (Vernon 1999).   2. § 5.151(b).   3. § 5.151(c).   4. § 5.151(d).   5. § 5.151(e).   6. § 5.151(f).   7. Justin Fambrough, Mail Order Minerals-Risky Business, 68 Tex. B. J. 889 (Oct. 2005).   8. 335 S.W 2d.371 (Tex.1960).   9.Id. at 376.   10. 809 S.W.2d 652 (Tex. App--Amarillo 1991, writ den’d).   11. 561 S.W.2d 207 (Tex. Civ. App.–San Antonio, writ ref’d, n.r.e.).   12. 971 S.W.2d 618,621 (Tex. App.–San Antonio 1998, no pet.) (Defendant supplier’s jury verdict upheld, upon defense of remediable obvious mistake, even where mistaken bid to subcontractor plaintiff had incorporated erroneous price in bid to general contractor).   13. 960 S.W.2d 408, 412 (Tex. App.–Houston [1st Dist.] 1998, no pet.).  In this case, Plaintiff sued to set aside comprehensive settlement agreement [“CSA”], on ground of mistake as to agreement settling later aggravation of injury, which was not foreseeable.  Mistake was unilateral and Plaintiff did not plead or prove required unconscionability of the CSA, i.e., that $38000 cash and three years of unlimited medical benefits was an unreasonable settlement for the injury.  Id.