The Lawletter Vol 40 No 11
Does a party buying mineral rights have to disclose to the vendor before the sale that it already has a deal in place to sell the mineral rights to a third party for a much higher price? In McCarthy v. Evolution Petroleum Corp., 2014-2607 (La. 10/14/15), 2015 WL 5972515, the court recently considered the novel issue of whether a mineral lessee who had purchased the lessor's mineral rights was liable to the lessor under a fraud-by-silence claim when the lessee failed to disclose to the lessor at the time of the purchase that it had already negotiated the resale of the rights to a third party for a significantly higher price.
In considering this issue, the court pointed out the well-established rule (codified by Louisiana statute) that "[a] mineral lessee is not under a fiduciary obligation to his lessor, but he is bound to perform the contract in good faith and to develop and operate the property leased as a reasonably prudent operator for the mutual benefit of himself and his lessor." La. Rev. Stat. Ann. § 31:122. This language, which focuses on mineral development operations, not the selling of mineral rights, did not, according to the court, impose on the lessee/purchaser a duty to disclose to the lessor/vendor that the lessee already had a deal in place to resell the mineral rights to a third party for a much higher price.
Accordingly, the vendor could not state a viable claim for fraud by silence (or fraud as a result of failure to disclose) against the lessee when the lessee failed to inform the vendor at the time of the sale that it was going to resell the mineral rights for a much higher price. The court further explained that the lessee "is not required to place the interests of the lessor ahead of his own, nor is he bound by the traditional fiduciary restraints of full disclosure, lack of self dealing, or prohibition against profiting from the affairs of one's principal." McCarthy, 2015 WL 5972515, at *8 (quoting Patrick H. Martin, Louisiana Mineral Law Treatise § 1003 (2012)).