Land Rush Leads to Double-Leasing and a Viable Fraud Claim

Originally published by Richard Smith.

JPMorgan, as Trustee of the Red Crest Trust, signed a letter of intent for Orca Assets to lease oil and gas properties in the Eagle Ford Shale. Unfortunately, JPMorgan had leased those same properties to GeoSouthern Energy six months earlier. GeoSouthern recorded its lease three days after Orca signed the letter of intent with JPMorgan, but Orca did not conduct any forward-looking title searches after the letter of intent. Orca proceeded to sign the leases a month later and promptly recorded them. GeoSouthern then contacted JPMorgan about the duplicate leases, and the bank promptly offered to refund Orca’s $3.2 million lease payment. Instead, Orca sued for $400 million in lost profits. At a Rule 166 pretrial conference, the trial court dismissed all of Orca’s claims, ruling that the leases unambiguously disclaimed any warranties, and that Orca could not establish justifiable reliance as a matter of law. The Dallas Court of Appeals reversed in part, holding that the disclaimers in the leases foreclosed Orca’s breach of contract claim, but not fraud and negligent misrepresentation.

Under the express language of the contractual disclaimer, Orca was to be “without recourse” under the lease if title to the oil and gas interests failed. That was sufficient to negate contract liability for JPMorgan’s failure to convey good title, but not fraud and negligent misrepresentation. Noting that the leases did not also include any provisions disclaiming reliance on any extra-contractual representations, the Court held that Orca could proceed with claims based on an oral representation that the properties in question were “open” for lease. In the course of that holding, the Court analyzes a number of other recent fraudulent inducement cases, leaving the distinct impression that courts are going to continue drawing some pretty narrow distinctions in the wake of the Texas Supreme Court’s Italian Cowboy opinion.

Orca Assets, G.P., LLC v. JPMorgan Chase Bank, N.A., No. 05-13-01700-CV

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