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Texas jury awards $60 million in oil and gas royalty fraud case

A jury in Roby, Texas has awarded a group of oil and gas investors $60 million, making it the largest verdict ever in Fisher County. The case stemmed from a fraudulent scheme concocted by two men to cut other partners out of profits from the sale of oil and gas leases, thus keeping the profits for themselves. The fraud was allegedly planned and performed by attorney Kerwin Stephens and oilman Chester Carroll.

The issue began when Richard Roughton and Lowry Hunt, along with other investors, acquired mineral and property rights to 25,000 acres in the Three Finger/Black Shale region of the Cline Shale in West Texas. Roughton then brought in as additional investors his attorney, Stephens, and Roughton’s best friend, Carroll. They created a partnership called the Alpine Group. The leases were then transferred from Roughton and Hunt to the Alpine Group. It was then that Stephens and Carroll allegedly conspired to cut the other partners out of any profits obtained from subsequently selling the leases.

Stephens and Carroll were accused of fraudulently convincing Roughton and Hunt to lower their percentages of ownership in the leases, indicating to the two that Stephens and Carroll were also lowering their interests, but they actually did not. This was done by allegedly convincing Roughton and Hunt that there was no buyer for any of the leases, but actually there was a buyer lined up by Stephens and Carroll. Instead of lowering their ownership interest, Stephens and Carroll purportedly increased their ownership interest in the leases. Then, unbeknownst to Roughton and Hunt, Stephens and Carroll allegedly sold an additional 17,000 acres of leases to a buyer, splitting the money for themselves.

The verdict on behalf of Hunt and Raughton includes $3 million in actual damages plus more than $7 million in returned profits and $18 million in punitive damages. Two additional plaintiffs in the trial, Tiburon Land and Cattle and Trek Resources, both of Dallas, were awarded $33.1 million, including $24 million in actual damages and $9 million in exemplary damages.

Attorney Gregory D. Jordan is an oil and gas litigation attorney with offices in the Austin area. To learn more, visit http://www.theaustintriallawyer.com/

Co-owner dispute at Spider House in Austin, Texas gets serious

The Spider House Cafe and Ballroom has been a famous Austin college hang-out since it opened its doors in 1995. Most customers, however, probably do not know of the legal battle between the two co-owners of the business, John Dorgan and Conrad Bejarano. In October of 2018, Dorgan filed a lawsuit against Bejarano and an employee of Spider House, Jeremy Rogers. The lawsuit accuses both men of libel and slander against Dorgan and Spider House. The lawsuit has brought to light many instances of alleged impropriety in the business and on the premises.

The lawsuit stems from a social media post by Rogers and his wife asserting that Dorgan sexually assaulted his wife in 2014. A day after the post, Bejarano stated that he was banning Dorgan from the property, of which he is still a co-owner. In the lawsuit, Dorgan is seeking monetary damages as well as a declaratory judgment that Bejarano has no legal authority to ban Dorgan or constrain his ownership. There is no record of Bejarano filing any kind of legal document restricting Dorgan from the property.

Motion to Dismiss
On December 21, 2018, Bejarano filed a motion to dismiss Dorgan’s lawsuit, arguing that the lawsuit is inhibiting Bejarano’s free speech. The motion relies on the Texas Citizens Participation Act, which specifically protects free speech made in connection with a “matter of public concern.” Bejarano also filed an answer to the lawsuit denying the substantive claims.

Attorney Gregory D. Jordan is a business litigation and corporate law attorney with offices in Austin who has handled matters under the Texas Citizens Participation Act. To learn more, visit http://www.theaustintriallawyer.com/

Retaliation claim over firing that took place soon after workplace injury should have gone to jury

The close proximity in time between a construction worker’s termination and his filing of a workers’ compensation claim, along with other factors that called the employer’s justification into question, should have been enough to get the employee past the employer’s motion for a judgment in their favor, the U.S. Court of Appeals for the Fifth Circuit held recently in a retaliatory termination case.

Reversing the trial court in a case in which the worker was fired just 15 days after he injured himself in a fall from a scaffold, and 11 days after he filed a workers’ compensation claim, the court said that the worker had presented enough evidence to get his case to the jury. The court, in an opinion written by Judge Catharina Haynes, called the judge’s decision to direct a verdict in favor of the employer “unexplained and difficult to discern.”

The Texas Supreme Court, in Cont’l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 451 (Tex. 1996), set out a list of factors for trial courts to consider when deciding whether unlawful retaliation played a role in a termination following a workers’ compensation claim:

  • Did the manager making the decision on the termination have knowledge of the compensation claim?
  • Did the manager express a negative attitude toward the employee’s injured condition?
  • Did the manager fail to adhere to established company policies?
  • Is there evidence of discriminatory treatment in comparison to similarly situated employees?
  • Is there evidence that the stated reason for the discharge was false?

Here, the Fifth Circuit, without passing on the merits of the employee’s retaliation claim, found more than enough evidence to withstand the employer’s motion for judgment as a matter of law.

First, the firing took place two weeks after the injury, and the manager was aware of both the injury and the subsequent filing of a worker’s compensation claim.

Second, the manager failed to follow the company’s progressive discipline policy — he jumped from Step One (verbal warning) to Step Five (termination), skipping the intermediate steps.

Third, the manager expressed a negative attitude toward the employee, describing his injury as a “supposed injury” and his physical restrictions as “self-imposed.”

Fourth, the manager — who in fact was the employer’s safety officer and not the employee’s direct supervisor at the time of the accident — offered several, shifting explanations for why the employee was fired. The employee was initially verbally warned for failing to pick up paperwork, then later fired after the manager accused him of being profane and insubordinate on a single occasion. However, the company’s documentation of the firing mentioned only “Violation of Safety Rules” and “Violation of Company Policy/Practices.” It described the employee’s injury as an occasion in which the employee “took it upon himself to utilize a scaffold of which he was not trained or authorized to use.”

The court decided that the circumstances surrounding the employee’s termination were circumstantial evidence of retaliatory motive.

“[The employee] has presented evidence to support the notion that the stated reason for discharge was false,” the court ruled, sending the retaliation claim back to the lower court for retrial.

The case is Cristain v. Hunter Buildings and Manufacturing LP, No. 17-20667 (5th Cir., decided Nov. 14, 2018).

Disclosure requirements reach mailed, but not emailed, offers to purchase oil interests

A Texas statute requiring that offers to purchase oil rights contain a conspicuous, large-print disclaimer does not apply to emailed offers, according to a recent ruling from the Texas Court of Appeals in El Paso.

The court turned back several arguments why an arbitration clause in an agreement to purchase mineral interests was unconscionable, among them the lack of the statutorily mandated large-print disclaimer.

Texas Property Code, § 5.151, provides in relevant part:

A person who mails to the owner of a mineral or royalty interest an offer to purchase only the mineral or royalty interest . . . and encloses an instrument of conveyance of only the mineral or royalty interest and a draft or other instrument, as defined in Section 3.104, Business & Commerce Code, providing for payment for that interest shall 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).

By its terms, Section 5.151(a) applies only to “mailed offers, not emailed offers,” Justice Yvonne T. Rodriguez wrote for a unanimous court. The court gave this limiting interpretation to the statute without analysis, though it appears to be the first time a Texas court has considered the question.

State law regulating real estate transactions marched into the twenty-first century with the 2005 Uniform Electronic Real Property Recording Act (Real Property Code § 15.001 et seq.) and 2007 Uniform Electronic Transactions Act (Business and Commerce Code § 322.001 et seq.), the latter declaring that if a law requires a record to be in writing, an electronic record satisfies the law.

The court’s ruling, if widely adopted, means that consumer protections found in Section 5.151 will not be traveling along. By restricting the statute’s reach to mailed offers, the court appears to have confined the state legislature’s command that offers to purchase mineral interests include a conspicuous disclaimer to the rapidly receding era of mailed, ink-on-paper transactions.

Even if the statute did apply to emailed offers, the court continued, the remedy is not rescission or a finding of unconscionability.

“Nothing about the text of this statute indicates that the Legislature intended for transactions like this one to be voidable, and nothing in the text of the statute excuses a party from his general duty under Texas contractual common law to read whatever instrument it is he is signing,” the court said.

Justice Rodriguez said that the remedy for a violation of Section § 5.151 is an award of $100 statutory damages or the difference in value between the amount paid for the mineral interest and its fair market value.

Along the way, the court invalidated language in the arbitration agreement eliminating punitive damages, finding that this restriction on available remedies violates Texas public policy. The court’s ruling is consistent with other rulings in this area, cf., Amateur Athletic Union of the U.S., Inc. v. Bray, 499 S.W.3d 96, 108-09 (Texas Ct. App., 4th Dist.—San Antonio, 2016).

The case is Ridge Natural Resources LLC v. Double Eagle Royalty L.P., No. 08-17-00227, (Texas Ct. App., 8th Dist.—El Paso, Aug. 24, 2018).

EEOC to United Airlines: Conduct outside the workplace can create harassment in the workplace

A case involving “revenge porn” photos of a flight attendant published online by a pilot for the same airline promises to illuminate an employer’s duty to take affirmative measures to protect employees against sexual harassment in the workplace.

According to a recent complaint filed by the Equal Employment Opportunity Commission against United Airlines, the airline’s duty to keep its workplace free from sexual harassment includes a duty to crack down on harassment occurring outside the workplace as well — at least when bad acts are brought to its attention, multiple times, over a period of several years.

The EEOC’s complaint alleges that United Airlines knew about the pilot’s “revenge porn” posts targeting the flight attendant but unlawfully did nothing about them.

“Employers have an obligation to take steps to stop sexual harassment in the workplace when they learn it is occurring through cyber-bullying via the internet and social media,” said Philip Moss, an EEOC attorney. “When employers fail to take action, they fail their workers and enable the harassment to continue.”

The EEOC’s complaint was a long time in coming, according to the government. According to the EEOC, the flight attendant filed three civil lawsuits against the pilot. She obtained restraining orders against him in 2009 and 2011. Reporting by the San Antonio Express-News indicated that the pilot settled these cases for $110,000.

The flight attendant also purportedly complained to United Airlines officials in 2011. No corrective action took place as a result of these complaints. The pilot continued to work at the airline.

In 2013, the flight attendant filed another complaint with United Airlines. According to the flight attendant, the pilot was continuing to post photos of her online, sometimes while on the job during layovers between flights. United Airlines investigated but, according to the EEOC, took no action “that could be reasonably calculated to be effective.”

The flight attendant next complained to the FBI, which arrested the pilot in 2015. Federal charges notwithstanding, the pilot remained actively employed at United Airlines until January 2016 when the airline granted him a long-term disability. He pleaded guilty to a federal stalking offense in June 2016 and retired with full benefits one month later.

In its complaint, the EEOC alleged that United Airlines’ failure to address that the pilot’s actions interfered with the flight attendant’s ability to perform her job. The EEOC asserts that United Airlines’ inaction subjected the flight attendant to a sexually hostile work environment, in violation of Title VII of the Civil Rights Act of 1964, which prohibits employment discrimination based on sex, including sexual harassment. The EEOC is seeking a permanent injunction preventing the airline from allowing hostile work environment for women. It also seeks money damages for the flight attendant.

United Airlines told the San Antonio Express-News that its conduct did not violate federal law. “United does not tolerate sexual harassment in the workplace and will vigorously defend against this case,” the airline said through a spokesman.

The case is EEOC v. United Airlines, Inc., No. 5:18-cv-817 (W.D. Texas, complaint filed Aug. 9, 2018).

Corporation’s Attorney Owed No Legal Duty to Minority Shareholder

On August 21, the Texas Court of Appeals at Dallas, Texas turned away a disgruntled shareholder’s legal malpractice complaint against the corporation’s outside counsel, finding that no attorney-client relationship existed between the attorney and the shareholder.

Curtis Pennington, a minority shareholder who was ousted from the board of directors and as president of Advantage Marketing and Labeling Inc., alleged that attorney Michael Collins negligently advised two other shareholders (who, together, owned a controlling interest in the corporation) to engage in oppression and breaches of their fiduciary duties. Pennington also alleged that Collins negligently failed to advise him to protect his interests against the misconduct of the other two shareholders.

Reviewing the trial court’s dismissal of Pennington’s malpractice claim, Justice Ada Brown’s opinion in Pennington v. Fields began by pointing out that merely rendering legal services to a corporation does not create an attorney-client relationship between the attorney and the corporation’s officers, directors or shareholders.

The court rejected Pennington’s argument that an attorney-client relationship was established by a pair of retainer agreements executed between attorney Collins and one of the majority shareholders in his capacity as president of Advantage. The retainer agreements described the legal services to be provided as “general corporate matters, including reviewing and revising your existing documents, negotiations with former employees, drafting notices and other corporate legal work as required by the board of directors.”

Nothing in these agreements created an attorney-client relationship between Pennington and Collins, the court ruled. First, the agreements were executed between Collins and the corporation. Pennington did not sign the retainer agreements nor was he mentioned in them, the court pointed out. The court rejected Pennington’s contention that language in the retainer agreements describing the attorney’s duties to include “representation of directors” and performing work “as required by the board of directors” created an attorney-client relationship between Pennington and Collins.

Finding no express agreement creating an attorney-client relationship, the court addressed — and rejected — Pennington’s additional argument that an attorney-client relationship could be implied from Collins’s dealings with board members, including Pennington. Regardless of Pennington’s subjective belief, nothing in the parties’ dealings objectively suggests that there had been a meeting of the minds about Collins’ representation of Pennington, the court said.

“An attorney–client relationship was not created between Collins and Pennington simply because Collins discussed matters with Pennington that were relevant to both Pennington’s and Advantage’s interests,” the court said.

The case is Pennington v. Fields, No. 05-17-00321-CV (Tex. Ct. App, 5th Dist., decided Aug. 21, 2018).

Employer’s Failure to Sign Arbitration Agreement Made it Unenforceable Against Employee

Notwithstanding the strong federal and state policies in favor of arbitrating business disputes, employers that manage litigation risk via mandatory arbitration agreements may wish to consider whether the agreements require execution on the company’s part.

After all, employers should expect that any important contract or agreement is going to be closely scrutinized in a court of law if a dispute arrises..

Recently, in Huckaba v. Ref-Chem L.P., the Fifth Circuit held that an arbitration agreement signed by an employee was not enforceable because it was not signed by a representative of the employer. Having gone to the trouble of drafting the arbitration agreement and obtaining the employee’s signature on it, the employer placed the document in the employee’s personnel file and moved on to other business.

The Fifth Circuit said that language in the agreement explicitly required the signature of both parties. For example, the agreement provided that “[by] signing this agreement the parties are giving up any right they may have to sue each other.” Elsewhere the agreement provided that modifications must be “in writing and signed by all parties.” There was also a blank signature line for the employer, though the court said that this was not dispositive.

In view of this language, the court said, the absence of the employer’s signature is fatal to enforcement of the arbitration agreement.

The court rejected the employer’s argument that the employee’s continued employment after signing the arbitration agreement constituted acceptance of the agreement. The contested issue in this case, the court said, is whether the arbitration agreement was properly executed — not whether the employee accepted its terms.

The court also turned back the employer’s reliance on In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002), a case in which the Texas Supreme Court enforced an arbitration agreement that was not signed by either the employee or the employer. In Halliburton, the court noted, the agreement stated that submission to arbitration was a term of employment. In this case, on the other hand, the arbitration agreement merely provided that continued employment was consideration for the agreement.

Along the way, the Fifth Circuit observed that the trial court had erred when it concluded that the federal presumption in favor of arbitration, contained in the Federal Arbitration Act, meant that the party challenging an arbitration agreement has the burden to overcome its presumptive validity.

The Huckaba v. Ref-Chem case was decided a few weeks after the U.S. Supreme Court’s ruling in Epic Systems Corp. v. Lewis, No. 16-285 (U.S., decided May 21, 2018). In Epic Systems, the high court emphasized that federal courts may refuse enforcement of arbitration agreements only on “generally applicable contract defenses” under state law.

The message employers should take from the Huckaba and Epic Systems cases is that federal courts will enforce arbitration agreements, but they will not judicially repair contracts that fail under state contract law. The arbitration agreement in Huckaba might have survived if it had been drafted differently (e.g., omitting language explicitly mentioning the need for the employer’s signature, and tightening up the language regarding the effect of continued employment). However, employers should ensure, for all contracts affecting company operations, that airtight processes are put in place to guarantee that every necessary signature is obtained.

The case is Huckaba v. Ref-Chem L.P., No. 17-50341 (5th Cir., decided June 11, 2018)

County Worker on FMLA Leave Deemed “Unemployed” Under Texas Unemployment Compensation Act

The Texas Supreme Court recently concluded that a county employee on unpaid medical leave was “unemployed” within the meaning of the Texas unemployment compensation statute.

The court’s ruling is surprising, because it appears to create a right to unemployment benefits for workers who are not actually unemployed as most understand the term. However, all unemployed workers are not entitled to unemployment benefits. They must also meet the Unemployment Act’s numerous eligibility criteria. The court was careful to point out that it was not ruling on the separate issue of eligibility.

Employee Sought Benefits During Unpaid Leave
The employee in this case worked for the Wichita County government as an assistant emergency management coordinator. Suffering from anxiety and depression, she took several months’ leave under the Family and Medical Leave Act. When her paid leave ran out, she converted to unpaid leave and subsequently made a claim for unemployment benefits.

The Texas Workforce Commission concluded that the county worker was unemployed while on unpaid leave of absence for a medically verifiable illness and that it could pay unemployment benefits if the worker “met all other requirements.”

Wichita County appealed. The case eventually arrived at the Texas Supreme Court, where the high court agreed with the Texas Workforce Commission. As Justice Debra H. Lehrmann observed in a unanimous opinion, the Texas Unemployment Compensation Act’s definition of “unemployed” does not require that an employee be terminated from employment.

An individual is considered unemployed if the individual meets the act’s definition of “totally unemployed” or “partially unemployed.” Those terms are defined, at §§ 201.091(a) and (b) of the Unemployment Act, by income thresholds: the individual did not earn more than $5 of 25 percent of the benefit amount during the relevant benefit period.
“Pursuant to these provisions, an individual qualifies as ‘unemployed’ so long as her wages are low enough,” Justice Lehrmann wrote. “Nothing in these definitions contemplates a formal severance of the employer–employee relationship.”

The Texas high court rejected both the county’s contention that this reading of the Unemployment Act defied a common-sense understanding of the word “unemployed,” and the Texas Court of Appeals’ somewhat related view that giving the Unemployment Act a plain language interpretation would lead to absurd results.

The Unemployment Act, § 207.021(a)(1)–(5), (8) supplies a long list of criteria to be met before an individual is eligible to obtain unemployment benefits. The individual must:

  • have registered for work at an employment office and continued to report to the office as required by applicable Commission rules;
  • have made a claim for benefits;
  • be able to work;
  • be available for work;
  • be actively seeking work in accordance with Commission rules; and
  • have been “totally or partially unemployed for a waiting period of at least seven consecutive days.”

In order to receive unemployment benefits, an individual must be “unemployed” and “eligible” and not otherwise statutorily excepted or disqualified from receiving benefits. Justice Lehrmann wrote that the court was not deciding whether the county worker met the eligibility criteria. She surmised that it was not likely that a worker could qualify for FMLA leave and also be eligible for unemployment benefits.

Going forward, it will be important for employers in Texas to test the court’s assumptions. Employers should take a hard look at their employment policies to see if there are any loopholes that would allow employees on unpaid leave to meet the Unemployment Act’s eligibility criteria. These should be closed up immediately; otherwise employers could face unforeseen exposure for employment benefits.

The case is Texas Workforce Commission v. Wichita County, No. 17-0130 (Texas, decided May 25, 2018).

Court applies foreseeability limitation to catch-all force majeure clause

A Texas appellate court ruled that a significant downturn in the price of oil is not a force majeure event that excuses non-performance with a promise to drill for oil by a certain date. Reviewing a contract that excused non-performance for several reasons plus a catch-all clause which stated, “any other cause not enumerated herein,” the court said that this broad language must be interpreted to reach only force majeure events that were not reasonably foreseeable at the time the parties entered into their contract.

The case arose from a contract dispute between two oil companies, TEC Olmos and ConocoPhillips. TEC Olmos contracted with ConocoPhillips to drill for oil and gas on land leased by ConocoPhillips. The contract contained a deadline for drilling to begin, and a $500,000 liquidated damages clause in the event TEC Olmos failed to meet the deadline. The contract contained a force majeure clause listing several specific events, adding to the list a catch-all provision that excused non-performance due to “any other cause not enumerated herein but which is beyond the reasonable control of the Party whose performance is affected.”

After the contract was executed, global oil prices dropped significantly, causing TEC Olmos’ financing partners to drop out of the project. TEC Olmos informed ConocoPhillips that it would be unable to meet the drilling deadline, citing the force majeure clause as a reason to extend the deadline. ConocoPhillips successfully sued for the $500,000 liquidated damages amount, with the trial court finding that the force majeure clause did not excuse TEC Olmos’ non-performance.

First District Court of Appeals Chief Justice Sherry Radack, writing for a 2-1 majority, explained that, at common law, the term “force majeure” included the notion of foreseeability. In cases such as this one, where an event is alleged to fall within the terms of a catch-all force majeure provision, it is unclear whether the contracting parties had contemplated and voluntarily assumed that risk of that event.

In a such a circumstance, it is appropriate to apply common-law notions of force majeure, including unforeseeability, to “fill the gaps” in the force majeure clause, Chief Justice Radack wrote. “Because fluctuations in the oil and gas market are foreseeable as a matter of law, it cannot be considered a force majeure event unless specifically listed as such in the contract.”

The case is TEC Olmos LLC v. ConocoPhillips Co., No. 01-16-00579.

Professors alleging discrimination sue University of Houston-Victoria

Three business professors at the University of Houston-Victoria (UHV) are alleging discrimination by their former dean in a lawsuit they filed in March. In their lawsuits, associate professors Luh Yu Ren, Chun-Sheng Yu and Jianjun Du argue UHV officials failed to protect them from discrimination and retaliation from Farhang Niroomand, the former dean of the School of Business Administration.

The plaintiffs, whose are between 59 to 65 years old, are alleging their former boss created a hostile work environment and implemented obstacles preventing them from receiving promotions and pay raises after they complained about Niroomand to the UHV officials about his behavior. Further, the plaintiffs complain the prejudicial treatment they received was due to their ages and Chinese heritage.

Attorneys for UHV argue the men’s lawsuits are without merit, dismissing them as nothing more than common workplace disagreements. “Plaintiff[s] [are] simply complaining about ordinary tribulations of the workplace such as petty slights and minor annoyances,” they argued in court documents. They also claimed the lawsuit fails to meet procedural and jurisdictional requirements.

The embattled former dean resigned in 2017.

The plaintiffs allege they filed suit only after failing to resolve their complaints through the university’s human resources department, the Texas Workforce Commission Civil Rights Division and the Equal Employment Opportunity Commission. While initially complaining UHV failed to respond to their grievances, the plaintiffs since admitted they believed officials did not actually take their complaints seriously.

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