Case Information
*0 FILED IN 4th COURT OF APPEALS SAN ANTONIO, TEXAS 05/29/2015 2:46:22 PM KEITH E. HOTTLE Clerk *1 ACCEPTED 04-12-00630-CV FOURTH COURT OF APPEALS SAN ANTONIO, TEXAS 5/29/2015 2:46:22 PM KEITH HOTTLE CLERK
No. 04-12-630-CV IN THE COURT OF APPEALS FOR THE FOURTH DISTRICT OF TEXAS AT SAN ANTONIO, TEXAS The Huff Energy Fund LP, WRH Energy Partners LLC, William R. “Bill” Huff, Rick D’Angelo, Ed Dartley, Bryan Bloom, and Riley-Huff Energy Group, LLC, Appellants , vs.
Longview Energy Company, Appellee .
Appeal from the 365th Judicial District Court of Zavala County, Texas Trial Court Cause No. 11-09-12583-ZCVAJA AMICUS CURIAE BRIEF OF ENERQUEST OIL & GAS, LTD. Sawnie A. McEntire Joseph M. Nixon
Texas Bar No. 13590100 Texas Bar No. 15244800
smcentire@bmpllp.com jnixon@bmpllp.com
David A. Walton B EIRNE , M AYNARD & P ARSONS , L.L.P.
Texas Bar No. 24042120 1300 Post Oak Blvd., Suite 2500
dwalton@bmpllp.com Houston, Texas 77056
B EIRNE , M AYNARD & P ARSONS , L.L.P. Tel. (713) 623-0887
1700 Pacific Avenue, Suite 4400 Fax (713) 960-1527
Dallas, Texas 75201
Tel. (214) 237-4300
Fax (214) 237-4340
ATTORNEYS FOR AMICUS CURIAE *2 TABLE OF CONTENTS
IDENTITY AND INTEREST OF AMICUS CURIAE ........................................... 1
STATEMENT OF CASE ........................................................................................... 5
ISSUES PRESENTED ................................................................................................ 5
STATEMENT OF FACTS ......................................................................................... 5
SUMMARY OF ARGUMENT ................................................................................. 6
ARGUMENT .............................................................................................................. 8
1. Since directors and officers are uniquely privy to business opportunities that could easily be exploited, fiduciary duties owed by the directors and officers, such as duty of loyalty, must be strictly enforced ..................................................................... 8 2. To excuse conduct in breach of the fiduciary duty of loyalty would weaken the fundamental purpose of the corporate opportunity doctrine to the point that the doctrine may not effectively deter a fiduciary from personally developing corporate opportunities. ...................................................................... 10 3. The “interest and expectancy” test should not be applied narrowly, but rather broadly, in the unique circumstances of the oil and gas industry so as not to create a dangerous exception to the duty of loyalty that fosters, rather than prohibits, disloyalty of directors and officers. ................................. 15 4. It would be imprudent to permit directors and officers to exploit corporate opportunities based on their company’s purported financial inability short of actual insolvency. ................. 22 PRAYER ...................................................................................................................... 26
i *3 INDEX OF AUTHORITIES C ASES
Abbott Redmont Thinlite Corp. v. Redmont ,
475 F.2d 85 (2d Cir. 1973) ..................................................................................18 Alexander & Alexander of New York, Inc. v. Fritzen ,
147 A.D.2d 241, 542 N.Y.S.2d 530 (N.Y. App. Div. 1989).............................24 Boxer v. Husky Oil Co. ,
429 A.2d 995 (Del. Ch. 1981) ............................................................................... 9 Broz v. Cellular Info. Sys., Inc. ,
673 A.2d 148 (Del. 1996) ................................................................. 10, 11, 13, 22 Canion v. Texas Cycle Supply, Inc. ,
537 S.W.2d 510 (Tex. Civ. App.—Austin 1976, writ ref'd n.r.e.) .................15 Cede & Co. v. Technicolor, Inc. ,
634 A.2d 345 (Del. 1993) ...................................................................................... 8 CST, Inc. v. Mark ,
520 A.2d 469 (Pa. Super. Ct. 1987) ...................................................................25 Duane Jones Co. v. Burke ,
306 N.Y. 172, 117 N.E.2d 237 (1954) ................................................................19 Durfee v. Durfee & Canning ,
323 Mass. 187, 80 N.E.2d 522 (1948) ................................................................19 Dweck v. Nasser ,
2012 WL 161590 (Del. Ch. Jan. 18, 2012) .........................................................13 Dyer v. Shafer, Gilliland, Davis, McCollum & Ashley, Inc. ,
779 S.W.2d 474 (Tex. App.—El Paso 1989, writ denied) ..............................12 Elec. Dev. Co. v. Robson ,
28 N.W.2d 130 (Neb. 1947) ...............................................................................25 ii
Equity Corp. v. Milton ,
221 A.2d 494 (Del. 1966) ....................................................................................11 Gen. Video Corp. v. Kertesz ,
No. 1922-VCL, 2008 WL 5247120 (Del. Ch. Dec. 17, 2008) ...........................22 Gottlieb v. McKee ,
107 A.2d 240 (Del. Ch. 1954) .............................................................................17 Grove v. Brown ,
No. 6793-VCG, 2013 WL 4041495 (Del. Ch. Aug. 8, 2013) ...........................15 Guth v. Loft ,
5 A.2d 503 (Del. 1939) ............................................................................... passim Harmony Way Bridge Co. v. Leathers ,
353 Ill. 378, 187 N.E. 432 (1933) ........................................................................20 Hollinger Intern., Inc. v. Black ,
844 A.2d 1022 (Del. Ch. 2004)...........................................................................13 Imperial Group (Texas), Inc. v. Scholnick ,
709 S.W.2d 358 (Tex. App.—Tyler 1986, writ ref'd n.r.e.) ..................... 12, 16 In re Mobilactive Media, LLC ,
No. 5725-VCP, 2013 WL 297950 (Del. Ch. Jan. 25, 2013) ..............................13 Int'l Bankers Life Ins. Co. v. Holloway ,
368 S.W.2d 567 (Tex. 1963) ...........................................................................8, 12 Irving Trust Co. v. Deutsch ,
73 F.2d 121 (2d Cir. 1934) ........................................................................... 23, 24 Jasper v. Appalachian Gas Co. ,
152 Ky. 68, 153 S.W. 50 (1913) ..........................................................................19 Johnson v. Peckham ,
120 S.W.2d 786 (Tex. 1938) ................................................................................. 9 iii
Johnston v. Greene ,
121 A.2d 919 (Del. 1956) ............................................................................. 15, 16 Kerrigan v. Unity Sav. Ass'n ,
317 N.E.2d 39 (Ill. 1974) .....................................................................................23 Kinzbach Tool Co. v. Corbett-Wallace Corp. ,
138 Tex. 565, 160 S.W.2d 509 (1942) .................................................................. 8 Klinicki v. Lundgren ,
695 P.2d 906 (Or. 1985) ......................................................................................24 Lagarde v. Anniston Lime & Stone Co. ,
126 Ala. 496, 28 So. 199 (1900) ..........................................................................20 Landon v. S & H Mktg. Group, Inc. ,
82 S.W.3d 666 (Tex. App.—Eastland 2002, no pet.) ......................................21 Lincoln Stores, Inc. v. Grant ,
309 Mass. 417, 34 N.E.2d 704 (1941) ................................................................20 Litwin v. Allen ,
25 N.Y.S.2d 667 (N.Y. Sup. Ct. 1940) ...............................................................19 Meinhard v. Salmaon ,
249 N.Y. 458, 164 N.E. 545 (1928) ....................................................................... 9 News-Journal Corp. v. Gore ,
147 Fla. 217, 2 So. 2d 741 (1941) .......................................................................20 Nicholson v. Evans ,
642 P.2d 727 (Utah 1982) ...................................................................................25 Norman v. Elkin ,
617 F. Supp. 2d 303 (D. Del. 2009) ...................................................................22 Northeast Harbor Golf Club, Inc. v. Harris ,
661 A.2d 1146 (Me. 1995) ..................................................................................24 iv
Paulman v. Kritzer ,
219 N.E.2d 541 (Ill. App. Ct. 1966) ..................................................................25 PJ Acquisition Corp. v. Skoglund ,
453 N.W.2d 1 (Minn. 1990) ...............................................................................21 Plas-Tex, Inc. v. Jones ,
No. 03-99-00286-CV, 2000 WL 632677
(Tex. App.—Austin May 18, 2000, pet. denied) ............................................25 Rosenblum v. Judson Eng'g Corp. ,
99 N.H. 267, 109 A.2d 558 (1954) .....................................................................19 Schildberg Rock Products Co. v. Brooks ,
140 N.W.2d 132 (Iowa 1966) .............................................................................18 Southeast Consultants, Inc. v. McCrary Eng'g Corp.,
273 S.E.2d 112 (Ga. 1980) ..................................................................................18 Winger v. Chicago City Bank & Trust Co. ,
394 Ill. 94, 67 N.E.2d 265 (1946) .......................................................................10 Yiannatsis v. Stephanis by Sterianou ,
653 A.2d 275 (Del. 1995) ....................................................................................22 Young v. Columbia Oil Co .,
110 W. Va. 364, 158 S.E. 678 (1931) ..................................................................20 R ULES
T EX . R. A PP . P. 6.3 ...................................................................................................29
T EX . R. A PP . P. 9.4 ...................................................................................................28
T EX . R. A PP . P. 9.5 ...................................................................................................29
T EX . R. A PP . P. 9.5(e) ..............................................................................................28
T EX . R. A PP . P. 25.1(e) ............................................................................................29
v *7 IDENTITY AND INTEREST OF AMICUS CURIAE EnerQuest Oil & Gas, Ltd. (“EnerQuest”) is a Texas limited partnership which, since its formation in 2001, has been engaged in the
business of investing in oil and gas assets both within and outside of Texas.
EnerQuest currently invests in companies, such as Longview Energy
Company (“Longview Energy”), [1] which are engaged in the exploration and
production of oil and gas. Such companies are commonly referred to as
Exploration and Production Companies (or “E&P Companies”), and they
are essentially engaged in the exploration, acquisition, development,
exploitation, production, and sale of crude oil and natural gas. This case
involves Longview Energy’s efforts as an E&P Company in the Eagle Ford
Shale, the “shale play” which is the subject of this case.
EnerQuest is interested in this case, and submits this amicus curiae brief, because of important issues concerning how directors and officers in
an E&P Company should define “ corporate opportunities ” and, in doing so,
*8 delineate prohibited conduct in light of their heightened duties of loyalty
as fiduciaries. In this current case, Appellants, William R. “Bill” Huff
(“Huff”) and Rick D’Angelo (“D’Angelo”), seek to shed liability for their
disloyalty to Longview Energy, as found by the jury, by advocating
narrowly defined fiduciary duties based upon a rigidly defined area of
geographic interest. In doing so, Huff and D’Angelo seek to narrow the
definition of what constitutes a “corporate opportunity” under pertinent
legal principles and Delaware law to justify their seizure of leasehold
interests which were the legitimate business opportunities of Longview
Energy. Their proposed limitations ignore the realities of the E&P industry
and “shale plays” – such as the Eagle Ford Shale – including how oil and
gas prospects are identified and explored, how leasehold acreage is
secured, and how oil and gas reserves are economically developed.
Appellants seek to excuse their disloyalties, as determined by the jury, by
“watering down” the types of oil and gas opportunities that trigger duties
of loyalty and trust.
E&P Companies, such as Longview Energy, incur substantial risks when investing time, expertise, and money in researching, identifying, and
acquiring oil and gas prospects. The modern E&P company, such as
Longview Energy, typically identifies generally large geographic areas – in
this case, a large “shale play” covering almost 20,000 square miles – that
may hold prospective value. They then develop strategies to lease acreage
within this area to secure a foothold for the commencement of drilling
operations. Some wells are “exploratory” wells only. Importantly, there is
seldom a single well program. Rather, in large plays, such as the Eagle
Ford Shale, there will be multiple wells drilled under the aegis of multiple
mineral leases over extended periods of time by the same E&P Company.
Strategies regarding expansion of leasehold interests will be driven by well
data because the goal is exploration and exploitation of a large “shale play”
within a congruent formation or formations of hydrocarbons. Wells may be
in adjacent acreage or even separated by leases held by others. Wells that
are not economic may still yield important data that will lead the E&P
Company to explore other acreage or formations in the general, and often
times larger area tied to the primary relevant geologic formation. Similarly,
a successful economic well will likely drive additional investment decisions
about the opportunities presented by other leased or unleased acreage
within the same “shale play.” No rigid line should be drawn about what is
included in an area of interest that is part of a “shale play,” such as the
Eagle Ford. Rather, the notion of “corporate opportunity” should be
broadly, and not narrowly defined. Otherwise, investments of an E&P
Company in such a “shale play” will be outweighed by the risks.
The E&P industry is fraught with risk, and such risks are without reward (or worse, without purpose) if fiduciaries are permitted to excuse
usurpation of exploration opportunities by expediently (and
retrospectively) redefining areas of geologic and/or geographic areas of
interest. Thus, EnerQuest seeks to call to the Court’s attention the
importance of upholding the highest ethical standards that must define the
crux of fiduciary relationships within the context of the E&P industry. A
reversal of the current judgment against Huff and D’Angelo will have a
substantial negative effect upon the E&P industry because fiduciary
disloyalty will be encouraged, not discouraged.
EnerQuest has paid the fees incurred in the preparation of this amicus curiae brief.
STATEMENT OF CASE
EnerQuest adopts the Statement of the Case of Appellee Longview Energy to the extent such statement is applicable to the arguments
discussed herein. (Brief of Appellee at p. xxiii.)
ISSUES PRESENTED
EnerQuest adopts the Statement of Issues, in particular issues (1) and (2), of Appellee Longview Energy to the extent the arguments discussed
herein are limited to aspects of those issues. (Brief of Appellee at p. xxiv.)
STATEMENT OF FACTS
EnerQuest adopts the Statement of Facts of Appellee Longview Energy to the extent such facts are applicable to the arguments discussed
herein. (Brief of Appellee at pp. 1-25.)
SUMMARY OF ARGUMENT Companies involved in E&P activities are dynamic, and a number of factors influence these dynamics (and investment returns compared to
risk), including economies, innovation, efficiencies, and diversification of
development opportunities. Talent, know-how, time, and money go into
the identification of geographic and geologic areas holding prospective
value or interest for exploration and development. And, an essential tool
for protecting these proprietary opportunities are the fiduciary duties (in
particular, the duty of loyalty) owed by directors and officers of the E&P
Company to the E&P Company itself. Unless strictly governed by fiduciary
principles, a fiduciary’s pursuit of development opportunities that fall
within an area of geologic interest of an E&P Company will play havoc
with the ability to explore and develop mineral interests without fear that
directors or officers will seize legitimate corporate opportunities.
Here, as directors who were privy to the plans of Longview Energy, Huff and D’Angelo undeniably owed duties of utmost loyalty to Longview
Energy. And, contrary to their suggestions, corporate fiduciaries should
not be indulged in efforts to “water down” the notion of what constitutes a
“corporate opportunity,” and thereby introduce ambiguity into the
enforcement of their duties. Rather, the notion of corporate opportunity
should be broadly applied in the E&P industry given the characteristics of
the E&P industry itself and the risks that E&P Companies face daily.
Indeed, any narrow application will invite gamesmanship and expedience,
and will encourage disloyalty. Fine lines will be drawn to facilitate self-
dealing and expedience, but not fairness. Based on the record and the jury’s
verdict, Huff and D’Angelo placed themselves in a position where their
self-interests conflicted with their duties to Longview Energy, and they
chose to promote this self-interest in derogation of the best interests of
Longview Energy.
EnerQuest respectfully asks this Court to affirm the trial court’s judgment, and avoid entering any decision that weakens the protections
which the “ corporate opportunity ” doctrine, as applied under Delaware law,
was intended to provide to companies, such as Longview Energy.
ARGUMENT
1. Since directors and officers are uniquely privy to business
opportunities that could easily be exploited, fiduciary duties owed by the directors and officers, such as duty of loyalty, must be strictly enforced.
At the core of fiduciary law are common sense principles aimed to foster and encourage loyalty and trust. Delaware law, which applies to this
case, is substantially akin to Texas law in its clear mandate that directors
and officers owe fiduciary duties of care, loyalty, and good faith to their
company and should protect the company from self-interested conduct. See
Guth v. Loft , 5 A.2d 503, 510 (Del. 1939); Cede & Co. v. Technicolor, Inc. , 634
A.2d 345, 361 (Del. 1993); Kinzbach Tool Co. v. Corbett-Wallace Corp. , 138 Tex.
565, 160 S.W.2d 509, 512-13 (1942); Int’l Bankers Life Ins. Co. v. Holloway , 368
S.W.2d 567, 577 (Tex. 1963) (as a fiduciary, a director owes a duty to further
the interest of the corporation and to give it the benefit of uncorrupted
business judgment). As aptly stated by Justice Benjamin Cardozo:
[T]hose bound by fiduciary ties … [are] held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.
Johnson v. Peckham , 120 S.W.2d 786, 788 (Tex. 1938) (quoting Meinhard v.
Salmon , 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928)); see Boxer v. Husky Oil
Co. , 429 A.2d 995, 997 (Del. Ch. 1981) (citing Meinhard ).
In Guth v. Loft , the Supreme Court of Delaware emphasized the importance of these fiduciary duties:
A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty … [in order] to protect the interest of the corporation committed to his charge … [and] requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.
Guth , 5 A.2d 503 at 510. And, because directors and officers are uniquely
privy to business opportunities that could easily be exploited, courts
universally emphasize the importance of strictly enforcing these fiduciary
duties:
Nothing less than incapacity is able to shut the door to temptation, where the danger is imminent and security against discovery is great. The wise policy of the law has therefore put the sting of disability into the temptation, as a defensive weapon against *16 the strength of the danger which lies in the situation.
Winger v. Chicago City Bank & Trust Co. , 394 Ill. 94, 116, 67 N.E.2d 265, 279
(1946).
Delaware jurisprudence also favors certainty and predictability in the context of fiduciary law. Broz v. Cellular Info. Sys., Inc. , 673 A.2d 148, 159
(Del. 1996). The so-called corporate opportunity doctrine attempts to define
the boundaries of these duties where a director or officer may be tempted
to seize a business opportunity in derogation of the rights of the company
whose interests the fiduciary is bound to protect.
2. To excuse conduct in breach of the fiduciary duty of loyalty would
weaken the fundamental purpose of the corporate opportunity doctrine to the point that the doctrine may not effectively deter a fiduciary from personally developing corporate opportunities. Under Delaware law, “[t]he doctrine of corporate opportunity represents but one species of the broad fiduciary duties assumed by a
corporate director or officer.” Broz , 673 A.2d at 154. The corporate
opportunity doctrine is implicated when the corporate director or officer
takes an opportunity that results in a conflict between the fiduciary duties
of the director or officer to the company and the self-interest of the director
or officer. Id. at 157. Therefore, the central purpose of the doctrine is to stop
corporate directors or officers from misappropriating opportunities to
which the company has a superior right—that is, stop usurpation of
corporate opportunities. The basic question in all usurpation cases is
whether the director has appropriated something that, in all fairness,
should belong to the corporation. Equity Corp. v. Milton , 221 A.2d 494, 497
(Del. 1966).
The seminal case on establishing the existence of a corporate opportunity under Delaware law, and most other jurisdictions, is Guth v.
Loft . In Guth , the Supreme Court of Delaware held that a corporate director
or officer is not permitted, as a matter of law, to seize a corporate
opportunity:
[I]f there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation’s business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and by embracing the opportunity, the *18 self-interest of the officer or director will be brought into conflict with that of his corporation ….
Guth , 5 A.2d 503 at 511; see Holloway , 368 S.W.2d at 576-78; Dyer v. Shafer,
Gilliland, Davis, McCollum & Ashley, Inc. , 779 S.W.2d 474, 477 (Tex. App.—El
Paso 1989, writ denied). Thus, the Delaware Supreme Court laid out three
principal factors to consider in evaluating a corporate opportunity issue: (1)
whether or not the corporation has the financial ability to undertake the
opportunity; (2) whether or not the opportunity is in the corporation’s line
of business and is of practical advantage to it; and, (3) whether or not the
corporation has an interest or reasonable expectancy in the opportunity.
Guth , 5 A.2d 503 at 511.
The corporate opportunity doctrine is a judicially-designed means to test the conduct of a director or officer when weighed and measured in the
context of the duties of utmost good faith and loyalty. See Imperial Group
(Texas), Inc. v. Scholnick , 709 S.W.2d 358, 363 (Tex. App.—Tyler 1986, writ
ref’d n.r.e.) (citing Guth , 5 A.2d at 510)). Therefore, and arguably most
importantly, whether a corporate opportunity exists “is not one to be
decided on narrow or technical grounds, but upon broad considerations of
corporate duty and loyalty.” Guth , 5 A.2d at 511; see In re Mobilactive Media,
LLC , No. 5725-VCP, 2013 WL 297950, at *21-22 (Del. Ch. Jan. 25, 2013)
(citing Dweck v. Nasser , 2012 WL 161590, at *13 (Del. Ch. Jan. 18, 2012)). No
single factor determines when a corporate opportunity exists, and issues of
fairness are central to the analysis. Broz , 673 A.2d at 155; see also Hollinger
Intern., Inc. v. Black , 844 A.2d 1022, 1061-62 (Del. Ch. 2004).
The fiduciary duties owed by directors and officers to a company, in particular the duty of loyalty, mandates that the best interests of the
company take precedence over any interest of the director or officer. Put
differently, the duty of loyalty requires strict compliance and restraint from
self-dealing. These duties are especially important in the E&P industry in
light of the significant risks and investment, financially and otherwise,
associated with an E&P Company’s efforts to identify areas of prospective
value or geologic interest, and then acquiring leasehold acreage for
development.
As discussed above, E&P Companies, such as Longview Energy, typically identify generally large areas that may hold prospective value,
then they develop strategies to lease acreage within this area to secure a
foothold for commencement of drilling operations. Thereafter, based on
well data from drilling operations, E&P Companies implement strategies
regarding expansion of leasehold interests to explore and exploit the large
“shale play” in an efficient and economical manner. The E&P Company has
a clear “interest or reasonable expectancy” in the opportunity to fully
exploit a “shale play.” Clearly, the expansion of leasehold interests within a
“shale play” is, under the three-pronged Guth test, consistent with an E&P
Company’s “line of business” and provides significant “practical
advantage.”
Here, based on the record, Huff and D’Angelo engaged in conduct that directly conflicted with their responsibilities to Longview Energy. To
excuse their conduct (whether shown to be minor, moderate, or severe) will
weaken the fundamental purpose of the corporate opportunity doctrine to
the point that the doctrine may not effectively deter a fiduciary from
personally developing corporate opportunities.
3. The “interest and expectancy” test should not be applied narrowly,
but rather broadly, in the unique circumstances of the oil and gas industry so as not to create a dangerous exception to the duty of loyalty that fosters, rather than prohibits, disloyalty of directors and officers.
One of the “traditional” factors required to establish the existence of a corporate opportunity, as promulgated in Guth, is whether “the
corporation has an interest or a reasonable expectancy” in the business
opportunity. Guth , 5 A.2d 503 at 511; see Canion v. Texas Cycle Supply, Inc. ,
537 S.W.2d 510, 513 (Tex. Civ. App.—Austin 1976, writ ref'd n.r.e.). “[F]or a
corporation to have an expectant interest in any specific property, ‘there
must be some tie between the property and the nature of the corporate
business.’” Grove v. Brown , No. 6793-VCG, 2013 WL 4041495, at *8 (Del. Ch.
Aug. 8, 2013) (quoting Johnston v. Greene , 121 A.2d 919, 924 (Del. 1956)). An
opportunity is said to be in the corporation’s line of business where the
opportunity embraces “an activity as to which [the corporation] has
fundamental knowledge, practical experience and ability to pursue, which,
logically and naturally, is adaptable to its business, and . . . consonant with
its reasonable needs and aspirations for expansion.” Id . (quoting Guth , 5
A.2d at 512); see Scholnick , 709 S.W.2d at 365 (citing Guth, 5 A.2d 503).
It should be beyond credible dispute that E&P Companies, such as Longview Energy, invest significant time and financial resources into the
research and discovery of potentially feasible prospects across expansive
geographic and geologic areas. Such Companies must first find before they
can mine. It may take several wells, some of which may be uneconomical
or marginally economical, on several leases before a formation is fully
defined, and a prospect is fully exploited by the E&P Company. Again,
there is a reasonable expectancy that E&P Companies have (and should
have) that its exploration and development strategies will be free from
directors and officers who unilaterally determine to seize exploration and
development opportunities for themselves.
Thus, one of the most effective tools available to an E&P Company for protecting valuable research and evaluations concerning oil and gas
prospects is the duty of loyalty of those who have gained access to the E&P
Company’s intentions or strategies, and the valuable data supporting those
intentions and strategies. If fiduciaries are not strictly discouraged from
personally capitalizing on such strategies and supporting data, then what
was highly valuable to the E&P Company and those that financially invest
in such Companies (except those that decide to usurp the strategies and
data), becomes practically worthless.
Huff and D’Angelo appear to rely upon an antiquated “present interest” rule illustrated in the Colorado & Utah Coal Co. v. Harris opinion for
the proposition that Longview Energy has no “practical, not a mere
theoretical, basis for the opportunity” across such a “vast” area. (Brief of
Appellants Huff and D’Angelo at pp. 31-32); see, e.g. , Guth , 5 A.2d 503 and
Gottlieb v. McKee , 107 A.2d 240 (Del. Ch. 1954). The court in the 80 year old
Colorado & Utah Coal opinion summarily found that a company had no
expectancy in the opportunity to purchase a particular piece of land
contained in “vast” coal deposits because it may create a “virtual
monopoly” in the opportunity. However, Huff and D’Angelo’s reliance on
this outdated opinion implicitly asks this Court to ignore the unique
opportunities that arise for an E&P Company in significant “shale plays”
from informed (and highly valuable) research and analysis of the oil and
gas prospects. Huff and D’Angelo seek to create a dangerous exception to
the duty of loyalty that fosters, rather than prohibits, disloyalty.
Again, directors and officers, such as Huff and D’Angelo, have a fiduciary duty not to engage in activities that directly compete with and
have potentially detrimental effect upon Longview Energy’s business. Huff
and D’Angelo cannot be disloyal to the interests and welfare of Longview
Energy, and the Colorado & Utah Coal opinion does not (and should not)
change that conclusion. See Abbott Redmont Thinlite Corp. v. Redmont , 475
F.2d 85, 88-89 (2d Cir. 1973) (finding company had tangible expectancy in
multiple potential projects for which its former officer had written product
specifications and prepared bids); Southeast Consultants, Inc. v. McCrary
Eng’g Corp. , 273 S.E.2d 112, 116-18 (Ga. 1980) (finding prospective city
planning project in which former officer had prepared preliminary study
before the project was financed was a corporate opportunity); Schildberg
Rock Products Co. v. Brooks , 140 N.W.2d 132, 137-38 (Iowa 1966) (finding
company had interest and reasonable expectancy in prospective limestone
quarry which it had previously explored for economic feasibility and
quality of limestone); Durfee v. Durfee & Canning , 323 Mass. 187, 198-99, 80
N.E.2d 522, 528-29 (1948) (citing Guth , 5 A.2d at 510, and Jasper v.
Appalachian Gas Co. , 152 Ky. 68, 79, 153 S.W. 50, 55 (1913)) (it is “inveterate
and uncompromising in its rigidity” based on “wise public policy” that
“one in ‘a position of trust in the management and conduct of the affairs of
a corporation … owes to said corporation the duty … of refraining from
doing anything whatever that would injuriously affect said corporation”);
Rosenblum v. Judson Eng’g Corp. , 99 N.H. 267, 271-73, 109 A.2d 558, 562-63
(1954) (finding unfaithful directors may be found liable despite absence of
company’s present interest or expectancy in opportunity); Duane Jones Co.
v. Burke , 306 N.Y. 172, 187-89, 117 N.E.2d 237, 245 (1954) (finding former
directors and officers violated fiduciary duty by engaging in conduct to
acquire multiple accounts that “resulted in benefit to themselves through
destruction of” the business they owed the fiduciary duties); Litwin v. Allen ,
25 N.Y.S.2d 667, 685-86 (N.Y. Sup. Ct. 1940) (right or expectancy may arise
from fact that directors had undertaken to negotiate in the field at issue);
Young v. Columbia Oil Co ., 110 W. Va. 364, 158 S.E. 678 (1931) (finding
directors of oil and gas company that purchased land on their own
behalves without notifying company of the opportunity breached their
fiduciary duty despite purchase being potentially “impractical” for
company).
In addition, courts have upheld a company’s expectancy interest in a corporate opportunity if the company is in substantial need of the
opportunity. See Lagarde v. Anniston Lime & Stone Co. , 126 Ala. 496, 502, 28
So. 199, 201 (1900) (director or officer may not pursue opportunity if it “will
in some degree balk the corporation in effecting the purposes of its
creation”); News-Journal Corp. v. Gore , 147 Fla. 217, 223, 2 So. 2d 741, 744
(1941) (director breached fiduciary duty by purchasing and increasing rent
on land that company leased for its equipment and office); Harmony Way
Bridge Co. v. Leathers , 353 Ill. 378, 395, 187 N.E. 432, 439 (1933) (“corporate
director who purchases property which he knows the corporation will
need, and then sells the same to the corporation at an advanced price,
abuses the trust reported in him”); Lincoln Stores, Inc. v. Grant , 309 Mass.
417, 421, 34 N.E.2d 704, 707 (1941) (“director cannot be allowed to profit
personally by acquiring property that he knows the corporation will need
or intends to acquire”); PJ Acquisition Corp. v. Skoglund , 453 N.W.2d 1, 8-9
(Minn. 1990) (acknowledging general rule that corporate “necessity” may
be considered to determine corporate opportunity); Landon v. S & H Mktg.
Group, Inc. , 82 S.W.3d 666, 681 (Tex. App.—Eastland 2002, no pet.) (finding
opportunity to improve company’s financial condition clearly constitutes a
business opportunity).
Here, assuming that Longview Energy was financially distressed for argument purposes, it can hardly be disputed that Longview Energy
would be in substantial need of the corporate opportunity it identified in
the Eagle Ford Shale that was later usurped by Huff and D’Angelo. Also,
without a doubt, investment companies, such EnerQuest, would be
substantially less likely to invest in an E&P Company, such as Longview
Energy, if they knew that the directors and officers of the E&P Company,
such as Huff and D’Angelo, do not have strict disincentives from taking
proprietary information and seizing production opportunities of the E&P
Company. Accordingly, to accept Huff and D’Angelo’s lax interpretation of
the “interest or expectancy test” promulgated in Guth would foster, not
frustrate, fiduciary disloyalty.
4. It would be imprudent to permit directors and officers to exploit
corporate opportunities based on their company’s purported financial inability short of actual insolvency.
Another focus of the corporate opportunity doctrine is whether “the corporation is financially able to undertake” the opportunity. Guth , 5 A.2d
503 at 511; Broz , 673 A.2d at 155 (permitting limited defense of financial
inability under the corporate opportunity doctrine). Delaware courts
recognize the policy concerns implicated by the financially inability
defense: a director or officer is less likely to fulfill duties of loyalty to
improve the business’ financial condition to permit it to exploit a business
opportunity if the business is financially distressed. Norman v. Elkin , 617 F.
Supp. 2d 303, 312 (D. Del. 2009) (citing Gen. Video Corp. v. Kertesz , No. 1922-
VCL, 2008 WL 5247120, at *19 (Del. Ch. Dec. 17, 2008) (finding financial
inability must amount to insolvency such that the company is practically
defunct)); Yiannatsis v. Stephanis by Sterianou , 653 A.2d 275, 279 (Del. 1995)
(flexible standard applies to the consideration of whether the corporation
was financially able to undertake the opportunity).
Here, it would be imprudent to permit directors and officers, such as Huff and D’Angelo, to exploit opportunities based on their company’s
purported financial inability short of actual insolvency. See Irving Trust Co.
v. Deutsch , 73 F.2d 121, 124 (2d Cir. 1934), cert. denied , 55 S. Ct. 405 (1935)
(“[u]ncompromising rigidity has been the attitude of courts of equity when
petitioned to undermine the rule of undivided loyalty by the
‘disintegrating erosion’ of particular exceptions.”) Indeed, it would
incentivize, and not discourage, disloyalty, especially if the opportunity
may later be more valuable or coveted by a competitor. Again, courts
recognize the inevitable consequences of a lax standard, including the
disincentive a director or officer would have to solve corporate financing
and other problems facing the corporation. See Irving Trust Co. , 73 F.2d at
124 (“If directors are permitted to justify their conduct on [a financial
inability] theory, there will be a temptation to refrain from exerting their
strongest efforts on behalf of the corporation since, if it does not meet the
obligation, an opportunity of profit will be open to the them personally.”);
Kerrigan v. Unity Sav. Ass’n , 317 N.E.2d 39, 44 (Ill. 1974) (relying on Irving
Trust in finding the directors “were actively exploiting their position as
directors … for their personal benefit”); Northeast Harbor Golf Club, Inc. v.
Harris , 661 A.2d 1146, 1149 (Me. 1995) (“the injection of financial inability
into the equation will unduly favor the inside director or executive” and
“will also act as a disincentive to corporate executives to solve corporate
financing and other problems”); Alexander & Alexander of New York, Inc. v.
Fritzen , 147 A.D.2d 241, 247-49, 542 N.Y.S.2d 530 (N.Y. App. Div. 1989)
(permitting a dispositive inability defense would “reduce[ ] the incentive
for executives to seek effective solutions to corporate problems,” and
would “encourage employees and fiduciaries to divert corporate
opportunities knowing that the diversion may not be effectively
challenged”); Klinicki v. Lundgren , 695 P.2d 906, 915-16 (Or. 1985).
Huff and D’Angelo are attempting to exploit a financial inability defense, without evidence of insolvency, to ask this Court to ignore the
time and expense invested by Longview Energy in the research and
identification of development opportunities in the Eagle Ford Shale. Not
surprisingly, courts have rejected (and should reject) the notion that
fiduciaries, such as Huff and D’Angelo, may excuse unfaithful conduct
because a company is merely distressed financially. See Paulman v. Kritzer ,
219 N.E.2d 541, 547 (Ill. App. Ct. 1966) (finding contention that company
was not financially able to seize the opportunity “not particularly
compelling in view of its solvency”); Elec. Dev. Co. v. Robson , 28 N.W.2d
130, 138 (Neb. 1947) (“Financial inability, unless it amounts to insolvency to
the point where the corporation is practically or actually defunct, is
insufficient to warrant application of the [defense].”); CST, Inc. v. Mark , 520
A.2d 469, 472 (Pa. Super. Ct. 1987) (stating that there “was no evidence that
[the corporation] was near insolvency or that it could not have produced
the funds necessary” to exploit the opportunity); Nicholson v. Evans , 642
P.2d 727, 731 (Utah 1982) (“in most jurisdictions, corporate financial
difficulty short of actual insolvency … is inadequate by itself to exonerate a
fiduciary who appropriates an opportunity”); see also Plas-Tex, Inc. v. Jones ,
No. 03-99-00286-CV, 2000 WL 632677, at *6 (Tex. App.—Austin May 18,
2000, pet. denied) (finding no usurpation of corporate opportunity because
company was “insolvent, [and] in default”).
Accordingly, directors and officers should not be excused from conduct detrimental to the company because a company may be financially
distressed. Instead, it is only when the company is insolvent that financial
inability is so palpably clear that the law should allow a fiduciary to take
what is otherwise a corporate opportunity. Based on the record, that is not
the case here.
PRAYER
For the foregoing reasons, EnerQuest Oil & Gas, Ltd. respectfully requests that this Court affirm the trial court’s judgment.
Dated: May 29, 2015.
Respectfully submitted, B EIRNE , M AYNARD & P ARSONS , LLP By: /s/ David A. Walton Sawnie A. McEntire Texas Bar No. 13590100 smcentire@bmpllp.com David A. Walton
Texas Bar No. 24042120 dwalton@bmpllp.com 1700 Pacific Avenue, Suite 4400 Dallas, Texas 75201 Tel. (214) 237-4300 Fax (214) 237-4340 Joseph M. Nixon
Texas Bar No. 15244800 jnixon@bmpllp.com B EIRNE , M AYNARD & P ARSONS , L.L.P. 1300 Post Oak Blvd., Suite 2500 Houston, Texas 77056 Tel. (713) 623-0887 Fax (713) 960-1527 Attorneys for Amicus Curiae, EnerQuest Oil & Gas, Ltd.
CERTIFICATE OF COMPLIANCE WITH RULE 9.4 As required by Texas Rule of Appellate Procedure 9.4, I certify that: 1. This amicus curiae brief complies with the type-volume limitation of T EX . R. A PP . P. 9.4 because it contains 4,652 words, excluding the parts of the brief exempted by T EX . R. A PP . P. 9.4.
2. This amicus curiae brief complies with the typeface requirements of T EX . R. A PP . P. 9.5(e) because it has been prepared in a proportionally spaced typeface using Microsoft Work 2010 in 14 point Palatino Linotype font for the text and 12 point Palatino Linotype font for the footnotes.
/s/ David A. Walton David A. Walton *35 CERTIFICATE OF SERVICE As required by Texas Rules of Appellate Procedure 6.3, 9.5, and 25.1(e), I certify that I have served this document on all other parties—
which are listed below—on May 29, 2015, by fax or e-service.
Thomas R. Phillips Louis M. Solomon
Matt C. Wood Hal S. Shaftel
B AKER B OTTS LLP Solomon B. Shinerock
1500 San Jacinto Center C ADWALADER W ICKERSHAM & T AFT LLP
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Daryl L. Moore Ricardo R. Reyna
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Houston, Texas 77008 San Antonio, Texas 78247-2302
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Michael W. O’Donnell L AW O FFICE OF A LFREDO Z. P ADILLA
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F ULBRIGHT & J AWORSKI LLP Carrizo Springs, Texas 78834
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/s/ David A. Walton David A. Walton
[1] EnerQuest holds a 1.109% interest in Longview Energy. An affiliated entity, Hexagon Interim Partners, Ltd. (“Hexagon”), holds a similar interest. Robert W. Floyd and Timothy M. Dunn, both of Midland, Texas, are interest holders in EnerQuest. Mr. Dunn and members of his family are interest holders in Hexagon.