Orca Assets, G.P., L.L.C. v. JPMorgan Chase Bank, N.A. , 542 S.W.3d 591 ( 2015 )

AFFIRM in Part, REVERSE in Part, and REMAND; Opinion Filed August 11, 2015.
S In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-13-01700-CV
ORCA ASSETS, G.P., L.L.C., Appellant
V.
JPMORGAN CHASE BANK, N.A.,
JPMORGAN CHASE BANK, N.A., TRUSTEE OF THE RED CREST TRUST,
AND PHILIP METTHAM, Appellees
On Appeal from the 44th Judicial District Court
Dallas County, Texas
Trial Court Cause No. DC-12-05303
MEMORANDUM OPINION
Before Justices Bridges, Lang, and Schenck
Opinion by Justice Schenck
Appellees JPMorgan Chase Bank, N.A., JPMorgan Chase Bank, N.A., Trustee of the Red
Crest Trust, and Philip Mettham (“JPMorgan”) leased oil and gas properties to appellant Orca
Assets, G.P., L.L.C. (“Orca”). But JPMorgan had already leased the same properties to
GeoSouthern Energy Corporation, an unrelated third party, some six months before. Orca sued,
alleging fraud, negligent misrepresentation, and breach of contract. After a hearing under rule
166, Texas Rules of Civil Procedure, the trial court rendered judgment for JPMorgan. Because
JPMorgan was not entitled to judgment as a matter of law on Orca’s fraud and negligent
misrepresentation claims, we reverse the trial court’s judgment and remand the cause as to those
claims. We affirm the trial court’s judgment on Orca’s claims for breach of contract.
BACKGROUND
In June, 2010, JPMorgan leased the mineral rights to acreage in DeWitt County, Texas to
GeoSouthern. 1 Around the same time, Orca identified the same acreage for potential acquisition
as part of a strategy to “pursue unconventional drilling opportunities in the Eagle Ford Shale
play.” The acreage in question was owned by the Red Crest Trust, and Orca was familiar with
the title issues that arose concerning oil and gas properties purchased by H. J. McMullen, the
original purchaser of the Red Crest Trust properties. Orca describes McMullen as “a colorful
figure in Texas oil and gas history,” and cites numerous fraud cases litigated in Texas in the
1960s over McMullen’s interests. Knowing of the potential title issues, but wanting to join the
Eagle Ford “land rush,” Orca opened an office in DeWitt County and moved landmen there to
check property records at the courthouse, as well as hiring two shifts of local residents to operate
a phone bank. The landmen identified potential acreage, and the phone bank workers called the
surface estate owners to inquire about any leasing activity on the properties.
In November, 2010, Orca met with representatives of JPMorgan to discuss leasing the
mineral rights to the same property that JPMorgan had already leased to GeoSouthern. Orca
contends and offered summary judgment evidence 2 that Mettham represented at the meeting the
acreage in question was “open” for lease.
On December 6, 2010, the parties signed a letter of intent for the property, for which
Orca paid consideration of $84,028.50. This letter provided in relevant part:
1. Orca has caused a search to be made in the records of Karnes and DeWitt
Counties and has preliminarily determined that Red Crest Trust is the owner and
1
The ensuing dispute between Orca and GeoSouthern is a separate lawsuit. Orca Assets, G.P., L.L.C. v. Burlington Res. Oil & Gas Co.,
No. 13-13-00462-CV, 2015 WL 233670 (Tex. App.—Corpus Christi, Jan. 15, 2015, pet. filed). Orca has filed a petition for review of the court
of appeals’ conclusion that GeoSouthern’s title and rights to the properties were superior to Orca’s. Orca Assets, G.P., L.L.C. v. Burlington Res.
Oil & Gas Co., L.P., No. 15-0161 (Tex., pet. filed Apr. 9, 2015). GeoSouthern is not a party here.
2
At the time of the Rule 166 hearing, the parties had conducted discovery and had moved for summary judgment, so that the record
contained summary judgment evidence submitted by both appellant and appellees. The record reflects that the trial court denied Orca’s motion
for partial summary judgment. There is no separate ruling on appellees’ motion for summary judgment in the record.
–2–
holder of the mineral estate underlying the following lands [descriptions omitted]
which lands ORCA has further determined to be free of any recorded oil and gas
lease heretofore executed [by] the rightful owner thereof; . . . .
Paragraph 2 of the letter of intent recited that Orca had offered consideration for leases covering
the property described. The leases were to use the same form as a specific previous lease
between the parties, except for a new paragraph 18 required by Mettham on behalf of JPMorgan.
This new paragraph 18 is quoted in full in the letter of intent:
18. Negation of Warranty. This lease is made without warranties of any
kind, either express or implied, and without recourse against Lessor in the event
of a failure of title, not even for the return of the bonus consideration paid for the
granting of the lease or for any rental, royalty, shut-in payment, or any other
payment now or hereafter made by Lessee to Lessor under the terms of this lease.
Paragraph 3 of the letter of intent recited that “Orca has accepted the counteroffer of [JPMorgan]
proposing to modify paragraph 18.” Paragraph 3 also explained that “in light of such requested
modification,” the parties agreed to a delay in closing the transaction for up to thirty days “to
allow ORCA the opportunity to re-examine its title work upon which its determination of
ownership is based.” Paragraph 4 permitted Orca to close the transaction “on a piecemeal basis,
that is to say, as the title to the individual tracts is examined and approved.” Also under
paragraph 4, Orca could elect not to take a lease on a particular tract “[i]n the event that such re-
examination of title should reveal information to Orca heretofore unknown to it about one or
more tracts above described that brings into question the ownership of [JPMorgan] therein.”
Paragraph 5 provided that during the term of the letter agreement, JPMorgan “shall not grant any
oil, gas and mineral lease or leases to another party or parties covering the above described land”
or grant an option to another party to acquire any mineral lease affecting the land.
After the letter of intent was signed, Orca undertook to review the title work it had
already conducted on the property in question. That is to say, Orca retained counsel to closely
examine the title history revealed by its examination prior to the November 2010 meeting and
–3–
resulting letter of intent. Orca did not, however, conduct any new, forward-looking title searches
for competing leases on the property that might have been filed after the letter of intent.
Therefore, when GeoSouthern recorded its lease on December 9, 2010, Orca did not discover it
even though the thirty-day period to “re-examine” title work was still running under the letter of
intent.
On January 5, 2011, Orca signed six leases, identical except for the property descriptions.
Paragraph 18 of the leases signed by the parties contained the “Negation of Warranty” clause
quoted above. Paragraph 1 of the leases provided in part:
1. A. Grant of Interest/Description. Lessor, in consideration of a cash bonus
in hand paid, of the royalties herein provided, and of the agreements of Lessee
hereinafter contained, hereby grants, leases and lets unto Lessee for the sole
purpose of exploring for, drilling, operating and producing oil and/or gas . . . the
following described land situated in DeWitt County, State of Texas ,
(sometimes referred to hereinafter as the “leased premises” or “said lands”) . . . .
B. Exceptions and Reservations. Lessor expressly EXCEPTS from this
lease and RESERVES all minerals of every kind and character in, on, and under
the lands above described, except only the oil and gas as hereinabove defined . . . .
On January 11, Orca delivered payment of $3,217,585 to JPMorgan pursuant to the
leases. Orca contends and offered summary judgment evidence that when its representative
delivered the payment, Mettham again represented that the property was “open” in response to
Orca’s inquiry. Orca recorded its leases on January 12. Some days later, GeoSouthern contacted
JPMorgan about the duplication, and JPMorgan attempted to return Orca’s consideration. Orca
refused the payment, and sued for alleged lost profits of approximately $400 million.
At a pretrial conference, the trial court heard argument on five issues of law that
JPMorgan contended were dispositive of Orca’s claims. After hearing, the trial court signed a
Rule 166 order containing the following conclusions: 3
3
The trial court’s order also included rulings on Orca’s tortious interference and civil conspiracy claims. Because Orca states in its brief
that it does not pursue these claims in this appeal, we do not consider them further.
–4–
1. The Letter of Intent and the six Leases are unambiguous. As stated therein, the
parties agreed that the Leases would be, and were, “without warranties of any
kind” and “without recourse in the event of a failure of title.”
2. Orca cannot establish the element of justifiable reliance necessary for its
claims of fraud, statutory fraud, and negligent misrepresentation.
3. The unambiguous terms of the Letter of Intent and Leases bar Orca’s claim for
breach of contract.
The trial court then rendered final judgment for JPMorgan. This appeal followed.
STANDARD OF REVIEW
Subsection (g) of rule 166, Texas Rules of Civil Procedure, provides that a trial court
may direct the parties to appear at a pretrial conference to consider “[t]he identification of legal
matters to be decided by the trial court.” TEX. R. CIV. P. 166(g). The trial court must make an
order reciting the actions taken at the pretrial conference, which “control[s] the subsequent
course of the action.” TEX. R. CIV. P. 166; see also In re Estate of Henry, 250 S.W.3d 518, 526
(Tex. App.—Dallas 2008, no pet.) (discussing trial court’s order under rule 166). After a rule
166 pretrial conference, the trial court identified and determined six matters of law, and rendered
judgment for JPMorgan. We review questions of law de novo. See, e.g., Ferry v. Sackett, 204
S.W.3d 911, 912 (Tex. App.—Dallas 2006, no pet.) (appellate court performs de novo review of
pure questions of law). “A de novo review is less deferential than ordinary reviews because a
trial court has no discretion in deciding what the law is or in properly applying it.” Id.; see also
McCreight v. City of Cleburne, 940 S.W.2d 285, 287 (Tex. App.—Waco 1997, writ denied)
(concluding that rule 166 order “dispos[ing] of one of [plaintiff’s] theories of liability in a
summary fashion” was “essentially a partial summary judgment,” and applying de novo standard
of review).
The standard of review for questions of fact under rule 166 is the same as for a directed
verdict. Walden v. Affiliated Computer Servs., Inc., 97 S.W.3d 303, 324 (Tex. App.—Houston
[14th Dist.] 2003, pet. denied). A directed verdict in favor of a defendant is proper when the
–5–
plaintiff does not present evidence that raises a fact issue essential to the plaintiff’s right of
recovery, or when the plaintiff admits or the evidence conclusively establishes a defense to the
plaintiff’s cause of action. Prudential Ins. Co. v. Fin. Review Servs. Inc., 29 S.W.3d 74, 77 (Tex.
2000). In reviewing a directed verdict, the standards are the same as a legal sufficiency
challenge. City of Keller v. Wilson, 168 S.W.3d 802, 823 (Tex. 2005). We must credit favorable
evidence if reasonable jurors could and disregard contrary evidence unless reasonable jurors
could not. See id. at 827.
DISCUSSION
To decide Orca’s three issues, we must interpret the leases to determine (1) whether Orca
contractually disclaimed reliance on any representation by JPMorgan, thereby barring its fraud
and negligent misrepresentation claims; (2) whether Orca so clearly appreciated the risk of a
prior lease that a reasonable factfinder would be compelled to find any reliance unreasonable;
and (3) whether, regardless of the viability of its fraud and negligent misrepresentation claims,
Orca disclaimed any warranty by JPMorgan, thereby barring its claim for breach of contract. We
conclude the provisions of the leases do not bar Orca’s fraud and negligent misrepresentation
claims, but do bar Orca’s contract claims as a matter of law, for the reasons we discuss below.
1. Breach of contract claim
In the Rule 166 Order, the trial court determined as a matter of law that “[t]he
unambiguous terms of the Letter of Intent and Leases bar Orca’s claim for breach of contract.”
In its third issue, Orca contends this ruling was error. In Count VII of its operative petition, Orca
asserts its breach of contract claim. Paragraph 59 of Orca’s petition quotes the contractual
provision Orca contends was breached by JPMorgan:
Lessor, in consideration of a cash bonus in hand paid, of the royalties herein
provided, and of the agreements of Lessees hereinafter contained, hereby
grants, leases, and lets unto lessee for the sole purpose of exploring for,
drilling, operating, and producing oil and/or gas . . . from the land leased
–6–
hereunder, the following described land situated in DeWitt County, State of
Texas.
In paragraph 60 of its petition, Orca claims that appellees “failed to convey the Property
to Orca because they claim they previously leased the property to a third party,” and therefore
breached the letter of intent and the leases. Orca’s breach of contract pleading omits reference to
the negation of warranty provision quoted above, included in both the letter of intent and the
leases, which states that each lease “is made without warranties of any kind, either express or
implied, and without recourse against Lessor in the event of a failure of title.”
Orca contends that “[t]he leases cannot reasonably be construed as waiving Orca’s right
to redress in the event JPMorgan failed to convey the property as promised.” Orca argues (1) the
phrase “failure of title” in paragraph 18 “cannot reasonably be construed to include prior leases
by JPMorgan of the same property it leased to Orca,” but if the phrase may be so construed, then
it is ambiguous and presents a fact issue for the jury, and (2) even if Orca waived any express
warranties, it did not waive the covenants implied under section 5.023 of the Texas Property
Code. See TEX. PROP. CODE ANN. § 5.023 (West 2014). We disagree with both propositions.
We begin by briefly considering the character of Orca’s claim to damages under the lease
itself as a function of its nature as both a deed of conveyance and a contract. In Texas, minerals,
including oil and gas, are regarded as a part of the fee interest from the inception of the estate.
Brown v. Humble Oil & Refining Co., 83 S.W.2d 935, 940 (Tex. 1935). 4 That interest may be
severed from the surface estate or at any point in the chain of title by a deed or reservation or, as
here, by the execution of an oil and gas lease. Quite unlike the “lease” of a surface interest, a
standard oil and gas lease, then, has the effect of transferring a fee interest in land—a fee simple
4
While the surface owner may claim ownership to the minerals in place, prior to severance, in jurisdictions recognizing that interest as title,
he does so subject to the law of capture by which his neighbors might remove the minerals by drilling operations on their own property without
trespass. Brown, 83 S.W.2d at 940.
–7–
determinable—for the period of, and subject to the terms of, the lease. The lease thus operates as
both a conveyance and a contract. This is hardly unusual, as the transfer of other land interests
by deed or lease, i.e., freehold or non-freehold, do the same. In particular, and as relevant here,
the standard lease of a dwelling or the sale of the fee interest in land may or may not be
accompanied by warranties, expressed or implied, assuring rights of the transferee. And,
regardless of the nature or description of the transaction, those warranties may be excluded or
waived by the parties. Gym-N-I Playgrounds v. Snider, 220 S.W.3d 905, 909–13 (Tex. 2007)
(lease); Young v. Rudd, 226 S.W.2d 469, 472 (Tex. Civ. App.—Texarkana 1950, writ ref’d n.r.e.)
(sale). Thus, a warranty concerning title is not part of the conveyance but is a separate contract,
enforceable as such and subject to rules governing contract construction, regardless of the form
of the transaction. Bond v. Bumpass, 100 S.W.2d 1047, 1049 (Tex. Civ. App.—Dallas 1973),
aff’d, 131 Tex. 266, 114 S.W.2d 1172 (1938).
We therefore agree with Orca that any claim to relief for a failure to effect a transfer of
good right or title to the lessee in contravention of the lease must sound in contract, if at all. See
Rowe v. Heath, 23 Tex. 614, 619–20 (1859); Unit Petroleum Co. v. David Pond Well Serv., Inc.,
439 S.W.3d 389, 395–96 (Tex. App.—Amarillo 2014, pet. denied) (an oil and gas lease in Texas
“is a contract and must be interpreted as one.”) (quoting Sabre Oil & Gas Corp. v. Gibson, 72
S.W.3d 812, 816 (Tex. App.—Eastland 2002, pet. denied)). The question at this stage, of course,
is whether any such claim in contract can survive as a matter of law in view of the lease’s
language.
When interpreting an unambiguous contract, the primary concern of the court is to
ascertain the parties’ intentions as expressed in the instrument. Coker v. Coker, 650 S.W.2d 391,
393 (Tex. 1983). That intent must be taken from the agreement itself, not from the parties’
present interpretation, and the agreement must be enforced as it is written. Calpine Producer
–8–
Servs., L.P. v. Wiser Oil Co., 169 S.W.3d 783, 787 (Tex. App.—Dallas 2005, no pet.). This is
known as the “Four Corners Rule,” which means that the intention of the parties is to be
ascertained from the instrument as a whole and not from isolated parts thereof. Id. We consider
the entire writing and attempt to harmonize and give effect to all the provisions of the contract by
analyzing the provisions with reference to the whole agreement. Frost Nat’l Bank v. L & F
Distribs., Ltd., 165 S.W.3d 310, 312 (Tex. 2005) (per curiam). If, after the pertinent rules of
construction are applied, the contract can be given a definite or certain legal meaning, it is
unambiguous and we construe it as a matter of law. Id. The courts will enforce an unambiguous
instrument as written; and, in the ordinary case, the writing alone will be deemed to express the
intention of the parties. Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726, 728 (Tex. 1981).
Orca focuses on the phrase “failure of title,” urging that it unambiguously refers only to
“a defect in the chain of title descending to the Red Crest Trust.” Under Orca’s interpretation, as
long as the trust obtained good title when it acquired the property, there would be no “failure of
title” even if, after it acquired its title, the trust effected a transfer of its interest by a lease, sale or
other disposition. Orca argues the disclaimer “cannot reasonably be interpreted as showing an
intent by Orca to waive its right to receive a remedy in the event JPMorgan had already leased
the covered acreage to a third party.” Read in context, however, the “failure of title” phrase
appears in a very broad contractual provision disclaiming “warranties of any kind, either express
or implied,” and denying “recourse against Lessor in the event of a failure of title.” Orca’s
argument, in effect, is that the disclaimer leaves the lease’s contractual covenants to function as a
special warranty. Unlike a general warranty deed, which expressly binds the grantor to defend
against title defects created by himself and all prior titleholders, the grantor under a special
warranty deed is bound to defend the title only against the claims and demands of the grantor and
all persons claiming through him. See Dyer v. Cotton, 333 S.W.3d 703, 712 n.2 (Tex. App.—
–9–
Houston [1st Dist.] 2010, no pet.) (citing Munawar v. Cadle Co., 2 S.W.3d 12, 16 (Tex. App.—
Corpus Christi 1999, pet. denied)). But in light of the broad disclaimer of “warranties of any
kind, either express or implied,” this argument is not well-taken.
As JPMorgan argues and as briefly outlined above, an oil and gas lease is not a “lease” in
the traditional sense in Texas, but instead “conveys title to all of the oil and gas in place to the
lessee.” Nat. Gas Pipeline Co. of Am. v. Pool, 124 S.W.3d 188, 192 (Tex. 2003). The lessee
acquires ownership of all the minerals in place that the lessor owned and purported to lease,
subject to the possibility of reverter. Id. The parties’ use of the term “title” in the disclaimer
encompasses the interest that, under the terms of the leases, JPMorgan purported to convey and
Orca sought to acquire. And under the express terms of the letter of intent and the leases, Orca is
“without recourse” under the lease if title fails. This contractual allocation of risk is not
ambiguous. As we have explained, in interpreting an unambiguous contract we consider only the
parties’ agreement in order to ascertain their intent at the time the agreement was made. See
Calpine Producer Servs., L.P., 169 S.W.3d at 787. “[A] court will not change the contract
merely because it or one of the parties comes to dislike its provisions or thinks that something
else is needed.” Id. Objectively considering the language chosen by the parties at the time of
their agreement, there is no indication that the parties expected JPMorgan would convey a
special, but not a general warranty to Orca. Contracting parties are free to structure their
contractual undertaking and allocate risk as they see fit. See El Paso Field Servs., L.P. v.
MasTec N. Am., Inc., 389 S.W.3d 802, 811–12 (Tex. 2012). “The role of courts is not to protect
parties from their own agreements, but to enforce contracts that parties enter into freely and
voluntarily.” Id. at 810–11. The trial court correctly enforced the parties’ agreement as written.
See id.
–10–
In the alternative, Orca argues that even if any express warranty of title has been
disclaimed, there was no disclaimer of the statutory implied covenant against prior conveyances.
This covenant is set forth in section 5.023(a)(1) of the property code:
(a) Unless the conveyance expressly provides otherwise, the use of “grant”
or “convey” in a conveyance of an estate . . . implies only that the grantor
. . . covenant[s] to the grantee . . . :
(1) that prior to the execution of the conveyance the grantor has not
conveyed the estate or any interest in the estate to a person other than
the grantee; . . .
TEX. PROP. CODE ANN. § 5.023(a)(1). There is also an implied covenant “that at the time of the
execution of the conveyance the estate is free from encumbrances.” Id. § 5.023(a)(2). Orca
argues (1) the waiver of implied warranties in the leases is not specific enough to waive the
statutory warranties; and (2) any warranties of title disclaimed in the leases “are separate and
distinct from the covenants implied through the Property Code.”
Under the property code, “a covenant of warranty is not required in a conveyance.” TEX.
PROP. CODE ANN. § 5.022(b) (West 2014). If the grantor omits a warranty clause, no warranties
will be implied except as to prior conveyances by the grantor and encumbrances. Bond, 100
S.W.2d at 1049. But even that implied warranty as to prior conveyances may be disclaimed “if
the conveyance expressly provides otherwise.” TEX. PROP. CODE ANN. § 5.023(a).
Orca contends the statutory covenant is “separate and distinct from the warranty of title,”
citing City of Beaumont v. Moore, 202 S.W.2d 448, 453 (Tex. 1947). Orca argues that the leases
disclaim only “warranties of any kind, either express or implied,” and under Moore, the statutory
“covenant” is not the same thing as a “warranty.” 5 The court in Moore explained that the
5
Orca also cites Luker v. Arnold, 843 S.W.2d 108, 115 (Tex. App.—Fort Worth 1992, no writ), overruled in part by PPG Indus., Inc. v.
J.M.B./Houston Ctrs. Partners Ltd. P’ship, 146 S.W.3d 79, 82 n.1, 92 (Tex. 2004), for the proposition that the statutory implied covenant “has
nothing to do with implied warranties, which are different creatures.” Neither Luker nor the case upon which it relies, however, addressed
implied covenants dealing with conveyances of property. See id. (proposed warranty of developers to develop property in good and workmanlike
manner for consumers who ultimately buy property from separate builder); Humber v. Morton, 426 S.W.2d 554, 555–56 (Tex. 1968)
(contractor’s implied warranty that house was constructed in good and workmanlike manner and was suitable for human habitation). The court in
–11–
statutory implied covenant against encumbrances “is intended to protect the grantee against
rights or interests in third persons, which, while consistent with the fee being in the grantor,
diminish the value of the estate conveyed.” Id. Thus, the Moore court’s statement that the
implied statutory covenant was “separate and distinct from the warranty of title” was in
explanation that even where the grantor owns the property (that is, holds “the fee”), the grantor
may be called upon to indemnify the grantee if an interest in a third party, such as a lienholder,
decreases the value of the property conveyed. See id. But the court also explained that “the
covenant against incumbrances is embraced within the general warranty clause . . . .” Id. “The
covenantor warrants that he will restore the purchase price to the grantee if the land is entirely
lost,” or restore a portion of the consideration in cases of partial loss. Id.
Orca also cites Gibson v. Turner, 294 S.W.2d 781, 787 (Tex. 1956), in support of its
argument that warranties of title, even if disclaimed in the leases, are different from the implied
statutory covenants in section 5.023(a). In Gibson, the court explained that a warranty of title
“does not constitute part of the conveyance.” 294 S.W.2d at 787. The covenant of general
warranty in a lease “warrants the title of the lessees,” not the lessors. Id.; see also McMahon v.
Christmann, 303 S.W.2d 341, 347 (Tex. 1957) (“The purpose and operative effect of the
[warranty of title] covenant is not to guarantee that the lessor has good title to the premises but to
guarantee the lessee in his title thereto.”). As we explained in Davis v. Andrews, 361 S.W.2d
419, 424–25 (Tex. Civ. App.—Dallas 1962, writ ref’d n.r.e.), “[t]he very purpose of the warranty
covenant is for the indemnity of the purchaser against a loss or injury he may sustain by a defect
in the vendor’s title. The warranty clause does not convey title nor does it determine the
character of the title conveyed.”
Humber explained that the predecessor to property code section 5.023 “relates to covenants of title which arise out of conveyances and not to
collateral covenants such as the suitability of a house for human habitation.” Id. at 556.
–12–
But the implied covenant on which Orca relies is a promise that the grantor has not
conveyed the property interest to anyone else. See TEX. PROP. CODE ANN. § 5.023(a)(1). As
noted, this covenant is included in the “covenant of general warranty” and is the essence of the
special warranty, both of which were emphatically excluded from this lease. Compton v. Trico
Oil Co., 120 S.W.2d 534, 537 (Tex. Civ. App.—Dallas 1938, writ ref’d) (“a deed with covenant
of general warranty means that the grantor has not conveyed the same estate, or any right, title,
or interest therein, to any person other than the grantee, and that the property is free from
encumbrances” (internal citations omitted)). And Orca expressly disclaimed “warranties of any
kind, whether express or implied.” While the clause did not directly and specifically reference
the possibility of a prior lease to GeoSouthern or to anyone, its far-reaching breadth to any
warranty of any kind is sufficient. Therefore regardless of Orca’s arguments that the covenant
regarding prior conveyances is different from “warranty of title” or implied by statute, Orca’s
disclaimer encompassed its claim and foreclosed it. We overrule Orca’s third issue.
2. Fraud and negligent misrepresentation
In its first two issues, Orca contends the trial court erred by ruling that the negation of
warranty barred Orca’s claims for fraudulent inducement and negligent misrepresentation by
disproving the element of reliance as a matter of law. We agree.
a. Contractual waivers of reliance
For purposes of this appeal, JPMorgan assumes that Mettham represented to
representatives of Orca that the properties in question were “open” for lease. JPMorgan
contends, however, that Orca’s claim for this misrepresentation is barred by the disclaimer in the
leases. While a contract may generally be voided for fraud, under certain circumstances, the
parties’ agreement in the contract with respect to whether either is relying on prior
representations of the other may be treated as a separate undertaking, severable from the balance
–13–
of the agreement and enforced in much the same way as an arbitration commitment would be.
E.g., Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 446 (2006); In re Labatt Food
Serv., 279 S.W.3d 640, 647–48 (Tex. 2012). Thus, under appropriate circumstances, 6 a
disclaimer of reliance embedded within a contract said to be induced by fraud will continue to
function as an estoppel foreclosing what might otherwise appear to be a colorable claim of
fraudulent inducement. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex.
1997).
JPMorgan urges that the waiver of warranty language had the effect of disclaiming the
reliance element necessary to maintain a fraud or misrepresentation claim under Schlumberger
and its progeny. But the “intent to disclaim reliance on others’ representations—that is, to rely
only on one’s own judgment” must be “evident from the language of the contract itself.” Italian
Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 335 (Tex. 2011) (citing
Schlumberger, 959 S.W.2d at 180, and Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 54 (Tex.
2008)). “Pure merger clauses, without an expressed clear and unequivocal intent to disclaim
reliance or waive claims for fraudulent inducement, have never had the effect of precluding
claims for fraudulent inducement.” Id. at 334. The clause at issue, “[t]his lease is made without
warranties of any kind, either express or implied, and without recourse against Lessor in the
event of a failure of title,” does not mention the word reliance or purport to disclaim any earlier
statements or representations of JPMorgan. In Italian Cowboy, the restaurant lease at issue
included a clause entitled “representations,” and a clause entitled “entire agreement.” See id. at
328. The former clause was the tenant’s acknowledgment that the landlord had not made any
6
In order to give effect to such a disclaimer, the Texas Supreme Court has, among other things, required clear and unequivocal language of
that intent in order to protect parties from unintentionally waiving a claim for fraud. It has also been mindful of the contractual context. A
settlement agreement between sophisticated parties already embroiled in controversy and represented by counsel, as in Schlumberger Technology
Corp. v. Swanson, 959 S.W.3d 171, 180–81 (Tex. 1997), would appear to be the quintessential setting for an effective disclaimer. An agreement
initiating a long-term lease relationship, on the other hand, “should be all the more clear and unequivocal in effectively disclaiming reliance.”
Italian Cowboy Partners v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 335 (Tex. 2011).
–14–
representations about the premises “except as expressly set forth herein.” Id. The latter clause
provided that the lease constituted the entire agreement of the parties. Id. The court held neither
of these clauses was sufficient to disclaim reliance on the lessor’s statements, made before the
parties signed the lease, that the building to be leased “was in perfect condition.” See id. at 328,
336. In fact, the previous tenant had moved out after unsuccessful attempts to remedy a
persistent sewer gas odor on the premises, and the lessor was aware of the problem. Id. at 329,
338. The court concluded, “[w]e have repeatedly held that to disclaim reliance, parties must use
clear and unequivocal language,” contrasting the provisions in Schlumberger and Forest Oil
which stated the contracting party was not “relying upon any statement or representation” in
executing the contract. Id. at 336. There is no such unequivocal language in the negation of
warranty paragraph relied on by JPMorgan. We conclude the negation of warranties is not
sufficient to meet the standards of Italian Cowboy.
b. Direct conflict between representation and contract
JPMorgan contends, however, that “this case is not about a generic merger clause,” so
that Italian Cowboy does not apply. Rather, JPMorgan urges that Orca’s fraud in the inducement
claim, premised on Mettham’s alleged assurances that the property remained open for lease,
must fail here in the face of Mettham’s insertion of the disclaimer of warranty into the
agreement. Thus, according to JPMorgan this case “is about whether reliance is justified in light
of a specifically negotiated, ‘red flag’ provision conflicting with the alleged misrepresentations.”
In support of this argument, JPMorgan cites Miller Global Properties, LLC v. Marriott
International, Inc., 418 S.W.3d 342, 348 (Tex. App.—Dallas 2013, pet. denied), and Grant
Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010). In both cases,
justifiable reliance was disproved as a matter of law. See Miller, 418 S.W.3d at 348–50; Grant
Thornton, LLP, 314 S.W.3d at 923.
–15–
To be sure, “[a] party cannot justifiably rely on oral representations in an arms-length
transaction that are directly contradicted by the contract he signs.” McGonagle v. Stewart Title
Guar. Co., 432 S.W.3d 535, 541 (Tex. App.—Dallas 2014, pet. denied) (citing Miller, 418
S.W.3d at 347–48). In Miller, we noted that the subject matter of the alleged misrepresentations
was “specifically dealt with at significant length in the contracts between the parties” and was
“directly contradicted by the contracts’ terms.” Miller, 418 S.W.3d at 348. We distinguished
Italian Cowboy, explaining that “the contract at issue in Italian Cowboy did not address the
subject matter made the focus of the dispute and nothing in the agreement contradicted the
alleged misrepresentation.” Id. at 350. We concluded, “[w]hen a party signs a contract that
directly contradicts alleged misrepresentations and affirmatively disclaims any promises or
representations other than those made in the contract, the party cannot justifiably rely on alleged
extra-contractual misrepresentations as a matter of law.” Id.
Neither Italian Cowboy nor Miller is exactly on point. In Italian Cowboy, the contractual
disclaimers did not address the subject of the misrepresentation. Italian Cowboy, 341 S.W.3d at
328, 336. In Miller, the contract dealt with the subject of the misrepresentations “at significant
length.” Miller, 418 S.W.3d at 348. Here, the negation of warranty provision does address the
subject of failure of title, but does not disclaim reliance on statements made by JPMorgan or
directly conflict with Mettham’s statements that the properties were open. See also Nat’l Prop.
Holdings, L.P. v. Westergren, 453 S.W.3d 419, 424 (Tex. 2015) (per curiam) (no justifiable
reliance as matter of law where plaintiff chose not to read release before signing it and instead
relied on defendant’s representation that document was a receipt, but on its face “intent and
effect” of release was “obvious and unambiguous”).
In Grant Thornton LLP, the court concluded that investors did not justifiably rely on an
accountant’s audit report when buying additional bonds where the investors’ own sophisticated
–16–
senior portfolio manager knew the company issuing the bonds had lost its primary source of
funding. Grant Thornton LLP, 314 S.W.3d at 923–24. The court stated that “both fraud and
negligent misrepresentation require that the plaintiff show actual and justifiable reliance,” and
explained, “[i]n measuring justifiability, we must inquire whether, given a fraud plaintiff’s
individual characteristics, abilities, and appreciation of facts and circumstances at or before the
time of the alleged fraud, it is extremely unlikely that there is actual reliance on the plaintiff’s
part.” Id. (quoting Haralson v. E. F. Hutton Group, Inc., 919 F.2d 1014, 1026 (5th Cir. 1990),
abrogated on other grounds by Gustafson v. Alloyd Co., 513 U.S. 561 (1995) (internal quotation
marks omitted)). The court continued, “[m]oreover, a person may not justifiably rely on a
representation if there are ‘red flags’ indicating such reliance is unwarranted.” Id. (quoting
Lewis v. Bank of Am. NA, 343 F.3d 540, 546–47 (5th Cir. 2003) (internal quotation marks
omitted)). The court rendered judgment for the accountant, concluding there was no evidence of
justifiable reliance by the investors on the accountant’s statement that the issuer was in
compliance with certain escrow requirements. Id. at 931.
Relying on Grant Thornton LLP, JPMorgan claims that several “red flags” preclude
justifiable reliance by Orca as a matter of law. JPMorgan cites Mettham’s statement that he
“would have to check” whether the property was open for lease; JPMorgan’s insistence on the
stricter negation of warranty provision; JPMorgan’s refusal to accept responsibility for verifying
title; the letter of intent itself; Mettham’s statement that other lessees were not doing careful title
work; Orca’s knowledge that competitors might delay recording their leases; Orca’s knowledge
that it did not check property records after the letter of intent was signed; and Orca’s landman’s
“doubts” when delivering the bonus check, asking Mettham to confirm whether the property was
open. But as Orca points out, these purported red flags are questions of fact for a jury regarding
whether Orca’s reliance on Mettham’s representations that the property was open to lease was
–17–
reasonable, not, as in Grant Thornton LLP, evidence making actual reliance “extremely
unlikely.” See id. at 923–24. Orca offered evidence that Mettham’s statements were consistent
with Orca’s own title work, and therefore Orca did not undertake any new title searches after the
letter of intent was signed. Whether this reliance was reasonable under the circumstances is a
fact question to be resolved by a jury. See, e.g., Bank of Texas, N.A. v. Glenny, 405 S.W.3d 310,
318 (Tex. App.—Dallas 2013, no pet.) (summary judgment improper where genuine issues of
material fact existed about whether Bank justifiably relied on letters and other information in
loan application).
As noted above, the breadth of the warranty waiver is substantial and sufficient to defeat
any contract claim arising from any defect in title. But that same breadth of reach undermines
JPMorgan’s claim of a “direct” conflict between Mettham’s alleged statements assuring that the
property was still open for lease and the lease language. Our cases rejecting misrepresentation
claims based on a conflict with subsequent contract language have consistently required a
“direct” conflict with the earlier representation such that a reasonable person could not read the
agreement and still plausibly claim to believe the earlier representation. E.g., Miller, 418 S.W.3d
at 348 (alleged statements that property development was “essentially complete” and existing
budget adequate were in conflict with contract’s 21 pages listing 200 projects yet to be approved
and provision assigning risk of cost overruns to plaintiff); Simpson v. Woodbridge Props., L.L.C.,
153 S.W.3d 682, 684 (Tex. App.—Dallas 2004, no pet.) (alleged representation that seller was
not concerned with deadlines conflicted with contract’s imposing a specific deadline for closing).
We are aware of no case from this Court (or any other for that matter) that would treat a
general disclaimer of warranty as so plainly correcting an earlier, specific misrepresentation to
the effect that the seller of a land interest himself had not already, recently sold the same interest
to someone else as to warrant a rendition of judgment. The far-sweeping warranty disclaimer
–18–
here would have covered a virtually limitless span of title defects on numerous tracts ranging
from misplaced boundary fences to pretermitted heirs, and certainly did so without making any
reference to a prior lease. In all events, we do not believe the disclaimer of warranty here was
sufficiently specific to re-assign that risk from a seller, with obviously superior knowledge of its
own actions, to a buyer who is groping for the same information in the face of what a reasonable
jury might find as an assurance from the seller that he had not already sold the property to
someone else.
We conclude that questions of fact remain regarding Orca’s claim that it was fraudulently
induced into a contractual relationship with JPMorgan. The same questions of fact remain
regarding Orca’s negligent misrepresentation claims, which also require proof of justifiable
reliance. See Grant Thornton LLP, 314 S.W.3d at 923. JPMorgan contends that in the letter of
intent and the leases, Orca expressly assumed the responsibility to ensure that the properties were
available to be leased. Even if that is the case, JPMorgan was not free to affirmatively
misrepresent that the properties were open in order to induce Orca into a contractual relationship,
as Orca claims it did. A jury may decide that no misrepresentations were made, or that Orca did
not reasonably rely on them. But as a matter of law and based on the record presently before us,
Orca has offered more than a scintilla of evidence to support its claim that it was fraudulently
induced into a contractual relationship with JPMorgan and suffered damage as a result. We
sustain Orca’s first and second issues.
–19–
CONCLUSION
We reverse the trial court’s judgment as to Orca’s fraud and negligent misrepresentation
claims, affirm the judgment as to Orca’s claim for breach of contract, and remand the cause to
the trial court for further proceedings consistent with this opinion.
/David J. Schenck/
DAVID J. SCHENCK
JUSTICE
131700F.P05
–20–
S
Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
ORCA ASSETS, G.P., L.L.C., Appellant On Appeal from the 44th Judicial District
Court, Dallas County, Texas
No. 05-13-01700-CV V. Trial Court Cause No. DC-12-05303.
Opinion delivered by Justice Schenck,
JPMORGAN CHASE BANK, N.A., Justices Bridges and Lang participating.
JPMORGAN CHASE BANK, N.A.,
TRUSTEE OF THE RED CREST TRUST,
AND PHILIP METTHAM, Appellees
In accordance with this Court’s opinion of this date, the judgment of the trial court is
AFFIRMED in part and REVERSED in part. We REVERSE that portion of the trial court’s
judgment on the claims of Orca Assets, G.P., L.L.C., for fraud and negligent misrepresentation.
In all other respects, the trial court’s judgment is AFFIRMED. We REMAND this cause to the
trial court for further proceedings consistent with this opinion.
It is ORDERED that each party bear its own costs of this appeal.
Judgment entered this 11th day of August, 2015.
–21–