CHAPTER 6 THE ETHICAL LANDMAN: ALL YOU NEED TO KNOW ABOUT ETHICS YOU LEARNED IN SUNDAY SCHOOL
| Jurisdiction | United States |
(2000)
THE ETHICAL LANDMAN: ALL YOU NEED TO KNOW ABOUT ETHICS YOU LEARNED IN SUNDAY SCHOOL1
Snell & Wilmer L.L.P.
Salt Lake City, Utah
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Do unto others, as you would have them do unto you.2
One's conduct is considered by society to be "ethical" when it is moral. In a professional setting, conduct is ethical when it conforms to moral standards of conduct established to govern the activities of the professions.3 The root "ethics," when used as a noun, is defined in Black's Law Dictionary as a "consensus of expert opinion as to necessity of professional standards.4
Since the underpinnings of Western morality are found in Judeo-Christian precepts, it follows, a fortiori, that ethical standards of the professional landman may be said to be encapsulated by the Golden Rule: "Do unto others, as you would have them do unto you." Truly, all you need to know about ethical conduct for landmen you learned in Sunday School.
In actuality, I could sit down. But recognizing that some of you may be truants from Sunday or Bible School, and fully aware of your need for landmen certification credits measured in increments of time, I must continue for another 50 minutes to translate the abstract to the concrete.
Landman misconduct typically arises in six contexts: (1) fraudulent conduct, (2) duty to disclose in a confidential or fiduciary relationship, (3) duty to disclose based upon superior knowledge or bargaining position, (4) duty to employer, (5) violation of other professional standards, and (6) top leasing. Also, this presentation, perhaps somewhat audaciously, addresses the ethics of unauthorized practice of law by landmen. It will provide what may be for some disquieting examples of what might constitute unauthorized practice of law, while suggesting what acts may not rise to the level of prohibited acts.
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I. FRAUDULENT CONDUCT.
A. Affirmative Fraud. The Utah rule is found in Crookston v. Fire Ins. Exchange, 817 P.2d 789, 800 (Utah 1991). The elements are:
1. Representation made,
2. Concerning a presently existing material fact;
3. Which was false;
4. Which the representor (a) either knew was false, or (b) made recklessly, knowing that he [or she] had insufficient knowledge upon which to base such representation;
5. For the purpose of inducing the other party to act upon it;
6. That the other party, acting reasonably and in ignorance of its falsity;
7. Did in fact rely upon it;
8. And was thereby induced to act;
9. To his [or her] injury and damage.5
B. Examples of Affirmative Fraud:
1. Sellers induced to sell with statement that land had been condemned for mineral purposes because of a nearby dry hole. Roeser v. Coffer, 98 S.W.2d 275 (Tex. Civ. App. 1936)(mineral deed rescinded).
2. Buyer informed owners that lands had no mineral value and there was no mineral activity in the area. Patterson v. Shell Petroleum Corp., 143 S.W.2d 208 (Tex. Civ. App. 1940)(quitclaim deed rescinded).
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3. Section in Cedar Rim area of Duchesne County spaced on 640s. Well is drilled and actively producing. Landman subsequently obtains a lease from absentee owner when, upon inquiry from the owner, states that no well has been drilled. Shamas v. Koch Industries, Inc., 759 F.2d 796 (10th Cir. 1985)(lease cancelled).
4. Owner of oil and gas leases represented to purchaser that well produced "pure, sweet, premium gas that could be marketed readily and that gas purchaser would install a pipeline when the lessee knew representations were false. Glock v. Carpenter, 184 F.Supp. 829, 831 (E.D. Ky 1960).
C. Result: voidable at the option of the defrauded party.
D. Incomplete or Misleading Disclosure. Geologist obtained lease without disclosing all he knew about drilling in the area required to disgorge overriding royalty and pay damages. He stated that this well had some gas shows, when, in fact, it produced substantial gas. Note: fiduciary relationship established by long-term use of geologist by plaintiff and fact that geologist was the plaintiff's only contact in the area. Consolidated Oil & Gas, Inc. v. Ryan, 250 F. Supp. 600, 605 (W.D. Ark. 1966), motion for new trial denied, 250 F. Supp 607, aff'd 368 F.2d 177 (8th Cir. 1966).
E. Nondisclosure (Silence). A charge of fraud is maintainable when a party who knows material facts is under a duty, under the circumstances, to speak and disclose his information, but remains silent. See First Sec. Bank v. Banberry Development, 786 P.2d 1326, 1328 (Utah 1990)(citing numerous cases and situations involving duty to disclose).6
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1. Rules Governing Fraud by Silence 7 :
a. There must be a duty;
b. Burden is on party alleging the fraud; and
c. Establishment is a question of law for the court to decide.
2. Silence may give rise to fraud only when a material matter is known to one party and that party is bound to disclose it to the other. Peterson v. Koch Industries, Inc., 684 F.2d 667, 671 (10th Cir. 1982)(citing as authority Elder v. Clawson, 14 Utah 2d 379, 384 P.2d 802 (1963)).
3. Silence may give rise to fraud when a fiduciary duty exits. In the absence of a fiduciary duty or superior knowledge, silence regarding active production of an existing well upon presentation of rental division orders deemed not actionable for fraud. Peterson 684 F.2d at 671 (citing 4 SUMMERS ON OIL AND GAS § 662 (1962).8
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4. Person lawfully on property does not have a duty to disclose knowledge of the land to owner/seller. Mallon Oil Co. v. Bowen/ Edwards Associates, Inc., 965 P.2d 105, 111 (Colo. 1998)(employee of Southern Ute Tribe finds coalbed methane on lands leased to oil and gas lessee, does not disclose, leaves employee of Southern Ute Tribe, and discloses it to new employer and competitor of oil and gas lessee, who obtains coalbed methane lease).
5. Silence may give rise to fraud when there is a contract. (Geophysical testing undertaken at the request of the lessor). Peterson 684 F.2d at 671 (citing 4 SUMMERS ON OIL AND GAS § 662 (1962)).
II. DUTY TO DISCLOSE IN A CONFIDENTIAL RELATIONSHIP
A. Confidential Relationship Defined. A confidential relationship exists when one occupies a superior position over the other intellectually, physically, governmentally, or morally, with the opportunity to use that superiority to the other's advantage. See United Fire & Casualty Co. v. Nissan Motor Corp., 164 Colo. 42, 433 P.2d 769, 771 (1967); Bradbury v. Rasmussen, 16 Utah 2d 378, 401 P.2d 710 (1965).
Mere confidence in one person by another is not sufficient alone to constitute such a relationship. Bradbury v. Rasmussen, 16 Utah 2d 378, 401 P.2d 710 (1965).
B. Types of Confidential or Fiduciary Relationships.
1. Close Friendship. Feist v. Roesler, 86 SW.2d 787 (Tex. Civ. App. 1935).
2. Agency Based upon Contract. Clinkenbeard v. Central Southwest Oil Corp., 526 F.2d 649, 653 (5th Cir. 1976)(agency relationship must be existing at the time of the act). Former agent under terminated contract may subsequently deal with principal at arms-length; and mere subjective trust of former principal not sufficient to establish a fiduciary duty.
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3. Agency Based upon Moral, Social, Domestic, or Personal Relationships. See Clinkenbeard v. Central Southwest Oil Corp., 526 F.2d 649, 653 (5th Cir. 1976); Hilliard v. Shellbarger, 120 Colo. 441, 210 P.2d 441, 449 (194).
4. Dual Agency. See Kelly v. Shamrock Oil & Gas Corp., 171 F.2d 909 (5th Cir. 1948)(represented both the seller and the buyer).
5. Long-Standing, Exclusive Relationship in Area. Consolidated Oil & Gas, Inc. v. Ryan, 250 F. Supp. 600, 605 (W. D. Ark. 1966), motion for new trial denied, 250 F. Supp. 607, aff'd 368 F.2d 177 (8th Cir. 1966).
6. Parent and Child. Blodgett v. Martsch, 590 P.2d 298 (Utah 1978).
7. Attorney and Client. Blodgett v. Martsch, 590 P.2d 298 (Utah 1978).
8. Trustee and Beneficiary. Blodgett v. Martsch, 590 P.2d 298 (Utah 1978).
9. Spiritual Advisor and Dying Man. Church of Jesus Christ of Latter-day Saints v. Watson, 25 Utah 45, 69 P. 531 (1902).
10. Infirm Owner Deeds to Caretaker with Understanding that Owner Would Live in Home for Remainder of Life. Baker v. Pattee, 684 P.2d 632 (Utah 1994). Contra, Hilliard v. Shellabarger, 120 Colo. 441, 210 P.2d 441 (1949).
C. Rules Regarding Disclosure in Confidential Setting.
1. When a confidential relationship exists, the landman is obligated to disclose all pertinent facts that may affect a transaction. Hilliard v. Shellabarger, 120 Colo. 441, 210 P.2d 441 (1949)(deed given by infirm owner to tenant-grantees in a situation where the owner deeded property to tenants who allowed her to use the property so long as she lived, when inadequate consideration was given).
2. With three exceptions, a confidential relationship is never presumed, and the party asserting the relationship has the burden of proving its existence. See Peterson v. Koch Industries, Inc., 684 F.2d 667, 671 (10th Cir. 1982)(interpreting Utah law); Hilliard v. Shellabarger, 120 Colo. 441, 210 P.2d 441 (1949). See Baker v. Pattee, 684 P.2d 632, 636 (Utah 1984)(confidential relationship is presumed between parent and child, attorney and client, and trustee and cestui que trust).
3. Once a relationship is established, a presumption of unfairness arises which must be overcome by countervailing evidence, and the burden shifts to the
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landman to show by clear evidence (Colorado) or by a preponderance of the evidence (Utah) that he took no advantage. Id.; Baker v. Pattee 684 P.2d 632, 636 (Utah 1984)(citing Robertson v. Campbell, 674 P.2d 1226 (Utah 1983)).
4. General Rule: Absent a confidential or fiduciary duty, the landman has no duty to disclose information that he may have concerning the land which he either knows or may suspect that the landowner does not have. Hatton v. Johnson, 150 Ga. 218, 103 S.E. 233 (1920).
D. Examples:
1...
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