Operation Executive Freedom (of Contract): Following the Executive's Fiduciary Obligation from Manges to Magruder in Mineral Leasing

Article excerpt

I. INTRODUCTION

Fiduciaries hold an esteemed and valuable position in the U.S. common law of trusts and agency as inherited from England. In these contexts, the duty a fiduciary owes to a beneficiary is essential to protect dependent beneficiaries from potential abuses arising from the power a fiduciary holds over the interests of the beneficiary.1 Literally, a fiduciary is either "[o]ne who owes to another the duties of good faith, trust, confidence, and candor," or "[o]ne who must exercise a high standard of care in managing another's money or property."2 In essence, "[t]he duty of loyalty, coupled with restitution of any gain the trustee obtains by favoring his own interest," creates the special relationship that the common law recognizes as containing the fiduciary duty owed in a fiduciary relationship.3 Although appropriate and necessary in certain contexts, a fiduciary duty may be inapposite in other contexts, detracting from economic value or upsetting the longstanding expectations of parties to a contract.4 This age of expanding fiduciary duties5 demands recognition of limits on the reach of fiduciary duties or relationships, particularly where the fiduciary duty might interfere with legitimate property rights or upset principles of contract law.

Fundamental principles of property and contract law govern the relationships between parties to mineral leases in the context of oil and gas law. In mineral leasing, the inequality resulting from the ownership of disparate property interests can create the opportunity to contract. But some courts have supplanted the bargaining power attendant to the unequal property interests in the relationship between the owner of the executive interest6 and owner(s) of the nonexecutive interest7 in a mineral estate. They have found that a fiduciary obligation exists in that relationship that accrues to the benefit of the nonexecutive.8 Holders of the executive mineral interest in mineral estates, whose executive right is a legitimate property right,9 were not originally subject to strict fiduciary obligations10 requiring them to subordinate their interests to those of the nonexecutive interest holder when contracting with third parties in mineral leases before these courts began imposing a fiduciary duty on them.

This Comment examines this expansion of fiduciary duties in the mineral estate in a bid at reestablishing the executive mineral interest holder's freedom of contract when leasing with third parties. First, Part II surveys the spectrum of duties of care-arising out of property and contract law-in oil and gas relationships. The duties that arise in these relationships constitute various duties of care rather than a fiduciary duty of loyalty,11 which precludes any selfish benefit on the part of the fiduciary. Part III investigates fiduciary relationships in search of what sets them apart from other standards of care, concluding that the duty of loyalty, combined with a standard of care concerned with measuring competence in performance, creates a fiduciary obligation. Absent a duty of loyalty, the severity of which is so starkly exemplified in MagruAer v. Drury,12 a mere duty of care does not rise to the level of a fiduciary duty. Part IV compares the strict nature of the fiduciary obligation and its characteristic duty of loyalty with the spectrum of relationships and duties of care in oil and gas operations. Absent special facts that normally create a fiduciary relationship in other contexts, the duty of loyalty-the prohibition against any selfish benefit to the fiduciary-inherent in a fiduciary obligation does not naturally exist in these relationships.

Part V examines the applicability of a fiduciary obligation between the executive and the nonexecutive interest owners in a mineral estate, questioning the soundness of the court's reasoning in Manges v. Guerra^ the leading case holding that a fiduciary duty is proper in this relationship. The Manges court's lack of adequate analysis or explanation for departing from the earlier intermediary standard in favor of the unreasonably high fiduciary standard renders recent court decisions reinforcing Manges\ "radical departure from orthodoxy"14 troublesome, not least because the Manges fiduciary duty inevitably exposes executive mineral interest holders to the fiduciary severity of Magruder. …