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DALF Energy, LLC v. GS Oilfield Services addresses a fiduciary’s deceptive actions in oil and gas transactions. The Fifth Circuit held:
- self-dealing may constitute a breach of fiduciary duty even when the principal is not a direct party to the transaction;
- uncertainty in the amount of damages does not bar recovery when injury is evident; and
- opinions about profitability can be actionable as fraud.
The relationship
DALF Energy hired Jeffrey Scribner to identify oil and gas investment opportunities in Texas. Scribner identified old wells that he claimed could be returned to production with “virtually no risk.” Relying on Scribner’s advice, DALF’s parent company, TitanUrbi21, LLC (“TU”), purchased several oil and gas leases.
However, Scribner had falsified production reports, misled DALF about the risks involved, and failed to disclose his personal interests in some of the acquired leases. Some leases were owned by his father’s company and in some, royalties were assigned to Scribner’s own company—all without DALF or TU’s knowledge.
When DALF and TU grew suspicious of Scribner’s production reports and requested information about a key subcontractor—GS Oilfield Services, LLC—Scribner claimed he could not contact its owners or managers. DALF later discovered Scribner was GSOS’s manager.
DALF and TU sued for, among other claims, breach of fiduciary duty and fraudulent inducement. After unsuccessful proceedings in bankruptcy and district courts, they appealed.
Fiduciary duty extends beyond direct transactions
A fiduciary’s duty to fully disclose matters affecting the principal’s interest and to refrain from self-dealing applies even when the principal is not a direct party to the transaction.
Scribner was DALF’s agent and owed a fiduciary duty to DALF but not to TU.
Under Texas law, a fiduciary must fully disclose matters affecting the principal’s interests and is prohibited from using the relationship to benefit his personal interest without full knowledge and consent of the principal.
After TU purchased the leases DALF began operating the wells. Scribner breached his duty by not disclosing his personal interest in the leases and by using his relationship with DALF to influence TU to sign contracts that assigned royalties to Scribner’s company.
Scribner breached his fiduciary duty, even though DALF was not a party to the lease, by:
- falsifying production volumes, violating his duty of full disclosure;
- self-dealing, by not disclosing his or his father’s interest in entities involved in the transactions;
- claiming “virtually no risk” despite knowing there was always some risk;
- falsely claiming professional credentials by using “P.E.” after his name without certification; and
- concealing his relationship with a subcontractor while financially benefiting from its work.
Uncertainty in damage amount is not fatal
The bankruptcy court’s dismissal was based on a lack of specific evidence regarding the extent of DALF’s losses. However, the Fifth Circuit emphasized that while “uncertainty as to the fact of legal damages is fatal to recovery, … uncertainty as to the amount will not defeat recovery.”
The fact of injury was evident. Payments made before Scribner’s confession, based on falsified reports, constituted a tangible loss. The bankruptcy court’s dismissal of the claims was error.
The Court remanded to the bankruptcy court to calculate damages for certain actions and to determine whether DALF suffered injury from others.
Actionable Fraud For Opinions
DALF argued that Scribner’s profitability opinions in prospectuses were fraudulent. While Texas law generally exempts “pure expressions of opinion” from fraud claims, it recognizes exceptions when the speaker knows the opinion is false, claims special knowledge of future events, or bases the opinion on past/present facts.
The bankruptcy court failed to consider these exceptions and erred in concluding that Scribner’s opinions about profitability were not actionable solely because they were “statement[s] of belief about the future earnings or profitability of a business.”
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