SW Legal studies in Business

Inflated Estimates of Gas Field Production Can Be Basis for Fraud Action
Description

Texas high court upheld a jury verdict of fraud under Virginia law for false estimates made by a company about the quantity of gas to be produced from a gas field in Oklahoma. Since there was a history of production from the field, the inflated claims about the amount of gas to be recovered were fraudulent.

Topic Torts
Key Words

Fraud; Negligent Misrepresentation; Gas Exploration

C A S E   S U M M A R Y
Facts

Eight Virginia limited partnerships hired Arkoma Basin Exploration Company to estimate gas production from mineral rights held in the Arkoma Basin in Oklahoma. When the properties failed to produce the gas predicted, the partnerships sued Arkoma for fraud. Using Virginia law, the Texas jury found clear and convincing evidence of fraud and awarded $5.5 million in damages, reduced by the court to $2.9 million. Both parties appealed. The appeals court affirmed the verdict and increased damages to $4.4 million. Arkoma appealed.

Decision

Affirmed. Virginia law requires clear and convincing evidence. It must relate to a fact, not be based upon unfulfilled promised or statements as to future events. Each case is judged on its own facts, taking into consideration the nature of the representation and the meaning of the language as interpreted by the circumstances. Arkoma contends that its estimates of future gas production cannot be fraud under Virginia law because they represented guesses about the future, not facts. That argument fails because the estimates of production in a mature natural gas field involved representations of fact and so were actionable as fraud. There was a long track record of production in the field. Arkoma had a factual basis upon which to base estimates of production. The claims made by Arkoma were based on facts that were misrepresented when the gas reserves were inflated to induce investment. Since the damages were based on knowledge of production of a gas field, expert testimony was necessary for the jury to be able to calculate losses suffered by the investors. The expert testimony about expected production and revenue over an eight year period was credible; so the damages approved by the court of appeals would be upheld.

Citation

Arkoma Basin Exploration Co. v. FMF Associates 1990-A, Ltd., ---S.W.3d--- (2008 WL 204503, Sup. Ct., Tex., 2008)

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