Arnold Palmer v. Fuqua

United States Court of Appeals for the Fifth Circuit · 1981 · Contracts

Contractspartnership agreementlimited partnershipfiduciary dutyconstructive trustarea of interestoil and gas leasegeneral partner

Facts

Atlanta Limited No. 2 was formed to acquire and develop oil and gas properties, and Article 10.06 of its partnership agreement allowed partners to pursue outside oil and gas opportunities except that any property acquired in the partnership's "area of interest owned" had to be offered first to the limited partners. The partnership owned the Beever Brothers lease, and part of the later-acquired Ritchie lease was contiguous to that property. J. B. Fuqua, the sole general partner, acquired the Ritchie lease for himself and assigned part of it to J. Rex Fuqua without first offering Palmer, a limited partner, an opportunity to participate. Palmer then sought a constructive trust on a one-sixth interest in the Ritchie lease and related proceeds.

Issue

Whether the Ritchie lease fell within the partnership's "area of interest owned" under Article 10.06, so that J. B. Fuqua had a fiduciary duty to offer Palmer participation before acquiring it individually, and whether a constructive trust could be imposed despite defendants' Statute of Frauds, conveyancing, trust, and equitable defenses.

Rule

At minimum, property contiguous to land owned by the partnership is within the partnership's "area of interest owned" under this agreement. Where a partner acquires property within the scope of the parties' fiduciary relationship without complying with a partnership provision requiring prior offer to co-partners, that partner breaches fiduciary duty, and a constructive trust may be imposed; such relief is not barred here by the Statute of Frauds, Statute of Conveyances, or Texas Trust Act because the suit is for breach of fiduciary duty and unjust enrichment, not to enforce a land-sale contract.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Red Mesa Energy Partners, a Texas limited partnership, owns a producing lease near Midland. Its partnership agreement lets partners pursue outside oil-and-gas deals, except that any property acquired in the partnership's "area of interest owned" must first be offered to the limited partners for 20 days. The sole general partner, Nolan Price, buys a separate lease that directly adjoins one boundary of the partnership's lease and keeps it for himself without making any offer.

If a limited partner sues for breach of fiduciary duty and seeks a constructive trust, what is the strongest argument for recovery?

Explanation. The majority held that, at minimum, land contiguous to partnership-owned property falls within the contractual "area of interest owned." Where the agreement requires later-acquired property in that area to be offered first to limited partners, a general partner who acquires such property individually without offering participation breaches fiduciary duty. A constructive trust is an appropriate remedy for that breach; misuse of information is not required.