Complex Oil Well Deals—High Prestige Texas Law Firm

 Several companies were involved in oil & gas interest acquisitions and ultimately drilling.  The deals were substantial—1000s of acres, for example.  Things didn’t go well for various reasons and property interests changed hands as the companies separated.  In one of these transactions company A was to assign a set of interests, “‡”,  to company B.

There was an error, and the interests were assigned to a subsidiary of B. After additional difficulties, this time with the finance and economics of some drilling, B attempted to transfer ‡ to Patriot Exploration, the plaintiff-appellee in this case.  But it did not sign the revised and correct assignment, perhaps because it couldn’t effectively do that, since it did not own the property, its subsidiary did.  (It looks likely  that something had gone wrong with those companies.)

In the case report, the problem is called the “Title Gap.”  Thompson & Knight LLP* v. Patriot Exploration, LLC**, 444 SW3d 157 (Tex. App.—Dallas, 2014). Believe me! The facts are much more detailed in the opinion than here, where I am just “glancing” at the facts to illustrate a related but different point. [*Defendant and Appellant. **Plaintiff and Appellee.]

The law firm that, as it were, made the mistake, Thompson & Knight, an old, well-known, renowned Dallas law firm discovered its error, and tried to correct it by drafting a correct assignment document, but left the case because of the conflict of interest its error had created between it and its client Patriot. T & K settled in part with Patriot, but not totally.  (The court’s opinion does not say how the partial settlement worked.  I conjecture it involved Patriot’s litigation and similar or related costs in getting the error fixed.]

T & K Patriot had intended to sell the assets involved, but the sale was 5 months after the date Patriot wanted.  It sold the asset for $5.5M± but claimed it lost $960T± as the result of T & K’s error.  The firm stipulated it malpractice liability, but asserted that its error did not cause Patriot damages, or, in any case,
that Patriot could not prove that it did.  Patriot prevailed in the District Court—the trial court—in a judge-tried case that concerned only damages.

The Court of Appeals, however, reversed the lower court. The basis of the reversal was the court’s conclusion that the expert testimony did not support the plaintiff’s claims, both as to (a)whether the law firm’s error caused Patriot’s loss and as to (b) the amount of damages to be awarded, if any.

The testimony of Patriot’s expert was shot full of errors. Here are at least some of them. The expert testified  

1.     that the purchaser of the assert would have paid substantially more when the sale was originally intended than it paid 5 months later, but there was only 1 potential purchaser, and it did not concede that it would have paid more;

2.     that he has a model for calculating the correct prices but could not defend the model;

3.     that the sale prices could be analyzed by attending to the fact that Patriot acquired the assert at issue in a complex of facts arising out of a lawsuit;

4.     that he could predict reasonably what the return of future production would be, though he did not know this, given the existing history of related production, e.g., drilling costs;

5.    that he could accurately predict the relevant revenue of the purchaser, and therefore what he would have paid, even though he
merely assumed how many wells would be drilled, when there was no evidence as to what the number would be;

6.     in such a way that he has assumed that the oil and gas would be ready for market immediately upon production;

7.     assuming that the price of the petroleum to be drilled could be calculated relying on the price of the spot market;

8.     in such a way that his testimony was inconsistent with that of a disinterested witness;

9.     based upon as assumption this client, Patriot, instructed him to make;

10. and more.

This is a very long list of errors for an expert witness to be charged with having committed. Moreover, the expert would not have had to commit all these errors for his testimony to be rejected.

Interestingly, courts around the country are appearing to demand more and more out of expert witnesses appearing for a plaintiff in legal malpractice cases, and other service-based malpractice cases as well.  I have argued for a while that (i) legal malpractice cases are complicated to win, but that (ii) large cases were still promising, partly because big cases are complex and multi-faceted so more errors may get made.   I’m right about (i), for sure, but given the way courts are thinking about expert witnesses in legal malpractice cases today, I’m not sure I’m right about (ii).  Complexity and complicatedness are multidimensional configurations. My hesitancy arises from a very simple truth:  Complex events rarely result from single and/or simple causes. (The principle applies to non-occurrence events as well as overt events.) Complex causes involving complicated human behavior(s) and dependent economics–and not just like causes like physical defects–are very difficult for reliable expert testimony. This case is a paradigm of complicated behaviors, complex results, and economic/financial

It is easy to see why expert witnessing for the defendant is easier than doing it for the plaintiff.  All the defense expert must do is undermine the theories of the plaintiff’s expert.  To some extent and under some circumstances the work of the expert witness for a plaintiff is more interesting than that of the defense expert.  S/he may do the inventive and creative work.  Then again, consider what happened to the plaintiff’s expert witness in this case.

I am not suggesting that I think the Court of Appeals is wrong in its observations in this case.  The testimony of the plaintiff’s expert was a disaster; at least it looks like it. Maybe I’m wrong.  Maybe the Texas Supreme Court will reverse the court of appeals and uphold the trial judge.  I doubt it.  See my blog dated November 18, 2014, entitled “Expert Witnesses & Judicial Epistemology.”  It is about another very recent legal malpractice case decided by the Texas Supreme Court regarding the evaluation of damages, and the expert testimony, in that case, is not nearly as bad as it is in this case.