TO WHOM IT MAY CONCERN

Title To The Title Opinionand the Duty of the Examiner

Peter E. HoseyJackson Walker L.L.P.

112 E. Pecan Street, Suite 2400San Antonio, Texas 78205

33rd Annual Ernest E. SmithOil, Gas & Mineral

Law Institute

Houston, Texas

March 30, 2007

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Biographical Sketch

Peter E. Hosey

Peter E. Hosey is a Partner in the San Antonio, Texas office of Jackson Walker L.L.P. He received a Bachelor of Arts degree from The University of Texas at El Paso in 1976, and is a 1979 graduate of St. Mary’s University School of Law. He practices primarily in the areas of oil and gas, title and transactional matters, real estate law, business law, and international business law. He has served since 1998 on the Joint Editorial Board for the development of Title Examinations Standards established by the Real Property, Probate and Trust Law and Oil, Gas and Energy Resources Law Sections of the State Bar of Texas, which are published in the Tex. Prop. Code Ann. . He is a member of the San Antonio Bar Association (has been several times President and Treasurer of the Natural Resources Committee of the San Antonio Bar Association), a member of the American Bar Association and the State Bar of Texas. He is also a member of the College of the State Bar of Texas. He is a frequent lecturer and writer on oil, gas and land title issues. He recently spoke at the 50th Annual Rocky Mountain Mineral Law Foundation Institute, the State Bar of Texas, 23rd Annual Advanced Oil, Gas and Energy Resources Law Course, and the 2007 University of Houston Advanced Oil an Gas Short Course. He is currently an Adjunct Professor of Law at St. Mary’s University School of Law, teaching Texas Land Titles.

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Table of Contents

I. INTRODUCTION .......................................................................................................... 1II. THE TITLE OPINION ................................................................................................... 2

A. Lease Acquisition Title Opinion .......................................................................... 2B. Drilling Title Opinion.......................................................................................... 2C. Division Order Title Opinion............................................................................... 3D. Supplemental Title Opinion................................................................................. 4E. Mortgage Title Opinion ....................................................................................... 5

III. MATERIALS EXAMINED............................................................................................ 5IV. THE TITLE EXAMINER............................................................................................... 6V. STANDARD OF CARE ................................................................................................. 6VI. TO WHOM IS THE STANDARD OF CARE OWED .................................................... 7

A. Liability of the Lawyer to the Client. ................................................................... 7B. Liability of the Lawyer to Third Parties. .............................................................. 8

1. Fraud ....................................................................................................... 82. Negligent Misrepresentation .................................................................... 8

VII. LIMITATIONS ON THE SCOPE OF THE TITLE OPINION/ DISCLAIMERS .......... 12

A. LIMITATIONS GENERALLY......................................................................... 12B. SPECIFIC DISCLAIMERS............................................................................... 14

1. The Scope of the Title Opinion .............................................................. 142. Who May Rely....................................................................................... 153. Off the Record ....................................................................................... 154. Taxes ..................................................................................................... 155. Bankruptcy ............................................................................................ 156. Supplemental Opinions .......................................................................... 157. Law ....................................................................................................... 16

VIII. CONCLUSION............................................................................................................. 16

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TO WHOM IT MAY CONCERNTitle To The Title Opinion

and the Duty of the Examiner

I. INTRODUCTION

This paper will cover a subject near and dear to the hearts of oil and gas title examiners. What is the standard of care associated with the preparation and dissemination of title opinions and the parties to whom the examiner may be liable in the event that the title opinion is incorrect?

The purpose of the examination is to advise the client or other parties to whom the title opinion is addressed concerning the status of title and the means by which the defects or encumbrances referenced in the objections to title may be cured. Based upon the materials examined, relying upon the competence and experience of the examiner, the title opinion should advise the recipient of any defects, encumbrances, irregularities or other problems which an examination of the documents made by the examiner reveal and which would affect the title to the property for the purposes for which the examination is being prepared. It should disclose whether such defects, irregularities, or encumbrances may expose the owner to litigation or adverse claims, even if such claims may be successfully defended. See Texas Land Title Examination Standards, Standard 1.10, Tex. Prop. Code Ann. (2007).

Depending upon what has been requested by the client, the attorneygenerally examines the documents in the chain of title from the date of sovereignty of the soil, until the date disclosed in the title opinion for the close of the examination. The examiner should review the documents, records, deeds, abstracts, affidavits and other reliable materials necessary in order to form

a legal opinion as to the status of title to the real property. All of the materials that are examined which form the basis for the title opinion should be identified in the title opinion. Texas Land Title Examination Standards, Standard 1.20, Tex. Prop. Code Ann. (2007).

A title examination should be based upon the marketability of title. A marketable title is one that is free from reasonable doubt such that a prudent person with knowledge of all of the relevant facts and circumstances and their legal significance would be willing to accept. It need not be absolutely free from all possible doubt or suspicion. Texas Land Title Examination Standards, Standard 2.10, Tex. Prop. Code Ann. (2007). It should not expose the purchaser to the reasonable probability of litigation. It should be free of outstanding encumbrances and not be dependent upon rules of interpretation or presumptions of fact. It should be a title which a reasonably prudent person knowledgeable of the facts and legal significance would willingly accept. Lund v. Emerson, 204 S.W. 2d 639 (Civ. App. – Amarillo 1947, no writ). It is rare that an examiner will find a title free of all doubt or defect.

The title opinion will not change the status of the title. It neither conveys nor curestitle. It can only express the examiner’s opinion concerning the legal status of the title based upon the information examined. The title examiner must clearly explain to the client the status of the title, the defects or encumbrances associated with title, the curative instruments required, the scope of the examination and a clear disclosure of the information which the title examiner has not examined. The examiner should disclose to the client that even if all of the relevant documents in the chain of title are examined

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and properly interpreted, land titles are also affected by factors beyond the scope of the title record (i.e. forgery, adverse possession). The client should also furnish the examiner with all unrecorded documents referenced in the recorded instruments in the chain of title. Westland Oil Development Corp. v. The Gulf Oil Corp., 637 S.W.2d 903 (Tex. 1982). The examiner shoulddisclose to the client matters of inquiry which should be investigated, or other matters known to the examiner which are imputed to the client that may affect the status of the record title. Gavenda v. Strata Energy, Inc. 705 SW 2d 680. (Tex. 1986)The attorney/client relationship is also an agency/principal relationship. GMAC v. CD&M, 986 S.W.2d 632 (Tex. Civ. App.—El Paso 1998, pet. denied).

If all title examinations were perfect, this paper would not be necessary. The documents pertaining to the title would be found and correctly interpreted by the examiner who would be aware of all of the circumstances outside of the record or upon the ground which would affect the title. Nothing would be missed, nothing would be lost. This is not the world in which we live.

The scope of this paper will focus on oil and gas title opinions, rather than other types of legal opinions which may be rendered in conjunction with real estate transactions. We will discuss what a title opinion is, what it should accomplish, the standard of care required in its preparation, who may rely upon it, the liability associated with a title opinion and the ways in which the examiner may limit the scope of the title opinion.

II. THE TITLE OPINION

The examiner should receive clear and specific instructions from the client regarding the type of title opinion requested,

so that the examiner would be able to prepare the opinion in conformity with the request and limit the scope of the title opinion based upon such instructions.

The client may want an opinion regarding the status of title to the minerals in order to acquire oil and gas leases, or may want a more definitive status of the title in order to drill, but may not yet require a proceeds allocation of the burdens not affecting its leasehold working interest. After production is established, the client will require that the internal allocation of the royalty and overriding royalty proceeds be calculated, so that division orders may be issued. The examiner may be asked to supplement an existing opinion. A mortgagee may also be interested in determining that it has a first and valid subsisting lien or security interest upon the property of the debtor in conjunction with a financing transaction.

A. Lease Acquisition Title Opinion

Depending upon the acquisition cost and importance of the prospect, the client may ask an attorney to render a lease acquisition title opinion identifying the owner of the minerals and executive rights to be leased. Accordingly, this title opinion does not allocate the payment of production proceeds, but identifies the party(ies) from whom the lease should be taken, and whether there exist any encumbrances to those rights which would affect the acquisition of the working interest in the acreage.

B. Drilling Title Opinion

Once the lease(s) has been taken and the lessee intends to drill a well, the title examiner will be asked to render a drilling title opinion. Again, the client is not interested in the allocation of the overriding royalty, landowner royalty or non-

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participating royalty interest (except to the extent that these interests may affect its net revenue interest), but is interested in knowing the status of the title to the underlying working interest. The lessee needs to be apprised of its obligations under the lease, and what encumbrances or impediments to title exist with regard to its working interest. The examiner must disclose the curative requirement which should be obtained prior to drilling in order to “clear” title to the working interest. No client wants to drill a well only to find outstanding unleased mineral interests, mortgages or other encumbrances to its title, thereby creating third party rights in the proceeds of production. Nor does the lessee want to learn that it has breached the terms of the oil and gas lease because it has unwittingly failed to comply with its obligations.

C. Division Order Title Opinion

We have all joked that dry holes cure all titles. Dry holes also bankrupt clients,regardless of the posted price. Receiving a request to prepare a division order title opinion is always a happy time. Not only are we being asked to provide legal services, but instead of money being spent, our client is presumably making money. The purpose of the division order title opinion is to allocate the proceeds of production to all of the interest owners, whether they areroyalty, non-participating royalty, overriding royalty or working interest owners. Where prior agreements so require, this allocation may be identified on a “before payout” or “after payout” basis.

The division order title opinion is also addressed to a gatherer of production who shall distribute these proceeds, or to the client (gas well) who is receiving 100% of the distribution from the pipeline.

This title opinion will not only cover the lease and/or proration unit tract, but also any additional acreage with which this tract has been pooled under the terms of the relevant leases, pursuant to the recorded unit designation.

It is the purpose of the division order title opinion to identify all of the parties to whom the proceeds of production are to be distributed and to calculate and set out the specific ownership interest of each. The examiner is concerned with the entirety of the title to the property, including thespecific calculation of each subset of the title (i.e. the interest that each party owns and the type of interest, such as royalty, non-participating royalty, overriding royalty or working interest). Based upon the title opinion, the proceeds of production will be distributed. The title examiner must also determine the title of the working interest owners who bear their share of the costs in proportion to the interest identified.

From the information contained in this title opinion, division orders will be prepared by the payor and sent to the payees for signature. The terms of these division orders are established by statute (Natural Resources Code §§ 91.401 and 91.402 et seq., Vernon 2007). Once the payee has signed a division order and returned it to the payor, the proceeds of production will be placed in line for payment. Unless additional information is required, these proceeds will be paid on a monthly basis. Therefore, if a division order title opinion is incorrect, overpayments and underpayments will be made. However, the title examiner cannot always rely upon the fact that the payee signed a division order (please see this author’s paper entitled, “Follow the Money!, Oil & Gas Leases and Division Orders,” State Bar of Texas, 23rd Annual Advanced Oil, Gas and Energy Resources

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Law Course, 2005). Overpaid parties rarelyvolunteer to return proceeds. If funds cannot be disgorged from those overpaid, or made up out of future production, it could be the title examiner who may be making these contributions.

D. Supplemental Title Opinion

Title examiners are sometimes asked to prepare supplemental title opinions where the title has not been examined by the writer of the opinion from the sovereign, but from the date of a previous title opinion which hasbeen prepared by another examiner. Or, the opinion may have been prepared by the current examiner, but is being updated with additional curative documents presented to the examiner based upon the requirements made in the original title opinion.

If the supplemental title opinion is written as the result of curative documents which have been submitted based upon previous requirements contained in the original title opinion prepared by the examiner, then the supplemental title opinion becomes a comprehensive opinion of the title to the acreage examined. The examiner would presumably be personally familiar with all of the instruments in the chain of title up to the latest date that the public records were examined. If the public records have not been examined since the date of the original title opinion, this fact must be reflected in the supplemental title opinion and the supplemental title opinion will only modify the title reflected in the original title opinion to the extent of the curative documents received.

If the title examiner is basing the supplemental title opinion upon a previous title opinion prepared by another examiner, the preparer should specifically state that the supplemental title opinion is only prepared from the information contained in the

original title opinion and that the examiner has not reviewed any of the documents which made up the original opinion. The subsequent examiner does not want to take responsibility for the original opinion, but can only opine as to the instruments whichhe or she has personally examined.

That the client would assume the risk of the reliance by the examiner upon the prior title opinion, must be communicated to the client. According to Rule 102(b), Texas Disciplinary Rules of Professional Conduct, (2007) (the “Disciplinary Rules”), an attorney is permitted to limit the scope, objective and general method of the representation if the client consents after consultation. The Disciplinary Rules define consultation to “denote communication of information and advice reasonably sufficient to permit the client to appreciate the significance of the matter in question.” Texas Disciplinary Rules of Professional Conduct (2007). Should the examiner question the competence of the prior examiner, or the strength and validity of the original opinion, the examiner should disclose to the client that in the opinion of the examiner, he or she will not rely upon the original title opinion. Remember the supplemental title opinion prepared by the examiner will not change the title. If the prior original opinion was defective, such defect may not always be disclosed by the terms of the prior opinion. The examiner does not wish to assume such risk.

For an excellent discussion of the liability associated with the use of prior title opinions, please see “Dangers Associated with the Use and Reliance Upon Prior Title Opinions,” by Allen D. Cummings, State Bar of Texas, Advanced Oil, Gas and Energy Resources Law Course, 2002.

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E. Mortgage Title Opinion

When a bank or other financial institution wishes to place a mortgage or security interest upon the interest of the debtor, a deed of trust or such other security agreement will be executed. The mortgagee will want to confirm that this deed of trust shall be a first and valid lien upon the collateral. The mortgagee will ask the title examiner to prepare a mortgage title opinion. The purpose of this opinion is to opine whether the security instruments will create a first and valid lien or security interest in the collateral and the effect of the provisions of the security documents upon such title. The mortgagee is not interested in the other owners in the title, except to the extent that such interests may interfere with its security interest. The mortgagee is interested in the existence of any encumbrances or other impediments to title which may affect its lien.

III. MATERIALS EXAMINED

The documents which must be examined in preparing a title opinion are provided to the examiner in many ways. The record title to real property is the product of the documents filed for record in the office of the County Clerk where the land is located when properly filed and acknowledged, which recorded documents provide constructive notice of their contents. Chapters 12 and 13, Tex. Prop. Code Ann. (2007). The true status of title will also be affected by circumstances outside of the record which may provide actual or inquiry notice, divest the record owner of title in favor of a party who has ripened limitations title, or affect the validity of the recorded documents. The title examiner will probably be unaware of these circumstances.

The examiner should specifically make known that he or she has not examined any

information other than the documents specifically furnished to the examiner by the client, describing whether these documents have been contained in an abstract, through a full or partial run sheet prepared by a land man in which copies of the documents have been made for the examiner, or the examiner has conducted a “stand up” search of the records.

No matter how the examiner acquires access to the relevant title documents, it is essential that all of the recorded documents in the chain of title be examined. It does not matter whether the examiner goes to the documents, or the documents come to the examiner. Examiners may conduct “stand up” title searches in which they travel to the county courthouse where the property is located and physically run the grantor/grantee indices and look at the documents. Although expedient, it is more expensive and not the preferred method of examination, unless no alternative is readily available. Such record search may place the risk of having found all of the relevant documents upon the examiner.

More frequently, the client may send a landman to the county courthouse in order to run the records and prepare a “run sheet” of the documents contained in the chain of title. Copies of the relevant instruments would be made for review by the title examiner. In the absence of knowledge to the contrary, itis reasonable for the examiner to rely upon such run sheet. However, the examiner should satisfy himself that the run sheet reflects a sufficient expertise of the indices which the landman has examined in order to reveal the methodology of the title search, so that the examiner would feel comfortable in relying upon it. The examiner should demand that the run sheet contain a list of all of the documents covered so that the examiner may be reasonably assured that all

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of the documents contained in the run sheet have been copied and supplied to the examiner for review. If from an examination of the run sheet, the examiner believes that the run sheet is deficient, the examiner should not rely upon it and should inform the client that the examiner does not believe the run sheet to have been properly prepared and that he or she will not rely upon it. The examiner should request that the client obtain a new run sheet properly prepared containing copies of the documents filed of record upon which the examiner may base his or her opinion.

The most preferred method of document examination, yet one which seems to be a casualty of the times, is the use of abstracts. An abstract is a compilation of all of the instruments in a chain of title prepared and certified by the local county abstract company. In this way, the client is relying upon the certification supplied by the abstract company with regard to the compilation of the documents contained within the abstract.

IV. THE TITLE EXAMINER

The title examiner must be competent to examine the title to the real property under examination. Such competence would be the product of the knowledge and experience of the title attorney in conducting the title examination. Sometimes an examiner may be competent to examine most titles, but given the complexity of the title at issue, may not be qualified to render an opinion after examining the documents. The examiner should not render an opinion if he or she is not competent to do so. The Disciplinary Rules require that a lawyer should not accept or continue employment which the lawyer knows is beyond the lawyer’s competence. Disciplinary Rule 101(a) (2007).

In representing a client, the attorney must possess the skill and ability to practice law in which others similarly situated ordinarily possess, that he will exert his best judgment in the matter entrusted to him and that he will exercise reasonable and ordinary care and diligence in the application of the knowledge and experience on behalf of the client. Cook v. Irion, 409 S.W. 2d 475 (Tex.Civ. App. – San Antonio 1966, no writ). The Disciplinary Rules define competence to mean “possession [of] . . . legal knowledge, skill and training reasonably necessary for the representation of the client.” Disciplinary Rules – Terminology.

V. STANDARD OF CARE

The standard of care generally applicable to an attorney is that of the reasonable prudent attorney in the same or similar circumstances using reasonable care and ordinary skill in light of all the surrounding facts and circumstances existing at the time of the performance of the examination. Cosgrove v. Grimes, 774 S.W.2d 662 (Tex. 1989). This standard requires objective reasonableness, is based on negligence and requires the plaintiff to plead and prove the essential elements of duty, breach, causation and damages. A fiduciary relationship exists between the attorney and the client as a matter of law. General Motors Acceptance Corp./Crenshaw, Dupree & Milam, LLP v. Crenshaw, Dupree & Milam, LLP/General Motors Acceptance Corp., 986 S.W.2d 632 (Tex. Civ. App.--El Paso 1998, pet. denied). A good faith error in judgment in what the attorney believes to be in the best interest of the client will not subject the attorney to a claim for legal malpractice. Cook v. Irion, 409 S.W. 2d 475 (Tex. Civ. App. – San Antonio 1966, no writ).

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The most common areas for potential claims against title examiners would be: (i)the lack of knowledge or experience of the title examiner, (ii) failure to obtain all of the relevant documents associated with the title, (iii) misinterpretation or incorrect analysis of the documents examined, (iv) mistakes made in the mathematical calculation of the interests associated with the real property title (i.e. allocation of royalty, overriding royalty, net revenue interest, etc.), (v) failure to examine the title from sovereignty of the soil, (vi) reliance upon a prior incorrect title opinion, (vii) failure to clearly articulate the problems or encumbrances identified by the documents and the comments or objections contained in the title opinions, (viii) failure to properly communicate with the client regarding the nature and severity of the defects encountered by the title examiner and the impact of such encumbrances upon the title being examined, (ix) failure to appraise the client of the effect of factors outside of the record which may affect the title being examined (i.e. adverse possession, ripening liens, etc.), and (x) failure to properly disclaim the scope of the title opinion and inform the client about the assumptions under which the title opinion was prepared and the risks associated with such disclaimer.

VI. TO WHOM IS THE STANDARD OF CARE OWED

A. Liability of the Lawyer to the Client.

The duty of care is owed by the lawyer to the client. A breach of the standard of care would result in a cause of action by the client for legal malpractice. The duty giving rise to the exercise of reasonable care arises out of the contract between the lawyer and the client (privity) employing the lawyer to perform the legal services for which the client has engaged the attorney. Zidell v.

Byrd, 692 S.W.2d 550 (Tex. App. – Austin 1985, no writ). In order to maintain a claim for legal malpractice, the client must haveemployed the attorney to render the services. A lawyer’s duty for malpractice does not extend to a person whom the lawyer never represented. Barcelo v. Elliott, 923 S.W.2d 575 (Tex. 1996). The requirement for privity in a legal malpractice case is the majority rule, following the United States Supreme Court in National Sav. Bank v. Ward, 100 U.S. 195 (1879), (legal malpractice in a title examination).

An attorney may be sued for legal malpractice by the client with whom the lawyer has a contract for the commission of the title opinion and from whom he is to be paid for such services. Accordingly, where the attorney has breached the standard of care owing to the client which is the proximate cause of the client’s damages, the attorney will be liable to the client in the event that the title opinion is incorrect.

There are few cases dealing with the liability of the attorney to the client in the preparation of oil and gas title opinions. One case found is Gavenda v. Strata Energy Co., 705 S.W.2d 690 (Tex. 1986). This was a division order case where the negligence of the examiner in the preparation of the title opinion was paid for by his client. His client was the operator of several wells who was forced to disgorge more than $2.4 million plus interest as a result of a mistake in the title opinion. Although division orders prepared according to the divisions of interest contained in the title opinion were signed by the plaintiffs, the division orders were incorrect and the client was forced to properly pay the term non-participating royalty interest owners under the theory of unjust enrichment.

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In that case the title examiner had incorrectly interpreted the terms of a term nonparticipating royalty reservation as reserving a one-half interest in the retained land owner one-eighth (1/8th) royalty (being a 1/16th out of total production). Instead, the deed reserved a one-half (½) interest out of gross production for a term of 15 years.

The case does not otherwise talk about the negligence of the attorney. Obviously, the attorney would have been liable to the client for legal malpractice in incorrectly stating the nonparticipating royalty interest allocation. It is doubtful that the clientwould have drilled the wells had the title opinion correctly stated that the client’s net revenue interest would have been less than fifty percent (50%).

Gavenda was cited by the court in GMAC v. CD&M 986 S.W.2d 632 (Tex. Civ. App. – El Paso 1998, pet denied), for the proposition that the attorney/client relationship is an agency/principal relationship.

B. Liability of the Lawyer to Third Parties.

1. Fraud. A non-client may bring a cause of action against a lawyer who has committed a fraudulent act against the non client. Each coconspirator is responsible for the acts committed by any of the conspirators in furtherance of the unlawful combination. Likover v. Sunflower Terrace II, Ltd., 696 S.W.2d 468 (Tex. App. –Houston [1st Dist.] 1985, no writ). No privilege shields the lawyer from liability for fraudulent acts committed on behalf of the client because fraudulent acts are outside the scope of a lawyer’s role. Bernstein v. Portland Sav. & Loan Ass’n., 850 S.W.2d 694 (Tex. App. – Corpus Christi 1993, writ denied).

However, other jurisdictions have applied the “aiding and abetting” theory against attorneys where the lawyer was acting in the course of the attorney’s representation of the client. Granewich v. Harding, 985 P.2d 788 (Or. 1999), but see Reynolds v. Schrock, 142 P.3d 1062 (Or. 2006) in which the application of Granewichwas limited.

2. Negligent Misrepresentation. The privity requirement associated with legal malpractice causes of action, means that the examiner can only be liable to the client in the event that he or she has failed to exercise the proper standard of care in the preparation of the title opinion. The lawyer would not be liable for legal malpractice to third parties with whom there was no privity of contract (attorney-client privilege), butwho may also have been injured as a result of the mistakes contained in the title opinion. Having dodged one open hole, the title examiner may nevertheless fall into the next.

The Texas Supreme Court has negated the privity requirement where a negligent misrepresentation has been made to a non-client who relied upon the work product of the attorney. McCamish Martin Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999). In that case, privity did not exist between the parties. The attorneys represented Victoria Savings Association (“Victoria”), which had agreed to finance a real estate development project for a developer (“Boca”). Boca accepted the financing arrangement based upon Victoria’s oral representation that it would later expand the line of credit if the sales of the lots in the development justified the increase. Subsequently, Victoria decided not to extend the additional credit and Boca went into bankruptcy. Boca brought a lender liability suit against Victoria claiming

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breach of the agreement. At that time, Victoria was itself having problems. Boca was concerned that Victoria would be declared insolvent, a receiver would be appointed for the bank, and any judgment obtained by Boca would be unenforceable. As a result, the parties entered into a settlement agreement which was signed by Victoria’s board and which Boca also signed, on the condition that Victoria’s legal counsel (the McCamish law firm and the defendant in the subsequent suit) would provide a written opinion declaring that the settlement agreement would be enforceable in the event that Victoria was declared insolvent. The McCamish law firm provided a written opinion stating that the settlement agreement was enforceable even if Victoria were declared insolvent. Later, the settlement agreement was declared unenforceable. Under a prior Supervisory Order, the board relinquished its ability toenter into any such settlement agreement. Boca then sued the McCamish law firm.

The Texas Supreme Court held that an attorney could be liable to a third party in the absence of privity, not for legal malpractice, but for negligent mis-representation. Although this seems like a distinction without a difference to the attorney, the Court held that negligent misrepresentation and legal malpractice are not the same. Legal malpractice requires privity. Negligent misrepresentation does not. The Court began its ruling by applyingto lawyers the Restatement (Second) of Torts § 552 (1977). Section 552(1) of the Restatement (Second) of Torts provides:

One who, in the course of his business, profession or employment, or in any transaction in which he has a pecuniary interest, supplies false information for the

guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. McCamish, 991 S.W.2d at 791. Emphasis added.

The Court went on to state that Texas law had already applied §552 to other professionals and could see no reason why it should not also apply to attorneys. TheCourt stated that allowing a non-client to bring a negligent misrepresentation case would not undermine the general rule requiring privity in order to sue for legal malpractice since the claimant would not be a client. The liability is not based upon a breach of a duty a professional owes to his or her client, but is an independent duty owed to the non-client based on the professional’s awareness of the non-client’s reliance on the misrepresentation and the professional’s intention that the non-client so rely.

In these instances, the attorney invites a non-client to rely upon the work that the attorney has performed. The Court went on to say that clients would not lose control over the attorney-client relationship, nor would lawyers be subject to unlimited liability since the class of potential claimants would be narrow. The attorney who provides the information is aware of the non-client and intends that the non-client rely upon the information which the attorney has provided. Only in the instance of justifiable reliance may the non-client prevail in a suit for negligent

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misrepresentation. The Court stated that such reliance is not justified when the representation takes place in an adversarial context, whether in a business transaction or in litigation. The Court also stated that the attorney could further narrow the class by minimizing the risk of liability by setting forth, (1) limitations as to whom the representation is directed and who may rely on it, or (2) disclaimers as to the scope and accuracy of the factual investigation or assumptions forming the basis of the representation or the representation itself. McCamish, 991 S.W. 2d at 794.

The Court also cited the Disciplinary Rules, stating that an attorney could not give an evaluation to a third party unless he or she reasonably believes that making the evaluation is compatible with other aspects of the attorney/client relationship and the client consents after consultation. Consultation is defined in the Disciplinary Rules as “the communication of information and advice reasonably sufficient to permit the client to appreciate the significance of the matter in question.” Disciplinary Rule 2.02. A non-client cannot rely upon an attorney’s statement or an opinion letter unless the attorney invites that reliance. See also Restatement (Third) § 51 of the Law of Governing Lawyers (2006).

McCamish was the confirmation of the position of the Texas Supreme Court concerning the liability of attorneys to non-clients predicted by the United States Court of Appeals, Fifth Circuit, in First Nat’l Bank of Durant v. Douglass, 142 F.3d 802 (5thCir. 1998). This case specifically involved the issuance of an oil and gas title opinion by an attorney representing a clientborrower, prepared for the benefit of thelending bank in order to fund a loan secured by the working interest of the client.

Epps was the president and owner of Trans Terra Corporation International (TransTerra) which owned six oil and gas wells (Ledrick Wells) located in Roberts County, Texas. The attorney (Douglass) prepared the lease covering the Ledrick Wells for Epps in 1990, as well as a 1992 title opinion which stated that the attorney had personally examined the County Clerk’s records of Roberts County. Thereafter, numerous title opinions covering the wells were prepared; however, in the preparation of these later title opinions, Douglass did not examine the courthouse records, but instead relied upon information provided by Epps and a landman.

In 1993, Epps approached the First National Bank in Durant (Bank) for a loan. In conjunction with the transaction, the Bank reviewed a 1993 title opinion prepared by Douglass for Trans Terra. The Bank agreed to loan Trans Terra $1.5 million provided that the Bank receive an updated title opinion specifically addressed to the Bank prior to funding the loan. Douglass provided the Bank with a title opinion stating that it was rendered solely and exclusively for the benefit of the Bank and further stating that Douglass had examined the Deed Records of Roberts County, Texas from inception of title to the date of the opinion covering the captioned acreage. In fact, Douglass had not examined the records at the courthouse to the date of the opinion and had not received any additional information from the landman or the client.

Trans Terra defaulted and the security was foreclosed. In the course of the foreclosure, it was discovered that the net revenue interests actually owed by TransTerra in the Ledwick Wells weresignificantly less than the net revenue interest disclosed in the title opinions. Consequently, the Bank sued Trans Terra,

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Epps, Douglass and his law partner. TransTerra and Douglass filed for bankruptcy. At trial, the jury found that an attorney/client relationship existed between Douglass and the Bank. It further found negligence on the part of Douglass in the preparation of the title opinions.

On appeal, the Fifth Circuit held that the jury could not have found an attorney/client relationship between Douglass and the Bank since none existed. The Bank did not have a cause of action for legal malpractice since there was no privity between the Bank and Douglass. The Court also held that the designation of the Bank as an addressee in the title opinion without more did not establish a contract between the Bank and the attorney, thereby creating an attorney/client relationship which would allow the Bank to sue Douglass for legal malpractice.

The Court anticipated McCamish,holding that it would be the position of the Texas Supreme Court that privity between Douglass and the Bank would not be required where the Bank sued Douglass for negligent representation. Since it was not suing Douglass for malpractice, the Bank was not required to be Douglass’ client. This was of no comfort to Douglass since the Court recognized the cause of action for negligent misrepresentation applicable to lawyers citing the Restatement (Second) of Torts § 552 (1977). The court noted the intermediary appellate court’s opinion in the McCamish case and its reliance upon § 552 of the Restatement (Second) of Torts which applied the negligent mis-representation cause of action to attorneys. The Fifth Circuit held that the evidence supported the finding of liability against Douglass since his representation was made in the course of his business, that he supplied false information to the Bank in the course of its

business, that Douglass did not exercise reasonable care or competence in communicating information and that the Bank suffered a pecuniary loss by justifiably relying upon the title opinion.

The Court held that the Bank’s reliance was justifiable since the loan was not funded until the Bank had received the title opinion and that Douglass was aware that his opinion was the condition for the funding of the loan. In addition, the title opinion was specifically written to the Bank and stated that it was rendered solely and exclusively for the benefit of the Bank, thereby inviting the Bank to rely upon the title opinion.

The scope of the title opinion was limited to reliance by the Bank. Even though the attorney may be “adverse” to a third party in a business transaction, if the title opinion is rendered for the benefit of such third party and such dissemination does not otherwise conflict with the existing attorney/client relationship, the attorney may be liable for negligent misrepresentation by inviting such reliance within the context of the business transaction, if the lawyer isnegligent in the preparation of the title opinion, thereby causing pecuniary loss to the non-client third party.

The measure of damages was not the difference between the value of the working interest in the Ledwick Wells described in the title opinions and the actual working interest owned by Trans Terra, but rather the difference between the loan amount actually paid by Trans Terra and the remaining unpaid balance of the loan.

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VII. LIMITATIONS ON THE SCOPE OF THE TITLE OPINION/DISCLAIMERS

A. LIMITATIONS GENERALLY

The title opinion is the written communication between the lawyer and the client informing the client of the status of the title examined. It expresses the client’s legal rights and duties concerning the titleand identifies the encumbrances and third parties’ rights. It explains the legal significance of these interests and the options available to cure them.

Communication between the lawyer and the client is the foundation of the attorney/client relationship. The Disciplinary Rules state that, “the lawyer should explain the matter to the extent reasonably necessary to permit the client to make informed decisions . . .” (Disciplinary Rule 103(b)). The attorney preparing the opinion should be aware of the purpose for which the client has requested the title opinion. The title opinion should adequatelyinform the client concerning the title so that the client can make reasonably informed decisions about the business risks associated with the title to the property from the information contained in the opinion.

A lawyer may avoid or minimize the risk of liability to a non-client by limiting to whom the opinion is written and who may rely, as well as disclaiming the scope and accuracy of the factual investigations or assumptions forming the basis of the representation or the representation itself. McCamish v. FE Appling 991 S.W. 2.d 787 (Tex. 1999).

The Disciplinary Rules allow a lawyer to limit the scope of the objectives and general methods of the representation if the client consents after consultation. Consultation is

defined within the Disciplinary Rules as the “communication of information and advice reasonably sufficient to permit the client to appreciate the significance of the matter in question.” Disciplinary Rules –Terminology. Any disclaimer or limitation of liability, or limitation upon the scope of the title opinion, must be explained to the client. The practical effect is to limit the attorney’s liability as long as the client understands the significance of this limitation upon the scope of the opinion.

Generally, a lawyer may not limit liability to a client for malpractice unless the client is independently represented in the issue. Disciplinary Rule 108.(g) (2007). This is not intended to apply to “customary qualifications and limitations, regarding legal opinions and memoranda.” Disciplinary Rule 1.08 (g), Comment 6.

In addition to the requirement that such limitation be customary, the limitation may not disclaim the examiner’s own negligence, nor the measure of damages in the event that the standard of care has been breached. In McCamish, the Court cited DisciplinaryRule 2.02, Comment 6, which states that,“ordinarily a lawyer should have whatever latitude of investigation seems necessary as a matter of professional judgment.” Tex. Disciplinary R. Prof’l. Conduct 2.02 Comment 6. Limits placed upon the examiner’s investigation and evaluation should be disclosed in the title opinion, including the fact that certain sources may be excluded, or the scope of search may be limited by the time constraints or the noncooperation of persons having relevant information.” Disciplinary Rule 2.02, Comment 6.

It is also important that in commissioning the title opinion, the client communicates specifically the nature of the

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title opinion sought and the manner or method in which the information will be provided to the attorney (i.e., client generated run sheets, abstract, or attorney stand up investigation of the records). The client should be clear about the nature of the opinion and the objective of the client in obtaining the title opinion (i.e., whether the opinion is for lease acquisition purposes or a division order title opinion).

Sometimes, the client may want the title opinion directed to third parties as in the Durant and McCamish cases. However,this request may subject the attorney to a conflict of interest. The attorney must be satisfied that no conflict of interest exists and should advise the client of the implications of the evaluation, particularly the client’s responsibilities to third parties and the duties to disseminate such finding. McCamish, 991 S.W. 2d at p. 793.

The client makes the ultimate decisionabout to whom the title opinion shall be addressed and whose reliance shall be invited. The attorney must not allow the client to make the decision without advising the client about the potential impact that such evaluation may have upon the scope of the attorney/client relationship. Such consultation should also protect the attorney for having given work product to a third party since the dissemination was in consequence of a request by the client. Disciplinary Rule 2.02 provides:

A lawyer shall not undertake an evaluation of the matter affecting a client for the use of someone other than the client unless:

(a) the lawyer reasonably believes that making the evaluation is compatible with other aspects of the lawyer’s

relationship with the client; and

(b) the client consents after consultation.

In McCamish, the Court specifically allowed the lawyer to avoid, or minimize the risk of liability to a non-client by explainingto whom the representation is made and who may rely upon it, as well as including disclaimers as to the scope and accuracy of the factual investigation or the assumptions forming the basis of the representation or the representation itself. McCamish, 991 S.W. 2d at 794. A disclaimer specifically stating that the title opinion is prepared solely for the use of the client and the third party and that it is not to be relied upon by any other party without the prior written consent of the examiner is designed specifically to disinvite such third parties from relying upon the title opinion and to deprive thenon-client of any justifiable reliance upon the information contained in it.

Although this paragraph cannot insure that the title opinion will not be disseminated to additional third parties, it should be sufficient to inform them that their reliance upon the information contained in the title opinion will not give rise to a cause of action against the examiner in the event that the title opinion is incorrect. Although title opinions when delivered to the client are initially privileged work product, they are commonly disseminated.

The examiner must advise the client whether making the title opinion available to third parties is compatible with other aspects of the lawyer’s relationship with the client. If not, the lawyer cannot disseminate the title opinion to third parties. Disciplinary Rule 2.02.

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B. SPECIFIC DISCLAIMERS

Although the specific language of each disclaimer may vary by examiner, the objective of the disclaimer is generally the same. It is to inform the recipient of the title opinion of the limitation on the scope of the title opinion and the assumptions under which it was prepared. The disclaimer should also explain the effect of circumstances which may alter the title, but which the examiner has not seen or about which he or she is unaware. This would include (i) the methodology pertaining to the acquisition of the documents which were examined; (ii) the application of circumstances which would not be disclosed in the record, but which would affect the recorded documents (i.e., forgery of a deed); (iii) the possibility of the ripening of encumbrances against the title which havenot yet been recorded (i.e., mechanic materialmen’s liens); (iv) as well as facts and circumstances outside of the record, or on the ground which would affect the title as disclosed by the records examined (i.e., the location of fences and adverse possession).

It is the intention of the examiner in the disclaimer to shift the risk of the effect of these issues to the client or other addressee. The examiner must clearly inform the client of these risks, in a manner customary to the rendition of title opinions. The examiner should follow “good opinion practice.” See, State Bar of Texas Business Law Section, Report of the Legal Opinions Committee Regarding Legal Opinions in Business Transactions (June 1, 1992), State Bar of Tex. Bull. Bus. L. Sec., Vol. 29, Nos. 2 and 3 (June-September 1992) regarding transaction type legal opinions.

1. The Scope of the Title Opinion

This disclaimer should limit the scope of the title opinion to the documents

specifically examined. These documents should be clearly identified in the title opinion. Generally, the title opinion will cover the time from the sovereignty of the soil to the ending date of the examination. The documents examined should cover this entire period. The opinion should specify (whether in the disclaimer or in another part of the opinion), the methodology used in the acquisition of the documents examined,whether the examiner conducted a stand up investigation personally reviewing the records of the county courthouse, if the examiner has been furnished the documents by the client from a run sheet, or has obtained copies of the documents through an abstract. The disclaimer should clearly state that the examiner is not responsible for the examination of any other documents other than those which have been provided to the examiner by the client and are specifically described in the title opinion. Where appropriate, the examiner may also wish to inform the client that he or she has not conducted any personal investigation of the records or the property.

In the event that the examiner conducts a stand up examination of the records of the courthouse, the lawyer should state that he or she is not responsible for documents which have not been found due to the misfilings or idiosyncrasies of the clerk. Accordingly, the examiner will want to shift the risk to the client. Sometimes the clerk will index or file documents not in keeping with the overall index system (i.e., filing all documents where the clerk is unsure as to which letter of the alphabet under which to file the document, thereby filing all such documents under “X”) so that the examiner will not find them in the standup search. The examiner should be clear to inform the client of the practical effect of the failure to locate and examine such documents. The examiner should also

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explain to the client the assumptions upon which the title opinion is based, and the accuracy of any factual investigation which may have been conducted.

2. Who May Rely

The title opinion is the work product of the attorney addressed to the client who has employed the attorney. Also, third parties to whom the client has requested that the opinion be sent will also receive the title opinion. It is important to the attorney that the non-client recipients be specifically narrowed to just the addressees of the title opinion. The examiner should include a clear disclaimer specifically stating that only the client and the specific non-client addressee of the title opinion may rely upon the title opinion, and that no other parties may rely upon it without the specific written consent of the examiner, thereby removing any claims for justifiable reliance by any other party. This is the type of disclaimer approved by the court in McCamish, 991 S.W. 2d at 794.

3. Off the Record

Additionally, the examiner should specifically make known in the disclaimer that he or she is not responsible for facts or circumstances which are outside of the record, or circumstances existing on the ground which may affect title to the property being examined, yet may have an impact upon the documents examined. Unless furnished with a survey, or the examiner has personally inspected the property, he or she will not be aware of the location of fences, buildings, structures, or other factors which may affect the boundaries of the property, or give rise to actual or inquiry notice concerning the use of the property and the potential for the ripening of limitations title. The ripening of limitations title will have a

direct impact upon the status of the record title.

4. Taxes

The examiner should request a tax certificate showing the timely payment of taxes, or the examiner should clearly explain to the client that it should satisfy itself with regard to the payment of taxes. A foreclosure and sale of the property for nonpayment of taxes will cause the client to lose title, subject to the rights of subrogation and redemption, to the extent of the interest foreclosed.

5. Bankruptcy

The examiner should clearly state that he or she is not responsible for bankruptcy filings by any party in the chain of title, notice of which has not been placed in the county clerk’s records in the county in which the property is located, or about which the examiner is otherwise unaware. The examiner should clearly explain to the client that the filing of a bankruptcy petition by a party in the chain of title may have an adverse consequence upon the title disclosed in the title opinion. The examiner will also be on notice of the bankruptcy filing if it is referred to in a recorded document. See Westland, supra.

6. Supplemental Opinions

An examiner preparing a supplemental opinion is relying upon the information contained in the prior opinion. The examiner preparing the supplemental opinion runs the risk that the original title opinion is incorrect and therefore, so is the supplemental title opinion, notwithstanding that the supplemental examiner has properly examined the subsequent instruments and the curative documents. As previously discussed, if the examiner does not feel

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comfortable relying upon the original title opinion, the examiner should inform the client that another examination of the title from sovereignty of the soil should be made. Unless the supplemental title examiner has consulted with the client and the client is aware of the risks inherent in relying upon the prior title opinion, such reliance should not be undertaken.

Merely inserting a recitation in the disclaimer of the title opinion that the title opinion is based upon a prior title opinion by another examiner and assuming that the client understands all of the risks associated with such reliance, may not be sufficient to limit the liability of the supplemental examiner for defects in the prior title opinion.

7. Law

The examiner generally applies the law at the time of the vesting of title (i.e., intestate succession statute applicable at the time of the death of the intestate owner), aswell as at the time that the examiner prepares the title opinion. After the title opinion is prepared and disseminated, the law may change or be clarified. The examiner may explain to the client or other recipient of the title opinion that theexaminer is under no duty to inform them of a clarification or change in the law and its impact upon the title. It is not realistic to expect the examiner to be responsible to follow up each opinion written which may be so affected, (i.e. post productiondeduction prohibitions being declared surplusage, or subsequent plugging, liability of assignor after sale of working interest).

VIII. CONCLUSION

A title opinion is a written communication with the client. Communication between the attorney and

the client is the foundation of the attorney/client relationship. The examiner should remember that he or she should clearly communicate with the client in order to maintain a successful attorney/client relationship.

Forms of title opinions vary according toeach examiner and the objectives of the client. The attorney and the client should understand each other so that the title opinion prepared by the examiner will accomplish these objectives.

The attorney should be mindful of the standard of care that he or she owes to the client. Any limitation upon the scope of the title opinion must comply with the ethical obligations of the attorney and be explained to the client so that the client understands the scope of the title opinion.

Where the client wishes for the attorney to communicate the title opinion to third parties, the client and the attorney must clearly understand specifically to whom the title opinion is to be disseminated and the attorney must inform the client of the effect of such third party communication so that such dissemination does not adversely affect the attorney/client relationship.

The attorney will be liable for legal malpractice to the client who has employed him in the event that the attorney has breached the standard of care owing to the client in the preparation of the title opinion. The attorney will also be liable to third parties who have justifiably relied upon the title opinion for negligent misrepresentation.

Any limitation of the liability through a disclaimer contained in the title opinion must inform the recipient of the nature of the limitation upon the scope of the title opinion. Nothing contained in the disclaimer may reduce the standard of care that the

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attorney owes, nor disclaim the attorney out of his own negligence. It should also explain the assumptions upon which the title opinion has been based. The disclaimer should not contain provisions which are not customary in oil and gas title opinion practice.

The disclaimer may not always please the client, but it is necessary in order to properly inform the client of the limitations of the title opinion. An attorney should never render a title opinion where he or shedoes not feel comfortable with the methodology used to furnish the documents for examination, or the scope of the examination which may have been requested by the client. Additionally, the attorney should never incorporate opinions or conclusions with which the examiner is not comfortable in order to please the client. After all, it is the signature of the examiner at the bottom of the title opinion which establishes the liability for what is containedin it. Although the title to the title opinion may belong to the client and be relied upon by third parties, the liability for the title opinion may belong to the EXAMINER.

TABLE OF AUTHORITIES

CASE LAW

Barcelo v. Eilliott, 923 S.W.2d 575 (Tex. 1996)

Bernstein v. Portland Sav. & Loan Ass’n., 850 S.W.2d 694 (Tex. App.—Corpus Christi 1993, writ denied)

Cook v. Irion, 409 S.W.2d 475 (Tex. Civ. App.—San Antonio 1966, no writ)

Cosgrove v. Grimes, 774 S.W.2d 662 (Tex. 1989)

Gavenda v. Strata Energy Co., 705 S.W.2d 690 (Tex. 1986)

General Motors Acceptance Corp./Crenshaw, Dupree & Milam, LLP v. Crenshaw, Dupree & Milam, LLP/General Motors Acceptance Corp., 986 S.W.2d 632 (Tex. Civ. App.—El Paso 1998, pet. denied)

First Nat’l Bank of Durant v. Douglass, 142 F.3d 802 (5th Cir. 1998)

Granewich v. Harding, 985 P.2d 788 (Or. 1999)

Juhl v. Airington, 936 S.W.2d 640 (Tex. 1996)

Likover v. Sunflower Terrace II, Ltd., 696 S.W.2d 468 (Tex. App.—Houston [1st Dist.] 1985, no writ)

Lund v. Emerson, 204 S.W.2d 639 (Tex. Civ. App.—Amarillo 1947, no writ)

McCamish Martin Brown & Loefler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999)

National Sav. Bank v. Ward, 100 U.S. 195 (1879)

Reynolds v. Schrock, 142 P.3d 1062 (Or. 2006)

Westland Oil Development Corp. v. The Gulf Oil Corp., 637 S.W.2d 903 (Tex. 1982)

Zidell v. Byrd, 692 S.W.2d 550 (Tex. App.—Austin 1985, no writ)

STATUTORY SOURCES

Tex. Nat. Res. Code Ann. §§ 91.401 and 91.402 (2007)

Tex. Prop. Code Ann. §§ 12.001 and 13.001 (2007)

SECONDARY SOURCES

Restatement (Second) of Torts § 552 (1977)

Restatement (Third) of the Law Governing Lawyers §51 (2006)

RULES OF PROFESSIONAL CONDUCT/TITLE STANDARDS

Texas Disciplinary Rules of Professional Conduct (2007)

Rule 1.01(a)

Rule 1.02(b)

Rule 1.08(g)

Rule 2.02

Comments

Terminology

Texas Land Title Examination Standards, Tex. Prop. Code. Ann. (2007)

Standard 1.10

Standard 1.20

Standard 2.10