Texas Board of Law Examiners

February 25, 1999

QUESTION 1

Owen is the owner of the surface of a 1000 acre tract of farm and range land situated in the outskirts of Boomtown, Texas. The oil, gas, and other mineral estate in and under the 1000 acre tract is owned by Martin. Rich Oil Company ("ROC"), in turn, has leased the oil, gas and other mineral estate from Martin.

Boomtown has been growing and developing all around Owen's 1000 acre tract, and this has resulted in a tremendous increase in the value of Owen's land. A year ago, he decided to develop and subdivide his 1000 acre tract into a residential development and has since then spent over $100,000 preparing and obtaining approval of a master plan for the development.

After learning that Owen had obtained approval of his master plan, ROC conducted seismic and geological studies on the 1000 acre tract and identified eight locations that appear prospective for gas well drilling and development. ROC has recently staked the eight well locations, has notified Owen of its intention to develop the wells, and has demanded that Owen permit ROC unrestricted access to the tract so it can commence drilling.

Owen objects to ROC's drilling plans because he believes the drilling and development of the gas wells will reduce the value of and interfere with his plan for the residential development. He refuses to grant ROC unrestricted access but has offered to meet with ROC to see if they can work out an agreement about where ROC can drill and that will minimize the impact on Owen's plans. ROC declines to meet with Owen and renews its request for unrestricted access.

1. In light of Owen's preexisting plans for a residential development, does ROC have any right to drill and attempt to develop the wells on the 1000 acre tract? Discuss fully.

2. Is ROC obligated to cooperate with Owen in an effort to reach an agreement such as Owen has suggested? Discuss fully.

3. Assuming ROC gains access to the 1000 acre tract, are there any limitations to which ROC's activities on the land are subject and what if any damages can Owen recover if ROC exceeds those limitations? Discuss fully.

QUESTION 2

Sam owns the oil, gas and other mineral estate in and under a 500 acre tract of land. He leased the oil, gas and other mineral estate to Golden Oil Company ("GOC"). The lease provided in clear terms for payment of "a one-fifth free royalty which is not to be charged with any costs of production, marketing or transportation."

GOC successfully drilled two gas wells on this 500 acre tract and, two months after the first sale of production from the wells, was prepared to give Sam his first royalty check. GOC presented and asked Sam to sign a division order stating that "pro rata adjustment has been made in the royalty for costs of marketing."

Sam refused to sign the division order on the ground that the adjustment for costs of marketing was at variance with the terms of the lease.

Asserting Sam's refusal to sign the division order as its justification, GOC withheld payment of the royalty. GOC has not paid Sam any royalties even though there has been actual production from the two gas wells for twelve consecutive months and actual sales of the production for nine months. During three of those twelve months, GOC had intentionally refrained from marketing the gas, again asserting Sam's refusal to sign the division order as its reason.

Sam seeks your advice on the following questions:

1. Did Sam's refusal to sign the division order presented by GOC justify GOC's withholding of the first royalty check? Discuss fully.

2. Did Sam have the right to receive periodic royalty payments during the ensuing months in which GOC produced and sold gas from the wells and, if so, at what intervals should GOC have paid Sam? Discuss fully.

3. Did GOC breach any duties implied at law for Sam's protection? Discuss fully.

 

QUESTION 3

Husband and Wife married in Dallas in 1993 and lived there for the duration of their marriage. Soon after they married, they formed Bakery, Inc., a corporation in which they were equal shareholders and in which they both worked full time and earned their livelihood. Child was born to them in 1996.

In 1998, Husband and Wife separated. Wife went to San Antonio, Bexar County, Texas to stay with Wife's mother until Wife could decide whether she wanted to stay in San Antonio or move back to Dallas. After living in San Antonio for 30 days, Wife filed a divorce petition in the district court of Bexar County and served Husband with process.

Husband, who did not want a divorce, immediately made a special appearance in the Bexar County court and moved to dismiss the petition on the ground of improper venue. The court granted the motion. Wife immediately refiled in the district court of Dallas County and served Husband.

Wife was able to make a prima facie showing that Husband has been neglecting the business of Bakery, Inc. during the pendency of the divorce petition. She filed ex parte application for temporary injunctive relief asking the Dallas County court, in the alternative, to appoint a receiver to run the business or to award her (Wife) exclusive control of the business during the pendency of the divorce petition and to award her attorney's fees incurred in filing the ex parte application. The court issued the order appointing a receiver and awarding attorney's fees without notice to Husband.

Husband, who believes the marriage can be saved through counseling, filed a motion requesting the court to order counseling. The court, over Wife's strenuous opposition, issued the order. Later, upon receipt of the counseling report, the court, believing that further counseling might bring about a reconciliation, sua sponte and again over Wife's strenuous objection, ordered further counseling for another 60 days, including counseling that addresses issues relating to the effect of the divorce on Child.

Counseling failed to effect a reconciliation but it did convince Husband and Wife that it would be in their best interests to enter into a binding agreement regarding spousal and child support, division of their property and all other issues in the divorce action. The court ordered them to enter into mediation and appointed a mediator.

1. Did the Bexar County court err in dismissing Wife's divorce petition? Discuss fully.

2. Did the Dallas County court have the power to issue temporary injunctive relief of the kind sought by Wife and, if so, did the court act properly in issuing the order ex parte? Discuss fully.

3. Did the court act properly in issuing both counseling orders? Discuss fully.

4. Did the court have the power to order Husband and Wife to enter into mediation and, if so, what steps are required to make a mediation agreement (a) binding and (b) a final judgment of the court? Discuss fully.

QUESTION 4

In 1983, Husband and Wife, both 21 years old, were married in Lubbock, Texas, where they have resided ever since. At the time of the marriage, Wife was a qualified registered nurse and was employed as such at a local hospital. She was earning an annual salary of $25,000 and had a savings account of $15,000. Husband possessed only a high school diploma and was earning $8.00 per hour working for a landscaping company.

By 1988, Wife's savings account had grown to $30,000, consisting exclusively of money from her earnings as a nurse. Husband, with Wife's consent, quit his job and started a landscaping company, using $20,000 from Wife's savings account as the start-up funds.

In February 1989, their only child, Daughter, was born with a serious mental disability with a prognosis that it would be a life-long condition that would require special medical attention, special schooling, and home care. As a result of Daughter's condition, Wife quit her nursing job to stay home to care for Daughter.

Wife thereafter became a full time homemaker, unable to work outside the home because of Daughter's needs. She has, however, maintained her credentials as a registered nurse but, if Wife were to reenter the job market, she would have to attend about six months of special schooling to update her skills. She could reasonably expect to earn an annual salary of $40,000 if she were to return to nursing full time and about $20,000 a year if she were to hold herself out for part time assignments. Wife would, in either case, have to make provision for Daughter's continuing care.

The landscaping business at which Husband worked has been the family's sole source of income since the birth of Daughter. The medical costs associated with Daughter's care have depleted Wife's savings and required an additional $10,000 a year which is supplied by the income from the landscaping business.

In 1997, Wife began having a sexual affair with the pediatrician who was caring for Daughter. When Husband found out about the affair in late 1998, he sued Wife for divorce. Wife filed a cross-petition.

Husband and Wife have agreed on division of their property, which consists exclusively of their mortgaged home, the landscaping business, and two family automobiles. Wife will be allowed to live in the family home until Daughter reaches age 18, and Husband will pay the mortgage. Husband will continue to own the business (which, by now, is producing net income of $80,000 per year) and will repay at the rate of $1,000 per month for 36 months the $20,000 he obtained from Wife's savings to start the business, plus interest, commencing at the time the divorce becomes final.

They have also agreed that Wife will be the sole managing conservator of Daughter and that Husband will pay $1,000 per month in child support for Daughter's life.

However, Husband and Wife have been unable to agree on post-divorce maintenance. Wife seeks indefinite post-divorce maintenance. Husband opposes her claim, asserting that he should not be required to pay any post-divorce maintenance whatsoever but that, in any event, it should not be indefinite.

1. Do Wife's circumstances fulfill the basic eligibility requirements necessary to sustain an award of post-divorce maintenance? Discuss fully.

2. What factors will the court consider in determining the nature, amount and duration of post-divorce spousal maintenance, if any, that Wife might receive and, applying the foregoing facts to those factors, what is the likely result in this case? Discuss fully.

 

QUESTION 5

A, B and C formed XYZ, Inc., a Texas corporation, to operate a business for profit in Texas. A, B and C were the sole officers, directors and employees of XYZ, Inc. The articles of incorporation authorized 1,200 shares. A, B and C were each issued 300 shares; the remaining 300 shares were held as treasury shares.

At the first meeting of directors, A, B and C entered into a written buy/sell agreement with XYZ, Inc. and among themselves agreeing that, if for any reason the employment of any of the shareholders were to terminate, each remaining shareholder would be obligated to purchase, at book value, an equal number of the total number of shares held by the outgoing shareholder. The agreement also stated that it was binding on the successors and assigns of the shareholders.

A year later, XYZ, Inc. hired D. Initially, he was neither an officer nor a director but he was a coequal employee with A, B, and C. A majority of the board of directors, with A voting against, voted to sell D the 300 treasury shares at book value and to accept D's promissory note in payment for the shares. D accepted the shares and gave his note in payment. The share certificate issued to D for his 300 shares did not bear any notation of the buy/sell agreement, although D knew about the agreement at the time he acquired his shares.

A has resigned as an officer and director of XYZ, Inc. and has announced his retirement. D is elected as a director.

In accordance with the buy/sell agreement, A tenders his 300 shares for sale at book value, 100 shares each to B, C and D. D refuses to purchase any of A's shares.

Related to another business venture in which D has an interest, D owns a number of computers he wishes to dispose of. At his first XYZ, Inc. directors meeting, D makes a full disclosure of his interest in the other business enterprise, including the fact that he owns and wishes to dispose of the computers. He states correctly that the value of the computers is slightly more than the balance due on the promissory note he gave for his XYZ, Inc. stock. In fact, XYZ, Inc. has a legitimate need for the computers. He offers to sell the computers to XYZ, Inc. in full payment of his promissory note. B votes in favor of accepting D's offer; C votes against it; and D casts the deciding vote in favor of acceptance.

A, displeased with D and the actions of XYZ, Inc., files suit against D and XYZ, Inc. asserting as grounds that:

a) By refusing to purchase any of A's shares, D breached the buy/sell agreement;

b) D's promissory note was not valid consideration for the issuance to him of the 300 treasury shares; and

c) D's participation in the vote on his offer to sell the computers to XYZ, Inc. in payment of his promissory note invalidated the transaction.

Assume that A brings the appropriate form of action against the appropriate parties, how is the court likely to rule on each of the grounds being asserted by A? Discuss fully.

QUESTION 6

Roadside Inns, Inc., a Texas corporation ("RSI"), owns and operates a chain of motels in Texas. RSI's board of directors consists of Art, Betty, Cal and Darla, each of whom owns 10% of RSI's outstanding shares. There are a 32 other shareholders in RSI, for a total of 36. Shares of RSI are not traded publicly.

Zed, a successful motel operator, had been hired in 1995 as CEO of RSI. Zed's employment contract allowed him to work for other motel operators even though such activities might compete with RSI, provided only that: "Zed shall not acquire any ownership interest in any motel within five miles of any property operated by RSI." The contract also provided for termination ". . . by a vote of 50% of the members of the Board of Directors of RSI."

In mid-1998, Zed supervised the start-up of a motel owned by an RSI competitor, Motel 8, less than a mile from one of RSI's motels. In December 1998, as payment for his services, Zed took Motel 8's promissory note; the note was secured by a mortgage in Zed's favor on the motel where he had supervised the start-up.

In January 1999, Art died, leaving his RSI shares to Peter, his only heir, and Peter was elected as a director. When Peter learned of Zed's involvement with Motel 8, he expressed concern that Zed's interest as a mortgagee in the Motel 8 property was a breach of Zed's employment contract. The other three directors disagreed and stated they were not concerned.

Without communicating in any way with the other directors or Zed, Peter filed a shareholder's derivative suit seeking to recover damages from Zed for breach of contract. The complaint alleged, among other things, that he (Peter) had acquired his stock in RSI by testamentary succession from Art, who had been a shareholder at the time of the alleged breach of contract.

At the next board meeting, Peter made a motion to terminate Zed's employment. Anticipating such an event, Cal and Darla had agreed with Zed that, when Peter made the motion, they would walk out of the board meeting. When Peter made the motion, Cal and Darla left the meeting and went home. Peter and Betty went forward with the motion and voted to terminate Zed's employment. The RSI by-laws and articles of incorporation are silent on what constitutes a quorum of the board of directors.

1. Has Peter satisfied each of the prerequisites for maintaining a derivative suit against RSI? Discuss fully.

2. Was the vote by Peter and Betty effective to terminate Zed's employment? Discuss fully.