A lawsuit against Denver firm Davis Graham & Stubbs appears to be resolved after the Colorado Supreme Court issued a ruling in its favor last week.
Rocky Mountain Exploration Inc., an oil and gas company that was opposite a DGS client in a transaction, had sued the law firm and one of its partners, Gregory Danielson, for breach of fiduciary duty, fraud and civil conspiracy. DGS’ client, Tracker Resource Exploration, had used an agent company to acquire oil and gas assets from RMEI, and RMEI claimed the law firm had misrepresented that the agent was its client and not Tracker. But on June 11 the supreme court upheld the district and appellate courts’ decisions that ruled in favor of DGS on all claims.
RMEI v. Davis Graham & Stubbs hinged upon the Restatement (Third) of Agency that governs contract practices. Under those principles, the supreme court found that while Tracker’s identity was concealed in the transaction, its involvement was not, so RMEI could not avoid its contract with Tracker’s agent. Justice Richard Gabriel delivered the majority opinion while Justice Monica Márquez dissented, with Justice Nathan Coats joining the dissent.
The case originated from a falling out that RMEI and Tracker had over a failed transaction more than a decade ago. In a purchase and sale agreement initiated in 2006, Tracker tried to buy out RMEI’s North Dakota interests at a price the latter “deemed too low,” according to the opinion.
When RMEI put the assets back up for sale, a third company, Lario, struck a deal with Tracker in which Lario would buy the RMEI interests and then transfer them over to Tracker, keeping 25 percent of the leasehold interests in return. But the companies agreed not to disclose Tracker’s involvement to RMEI, “recognizing that the issues between RMEI and Tracker might make a deal impossible if RMEI knew of Tracker’s involvement,” the opinion explained.
In the new deal, DGS represented not Lario, but Tracker. In that capacity, the firm drafted many of the transaction documents including the final agreement between RMEI and Lario, helped open an escrow account, and hosted the closing in its Denver office. But the firm removed traces of Tracker’s involvement in the documents it prepared, “scrubb[ing] the metadata from anything coming from Tracker to prevent RMEI from learning of Tracker’s involvement, which Tracker feared could threaten the deal,” according to the court.
After the sale closed, Lario re-assigned assets to Tracker, which then auctioned them off for profit. When RMEI learned of this, it sued Lario, Tracker and DGS over 18 claims, including civil conspiracy and fraud. Lario and Tracker settled the claims against them, leaving DGS. But DGS successfully moved for summary judgment in state trial court, arguing among other things that the law firm didn’t owe RMEI a duty to disclose it was representing Tracker. The Colorado Court of Appeals affirmed the trial court’s decision.
In upholding the lower courts, the supreme court’s analysis largely relied on documents showing that Tracker was an unidentified, but not undisclosed, principal in the deal.
“…[T]he assignment clause in the RMEI-Lario transaction agreements made clear to RMEI that Lario had partners in the transaction to whom Lario could assign a portion of its interests,” according to the majority opinion. “As a result, Tracker was not an undisclosed principal under the Restatement provision on which RMEI’s contract avoidance argument is exclusively premised, and that argument and the civil conspiracy claim against DGS that flowed from it fail as a matter of law.”
The court acknowledged that undisclosed principals aren’t uncommon in business transactions, and having agents act on their behalf isn’t fraudulent in and of itself. Yet as the Restatement related to RMEI’s case against DGS, RMEI could have avoided the contract if DGS had falsely represented that it wasn’t working on behalf of an undisclosed party, or if DGS received notice that RMEI wouldn’t have knowingly dealt with Tracker.
But the court reasoned that neither of those scenarios applied under the Restatement because Tracker wasn’t an undisclosed principal. Lario’s Letter of Intent disclosed that the buyer had “other investors or partners who may elect to join in the acquisition” and that Lario could “assign a portion … of its interest … to such investors or partners.” The purchase and sale agreement made reference to “Buyer’s venture partners in this transaction,” albeit without naming Tracker as said venture partner.
Making its case that DGS misrepresented itself as Lario’s counsel, RMEI had pointed to emails that its president received from Lario’s president, in which the latter referred to the DGS lawyer as “our attorney.” DGS failed to correct this, RMEI argued. But the supreme court majority didn’t find this point persuasive.
“Even though Lario’s president referred to DGS as Lario’s attorney, it does not follow that this statement amounted to a misrepresentation that Lario was not acting as an agent for an undisclosed principal,” according to the majority. “An agent may have its own lawyer (or share a lawyer with its principal), while at the same time acting on behalf of an undisclosed principal.”
Ultimately the high court sided with DGS in finding no misconduct.
“RMEI has not asserted, nor could it assert, that DGS owed it a duty to disclose Tracker’s existence,” the court held. “Indeed, were we to impose such a duty on DGS here, parties would no longer be permitted to conduct transactions involving undisclosed principals. … It would also interfere with attorneys’ well-settled duties of loyalty and confidentiality to their clients in situations like that present here.”
DGS issued a statement saying it was “pleased” with the result. “We have won this case at the trial court, the court of the appeals, and now the state’s highest court. We are glad to finally close this chapter.”
In her dissent, Márquez wrote that there were disputed issues of material fact in the case “that render summary judgment unwarranted.” She said she was “unconvinced” that the Restatement provisions that the majority relied upon had bearing on the claims, saying that the claims weren’t “brought to enforce or rescind a contract.”
But even if that Restatement could be applied to the case, Márquez disagreed with how the majority did it. She disagreed that references to other investors or partners in the transaction documents were sufficient notice to RMEI, as a matter of law, that Lario was merely acting as an agent.
“A third party such as RMEI has no burden to inquire about the existence of a principal,” Márquez wrote, referencing the Restatement. “Put differently, a principal’s existence is not considered ‘disclosed’ simply because ‘a third party could conceivably have discovered that the agent acted as the principal’s representative.’ ”
— Doug Chartier