In 2011 the Texas Supreme Court issued three opinions in which the claims of royalty for mineral owners were barred by the statute of limitations. These cases continue the general notion that the lessor/royalty owner is on notice of matters that could be discovered by a search of publicly available matters so that the statute of limitations starts to run when such material should have been discovered; this concept was broadened in HECI Exploration Co. v. Neel, et al., 982 S.W.2d 881 (Tex. 1998; corrected opinion filed Feb. 6, 1999) to include filings in Railroad Commission Records. The broadened concept was also applied to the owner of a reassignment right when production ceased in Hutchison v. Union Pacific Resources Co., S.W. 2d 368 (Tex. App. – Austin 1999). It has been previously applied to notice of payout in Rodessa Resources, Inc. and Louisiana Land and Exploration Company v. Arcadia Exploration and Production Company, 5 S.W.3d 363, 366 (Tex. App.-Texarkana 1999).
Exxon v. Emerald
Exxon Corporation v. Emerald Oil & Gas Company, L.C., 348 S.W.3d 194 (Tex. 2011), has a long and complicated history. First filed in 1996, it reached the Supreme Court in 2005. There were allegations of failure to develop, sabotage, negligent misrepresentation, fraud, and tortious interference with business opportunity. The royalty owners' claims were for statutory and common law waste, breach of alleged regulatory duty to plug wells properly, negligence, negligence per se, negligent misrepresentation, tortious interference with economic opportunity, breach of lease, and fraud.
Exxon argued that the statute of limitations barred some of the plaintiff's claims. Causes of action accrue and statutes of limitations begin to run when facts come into existence that authorize a claimant to seek a judicial remedy. Emerald (a subsequent lessee) and the royalty owners claimed that Exxon's plugging operations caused them injury. Exxon advised the royalty owners by letter in August 1991 that it had completed plugging all wells in the field. Thus, the alleged tortious conduct occurred by August 1991. Emerald filed suit in June 1996, and the royalty owners intervened in the lawsuit in September 1996 to assert claims against Exxon. Both Emerald and the royalty owners filed suit more than two years after the injuries occurred for these claims but each said that Exxon fraudulently concealed its wrongful conduct, thereby tolling the statute of limitations, and that the nature of their injuries was difficult to discover, thus delaying accrual of their claims.
The Court did not reach the question of the impact of the discovery rule or fraudulent concealment on the limitations period for the pending claims because Emerald and the royalty owners had actual knowledge more than two years before they filed suit based on Exxon's alleged wrongful actions and that those actions caused problems or injuries to their interests. The Court held that the applicable legal standard is that the statute of limitations begins to run when a party has notice of "actual or potential injury-causing conduct" irrespective of a lack of knowledge regarding the extent or total value of damages. Once the plaintiffs had any knowledge of potential wrongful conduct by Exxon, they had a duty to diligently investigate the suspected harm and file suit on such claims within two years of such notice.
Emerald and the royalty owners had the statutory two-year period to investigate the problems raised by Emerald and to file claims for damages arising from Exxon's alleged conduct in the Field. The court held that when a person is on notice of injury-causing conduct, the claimant has a duty to use reasonable diligence to discover if he has a claim and, if so, to file it within the limitations period to preserve his right to recover. Knowledge of injury initiates the accrual of the cause of action and triggers the putative claimant's duty to exercise reasonable diligence to investigate the problem, even if the claimant does not know the specific cause of the injury or the full extent of it. Irrespective of the potential effect any fraudulent concealment by the lessee or the discovery rule on limitations, actual knowledge of alleged injury-causing conduct starts the clock on the limitations period.
BP America v. Marshall
BP America Production Co. v. Stanley G. Marshall, Jr., et al., 342 S.W.3d 59 (Tex. 2011) is another case decided against royalty owners based upon the statute of limitations. An oil and gas lessor, the Marshalls, brought a suit against its lessee, BP, asserting claims for fraud arising out of the termination of a lease.
The primary term of the lease expired in July 1980. Two weeks prior to expiration, BP drilled a well on the lease and allegedly continued to work the well for the rest of the year. One of the Marshalls contacted BP because there was no production following the expiration of the primary term. BP responded with a three page letter explaining that the lease was being kept alive by continuing operations. Marshall did not investigate further. In March 1981, BP entered into several agreements with a successor operator and, on the same day, decided to plug the well drilled in July 1980. The successor operator drilled a productive well in April 1981 and operations have continued since that date without a lapse in production.
In 2001, Marshall intervened in a suit against BP alleging that the lease terminated in 1981. Marshall claimed that, due to BP's fraudulent concealment of the lease expiration, the four-year period (normally applicable to fraud claims) should be extended to the time they could have reasonably discovered the fraud—June 2000, which is the date BP released internal documents regarding the well drilled in July 1980.
The Supreme Court held that the discovery rule, under which a cause of action does not accrue until the injury could reasonably have been discovered, did not operate to defer the accrual of the cause of action. The Court, relying on Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732 (Tex. 2001), and HECI Exploration, concluded that information disclosing a lessee's failure to continue good faith efforts to develop an oil and gas lease is available from the same resources referenced in those cases, including public records. The Marshalls' expert testified that records filed with the Railroad Commission no later than 1982 could be used to determine that BP's operations reworking the July 1980 well were not in good faith. Though the records were highly technical, the expert acknowledged that anyone could have obtained the records from the RRC and reached the same conclusions. While BP's internal documents helped the Marshalls discover the injury, the information was otherwise discoverable and, therefore, the Court declined to apply the discovery rule to delay accrual of the Marshalls' cause of action.
The Marshalls also claimed that the limitations period should be equitably extended due to BP's fraudulent concealment of its wrongdoing. The jury found that BP had fraudulently concealed its cessation of good faith operations on the well and that it had fraudulently concealed the facts necessary for the Marshalls to know that they had a cause of action available. The Court found that fraudulent concealment only tolls the limitations period until the fraud is either actually discovered or could have been discovered with reasonable diligence. The Court stated that reasonable diligence obliges owners of property interests to make themselves aware of pertinent information available in the public record and the Marshalls did not exercise reasonable diligence relying on BP's representations, and limitations barred their claim.
Shell v. Ross
Shell v. Ross was decided December 16, 2011. The case involved the underpayment of royalties. The 1961 lease required a royalty of "one-eighth of the amount realized" by Shell for any gas or casinghead gas produced from the land.
From 1994 through 1997, Shell paid royalties based upon a so-called "arbitrary price." Shell could not explain this price and admitted at trial that it was a "mistake." From 1988 through 1994 Shell used a weighted-average method for the wells by averaging the third-party sales prices of Shell and other operators for sales from nearby units. Shell challenged the court of appeals decision holding that the fraudulent concealment doctrine did not toll the limitations period.
Fraudulent concealment tolls limitations because a person cannot avoid liability by concealing wrongdoing until limitations has run. The jury had found that Shell had fraudulently concealed its failure to properly pay royalties and that the Rosses, exercising reasonable diligence, could not have discovered such failure. The Rosses argued that they reasonably relied upon the prices on the check stubs that Shell enclosed with monthly royalty statements. The Court disagreed holding that reasonable diligence requires that owners of property interests make themselves aware of relevant information available in the public record. The Court stated that the large difference between the prices paid by Shell to the Rosses for their various wells (a 50% to 60% difference between "Unit" wells and "Lease" wells) triggered the Rosses' duty to investigate the royalty payments. The Court agreed with Shell's argument that the Rosses could have discovered Shell's breach if they had conducted additional investigation, including asking Shell about the prices, asking the companies Shell sold the gas to, consulting publicly available records at the Texas General Land Office, and researching the prices listed in the publicly-available El Paso Permian Basin Index. Thus, the Court held that the Rosses did not use reasonable diligence since readily accessible and publicly available information could have led to the discovery of the underpayments.
Who cares? Lessors and anyone with a right to receive something under a contract: rights to after payout interests; rights to reassignment of a lease prior to its expiration, payments under a lease; reversionary interests, etc.
The rule: Lessors and the like are on notice of a host of information available in public records. Although traditional title rules say that a Lessor is not on notice of anything filed in the County Records after such Lessor took title, current Texas law puts the Lessor on notice of many things outside of the traditional title records.
Lessons for Lessors
- Review royalty statements; investigate obvious discrepancies between different wells or units; understand your lease terms—the primary term, what can continue the lease after the end of the primary term, the basis on which royalty is to be paid and what costs may be deducted.
- Learn to access records from the Railroad Commission, Comptroller, and General Land Office; learn the public pricing indexes covering your well locations; you are looking for production records and history, adjoining wells and production history.
- Follow up on any discrepancies; there are consultants who do nothing but analyze royalty payments.
- Do it again every year.
Lessons for Lessees
- All lessors, after the production begins to decline, suspect they are being underpaid; file all of your required reports—accurately and timely.
- Comply with all lease requirements for disclosure.
- Pay attention to inquiries from royalty owners; favor full disclosure.
- If there is any doubt, decide early on whether you are likely to win, or whether you need to seek ratification; a ratification may be expensive, but probably not as expensive as a new well.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
