Supreme Court Favors Oil Company over Landowners

In a case last month, the Texas Supreme Court ruled that an oil company which substantially underpaid royalty owners would not be liable to them for the difference. The Court criticized the royalty owners for not looking in various public records to discover the oil company’s wrongdoing.

The case was Shell Oil Company, et al. v. Ross, ___ S.W.3d ___ (Tex. 2011)(12/16/11). Shell had entered a lease with a plaintiffs’ predecessor, part of which was later placed in pooled unit. There was production in both the unitized and non-unitized parts. Shell failed to pay the proper royalty and also made false representations on monthly royalty statements. It admitted at trial that it had “made a mistake” for which it had no explanation. But it alleged that the royalty owners’ claim should be barred by the statute of limitations. At trial, the jury found that there had been fraudulent concealment on the part of Shell.

The Supreme Court ruled “that the fraudulent concealment doctrine does not apply to extend limitations as a matter of law when the royalty underpayments could have been discovered from readily accessible and publicly available information before the limitations period expired.” In addition, the “discovery rule does not apply to defer the accrual of royalty owners’ claims for underpayments when the injury could have been discovered through the exercise of due diligence.” Here, the “pertinent information was readily accessible and publicly available.”

“Fraudulent concealment” requires plaintiffs to prove that defendant “‘actually knew a wrong occurred, had a fixed purpose to conceal the wrong, and did conceal the wrong.’ However, fraudulent concealment only tolls the statute of limitations until ‘the fraud is discovered or could have been discovered with reasonable diligence.'” “Reasonable diligence requires that owners of property interests make themselves aware of relevant information available in the public record.”

The Court ruled that the royalty owners’ reliance on Shell’s monthly statements was unreasonable. A landowner’s reliance on the oil company’s monthly statements “‘is not reasonable when information revealing the truth could have been discovered within the limitations period.'” The “large difference” between the royalty payments in the pooled unit and the other portion that was not unitized “triggered [plaintiffs’] duty to investigate the royalty payments.” A “royalty owner cannot avoid making a diligent investigation just because there might be a legitimate explanation for a suspicious royalty payment.” Information was available to the royalty owners “in the El Paso Permian Basin Index.” Also, researching the records of defendant’s payment to the State of Texas, another royalty owner, would reveal the prices. Therefore, here, as a matter of law, the royalty owners were not reasonably diligent.

The statute of limitations was also not extended by the “discovery rule,” which defers limitations “until the injury was or could have reasonably been discovered. The discovery rule applies ‘only when the nature of the plaintiff’s injury is both inherently undiscoverable and objectively verifiable.'” The discovery rule did not “defer the accrual of royalty owners’ claims for underpayments since the injury was not inherently undiscoverable because the royalty owners could have timely discovered the underpayments through the exercise of due diligence.”