403 Exxon Corporation v. Miesch

Wednesday, September 2nd, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
Exxon Corp. v. Miesch held that false statements made during lease renegotiations may support a cause of action for fraud or for negligent misrepresentation.  This case involved failed attempts by Exxon Corporation and Exxon Texas, Inc. (collectively “Exxon”) to re-negotiate a 1950’s lease in the 1990’s with Exxon’s lessors (“Miesch”).  Exxon wanted to reduce the fifty percent royalty, Miesch was unwilling to make concessions, and the negotiations broke down.  Exxon then capped the oil wells and ceased all production.  Exxon formally notified Miesch that it had completed its plugging operations in 1991, but it refused or simply failed to turn over all of the well and field data as requested by Miesch.  In 1993, Miesch entered into a new lease.  In 1994, Emerald Oil & Gas Company, LLC (“Emerald”), as the new lessee, informed Miesch that Exxon had plugged the wells using non-standard procedures and left junk in the hole, which made the use of the old wellbores difficult or impossible.  In 1996, Emerald filed suit against Exxon, and Miesch intervened in the law suit with various claims against Exxon specific to Miesch. Litigation from these original claims continued for over a decade with various appeals, reversals, and remands.  This particular appeal was focused on the trial court’s instructed verdict against Miesch on Miesch’s claims alleging negligence, fraud, and negligent misrepresentation against Exxon.
Miesch raised multiple negligence claims premised on injuries caused by Exxon’s plugging operations.  The court held that the instructed verdict was proper for all negligence related claims because the statute of limitations had run.  For the claims in question, the statute of limitations was two years, and the time began to run when the claimant had actual knowledge of the wrongful injury.  Meisch claimed that the evidence presented a fact question about when Miesch knew or should have known that Exxon’s actions had damaged the wells.  The court held that Miesch had knowledge of these injuries in June of 1994, when an Emerald employee notified Miesch of the significant difficulties encountered by Emerald in reopening the wells.  The court stated that “[a]fter being put on notice of alleged harm or injury-causing actions, the claimant must exercise reasonable diligence to investigate the suspected harm and file suit within the limitations period.”  The court held that Miesch knew or should have known about the injuries for more than two years before filing suit.
Miesch’s fraud claim was premised on false statements made by Exxon during the lease renegotiations about the remaining reserves and other matters related to the property, which Miech apparently relied upon in leasing to Emerald.  The court held that there was some evidence that the statute of limitations had not run as to the fraud claim, and thus, the instructed verdict was improper.  Exxon’s central argument was that Miesch could not recover for fraud as a matter of law, because the complaint was premised on a breach of contract claim and not on the commission of a tort.  In order to distinguish between claims based on contract versus claims based on tort, the court looked at the source of both the duty and the damages that Miesch suffered.  Although Exxon was obligated by the lease to provide Miesch with information covering its operations, the “actionable fraudulent representations were not in response to its contractual obligations.”  The fraudulent representations were made by Exxon while renegotiating the terms of the lease it had with Miesch.  Exxon made false statements about the oil reserves covered by the lease, claiming that they were depleted, that there was “nothing there,” and that the reserves would only last a couple more years.  Exxon also stated that it “could not continue to produce [the field].”  The court held that these statements were not made in response to a contractual demand by Miesch, but instead were part of larger plan by Exxon to renegotiate a new contract.  The court held that Miesch’s claim was based on the law of tort, and stated that a “false material misrepresentation” is actionable when the statement was “either known to be false when made or was asserted without knowledge of the truth, which was intended to be acted upon, was relied upon, and caused injury.”  When Miesch requested the data supporting Exxon’s conclusions, Exxon failed or refused to provide it until much later.  As a result of these statements by Exxon, Miesch contracted with Emerald at a lower royalty rate and initially agreed to forego receiving bonuses from Emerald.  “Exxon affirmatively misrepresented the facts it knew concerning the physical properties of the field in order to induce the Miesches to form a new contract.  Exxon also refused and delayed the Miesches’ demand for the information they needed.”
Although the court upheld the instructed verdict for most of the negligence claims, it did find that Miesch could pursue a claim for negligent misrepresentation.  This claim was treated differently because it was premised, not on the alleged negligence of Exxon in plugging the wells, but instead on the false statements made by Exxon in relation to the reserves.  Determining when Miesch knew or should have known that these statements were false presents a question of fact that should be presented to the jury.  As a result, this negligence claim was not barred by the two-year statute of limitations that barred the other negligence claims.
The significance of the court upholding the instructed verdict for the negligence claims based on Exxon’s plugging of the wells is that lessors cannot be oblivious to potentially injurious activity taking place in the field.  If there is a potential injury, then lessors must investigate or they risk losing any claims based upon negligence.  The significance of the court holding that Miesch could bring a cause of action against Exxon for false statements during lease renegotiations is that lessee’s additional knowledge about the physical properties of the field may be construed as misrepresentation of fact and not as a mere opinion.  Even though Exxon did not benefit from its fraudulent misrepresentations, Miesch could bring a cause of action for fraud against Exxon for damages suffered by Miesch in leasing to Emerald.