531 Hooks v. Samson Lone Star, Ltd.

Tuesday, December 8th, 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.

Hooks v. Samson Lone Star, Limited Partnership held that although reasonable diligence should lead to discovery of information in the records of the Texas Railroad Commission (“TRC”), fraudulent filings in the TRC by lessee created a fact question as to whether earlier, correct filings should have been discovered by lessor in the exercise of reasonable diligence. Hooks leased to Samson. The Hooks lease prohibited pooling and included offset obligations which were triggered if a gas well was completed within 1,320 feet of Hooks’ lease line. The offset obligations were to drill, release, or pay compensatory royalty. In 2000, Samson drilled a well that bottomed about 1,186 feet from Hooks’ lease, triggering the offset obligation. Hooks and Samson agreed to amend the Hooks lease to pool the lease into a unit associated with the new well. In 2007, Hooks sued Samson for fraud and breach of contract. During the negotiations in 2001 to amend the lease, Samson’s landman presented Hooks with a plat showing the well to be located outside the protected zone. Earlier, in 2000, Samson filed a similar plat with the TRC that incorrectly located the bottom hole outside the protected zone. Months before that, Samson filed another plat at the TRC that correctly located the well as within the protected zone. There was some conflicting evidence on the meaning of each plat, but the central issue was whether “reasonable diligence” required Hooks to go behind the incorrect plats to find the earlier correct plat at the TRC. Hooks got a jury finding that Hooks could not have discovered Samson’s fraud until 2007 and a judgment for more than $21 million in damages, attorney’s fees and post-judgment interest at a rate of 18%.

Through a series of decisions, the Court has been gradually defining the effect of TRC filings upon the running of the statute of limitations, fraudulent concealment, and the Discovery Rule. “We have held that not all [TRC] records create constructive notice, meaning that in some circumstances, [TRC] filings may exist that one is not charged with discovering.” If TRC records do not impart constructive notice, then the issue is focused on what would be discovered in the TRC records by the exercise of reasonable diligence. The decided cases indicate that the Court is very reluctant to delay the accrual of a cause of action or to toll the running of limitations. “These cases reveal that when there is actual or constructive notice, or when information is ‘readily accessible and publicly available,’ then, as a matter of law, the accrual of a fraud claim is not delayed.” “Although ‘the date a cause of action accrues is normally a question of law,’ reasonable diligence is an issue of fact. Nevertheless, in some circumstances, we can still determine as a matter of law that reasonable diligence would have uncovered the wrong.” The Court then reviews and affirms BP America Production Co. v. Marshall, 342 S.W.3d 59 (Tex. 2011) and Shell Oil Co. v. Ross, 356 S.W.3d 924 (Tex. 2011), where reasonable diligence required sophisticated lessors to acquaint themselves with TRC records. That is, the lessor is generally charged with knowledge of whatever an examination of the TRC records would reveal.

In this case, the Court held that the exercise of reasonable diligence was a fact question which could not be determined as a matter of law. “The fact-finder, no doubt, may consider the failure to examine older records when determining whether reasonable diligence was exercised, but their availability is not enough to establish that reasonable diligence was not exercised as a matter of law.” “[H]ere the records themselves were tainted by fraud and thus provide no conclusive proof on the subject.” The opinion does not hold that lessors are relieved of the duty to review all of the TRC records in the exercise of reasonable diligence. “We hold that when the defendant’s fraudulent misrepresentations extend to the [TRC] record itself, earlier inconsistent filings cannot be used to establish, as a matter of law, reasonable diligence was not exercised. Under these circumstances, reasonable diligence remains a fact question.”

Hooks also claimed that there was a breach of the contract under the most-favored-nations clause in the Hooks lease. Samson originally leased the State of Texas at the same 25% royalty it paid Hooks. To induce the State to consent to a Pooling Agreement, Samson increased the State’s share of production from the pooled unit so that the State was effectively receiving a 28.28896% royalty on the State’s tract. Samson argued this did not increase the royalty under the State’s lease. Reasoning that “royalty owed on production from the whole unit is necessarily tied to royalty owed on production from the lessor’s individual tracts” the Court ruled that the later pooling agreement which allocated a unit royalty interest to the State resulted in a higher royalty payment on the State’s tract. Therefore, Samson was obligated to match this amount when paying royalties to Hooks, and its failure to do so was a breach.

Hooks also had two more leases with Samson which contained similar offset obligations (drill, release, or compensatory royalty). Hooks argued that the duty to pay compensatory royalty was a recurring obligation and that Hooks could recover beginning with the payment due four years before suit was filed. Samson argued that even if the failure to pay compensatory royalties was recurring, which would bring the claim within the limitations period, the leases authorized Samson to elect non-recurring options, such as to release or drill, and a breach of these provisions would be barred. The Supreme Court noted that payment of compensatory royalties was to take place after the first two options, and therefore “Samson impliedly elected to perform the later one” because “it would not be just to allow the obligor’s silent, continuous breach to constitute an election of the non-recurring alternative.”

The case affirms that TRC records are not constructive notice, but that a lessor (or at least a sophisticated lessor) is generally subject to whatever would be discovered from a review of the TRC records. The court will hold, as a matter of law, that the lessor knew whatever those records contain. The significance of this case is that fraudulent filings make it a question of fact whether earlier, correct filings should have been discovered.