Face Challenges Confidently

105 Houston Endowment, Inc. v. Atlantic Richfield Co.

Thursday, September 3rd, 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.
Houston Endowment Inc. v. Atlantic Richfield Co., 972 S.W.2d 156 (Tex. App. — Houston [14th Dist.] 1998, n.w.h.) considers when the statute of limitations will run against claims for underpayment of royalty. Ordinarily, claims under a written contract (lease) are barred if they are more than four years old. Texaco, Arco and others were lessees under various leases unitized into a gas unit. Production from the gas unit was run through a gas plant that was owned by the lessees and operated by Texaco. Each lessee paid royalties to the royalty owners separately, based on separate leases and division orders. In 1977, Texaco reduced the percentage of royalties it paid on the processed natural gas liquids from 100% to 85% in order to defray the costs of building a new plant. All of the other lessees followed suit; however, the lessees continued to deduct severance taxes from the royalty owners based on 100% of the value of the natural gas liquids. In 1986, Arco sold all of its interests in the gas unit.
In 1990, the royalty owners sued Texaco and other lessees of the unit, but not Arco. The royalty owners claimed they first learned of the working interest owners’ agreement to withhold royalties and that Arco was a party to the alleged scheme in 1993, during the course of discovery from Texaco. Soon after, plaintiff royalty owners sued Arco for underpayment of royalties from 1977 to 1986. Arco relied upon the statute of limitations for its defense. Plaintiff royalty owners contended that the statute of limitations was suspended by the “discovery rule” or by Arco’s fraudulent concealment of the underpayment scheme. If the “discovery rule” applies, the running of the statute of limitations does not commence until the plaintiff discovers the facts giving rise to the claim. Arco prevailed because the facts established that the royalty owners in this case knew or should have known of the underpayment more than four years before they took action on their claim, and their knowledge defeated any claim that they reasonably relied upon Arco’s fraudulent concealment.
However, Arco prevailed in this case on unusually favorable facts. The significance of the case is that the Court found that underpayments of royalty are generally undiscoverable and are subject to the discovery rule under the usual facts and circumstances. For the discovery rule to apply, a Court must find that (1) the injury was inherently undiscoverable, and (2) the evidence of the injury was objectively verifiable.
Because it was undisputed that the royalty owners’ alleged injuries were objectively verifiable, the inquiry was focused on whether the injury was “inherently undiscoverable.” The Court found that the royalty owners did not receive a detailed accounting showing the basis for the calculation of royalties, and that the amount of the royalties could not be calculated from the information Arco supplied in its monthly statements.  The significant holding of the case was:

Arco’s underpayment of royalties was not information about which the royalty owners, using due diligence, would ordinarily learn; they would not learn this information unless it was supplied by a working interest owner. Thus, the injury was inherently undiscoverable. As such, the discovery rule tolls the statute of limitation until the [royalty owners] subjectively knew or should have known of the underpayment.

This holding suggests that there may be many underpayment cases in which the recovery period could cover many, many years.