Face Challenges Confidently

113 Hay v. Shell Oil Co.

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.
Hay v. Shell Oil Co., 986 S.W.2d 772 (Tex. App.—Corpus Christi 1999, pet. denied) is a decision denying the application of the discovery rule to oil and gas pooling cases. For the discovery rule to apply (thus tolling the statute of limitations), the injury complained of must be inherently undiscoverable and objectively verifiable.
In this case, a pooled unit of 704 acres was formed by Shell in 1977. Shell’s 1977 Form P-15 filed with the Railroad Commission declared all the acreage in the unit reasonably productive. Shell sold all of its interest in the unit in 1984, and in 1989, after a series of hearings before the Railroad Commission, the subsequent operator was successful in getting the Railroad Commission unit reduced to 160 acres. In 1992, after reviewing the Railroad Commission records for the first time, various members of the Hay family (collectively the “Hays”) discovered that the unit “reasonably productive” for oil and gas was then described as only 160 acres. The Hays then sued Shell for an accounting for the full royalty share they would have received from the beginning of production, had the unit been “properly” pooled. Shell moved for summary judgment on the basis of limitations, and the Hays raised the discovery rule.
The four-year statute of limitations ordinarily applies to actions for the recovery of royalty payments, and that cause of action accrues when the wrongful act causes some legal injury, even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred. The legal injury, if any, occurred in 1977 when the 704 acre unit was formed. Limitations would bar that claim unless for some reason limitations was tolled. In some categories of cases, the discovery rule will toll the limitations period until the plaintiff knows, or in the exercise of reasonable diligence should have known, of the wrongful act and resulting injury. Because Shell’s 1977 P-15 form might have been some evidence that the injury was inherently undiscoverable, the court focused on whether the injury was objectively verifiable.
Shell’s motion included an unobjected-to affidavit of its petroleum consultant who opined as to the uncertainties of delimiting the reservoir rocks as either productive or unproductive of oil and gas. Although the Hays supplied competing affidavit testimony as to the nature of the formation, they did not object to Shell’s affidavit or contend that the geology was certain or “objectively veritable.” This suggests that the Hays might have avoided summary judgment by attacking the affidavit, but offers little comfort that the Hays could have prevailed against Shell’s limitations defense.
The application of the discovery rule in this and other cases has been strictly limited. The significance of this case is that it holds the discovery rule to be inapplicable in a bad faith pooling case.   The Supreme Court apparently intends to determine that the discovery rule is or is not applicable to “categories” of cases rather than on a case-by-case basis. If so, then this case may close that issue on pooling cases.