Face Challenges Confidently

326 Beckham Res., Inc. v. Mantle Res., L.L.C.

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.
Shell Oil Co. v. Ross , 356 S.W.3d 924 (Tex. 2011) held that neither the doctrine of fraudulent concealment nor the discovery rule will toll the statute of limitations when readily accessible, publicly available information would reveal a cause of action for underpayment of lease royalties.  Lessor leased to Lessee in 1961 for a royalty on gas equal to “‘1/8 of the amount realized’” by Lessee.  Part of the leased land was pooled into two pooled units.  One producing well was drilled on each of the pooled units and two producing wells were drilled on the leased land.  The unit wells were on state lands and the royalty was proportionately reduced.  From 1988 to 1994, Lessee computed the royalty on the unit wells on the basis of a weighted-average of third-party sales prices for sales from the pooled units by Lessee and other operators.  Lessee could provide no explanation for the basis of royalty computations on the lease wells from 1994 to 1997.  The parties aligned as Lessor and Lessee, and Lessor sued Lessee in 2002 for breach of contract, unjust enrichment, and fraud.  Lessee conceded that Lessor was entitled to damages, but asserted a statute of limitations defense.  Lessor countered that Lessee had “‘set up an elaborate scheme to allow it to underpay royalties, and then made multiple misrepresentations to cover up this scheme, [including] making false representations in the monthly [royalty] statements.’”  Lessor secured a jury finding on fraudulent concealment.
The issues before the Supreme Court were (1) whether the statute of limitations was tolled by the doctrine of fraudulent concealment and (2) whether the discovery rule delayed the accrual of the cause of action.  The court stated that fraudulent concealment requires that the party asserting it demonstrate that the party committing the fraud, “‘actually knew a wrong occurred, had a fixed purpose to conceal the wrong, and did conceal the wrong.’”  However, the doctrine only applies until “‘the fraud is discovered or could have been discovered with reasonable diligence.’”
The court’s opinion focused almost exclusively on the second element of the test, namely whether the fraud could have been discovered with reasonable diligence.  Lessor argued that reasonable reliance on Lessee’s misrepresentations negated its duty to engage in due diligence.  The court rejected this argument, stating that the duty of diligence was triggered once Lessor was “‘put on notice of the alleged harm of injury-causing actions.’”  In this case, there was a large disparity in the price received from production on the lease wells and from production on the unit wells.  The court reasoned that because the wells were in a common reservoir the disparity in prices should have alerted Lessor to potential wrongdoing by Lessee, thus triggering the duty of diligence.  Lessor argued that the disparity in prices could have been attributed to differences in heating values, but the court rejected this argument, stating that a hypothetical, albeit reasonable, explanation for a suspicious royalty payment does not relieve a royalty owner of the duty to investigate.
According to the court, the duty of reasonable diligence requires that property owners “make themselves aware of relevant information available in the public record.”  Accordingly, “[Lessor] did not exercise reasonable diligence and their claims are barred by limitations if readily accessible and publicly available information could have revealed [Lessee’s] wrongdoing before the limitations period expired.”  In this case, the fraud could have been discovered by reference to the El Paso Permian Basin Index or the Texas General Land Office Records.  Both of these resources were publicly available, and reference to either of them would have revealed that Lessee was underpaying the royalty.  Accordingly, the court held that, as a matter of law, Lessor had not exercised reasonable diligence and the doctrine of fraudulent concealment did not apply.
The court then turned to the issue of whether the discovery rule could be applied to delay the accrual of the cause of action.  The court characterized the discovery rule as a “‘very limited exception to the statute of limitations.’”  Moreover, the rule applies “‘only when the nature of the plaintiff’s injury is both inherently undiscoverable and objectively verifiable.’”  An injury is inherently undiscoverable when it is, “‘unlikely to be discovered within the prescribed limitations period despite due diligence.’”  The court stated again that Lessor had not exercised due diligence.  Accordingly, the discovery rule did not apply.
The case is a continuation of a pronounced trend at the Supreme Court to enforce statutes of limitation, to require that injured parties take reasonable steps to be informed and to take prompt action to assert their claims, and to narrow the application of fraudulent concealment and the discovery rule in extending a statute of limitations.