Face Challenges Confidently

121 Advent v. Hyder

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.
Advent Trust Co. v. Hyder, 12 S.W.3d 534 (Tex. App.—San Antonio 1999, pet. denied), is a discovery rule case. If applicable, the discovery rule tolls the running of the statute of limitations until the plaintiff actually discovered, or should have discovered in the exercise of reasonable diligence, the facts giving rise to the cause of action. In this case, the operator produced two wells as dual completions, commingling production, and failing to file the necessary forms with the Railroad Commission. The working interest owners then farmed out one of the produced zones to CPX. After drilling a dry hole, CPX discovered the prior production, sued all the working interest owners, and obtained a substantial recovery. The Railroad Commission also assessed an administrative fine against the operator. More than four years after the CPX petition was served, the non-operator working interest owners sued the operator alleging negligence, negligent misrepresentation, fraud, breach of contract, and common-law indemnity. The causes of action accrued when the CPX petition was served. The critical issue was whether the limitation period commenced when the non-operators were served with the CPX petition. The operator argued that all claims were barred by the statute of limitations. The non-operators contended that the discovery rule, fraudulent concealment, and equitable estoppel applied. The Court of Appeals concluded that all claims were time-barred and reversed and rendered judgment that the non-operators take nothing.
At the time the CPX petition was served, the operator told the non-operators that the filings were complete, which was the basis for the non-operators contentions of fraudulent concealment and equitable estoppel. The Court held that the non-operators not only failed to properly submit the issues of fraudulent concealment and equitable estoppel, but also failed to establish the necessary element of reasonable reliance. When the non-operators were served with CPX’s petition, theycould have searched the Railroad Commission files themselves, and at least one of them did. The non- operators could not thereafter rely upon the operator’s representations that the filings were complete, when the records were publicly available.
The more interesting part of the case is the Court’s discussion of the application of the discovery rule and the Court’s almost petulant request for more guidance from the Texas Supreme Court. The Supreme Court’s opinion in the recent case of HECI Exploration Co. v. Neel, 982 S.W.2d 881 (Tex. 1998), upheld a limitations defense in a suit brought by royalty owners against their lessee. The lessee discovered reservoir damage caused by an adjoining operator, sued and recovered, but never informed the royalty owners. By the time the royalty owners actually discovered the reservoir damage, it was too late for them to sue anyone. HECI held that the discovery rule did not apply because damage to a reservoir from illegal production is not the type of injury that is inherently undiscoverable.
The difficult issue for the San Antonio Court was divining the meaning of HECI, which stated that in certain circumstances some records of the Railroad Commission may provide constructive notice.  In considering the meaning of HECI, the San Antonio Court said:

We admit to being somewhat bewildered by this language. . . . How are royalty owners, . . . who are not knowledgeable about the state of the Railroad Commission records, able to distinguish between production records that provide constructive notice and those that do not? Rather than bringing predictability and consistency to this area of the law, we fear that placing the onus on royalty owners to hire the experts necessary to investigate whether the Railroad Commission records reveal they are being cheated is inherently unfair and unworkable in the oil and gas business environment we have come to know.

The San Antonio Court found that HECI was not controlling, because a dual completion was not apparent from an inspection of the surface, nor were there any records on file with the Railroad Commission that would reveal the dual completion. The opinion is clearly dicta on this point and entirely unnecessary to the holding. It was unnecessary because the service of the CPX petition was all the notice that was required. However, the opinion indicates how closely a court may look at the facts of each case under the general guidelines set forth in HECI, and the confusion that remains after HECI as to whether Railroad Commission records are or are not constructive notice that will defeat a claim that the discovery rule should apply.