347 Holland v. Thompson

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Holland v. Thompson, 338 S.W.3d 586 (Tex. App.—El Paso 2010, pet. denied) held that the discovery rule did not toll the running of limitations on claims for fraud when the true facts could have been discovered in the records of the Texas Railroad Commission (“TRC”). Holland owned a 1/48 beneficial interest in the minerals underlying lands in Crockett County, Texas, owned and administered by the Bailey Estate Trust (“Bailey Estate”). Thompson was the operator and the owner of the majority of the working interest in the oil and gas leases on the Bailey Estate. In 1997, Thompson filed an application with the TRC to amend field rules related to well spacing which would allow for further development of the Bailey Estate. The TRC approved Thompson’s application in September of 1997. The TRC examiner’s findings of fact recited that Thompson planned to drill at least fifteen wells, although there was a factual dispute as to whether Thompson did or did not have such a plan. There was other evidence in the TRC records of the value of the lands in the Bailey Estate. Thompson did not drill any new wells.
 
In 1998, after learning that his cousin had sold his mineral interest in the Bailey Estate to Thompson, Holland approached Thompson about selling Holland’s interest to Thompson. Thompson offered Holland $9,000 for his interest, a figure he arrived at by multiplying the value of the past year’s production by four. There were apparently multiple representations that the lease was played out with little hope for future development. Thompson purchased Holland’s interest for $9,027.27 in November of 1998.
 
In late 2003, Thompson entered into a farmout agreement, and soon thereafter, the farmee began drilling on the Bailey Estate. When the farmee drilled into deeper undeveloped natural gas reserves, Thompson received more than $400,000 in royalties directly attributable to the interest he purchased from Holland.
 
Holland filed suit against Thompson for fraud, breach of fiduciary duty, and money had and received. Thompson filed traditional and no-evidence motions for summary judgment on various grounds, including that Holland’s suit was barred by the four-year statute of limitations. The trial court granted summary judgment without stating its reasons.
 
On appeal, Holland argued the discovery rule tolled accrual of his causes of action until the farmee began drilling in 2004. The court noted that “[t]he discovery rule only applies when the nature of the plaintiff’s injury is both inherently undiscoverable and objectively verifiable.” The court reasoned that “‘owners of an interest in the mineral estate . . . ha[ve] some obligation to exercise reasonable diligence in protecting their interest,’” including examining additional sources of information such as TRC and lessee records.
 
The court held that Thompson’s 1997 TRC filings and, specifically, the TRC examiner’s finding of fact that “Thompson plan[ned] to drill at least 15 wells” should have given Holland reason to inquire about future production on the Bailey Estate. In affirming the trial court’s grant of summary judgment and holding Jones’ damages were not inherently undiscoverable, the court stated that “[e]ven a cursory review of the 1997 application would have revealed the possibility that significant reserves existed on the Bailey leases in the Ozona NE. (Canyon 7520) Field because the Gas Proration Schedule listed them. And regardless of whether Thompson later denied that he planned to drill fifteen wells, a prudent mineral interest owner would certainly have reason to inquire about future production based on [Thompson’s petroleum engineer’s] representations in the application.” Thompson’s evidence on the data available at the TRC was based on affidavits from two petroleum engineers who testified that engineers rely on TRC records and the kinds of records available in 1998.
 
The significance of this case is the court’s holding that TRC filings put a mineral interest owner on notice of the potential for future lease development.