Based on the frequency of my articles that concern the statute of limitations, I am certain that some (many?) of you must think that I am unreasonably obsessed with the topic. While I can’t dispute that it interests me, the number
Angela Staples
of articles is actually due to the recent surge in lawsuits, and Texas Supreme Court opinions, concerning the topic. The most recent of Texas Supreme Court opinions involved a dispute over royalty payments. In short, certain royalty owners (their last name is Ross) brought a lawsuit against Shell Oil Company, after the statute of limitations had passed, claiming underpayment of royalties and alleging fraud and breach of contract (among other causes of action). To refresh memories, the statute of limitations for a fraud claim, and also for a breach of contract claim, is four years. That means that an allegedly injured party must file suit within four years of the occurrence of the injury. Texas law allows injured parties to bring their lawsuits even after the four-year deadline has passed if they can show that the injury was either undiscoverable or concealed fraudulently. These two doctrines are called, respectively, the Discovery Rule and the Doctrine of Fraudulent Concealment.
In the case at issue, Shell and the Rosses entered into a mineral lease in 1961. Some of the lands were contributed to a pooled unit. From 1988 to 1994, Shell paid royalties on the unpooled wells and the pooled wells using calculations that were not the calculations provided for in the lease. In 2002, the Rosses sued Shell for breach of contract, unjust enrichment, and fraud. The Rosses claimed that the fraudulent concealment doctrine tolled the statute of limitations because Shell “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,” which the Rosses reasonably relied on.
The jury at the trial court level found for the Rosses, and determined that fraudulent concealment tolled the statute of limitations. The court of appeals affirmed. Shell appealed the decision to the Texas Supreme Court.
In its opinion, issued December 16, 2011, the Supreme Court clarified, again, the application of both rules. It noted that the Discovery Rule is a “very limited exception to statutes of limitations,” which will defer “the accrual of the cause of action until the injury was or could have reasonably been discovered. The discovery rule applies ‘only when the nature of the plaintiff’s injury is both inherently undiscoverable and objectively verifiable.’ An injury is inherently undiscoverable if, by its nature, it is ‘unlikely to be discovered within the prescribed limitations period despite due diligence.’” The Court then referred to a previous decision, and reiterated that “the discovery rule did not apply to defer the accrual of royalty owners’ claims for underpayments since the injury was not inherently undiscoverable because the royalty owners could have timely discovered the underpayments through the exercise of due diligence.” The Court determined that “the Rosses could have timely discovered the underpayments through the exercise of due diligence.” Therefore, the Court’s opinion on the application of the discovery rule in cases involving underpayment of royalties has not changed: it does not apply.
In analyzing whether fraudulent concealment would toll the statute of limitation for the Rosses, the Court stated that fraudulent concealment tolls limitations “because a person cannot be permitted to avoid liability for his actions by deceitfully concealing wrongdoing until limitations has run.” “The fraudulent concealment doctrine requires that the Rosses prove Shell ‘actually knew a wrong occurred, had a fixed purpose to conceal the wrong, and did conceal the wrong.’ However, fraudulent concealment only tolls the statute of limitations until ‘the fraud is discovered or could have been discovered with reasonable diligence.’”
Here, the Rosses claimed that they reasonably relied on representations made by Shell, and that “negates any duty to investigate unless and until further information comes to light which re-triggers that duty, and that they reasonably relied on the prices listed on check stubs that Shell enclosed with its monthly royalty statements since misrepresenting the price would be a violation of the Natural Resources Code.” The Court did not agree, instead holding that “[r]easonable diligence requires that owners of property interests make themselves aware of relevant information available in the public record.” The Court noted that “the Rosses were put on notice that Shell was underpaying royalty,” and that all information regarding the underpayment of the royalties could have been discovered through a variety of public records. Thus, their reliance on Shell’s representations was not reasonable. The Court said that “a royalty owner cannot avoid making a diligent investigation just because there might be a legitimate explanation for a suspicious royalty payment.” Therefore, the jury’s verdict and the Court of Appeal’s decision were reversed, and the Rosses’ claims were barred by the statute of limitations.
Interestingly, although the doctrine of fraudulent concealment is an equitable doctrine typically examined on a case by case basis, and asserted in nearly every case where the statute of limitations has expired, the Court held that “the fraudulent concealment doctrine does not apply to extend limitations as a matter of law when the royalty underpayments could have been discovered from readily accessible and publicly available information before the limitations period expired.” In essence, the Court has now stated that, like the discovery rule, fraudulent concealment cannot apply to claims of underpayment of royalties, because of the public information available to the mineral interest owner. Therefore, once four years have passed from the time of the payment, the royalty owner simply has no recourse. Thus, the Supreme Court appears to endorse the notion that royalty owners are responsible for their interests and must not only review the information provided by operators, but also research the accuracy of that information though the available public sources. While this result is ultimately favorable to operators, allowing them to truly rest easy—as is the purpose of the statutes of limitations—one can imagine that savvy royalty owners may become more demanding for information in the coming years, and insist on including provisions for unlimited access to information in their leases.