Houston Endowment Inc. v. Atlantic Richfield Co.

• Decision Date: 02 July 1998
• Docket Number: No. 14-96-01581-CV,14-96-01581-CV
• Citation: 972 S.W.2d 156
• Parties: HOUSTON ENDOWMENT INC. et al., Appellants, v. ATLANTIC RICHFIELD CO., Appellee. (14th Dist.)
• Court: Texas Court of Appeals

Page 156

972 S.W.2d 156

HOUSTON ENDOWMENT INC. et al., Appellants, v.ATLANTIC RICHFIELD CO., Appellee.

No. 14-96-01581-CV.

Court of Appeals of Texas Houston (14th Dist.).

July 2, 1998.

David J. Beck, Curt Webb, Linda K. McCloud, Jennifer Parker Ainsworth, Houston, for appellants.

Charles G. King, James P. Pennington, Houston, for appellees.

Before MURPHY, C.J., and HUDSON and SMITH, ^* JJ.

OPINION

JACKSON B. SMITH, Jr., Justice(Retired).

Appellants, Houston Endowment Inc. and ten individuals and trustees(collectively, "HEI"), sued Atlantic Richfield Company("Arco") for unpaid royalty interests.The trial court granted summary judgment in favor of Arco based on the statute of limitations.In three points of error, HEI claims the trial court erred in granting summary judgment because the discovery rule applies and genuine issues of material fact exist as to whether Arco fraudulently concealed HEI's causes of action.

HEI or their predecessors in interest entered into oil, gas, and mineral leases between 1949 and 1956.In 1957, the properties subject to those leases were unitized to form the Headlee Devonian Unit (HDU), which utilized a gas processing plant (the Plant).Arco, Texaco, and other entities were working interest owners in the HDU and also owned the Plant.Texaco was the Plant operator.

Each working interest owner paid royalties to the royalty interest owners separately, pursuant to separate leases and division orders, and the amount of royalties fluctuated on a monthly basis.In 1977, Texaco decided to reduce the percentage of royalties it paid on the processed natural gas liquids (NGLs) from 100% to 85% in order to defray the costs of building a new plant.They withheld severance taxes, however, based on 100% of the value of the NGLs.To make the reduction less noticeable, Texaco allegedly convinced the other working interest owners, including Arco, to follow suit, and no working interest owner informed any royalty interest owner of the change.¹The reduction in the amount of royalties paid to the royalty owners between the years 1977 and 1986 is the basis for this lawsuit against Arco.The crux of HEI's appeal is that the statute of limitations had not run on its claim.

In October of 1986, Arco sold its interests in the HDU and the Plant to Amoco.Later, appellantHouston Endowment's bookkeeper, Alan Thigpen, noticed discrepancies in Texaco's calculation of severance taxes.Thigpen made written inquiries to Texaco to clarify the matter, but he apparently did not receive satisfactory responses.Thigpen eventually determined, no later than May 10, 1989, that Texaco was withholding 15% of the royalties on the sale of the NGLs processed through the Plant.Thigpen obtained a tolling agreement with Texaco, effective April, 1990, but did not seek one from any other working interest owner.

Concurrent with Thigpen's investigation, C.R. Bailey, a representative of several appellants collectively known as "The Parks Group," was investigating NGL price discrepancies for the HDU, and Texaco informed him in 1987 that the 15% withholding was for the Plant's operating costs.

HEI sued Texaco, Four Star, Chevron, Mobil, and Amoco in 1990, seeking accountings from the last four entities because they had refused to provide sufficient information to verify the royalty payments.Arco was not a party to that suit.²In January of 1993, during the course of discovery, HEI claims they first learned of the working interest owners' agreement to withhold royalties, and documents indicated Arco was a party to the alleged scheme.They assert that this was their first knowledge that Arco was involved.HEI eventually obtained a tolling agreement with Arco, effective September 22, 1993.They filed suit against Arco on March 2, 1995, and thereafter, Arco filed a motion for summary judgment based on the statute of limitations.HEI responded that the discovery rule applied to toll the running of the statute of limitations.The trial court granted Arco's motion, although its order does not specify whether or not it applied the discovery rule.

In their first and second points of error, HEI contends the trial court erred in granting Arco's motion for summary judgment based on limitations because (1) the discovery rule applied, and (2) genuine issues existed as to when appellants discovered or should have discovered the causes of action against Arco.

Standard of Review

We review the trial court's order granting summary judgment, indulging every reasonable inference in favor of the nonmovant.SeeScience Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911(Tex.1997).When a defendant moves for summary judgment on the basis of an affirmative defense, such as limitations, it must prove conclusively all elements of the affirmative defense as a matter of law and preclude all genuine issues of material fact.SeeRyland Group, Inc. v. Hood, 924 S.W.2d 120, 121(Tex.1996).

The Applicable Statute of Limitations

The parties agree the statute of limitations in breach of contract cases, including cases involving oil and gas royalties, is four years.SeeTEX. CIV. PRAC. & REM.CODE ANN. § 16.004(Vernon 1986);Williams v. Khalaf, 802 S.W.2d 651, 653(Tex.1990).A statute of limitations does not begin to run until the cause of action accrues.SeeMoreno v. Sterling Drug, 787 S.W.2d 348, 351(Tex.1990).Generally, a cause of action for breach of contract accrues on the date of the alleged breach.SeeHarrison v. Bass Enters. Prod. Co., 888 S.W.2d 532, 537(Tex.App.--Corpus Christi 1994, no writ).An exception arises, however, if the discovery rule applies.The discovery rule is a judicially-constructed test used to determine when a plaintiff's cause of action accrued.When applied, it tolls the running of the statute of limitations until the plaintiff discovers or should have discovered the nature of the injury.SeeMurphy v. Campbell, 964 S.W.2d 265, 271(Tex.1997).When a defendant seeks summary judgment on the basis of limitations and the plaintiff pleads the discovery rule, the defendant has the burden to prove when the cause of action accrued and negate the discovery rule by proving as a matter of law that there is no genuine issue of fact regarding when the plaintiff discovered or should have discovered the nature of the injury.SeeBurns v. Thomas, 786 S.W.2d 266, 267(Tex.1990);Ponder v. Brice & Mankoff, 889 S.W.2d 637, 641(Tex.App.--Houston [14 th Dist.]1994, writ denied).

HEI argues the discovery rule should apply so that their causes of action did not accrue until they knew or should have known of the underpaid royalties.A court must conduct a two-step process to determine whether and for how long the rule tolls the statute of limitations.First, it must determine if (1) the injury is inherently undiscoverable, and (2) the evidence of the injury is objectively verifiable.SeeComputer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 456(Tex.1996).Arco does not dispute that HEI's alleged injury is objectively unverifiable, but it asserts the injury was discoverable.If the party asserting the discovery rule establishes these elements, a court, in order to determine when the statute of limitations began to run, must still determine whether the injured party knew or should have known of the injury.Seeid. at 455.

An injury is inherently undiscoverable if a party using due diligence would not ordinarily learn of the negligent act or omission.SeeId.HEI argues their case is similar to Dorchester Gas Producing Co. v. Hagy, 748 S.W.2d 474(Tex.App.--Amarillo 1988, dism'd by agr.) which applied the discovery rule to an oil and gas breach of contract case after determining the plaintiff's injury was inherently undiscoverable.In Dorchester, the plaintiff sued for underpayment of royalties he should have received pursuant to a contract requiring a royalty increase when a federal order increased the minimum wellhead price.Seeid. at 476-77.A federal order subsequently raised the price, but the royalties did not increase.Id. at 475, 477.The defendants asserted the statute of limitations barred plaintiff's claims to any underpayments occurring more than four years earlier.Id. at 479.The court held the discovery rule applied, as the relationship between the plaintiff and defendants was such that the plaintiff could not learn of any price increase except through one of the parties to the increase.Id. at 480.

HEI, like the plaintiff in Dorchester, did not receive detailed accounting showing the basis for the calculation of royalties, and the amount of royalties could not be calculated from the information Arco supplied in its monthly statements.HEI points to other evidence making the determination of underpayments inherently undiscoverable, such as a Texaco memorandum stating the royalty owners were probably not notified of the change in the royalty calculation.HEI alleges the working interest owners' scheme was to underpay royalties and avoid detection by all agreeing to lower the payments, thus making the underpayments less noticeable.HEI also alleges that the fact that the working interest owners did not exchange documents is further evidence of their conspiracy.

Arco answers by first arguing the discovery rule only applies to cases in which it has been expressly adopted by the Texas Supreme Court.SeeHarrison, 888 S.W.2d at 538.It contends the rule is not germane to the present case because the Texas Supreme Court has never explicitly adopted it in a royalty owner dispute.Id.Harrison relied on Trinity River Authority v. URS Consultants, Inc., 889 S.W.2d 259, 263(Tex.1994), to support its statement that "the Supreme Court of Texas must explicitly adopt the discovery rule before it is applicable to a cause of action."Harrison, 888 S.W.2d at 538.We believe the Harrison court read Trinity River too broadly.In Trinity River, the court refused to apply a statute of repose to a negligent design case...