Shell Oil Co. v. Ross

• Decision Date: 17 February 2012
• Docket Number: No. 10–0429.,10–0429.
• Parties: SHELL OIL COMPANY; SWEPI LP d/b/a Shell Western E&P, Successor in Interest to Shell Western E&P, Inc., Petitioners, v. Ralph ROSS, Respondent.
• Court: Texas Supreme Court

356 S.W.3d 924

55 Tex. Sup. Ct. J. 223

SHELL OIL COMPANY; SWEPI LP d/b/a Shell Western E&P, Successor in Interest to Shell Western E&P, Inc., Petitioners,

v.Ralph ROSS, Respondent.

No. 10–0429.

Supreme Court of Texas.

Argued Oct. 4, 2011.Decided Dec. 16, 2011.Rehearing Denied Feb. 17, 2012.

Michael Andrew Heidler, Vinson & Elkins LLP, Dan Miller, Gregory S. Friend, McElroy Sullivan & Miller LLP, Austin, TX, Marie R. Yeates, Vinson & Elkins, L.L.P., Houston, TX, for Petitioners.

Mark L. Perlmutter, Carl Brooks Schuelke, Perlmutter & Schuelke, L.L.P., Austin, TX, David W. Scott, Attorney at Law, Georgetown, TX, for Respondent.

Everard A. Marseglia Jr., Liskow & Lewis, A PLC, Houston, TX, for Amicus Curiae Texas oil & Gas Association.Jesse R. Pierce, Jesse R. Pierce & Associates, P.C., Houston, TX, for Amicus Curiae Chesapeake Exploration, L.L.C.Charles Lawrence Stinneford, Gordon Arata McCollam Duplantis & Eagan, LLC, Houston, TX, for Amicus Curiae American Petroleum Institute and Independent Petroleum Association of America.Justice LEHRMANN delivered the opinion of the Court.

This case involves a dispute concerning alleged underpayments of gas royalty. We must decide whether limitations barred a royalty owner's claims against the operator of the field. We hold 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. When, as in this case, the information was publicly available and readily accessible to the royalty owner during the applicable time period, a royalty owner who fails to take action does not use reasonable diligence as a matter of law. It has long been the law that the discovery rule does not apply to defer the accrual of royalty owners' claims for underpayments when the injury could have been discovered through the exercise of due diligence. Accordingly, because the parties do not dispute that the pertinent information was readily accessible and publicly available, the royalty owner's claims are time-barred as a matter of law.

Ralph Lee Ross sued Shell Oil Company and Shell Western E & P (collectively “Shell”) for breach of contract, unjust enrichment, and fraud, based on claims that Shell underpaid royalty due under a mineral lease to Ross's grandmother, Gertrude T. Reuss (the family is collectively referred to as “the Rosses”). We are asked to determine whether limitations barred the Rosses' claims.

Based on jury findings that Shell fraudulently concealed its underpayments, the trial court rendered judgment for the Rosses. A divided court of appeals affirmed the trial court's judgment. 357 S.W.3d 8 (Tex.App.–Houston [1 Dist.] 2010). We reverse the court of appeals' judgment and render judgment for Shell.

I. Factual and Procedural History

In 1961, Shell entered into a mineral lease with Gertrude T. Reuss and her husband, G.T. Reuss (“Reuss Lease”). Several years later, Shell contributed parts of the land covered by the Reuss Lease to two pooled units—the Houston Unit and the Lasater Unit. In addition to the two wells Shell drilled on land covered by the Reuss Lease (“Lease Wells”), both the Houston Unit and the Lasater Unit contained a producing well located on land not covered by the Reuss Lease (“Unit Wells”). Shell paid royalty to the Rosses on both the Lease Wells and the Unit Wells. The Reuss's son, Ralph Louis Ross, administered the Reuss Lease and became trustee of the trust that held the lease when Gertrude Reuss died in 1998. Ralph Louis Ross was a lawyer who had done oil and gas work, and thus understood the oil and gas industry. In 2002, Ralph Louis Ross assigned all rights in the Reuss Lease to his son, Ralph Lee Ross.

Under the Reuss Lease, Shell was required to pay the Rosses “one-eighth of the amount realized” by Shell for any gas or casinghead gas produced from the land. The pooling and unitization agreement split the one-eighth royalty with the State, with both the State and the Rosses receiving a one-sixteenth royalty. However, Shell did not pay the Rosses based on third-party sale prices as required by the Reuss Lease. From 1994 to 1997, Shell paid royalty based on a so-called “arbitrary price” for the Lease Wells. At trial, Shell could not explain how or why it used this price instead of the third-party sales price, and admits that it “made a mistake.” ¹ From 1988 to 1994, Shell used a weighted-average method calculation for the Unit Wells, averaging the third-party sales prices of Shell and other operators for sales from the Lasater and Houston Units.²

In 2002, the Rosses sued Shell for breach of contract, unjust enrichment, and fraud. They alleged 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. Before the case was submitted to the jury, Shell stipulated that unless it prevailed on its statute of limitations defense, the Rosses were entitled to recover damages on their claim that Shell underpaid royalty on the Lease Wells by using the so-called arbitrary price to calculate royalty. Additionally, the trial court ruled, as a matter of law, that Shell had breached the lease by using the weighted-average method to calculate royalty for the Unit Wells. The only issues sent to the jury were (1) whether Shell fraudulently concealed its failure to pay royalty in accordance with the terms of Reuss Lease and (2) the dates on which the Rosses, exercising reasonable diligence, could have discovered that Shell failed to pay royalties in accordance with the Reuss Lease. The jury found for the Rosses on the fraudulent concealment issue for both the Lease Wells and the Unit Wells.³ The Rosses were awarded actual damages of $72,532.09 plus prejudgment interest, attorney's fees, and court costs.

The court of appeals affirmed, holding that Shell knowingly underpaid royalty and that the fraudulent concealment doctrine tolled the statute of limitations. 357 S.W.3d at 19. The majority reasoned that “the evidence presented ... support[ed] the jury's findings as to Shell's fraudulent concealment of its wrongful conduct and as to when the Rosses, with the exercise of reasonable diligence, could have discovered the wrongful conduct and their claims.” Id. at 23.

II. Limitations

Shell challenges the court of appeals' ruling that the Rosses' claims were not barred by limitations. Shell asserts that the court of appeals erred in holding that the fraudulent concealment doctrine tolled the limitations period. We agree that the fraudulent concealment doctrine did not toll the limitations period, but this does not end our analysis. We must also consider whether the discovery rule exception to limitations applied to defer accrual of the cause of action. We consider each doctrine in turn.

A. Fraudulent Concealment

We have recognized two doctrines that may apply to extend the statute of limitations. Computer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455–56 (Tex.1994). The first, fraudulent concealment, is an equitable doctrine that is fact-specific. BP Am. Prod. Co. v. Marshall, 342 S.W.3d 59, 67 (Tex.2011). Fraudulent concealment tolls limitations “because a person cannot be permitted to avoid liability for his actions by deceitfully concealing wrongdoing until limitations has run.” S.V. v. R.V., 933 S.W.2d 1, 6 (Tex.1996).

In this case, the jury found that Shell fraudulently concealed its failure to pay royalty in accordance with the Reuss Lease for the Lease Wells and the Unit Wells. The jury also found that the Rosses, exercising reasonable diligence, could not have discovered that Shell failed to pay royalty in accordance with the Reuss Lease until 2002 for the Lease Wells and until 2006 for the Unit Wells. A defendant's concealment of wrongdoing may toll the running of limitations. Shah v. Moss, 67 S.W.3d 836, 841 (Tex.2001). 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.” Id. However, fraudulent concealment only tolls the statute of limitations until “the fraud is discovered or could have been discovered with reasonable diligence.” BP Am., 342 S.W.3d at 67.

The Rosses argue that reasonable reliance on fraudulent representations 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. See Tex. Nat. Res.Code § 91.502(4) (requiring each check stub to include “the price per barrel or per MCF of oil or gas sold”). We disagree. Reasonable diligence requires that owners of property interests make themselves aware of relevant information available in the public record. For example, in BP America, we held that the limitations period was not tolled as a matter of law because BP's fraudulent misrepresentations about its good faith efforts to develop a well could have been discovered from publicly available information within the limitations period. 342 S.W.3d at 68–69. In Kerlin v. Sauceda, we held that a deed holder's descendants who had been given notice that deeds executed by their predecessors contained royalty reservations, but had not received any royalty payments for minerals on their property, could have discovered the existence of their claims for unpaid royalties by investigating public records of case settlements and conveyances. 263 S.W.3d 920, 926 (Tex.2008).

The Rosses did not exercise reasonable diligence...