Statute of Limitations on a Mineral Owner’s Claims of Fraud and Breach of Contract

In Hooks v. Samson Lone Star, Ltd., P’ship, No. 12-0920, 2015 Tex. LEXIS 56 (Tex. January 30, 2015), the Supreme Court of Texas addressed several issues concerning claims of fraud and breach of contract by a mineral owner against a lessee in the leasing and pooling of the mineral owner’s mineral interests.  All the claims involved three oil and gas leases that the Lessor (“Hooks”) executed with Samson Lone Star Limited Partnership (“Samson”), the Lessee, in 1999.  Id., at *4.

Fraud and Limitations

The main dispute in Hooks centered on the application of the four-year statute of limitations for fraud claims.  In 2006, Hooks sued Samson alleging fraud, fraudulent inducement, breach of contract and failure to pay royalties under the Texas Natural Resources Code § 91.404.  Id., at *3.  One of the leases, in addition to prohibiting pooling, contained “offset obligations” providing that if a gas well were completed within 1,320 feet of Hooks’ lease line but was not unitized with Hooks’ acreage, then Samson was required to either drill an offset well, pay Hooks compensatory royalties, or release the offset acreage.  Id., at *6.  In 2000, Samson drilled a well that bottomed inside the 1,320-foot protected zone around Hooks’ lease line, unbeknownst to Hooks.  Id.  Samson then asked Hooks to amend his lease and allow Samson to pool his lease into a unit associated with the new well; however, Samson provided Hooks with a plat incorrectly identifying the well’s bottom hole as outside of the protected zone.  Id.  That plat, along with previously filed plats, correctly identified the bottom hole as within the 1,320-foot boundary, were filed in the Texas Railroad Commission’s public records.  Id., at *6-7.

In 2007, Hooks brought suit against Samson alleging that Samson deprived Hooks of compensatory royalties by misrepresenting the well’s bottom-hole location and fraudulently inducing Hooks to amend the lease and pool his acreage.  Id., at *7.  The main dispute focused on when the four-year statute of limitations for fraud began to run.  Id.  Samson argued that the time period began to run when Hooks, through reasonable diligence, would have discovered the true location of the well’s bottom hole and that reasonable diligence requires a sophisticated lessor to acquaint themselves with “readily accessible and publicly available information” from Railroad Commission records.  Id.; see BP America Production Co. v. Marshall, 342 S.W.3d 59 (Tex. 2011); Shell Oil Co. v. Ross, 356 S.W.3d 924 (Tex. 2011).  Therefore, because the records included a plat correctly identifying the bottom hole as within the boundary, the time period should have began to run from around the time Hooks would have discovered the information through reasonable diligence.  Id.

However, Hooks argued, and the Court agreed, that the public records were tainted by the fraudulent plat.  Id., at *21.  The Court distinguished Marshall and Ross because, here, the records themselves were tainted by fraud.  Id., at *15.  Even though the records did contain correct information showing that the well did in fact bottom hole inside the protected zone, the Court determined that reasonable diligence did not require a lessor to double-check more recent filings against earlier filings.  Id., at *18.  Therefore, because the more-recent record was false, all of the public records were tainted by fraud.  Id.  Consequently, the public records themselves could not be used alone to establish a lack of reasonable diligence on the part of Hooks in the discovery of the fraud.  Id., at *21.  The ultimate question of whether Hooks was diligent in discovering the fraud is a question of fact.  Id., at *21.

Breach of Hardin County Offset Provision Claims

Similarly, the other two leases executed by Hooks and Samson also contained offset provisions, in addition to including an “entire-acreage clause”.  Id., at *35.  The entire-acreage clause provided that:

“Operations for drilling on or production of gas from any part of the pooled unit which includes all or a portion of the Leased Premises … shall be considered as operations for drilling on or production of gas from the Leased Premises … and the entire acreage constituting such unit or units shall be treated for all purposes, except the payment of royalties on production from the pooled unit, as if the same were included in this Lease.”

Id., at *35-36.  Samson pooled the two leases and drilled an additional well within 1,320 feet of the pooled units, but more than 1,320 feet from Hooks’ individual tracts.  Id., at *36.  Hooks alleged that Samson was in violation of the offset provision because the entire-acreage clause extended the protected zone from only covering the area around the leased acreage to covering the area around the acreage for the entire units.  Id.

Samson responded and argued Hooks’ claim is barred by the four-year statute of limitations bar for claims for breach of the offset provisions, because the offset provisions were first breached in 2001, more than five years prior to Hooks filing suit.  Id., at *38.  Nevertheless, Hooks argued that he is entitled to the damages for royalties that should have been paid during the four years preceding the filing of suit, because under the offset provisions, compensatory damages are owed monthly and the breach is therefore recurring.  Id., at *38.

The Court agreed with Hooks and held that the breach was recurring.  Id., at *40.  Even though under the offset provisions Samson could have elected for non-recurring penalties, such as drilling an offset well or releasing the acreage, those provisions required an action by Samson within ninety days following the original breach.  Id.  While, the payment of compensatory royalties as a penalty required payment at a time later than ninety days.  Id.  Therefore, the Court held that because Samson waited over ninety days without performing either of the first two alternatives, it impliedly elected to perform the latter alternative, paying compensatory royalties.  Id.  Consequently, Hooks may be entitled to damages for royalties owed within four years of filing suit.  Id.

Most-Favored-Nations Clause

All three leases contained a most-favored-nation clause providing that a lessee who pays higher royalties on nearby leases must pay matching royalties to the lessor under the subject lease.  Id., at *22.  Hooks argued that Samson breached that clause by paying a higher royalty to the State of Texas than was paid to Hooks.  Id., at *23.

Samson had leased an oil and gas interest from Hooks at 25% royalty.  Id.  Samson had also leased an oil and gas interest from the State at the same 25% royalty, but it later agreed with the State of Texas to a Pooling Agreement that provided that the state’s unit royalty interest shall be 0.7969%, thereby giving the State a royalty of 28.28896% on the production allocated to the State’s tract.  Id.  Hooks argued that he was entitled to the same 28.28896% royalty as the State, while Samson argued that the clause does not apply because the clause regards royalty payable under another lease, whereas Samson paid the State higher royalties under the Pooling Agreement.  Id., at *23-4.

The Court concluded that Hooks was entitled to the higher royalty and stated:  “the ‘primary legal consequence’ of pooling to this case – that production anywhere on a pooled unit is treated as production on every tract in the unit.”  Id., at 24; see Key Operating & Equip., Inc.v. Hegar, 435 S.W.3d 794, 798-99 (Tex. 2014) (quoting Se. Pipe Line Co. v. Tichacek, 997 S.W.2d 166, 170 (Tex. 1999)).  Any production from the whole pooled unit is tied to the royalty owed on production from a lessor’s individual tract.  Id., at *25.  Therefore, the Court held that the most-favored nations clause applied because the reason for the higher royalty was irrelevant in determining whether there was actually a higher royalty on an individual tract.  Id.

Conclusion

Hooks is significant for lessees that routinely file documents in the public records.  In previous decisions, in claims for fraud, courts have held that land title records and probate proceedings created an irrebuttable presumption of actual notice, preventing the accrual of a claim from being delayed for purposes of limitations.  However, now, if the public records are incorrect, the question of whether a plaintiff exercised reasonable diligence in discovering the fraud is a question of fact.  Additionally, it is always important to remember the consequences lease provisions may have if that leased tract is included within a pooled unit.