grip2Co-author Sandra L. Mazan

The Texas Supreme Court – that elephants’ graveyard of claims and causes of action – has sided with a lessor-plaintiff who relied on the discovery rule to defeat a limitations defense.  For the many with low expectations when the court agreed to review this case, this result is a welcomed surprise.

We discussed Hooks, et al. v. Samson Lone Star, Limited Partnership in a prior post, wondering if the Court would actually allow a plaintiff to invoke the discovery rule, something it has been loath to do ever since HECI Exploration v. Neel.

The Lie and Its Aftermath

Hooks sued Samson, alleging fraudulent inducement arising out of three oil and gas leases from Hooks, as lessor, to Samson, as lessee, in 1999.  (Other claims will be discussed in a future post.)  A Samson landman had submitted a plat to the Railroad Commission which misrepresented the bottomhole location of a well. It took Hooks a long time to discovery the fraud, and Samson argued that Hooks should have had acquired knowledge of the true bottomhole location from earlier RRC records (a directional survey and its associated plat). The Supreme Court disagreed.  Where the most-recent record show an inaccurate location, “reasonable diligence” does not require a review of earlier records.

Who Decides?

The jury determines whether a mineral owner, in the exercise of reasonable diligence, discovered or should have discovered the fraud foisted upon him.  But the existence of information in the public record may, as a matter of law, establish a lack of diligence in the discovery of fraud. This is because the public record gives everyone constructive notice of its contents, even records the plaintiff doesn’t examine. but that is not the case where the records themselves are tainted by fraud.

Earlier cases ruled that reasonable diligence requires sophisticated lessors to acquaint themselves with “readily accessible and publically available information” from RRC records.  As a matter of law the lessor is bound by the knowledge he would have obtained had he investigated the records. (Don’t be misled by that language: The royalty owner doesn’t have to be sophisticated to be done in by the rule. See HECI).

In Shell Oil Co. v. Ross, it was an oil and gas attorney; in BP America Production Co. v. Marshall it was a sophisticated plaintiff who “understood the oil and gas industry”.  A well log and plugging report that contained, in the words of the court, “highly technical information”, resulted in a ruling that as a matter of law Marshall would have been able to discover BP’s fraud through the use of reasonable diligence.

The difference was that in those cases the public record was not itself tainted by fraud.

Is This a Game-Changer?

Probably not.  We detect nothing in the opinion suggesting the Court intends to relax the basic rule: Royalty owners overlook, or naively ignore, the contents of public records at their peril.  With this musical interlude defendants remind the Supreme Court that it is their sweet and special friend against populist juries and disobedient appellate courts inclined to side with the royalty owner-plaintiff.