In a ruling that could benefit mineral owners who don’t regularly examine county deed records (to-wit, you?) the Supreme Court of Texas in Carl M. Archer Trust No. Three et al v. Tregellas held that the discovery rule delayed the running of the statute of limitations on behalf of the holder of a recorded right of first refusal to purchase mineral interests.

The trustees sued the Tregellases for buying the minerals without allowing the Trust to exercise its ROFR, contending that a contract was formed when they sued more than four years after the Tregellases’ purchase; the suit was their acceptance of the right to purchase the minerals, they said.

According to the Trellgases, the claim was barred by limitations because the suit was filed more than four years after the sale. The trustees responded that even if that were so, limitations should be delayed because they they had no obligation to search the county deed records.

The discovery rule described … Continue Reading Texas High Court Invokes the Discovery Rule

angry woman

Co-author Skyler Stuckey

The big trade-secret case, Southwestern Energy v. Berry-Helfand, reported on these pages here and here, has been worked over by the Texas Supreme Court. Highlights:

  • Lack of certainty in damages does not preclude recovery.
  • A “Flexible and imaginative” approach to damages in trade secret cases has its limits
  • For the limitations clock to begin running, notice must be more than a suspicion or subjective belief.

A good tactical call

A defendant’s decision not to call an expert damages witness is reminiscent of the suicide squeeze. Judgment is withheld until the result is in. Run scores – manager is a genius; runner out at the plate – manager is reckless and should be fired. Here Southwestern introduced no witness of its own, but instead attacked factual underpinnings of Helfand’s expert’s methodology and the reliability of his calculations. Decision vindicated? Looks like yes. The jury awarded far less than Helfand’s expert calculated.

Reduced damages for misappropriation

As the court saw it, the only figure in the calculations that bore a relationship to the jury’s award was three-percent override applied to past production revenue on the disputed wells. There was no basis for valuing an override in Southwestern’s deep-rights sale. An estimate based on that sale was no evidence to support the jury’s $10.6 million award. The remainder of his calculations, though overstated, was sufficient evidence of actual damages for trade-secret misappropriation.

The proper measure was the reasonable royalty that would be obtained for the trade secret’s use, not an override. Relying on a “flexible and imaginative approach” for trade secret misappropriation is not justified when objective evidence is available. The compensation in the comparable Petrohawk agreement was probative of the trade secret’s value, and not necessarily of a reasonable royalty. Legally sufficient evidence existed to support actual damages, but insufficient evidence exists to support the entire amount the jury awarded.

The expert’s opinion was insufficient to support the entire judgment because he applied the total average payout (3%) received by the plaintiff under an exemplar agreement with Petrohawk to the total number of wells drilled by the defendant. He should have applied the specific formula for payout in the exemplar contract to each well to determine the exact amount that would have been paid for the trade secret.

Damages remanded – not rendered

Overstated damages do not entirely defeat recovery when legally sufficient evidence shows damages exist. There were damages to be had, just not in the amount awarded.

Breach of contract do-over

The court of appeals’ take-nothing judgment on breach of the confidentiality agreement was reversed and remanded. The jury award, based on the “value of the trade secret”, was not a proper measure of contract damages. Error in the measure of contract damages was not before the appeals court because Southwestern abandoned it on appeal. There was evidence of damages, but not enough to support the full award.

Limitations and the discovery rule – plaintiff survives

For the statute to begin to run on a trade secret misappropriation claim based solely on notice of sufficient facts that would cause a reasonable person to make further inquiry, the facts of which the plaintiff has notice must be egregious. Suspicions, subjective beliefs, and concerns are not sufficient. Southwestern failed to establish the date the misappropriation was discovered or as a matter of law, should have been, and couldn’t identify evidence revealing what Helfand would have discovered had she made further inquiry.

And we close with this enticement from the Supreme Court to unhappy defendants.

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.

Another in our cavalcade of ugly college football uniforms

Why am I always reporting on plaintiffs who wait too long to file their lawsuit? See below for a few possible answers.

In the latest Texas case, Trahan v. Mettlen, the Trahans sued in 2010 on a 2006 warranty deed.

The earnest money contract for the sale of property from the Mettlens to the Trahans didn’t mention reservation of mineral rights. The warranty deed included a “clear and unequivocal” reservation. Mr. Trahan testified that he did not read the deed at the closing and a deed was not given to him at closing. More than four years later, when leasing activity began, the Trahans realized that the minerals had been reserved.

The clear and unequivocal reservation

The court’s first duty was to ask, When did the cause of action accrue? A mistake plainly evident or clearly disclosed on the face of a deed (such as this reservation of minerals) means that all parties are chargeable with knowledge of the contents of the deed. The court’s view was that a mutual mistake was plainly evident on the face of the deed. The statute began to run on the day the deed was executed by the grantor or on the date it was delivered to the grantee.

The discovery rule is sometimes available to the plaintiff. If the mutual mistake was not plainly evident but related instead to the legal effect of the material term, the statute will begin to run when the mistake was or in the exercise of due diligence should have been discovered. Subsequent conduct of the parties might rebut the presumption that all parties are chargable with immediate knowledge of the mistake. None of that happened in this case. The discovery rule was inapplicable.

What could have been

Game over, which is unfortunate for the Trahans because there might have been a legitimate claim to reform the deed for mutual mistake. A Texas court will find a mutual mistake when (1) there is a mistake of fact; (2) held mutually by the parties; (3) which materially affects the agreed upon exchange.

There is another way to go about it. A Texas court will consider a unilateral mistake by one party coupled with knowledge of that mistake by the other party as the equivalent of that mutual mistake.

Why do these things happen? 

I’m tempted to offer platitudes: Read and understand your contract, act if and when you need to. But the downfall of many unsuccessful plaintiffs is neglect. Your delay in acting is not forgiven if your mistake is about a term that isn’t important at the time. I suspect the Trahans didn’t act sooner because the didn’t think about the minerals until the landman came knocking on the door bearing bonus payments.

The second culprit is trust. Trust has two components: Integrity and competence. Your counterparty can be honest, but he also must be trusted to prepare a document correctly. Ronald Reagan had the right attitude on this subject.

A musical interlude. Don’t let this be you.

As Donald Rumsfeld teaches, knowledge can be divided into three categories:

  • Known knowns; things that we know that we know;
  • known unknowns; that is to say, we know there are some things we do not know; and
  • unknown unknowns; the ones we don’t know we don’t know.

Another philosopher, Slavoj Zizek, adds a fourth, for parents vis-a-vis the whereabouts of their children after midnight: “The unknown known; that which we intentionally refuse to acknowledge that we know.”

Which category fits the plaintiffs in Tipton v. Brock? You decide, but here is the lesson: If you don’t bother to read your deed, you stand little chance of knowing anything.

In August 1999, Brock and Tipton signed a Farm and Ranch Contract by which Tipton would acquire 519 acres in Montague County. (Lots of Brocks were parties to the contracts and the suit. I refer to them as one for convenience.) All mineral rights were to be retained by Brock Two months later, the parties executed a Warranty Deed transferring the land,

“LESS, SAVE AND EXCEPT all oil gas and other minerals found in … the above-described tract of land heretofore reserved by predecessors.”

In 2009, Brock sued for reformation of the Warranty Deed based on mutual mistake. Tipton asserted the four-year limitations statute and that the discovery rule did not apply. the jury rendered a verdict for Brock, even though testimony at the trial was that some of them didn’t read the deed, and those who did had what appear (to me, anyway) to be lame reasons why they didn’t understand it for what it was.

The Rules

The Supreme Court of Texas has several things to say on this subject:

  • A cause of action accrues and the statute of limitations begins to run when facts come into existence that authorize a claimant to seek a judicial remedy.
  • The discovery rule is an exception, and defers accrual of a cause of action until the claimant knows or, by exercising reasonable diligence, should know of the facts giving rise to the claim.
  • The rule applies when the injury is both inherently undiscoverable and objectively verifiable.
  • The injury is inherently undiscoverable if it is a type of injury that is not generally discoverable by the exercise of reasonable diligence.

Fair or Unfair?

Based on the jury verdict, the plaintiffs had a good case that just wasn’t brought timely. Some would call the limitations defense a “loophole”.  But one doesn’t have to be president of the AAPL to conclude that the sellers didn’t exercise diligence when executing the deed.

 For the Lawyers

Jury question No. 7 asked: “By what date did Plaintiff either know or, in exercise of reasonable diligence, should have discovered the original Warranty Deed did not reserve the mineral interests to Plaintiff?” The jury answered “7-8-08”.

The court ruled that Tipton, loser at trial and appellant, was not obligated to lodge an objection or request to that instruction because “inherently undiscoverable” and “objectively verifiable” are legal issues to be decided by the court and not by a jury. Although the jury could have determined when Brock discovered or should have discovered the cause of their injury and whether they exercised due diligence in discovering their cause of injury, it was up to the court, and not the jury, to resolve the question of whether the discovery rule applied.

Why did they wait so long to sue? The opinion gives some clues, but they should have listened to Van Morrison.

Two intriguing factors are present in the Texas Supreme Court’s decision to review Hooks v. Samson Lone Star, LP.  It is out of the ordinary for this court to consider a court of  appeals reversal of a large jury verdict. And the discovery rule is again in play in response to a statute of limitations defense. The practical question: How much investigation will the court require of a lessor to discover if he has been lied to?

The Background

Hooks the lessor sued Samson the lessee for fraud and breach of an oil and gas lease. After a summary judgment and jury trial, Hooks garnered a $20 million judgment, which the court of appeal took away on the basis that Hooks waited too long to bring his suit.

The Lie

The lease required Samson to drill a well, pay royalties, or release a portion of the lease if a well was drilled within 1,350 feet of the lease line. Samson directionally drilled a well that bottomed closer than that. Samson’s landman falsified a plat that he not only gave to Mr. Hooks but also filed with the Railroad Commission, showing the bottom hole to be 1,400 feet off the lease line. Hooks was fooled, at least for a while. In the face of Samson’s defense that the plat could be read two ways (and thus it was not really a lie?) several of Samson’s own witnesses agreed that the plat could be read only one way.

The court of appeals, relying on HECI v. Neal, 982 SW 2d 881 (Tex. 1997),  reversed.  Hooks should have investigated Railroad Commission records, where he would have found a Schlumberger directional survey showing that the bottom hole was 1281 feet from the lease line, thus catching Samson in its lie. The premise was that the Railroad Commission records placed Hooks on constructive notice of the fraud. He failed to use reasoanble diligence in protecting his interests. Had he done so he would have timely discovered the fraud. 

What Could it Mean?

  • Will the Supreme Court retreat from its brutal application of the discovery rule to plaintiffs who fail to examine public records to protect their interests?
  • Will a court of appeals be allowed to apply the law in a way that substitutes its view of the facts for the jury’s?
  • How the rule is applied sometimes begs the question: What if the lessor doesn’t suspect a lie?  Is there ever a point at which a lessor may just take his lessee’s word for something? Must he never believe anything his lessee says?  Is an investigation of everything a lessee says always required?
  • Rhetorical question: Should the audacity of the lessee’s lie diminish the lessor’s duty to investigate? In its briefing I never quite hear the lessee say “We didn’t do it”.
  • Personal question: After the jury has heard the evidence and rendered its verdict, must I still refer to everything as “alleged”?

This musical interlude is dedicated to the Samson landman.

Remember the Wilford Brimley character in The Firm? “I get paid to be suspicious when I’ve got nothing to be suspicious about.” Shell Oil Company v. Ross commands you to think like Mr. Brimley. If you suspect your lessee is not paying proper royalties, do not wait to investigate. Even if you don’t suspect anything is amiss, investigate anyway or you will lose your right to sue. The Texas Supreme Court has reaffirmed the heavy burden imposed on a royalty owner to discover he is being underpaid by his lessee.

The Suit

Mr. Ross didn’t take Mr. Brimley’s advice, perhaps because he wasn’t working for the Mob.  He was dealing with a major oil and gas producer. Mr. Ross owned royalty interests in wells operated by Shell. The lease royalty was 1/8th of the amount realized. The state had a 50% royalty interest and was paid independently of the plaintiffs. For some unexplained reason, Shell paid what the court referred to as an “arbitrary price”, and Shell’s the best explanation at trial was that it “made a mistake”.

Mr. Ross was a lawyer who did oil and gas work. The suit was for fraudulent concealment, accusing Shell of withholding sufficient information for him to determine that they were being paid less than they should have been.

The Rationale

The “discovery rule” can stop the running of limitations on a fraudulent concealment claim. The court reiterated the test for the rule to apply in Texas litigation: The injury must be “inherently undiscoverable and objectively verifiable.” The test is administered on a “categorical basis”. There are no exceptions!

The court identified several sources of “readily accessible and publically available information” that could have lead the royalty owner, if he had used “reasonable diligence” to discover he had been underpaid.

Among those sources was the El Paso Permian Basin Index which, according to the court, would have revealed that the royalties being paid were too low. Another was the records of the Texas General Land Office, which did not reveal the price Shell paid to the state on the same land, but “would have revealed that Shell was underpaying” the Rosses. The opinion also suggests that Mr. Ross could have “ask[ed] the companies Shell sold the gas to the price they paid …”. The court did not handicap the likelihood of the success of such a request.

A Few Questions

• If Shell merely “made a mistake”, why didn’t the company go ahead and pay what it admitted it owed? (Granted, this one is more ethical than legal)

• Should the “inherently undiscoverable/objectively verifiable” test be tempered by, say, a requirement that the royalty owner have some reason to believe he is being underpaid in the first place? Must a royalty owner assume that everybody is out to underpay him? The court says “yes”. Constant vigilance is the standard. Generalized mistrust is the word of the day.  Think like Mr. Brimley, the Mob enforcer.

• How many royalty owners are sophisticated enough to look at sources like those mentioned by the court? I would say, not very many. How much success would a small royalty owner have when she asks the pipeline how much the large producer was paid on one lease? Not much, I would say.