WHAT QUANTUM OF DILIGENCE IS (UN)REASONABLE?
Fraud prevents the running of the statute of limitations until it is discovered, or by the exercise of reasonable diligence could have been discovered. In this January 2015 opinion in an oil & gas case over underpayment of royalties, the Supreme Court of Texas holds that when the defendant's fraudulent misrepresentations extend to the Railroad Commission record itself, earlier inconsistent filings cannot be used to establish, as a matter of law, that reasonable diligence was not exercised by the plaintiff. Under these circumstances, reasonable diligence remains a fact question.
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| Hooks v. Samson Lone Star, Limited Partnership (Tex. Jan. 30, 2015) |
The facts underlying the case represent a variation on the theme of fraudulent concealment in that pertinent documents themselves could be discovered, but the error in them would not be readily apparent, and would therefore not give rise to awareness of injury and get the limitations clock ticking. Declining to impose a requirement that the lessor of mineral interests go back and double-check the Railroad Commission records and compare more recent filings against earlier filings to protect the lessor's rights under the "reasonable diligence" standard, the Court reversed the court of appeals' determination that the claim was time-barred, and remanded to the lower appellate court for consideration of other issues that the court had not reached. The court limited itself to the "matter of law" issue because it does not review factual sufficiency of the evidence with respect to jury findings, which will be the Houston court of appeal's job upon remand to that court.
OPINION BELOW: Samson Lone Star, Ltd. P’ship v. Hooks, 389 S.W.3d 409 (Tex. App.—Houston [1st Dist.] 2012).
Fraud and Limitations
Hooks' fraud claims relate to the Jefferson County Lease. This lease, which prohibited 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 would either drill an offset well, pay Hooks compensatory royalties, or release the offset acreage. In 2000, Samson drilled a well that bottomed about 1,186 feet from Hooks' lease, within the 1,320-foot protected zone. But, instead of complying with the original offset obligations, Samson asked Hooks to amend the Jefferson County Lease in 2001 to pool into a unit associated with the new well. In connection with this request, Samson provided Hooks with a plat that incorrectly placed the well's bottom hole outside of the protected zone. A plat with the same false information had already been filed with the Railroad Commission. Older Railroad Commission records, however, contained a directional survey and an attached plat[3] that correctly placed the bottom hole within the 1,320-foot boundary.[4] Other preliminary Railroad Commission filings demonstrated that Samson originally intended the well to bottom within 1,320 feet of Hooks' lease.
Hooks brought his fraud claims in 2007, 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.
A jury found that Samson committed fraud and statutory fraud, awarding more than $20 million in damages on these claims, and the trial court rendered judgment on the jury's verdict. The court of appeals, however, reversed, holding that the four-year statute of limitations for fraud barred the claims. Id. at 428-29 (citing TEX. CIV. PRAC. & REM. CODE § 16.004(a)(4)).
Hooks argues that the court of appeals erred because the statute of limitations did not begin to run until Hooks "knew or should have known of facts that in the exercise of reasonable diligence would have led to the discovery of the wrongful act." Exxon Corp. v. Emerald Oil & Gas Co., 348 S.W.3d 194, 216 (Tex. 2011) (quoting Little v. Smith, 943 S.W.2d 414, 420 (Tex. 1997)).
The jury found that, in the exercise of reasonable diligence, Hooks should have discovered Samson's fraud by 2007. Samson responds that, as a matter of law, reasonable diligence would have discovered the true location of the well's bottom hole in 2000 or 2001. Samson points to this Court's decisions in BP America Production Co. v. Marshall, 342 S.W.3d 59 (Tex. 2011), and Shell Oil Co. v. Ross, 356 S.W.3d 924 (Tex. 2011), where reasonable diligence required sophisticated lessors to acquaint themselves with "readily accessible and publicly available information" from Railroad Commission records. Ross, 356 S.W.3d at 929; see Marshall, 342 S.W.3d at 68-69. According to Samson, the directional survey and its associated plat, as well as filings showing the original proposed location of the well's bottom hole, should have been discovered by the exercise of reasonable diligence by 2001 at the latest, meaning that Hooks' fraud claims are barred by limitations.
We have long held that "fraud prevents the running of the statute of limitations until it is discovered, or by the exercise of reasonable diligence might have been discovered." Ruebeck v. Hunt, 176 S.W.2d 738, 739 (Tex. 1943).[5] Generally, "[c]auses of action accrue and statutes of limitation begin to run when facts come into existence that authorize a claimant to seek a judicial remedy," Emerald Oil, 348 S.W.3d at 202, but "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). Because "fraud vitiates whatever it touches," Borderlon v. Peck, 661 S.W.2d 907, 909 (Tex. 1983), limitations does not start to run until the fraud is discovered or the exercise of reasonable diligence would discover it, Marshall, 342 S.W.3d at 69.
EXCEPTIONS TO LIMITATIONS BAR BASED ON THE DEFENDANT'S FRAUD
ALSO APPLY TO FRAUDULENT INDUCEMENT OF A CONTRACT
The same rule applies to claims of fraudulent inducement. Fraudulent inducement is a subspecies of fraud; "with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties." Haase v. Glazner, 62 S.W.3d 795, 798-99 (Tex. 2001). Accordingly, the same principle applies: limitations does not start to run until the fraud with respect to the contract is discovered or the exercise of reasonable diligence would discover it.
And just when would reasonable diligence discover the wrong?[6] And who decides? Although "the date a cause of action accrues is normally a question of law," Etan Indus., Inc. v. Lehmann, 359 S.W.3d 620, 623 (Tex. 2011) (per curiam), reasonable diligence is an issue of fact, Estate of Stonecipher v. Estate of Butts, 591 S.W.2d 806, 809 (Tex. 1979).[7] Nevertheless, in some circumstances, we can still determine as a matter of law that reasonable diligence would have uncovered the wrong.[8] A survey of our decisions reveals the reasons for holding, as a matter of law, that the exercise of reasonable diligence would lead to the discovery of the wrong within the statutory period.[9]
In Shell Oil Co. v. Ross, we considered untimely claims made by Ross—an attorney who "understood the oil and gas industry"—and his family that Shell had underpaid gas royalties. 356 S.W.3d at 926. Despite Shell's allegedly fraudulent representations, the Rosses had a duty to "make themselves aware of relevant information available in the public record." Id. at 928. We held that "[d]iligence is required when claimants have been `put on notice of the alleged harm of injury-causing actions.'" Id. (quoting Emerald Oil, 348 S.W.3d at 207).[10] Discrepancies in royalties paid to the Rosses on different wells put them on notice. Id. at 929. A publicly available price index illuminated the underpayments, as did General Land Office records demonstrating that Shell paid higher royalties to the State even though it owed the Rosses the same royalty. Id. Had the Rosses exercised reasonable diligence, this "[r]eadily accessible and publicly available information" would have revealed the underpayments. Id. Accordingly, as a matter of law, they did not exercise reasonable diligence.
In BP America Production Co. v. Marshall, we held that the statute of limitations was not tolled when BP fraudulently represented that it was maintaining continuous operations on a lease. 342 S.W.3d at 67-69. This case also involved a sophisticated plaintiff who "understood the oil and gas industry." Id. at 69. The public record contained two public filings with the Railroad Commission: a well log and a plugging report that contained "highly technical information." Id. at 66. Had the Marshalls read these two documents together, they would have discovered that BP was not conducting good-faith continuous operations. Id. at 69. "[A]s a matter of law, the Marshalls would have been able to discover BP's fraud th[r]ough the use of reasonable diligence." Id.
We have reached similar conclusions in other cases. For example, if the plaintiff has "actual knowledge . . . of injury-causing conduct," then this "starts the clock on the limitations period" "[i]rrespective of the potential effect of fraudulent concealment." Emerald Oil, 348 S.W.3d at 209. The availability of court records may indicate under some circumstances that reasonable diligence would have found the information. See Kerlin, 263 S.W.3d at 926.
Land title records and probate proceedings create constructive notice, "an irrebuttable presumption of actual notice," which prevents limitations from being delayed. Mooney v. Harlin, 622 S.W.2d 83, 85 (Tex. 1981); Sherman v. Sipper, 152 S.W.2d 319, 321 (Tex. 1941). These cases reveal that when there is actual or constructive notice, or when information is "readily accessible and publicly available," Ross, 356 S.W.3d at 929, then, as a matter of law, the accrual of a fraud claim is not delayed.
The present case does not fall into any of the categories where we can determine, as a matter of law, that reasonable diligence would have timely uncovered the fraud. Though Samson relies extensively on Marshall and Ross, Hooks correctly identifies an important distinction: in those cases, the public record itself was not tainted by the fraud. We have not previously considered whether reasonable diligence would uncover a correct public Railroad Commission filing when more recent filings contain false information.
In December 2000, Samson submitted a plat to the Railroad Commission as part of an application to pool. The plat was signed by Glenn Lanoue, Samson's landman, and dated November 16, 2000, certifying that it was "a true and correct plat based on the best of my knowledge." The plat had a label stating "Proposed Well Location," but, unlike some earlier plats in the record, the individual data on this plat were not themselves also marked as "proposed." The plat gave "X" and "Y" coordinates for the well's bottom-hole location, the distance of the well from various survey lines, and the well's surface location along with the bottom hole's location relative to the surface. Trial testimony established that this data is internally consistent, placing the well's bottom hole more than 1,320 feet from Hooks' lease line even though the well actually bottomed within the 1,320-foot protected zone. When Lanoue was asked where he obtained the bottom hole's distance from the survey lines, he testified that he created them himself.[11]
Samson later provided a plat with the same information to Hooks in connection with Samson's request to amend the lease and allow pooling. Samson argues the plat was ambiguous and indefinite, creating a need for Hooks, an experienced oil and gas lessor, to investigate further. On the plat is the notation "1400' ± scaled," but trial testimony presented different interpretations of what points this distance measured between. Elsewhere, the plat expressly states that the bottom-hole location is "1400' ± scaled' FEL Unit." Testimony indicated that "FEL" means "from the eastern line" of the pooled unit. Another testified that taking the notation literally would be unreasonable because if the well truly bottomed about 1,400 feet from the eastern line of the unit, as opposed to Hooks' lease line, it would be very close to Hooks' lease, perhaps even within it.
Months earlier, a directional survey performed by an independent surveyor and an accompanying plat were filed with the Railroad Commission. Some information on the directional survey clearly contradicts the Lanoue plat discussed above, and Samson urges that the information on the survey could have easily been used to estimate the bottom hole's true location. Hooks argues that it would take an expert to interpret the survey and pinpoint its location.
We cannot say that, as a matter of law, Hooks should have discovered the accurate information when the more recent filing falsely conveyed that the well had been completed outside the protected zone. Although reasonable diligence should examine readily available information in the public record, it may stop at more recent filings with the Railroad Commission, without needing to double-check more recent filings against earlier filings.
This accords with our prior decisions. We have held that "fraud vitiates whatever it touches," Borderlon, 661 S.W.2d at 909, in this case, the public record. We have held that not all Railroad Commission records create constructive notice, HECI Exploration Co., 982 S.W.2d at 886, meaning that, in some circumstances, Railroad Commission filings may exist that one is not charged with discovering. We have held that fraudulent concealment is "an equitable doctrine that . . . is fact-specific." Marshall, 342 S.W.3d at 67. And we have held that "a person cannot be permitted to avoid liability for his actions by deceitfully concealing wrongdoing until limitations has run." S.V., 933 S.W.2d at 6. Though reasonable diligence should lead to information in the public record, here, the fraudulent information itself taints the public record. To require, as a matter of law, that Hooks double-check the more recent filings against earlier filings is a higher burden than reasonable diligence requires.
Samson argues that the directional survey is the "gold standard," and that the fraudulent plat was filed to show unit lines for pooling purposes, not to provide the exact location of the well's bottom hole. Samson observes that, in some situations, Texas law mandates directional surveys performed by independent surveyors, see 16 TEX. ADMIN. CODE §§ 3.11(c)(2)(A); 3.12 (Tex. R.R. Comm'n), and asserts that Hooks should have known this and looked for the survey to establish the bottom hole's true location. Samson also argues that because Lanoue told Hooks the well was about 1,500 feet from the lease line, but then sent Hooks a plat indicating the bottom hole was about 1,400 feet away, very close to the protected zone, these inconsistencies should have caused Hooks to inquire further.
None of these arguments avail.
Had Hooks gone to the Railroad Commission, the more recent filing would have been a plat with the same inaccurate information, placing the well's bottom hole beyond the protected zone. Hooks is not required, as a matter of law, to double-check it against the earlier directional survey. To the extent some information on the Lanoue plat is unclear, a careful reader could have examined other information on the plat (e.g., the "X" and "Y" coordinates, distances from lease lines, and location of the bottom hole relative to the surface) to resolve any ambiguity, determining that the plat placed the bottom hole outside the protected zone. Indeed, Hooks presented testimony that this plat clearly placed the bottom hole outside of the protected zone. Thus, though Samson's arguments regarding potential ambiguities on the plat, and the availability and superiority of the directional survey, may be appropriate for the factfinder to consider when determining whether reasonable diligence would have uncovered the fraud, they do not establish that, as a matter of law, Hooks did not exercise reasonable diligence.
Amicus Texas Oil and Gas Association suggests that holding for Hooks will encourage litigants to guise their breach-of-contract claims as fraud claims to avoid the statute of limitations. We disagree.
To establish fraudulent inducement, "the elements of fraud must be established as they relate to an agreement between the parties." Haase, 62 S.W.3d at 798-99. Many breach-of-contract cases do not implicate the elements of fraud. Only when fraud is established with regard to the contract may fraudulent inducement be established, and, in any case, the suit is based on the fraud itself rather than a breach of contract. Moreover, because fraudulent concealment may toll the statute of limitations for contract claims, no incentive will exist to recast them as fraud claims.
We hold that when the defendant's fraudulent misrepresentations extend to the Railroad Commission record itself, earlier inconsistent filings cannot be used to establish, as a matter of law, that reasonable diligence was not exercised. Under these circumstances, reasonable diligence remains a fact question. The factfinder, no doubt, may consider the failure to examine older records when determining whether reasonable diligence was exercised, but their availability is not enough to establish that reasonable diligence was not exercised as a matter of law.
Because the court of appeals mistakenly concluded that the date by which Hooks reasonably should have discovered Samson's fraud was a question of law, it did not reach Samson's other arguments concerning Hooks' fraudulent inducement claims. See 389 S.W.3d at 428-30. These include the factual and legal sufficiency of the evidence with regard to common-law fraud, statutory fraud, and damages for fraud, as well as the factual sufficiency of the evidence regarding when Hooks, by the exercise of reasonable diligence, would have discovered the fraud.
We remand these issues for the court of appeals' consideration.
SOURCE: TEXAS SUPREME COURT - HOOKS v. SAMSON LONE STAR, LIMITED PARTNERSHIP N/K/A SAMSON LONE STAR LLC, No. 12-0920 (Tex. Jan 30, 2015) (Opinion by Justice John P. Devine) (click hyper-linked case style to read entire opinion in pdf).
Footnotes:
[4] Although the plat correctly placed the bottom hole within the protected zone, some data on the plat does not completely correspond to data on a later correct plat.
[5] See also Emerald Oil, 348 S.W.3d at 216; Marshall, 342 S.W.3d at 68; Computer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996); Woods v. William M. Mercer, Inc., 769 S.W.2d 515, 517 (Tex. 1988).
[6] Hooks and amicus Cardwell, Hart & Bennett, LLP cite cases stating that if there is a fraudulent misrepresentation, it is no defense that proper inquiry might have revealed the truth. See, e.g., Buchanan v. Burnett, 119 S.W. 1141, 1142 (Tex. 1909); Labbe v. Corbett, 6 S.W. 808, 811 (Tex. 1888); Mitchell v. Zimmerman, 4 Tex. 75, 79-80 (1849). These cases, however, stand for the general proposition that one may be liable for fraud even if it could be discovered by due diligence; they do not hold that limitations is extended even if due diligence would reveal the fraud. Also, at least one amicus, Cardwell, Hart & Bennett, LLP, invokes a lessee's implied covenant to act as a reasonably prudent operator. But we held in HECI Exploration Co. v. Neel that "[i]mplied covenants do not dispense with the need for royalty owners to exercise due diligence in enforcing their contractual rights, express or implied, within the statutory limitations period." 982 S.W.2d 881, 887 (Tex. 1998).
[7] See also Shah v. Moss, 67 S.W.3d 836, 846 (Tex. 2001) ("To avoid summary judgment on limitations grounds, Moss must have raised a fact issue to support his fraudulent-concealment assertion."); Hurlbut v. Gulf Atl. Life Ins. Co., 749 S.W.2d 762, 766 (Tex. 1987) ("[W]e agree that whether the plaintiffs knew or should have known of the fraud . . . raises a fact issue. . . ."); Borderlon, 661 S.W.2d at 909 ("A fact issue exists whether, in the exercise of reasonable diligence, Borderlon knew, or should have known . . ., that the presence of the foreign object in her abdomen gave rise to a cause of action against Dr. Peck."); Cherry v. Victoria Equip. & Supply, Inc., 645 S.W.2d 781, 782 (Tex. 1983) ("The ultimate duty to weigh the evidence, determine credibility and decide if fraudulent concealment actually existed rests upon the trier of fact."); Ruebeck, 176 S.W.2d at 740 ("What will constitute reasonable diligence to discover fraud and when the fraud might have been discovered by the exercise of such diligence are necessarily questions which must be determined from all the facts and circumstances in evidence in each particular case. When, under the facts in evidence, reasonable minds might differ on such issues, the findings of the jury thereon are binding on the appellate court.").
[8] See, e.g., Etan Indus., 359 S.W.3d at 623 ("On these facts, we hold as a matter of law that the estoppel effect of the alleged fraudulent concealment ended in December 2002 at the latest. By that date, the Lehmanns were apprised of facts, conditions, and circumstances sufficient to cause a reasonable person to make inquiry that would lead to the discovery of the concealed cause of action."); Ross, 356 S.W.3d at 929 ("Because the Rosses could have discovered Shell's alleged fraud through the use of reasonable diligence, we hold that, as a matter of law, the doctrine of fraudulent concealment cannot apply to toll the statute of limitations."); Marshall, 342 S.W.3d at 69 ("[A]s a matter of law, the Marshalls would have been able to discover BP's fraud through the use of reasonable diligence."); Kerlin v. Sauceda, 263 S.W.3d 920, 926 (Tex. 2008) ("As a matter of law, the Ballis could have discovered the existence of any claims before limitations expired through the exercise of reasonable diligence.").
[9] Hooks denies relying on the discovery rule or fraudulent concealment. Although fraudulent concealment allows the statute of limitations to be tolled for causes of action besides fraud itself, the standard of reasonable diligence remains the same: "Fraudulent concealment only tolls the running of limitations until the fraud is discovered or could have been discovered with reasonable diligence." Marshall, 342 S.W.3d at 67. Consequently, cases discussing fraudulent concealment are relevant to the meaning of reasonable diligence.
[10] Samson and Hooks dispute whether parties must be put on notice of potential harm before they have a duty to exercise reasonable diligence, as well as whether Hooks was on notice. We need not reach these questions here. Instead, we decide the case by assuming, without deciding, that Hooks should exercise reasonable diligence.
BLOG POSTS ON THIS CASE BY OTHERS:
Texas Supreme Court Rules for Mineral Owner in Hooks v. Samson (Oil & Gas Lawyer Blog)
How Much Due Diligence is Due? CASE STUDY: HOOKS V. SAMSON LONE STAR, LTD (Manning Wolfe)
Hooks v. Samson: A Bold Prediction on Overcoming the Discovery Rule (Soden Abraham) (written and published prior to Tex. Sup. Ct.'s decision in this case)
