Assisting royalty owners in locating lost oil and gas royalties, and getting royalty owners paid their rightful royalty payments, is one of the parts of my practice as a Texas oil and gas attorney that I enjoy the most. However, many of my clients are suprised to learn that there is a pretty strict time limit to how far back they can claim unpaid or underpaid royalties. For that reason, if you think you are not getting royalties to which you are entitled, or if you think your royalty payments are not being correctly calculated and that you may be underpaid, it is important to take action to correct the situation sooner, rather than later.
A recent decision last week by the Texas Supreme Court underscores this point. Specifically, the Court issued a decision in Shell Oil Co., et al. v. Ralph Ross which could effect all future royalty disputes in Texas. In a nutshell, the Court solidified the four year limit under Texas law within which a lawsuit for underpaid or nonpaid royalties must be filed.
The case involved a dispute between the Ralph Ross, as the Plaintiff, and Shell Oil Company. Mr. Ross’s family had leased the mineral rights on their land to Shell since 1961. Mr. Ross is an oil and gas attorney and therefore understood the oil and gas industry and the relevant legal issues more than the usual lessor. Under the original lease, Shell was required to pay a certain percentage to the family for any gas produced from the land—a total roughly equaling one sixteenth of the profits. However, between 1994 and 1997, Shell used a different calculation, and underpaid Mr. Ross and his family for their royalties. Shell claimed this was due to a simple accounting mistake.
In 2002, Mr. Ross assumed all rights relating to his family’s oil and gas lease and first became aware of the underpayment. In 2002, Mr. Ross sued Shell Oil for breach of contract, unjust enrichment, and fraud. The family’s legal claims were brought five years after the final underpayment took place. Texas has a four year statute of limitations for filing this type of suit. However, the family argued that the statute of limitations period should be extended, or "tolled", under the “fraudulent concealment doctrine.” The doctrine essentially states that if a defendant conceals information from the plaintiff, and as a result the plaintiff could not have become aware of the problem, then the statute of limitations "clock" will not start to run until the plaintiff actually becomes aware (or should have become aware) of the problem.
Both the trial and appellate courts found for the family, holding that Shell had behaved fraudulently in underpaying for the gas produced from the family's land and that Shell engaged in fraudulent conduct which extended (or "tolled") the four year statute of limitations. Shell appealed the decision of the trial court and court of appeals to the Texas Supreme Court.
Last week the Supreme Court reversed the decision of the lower courts and found for Shell Oil. Justice Lehrmann, writing the opinion, held that contrary to the lower courts’ rulings, the fraudulent concealment doctrine did not toll the limitation period in this case. Justice Lehrmann noted that royalty owners are required to make themselves aware of relevant information which was publicly available to the royalty owners regarding the royalty payments they actually receive (or don't receive) and the payments they should have received. The Court held that if a royalty owner fails to utilize due diligence by finding that information within the 4 year limitations period, then that royalty owner's claim has expired. This opinion was a reiteration of the Court’s decision in BP Am. Prod. Co. v. Marshall.
The Court went on to say that there were significant discrepancies in royalties paid to the Ross family, and that these discepancies put them on notice that Shell was underpaying them. The Court also restated its decision in Wagner & Brown, Ltd. et al v. Horwood, in which they held that even if a reasonable explanation for the suspiciously low royalty payments exists, the royalty owner cannot avoid the due diligence requirement to investigate. The Court concluded that Shell’s alleged fraud could have been discovered by the Ross family if they had acted diligently during the limitations period. As a result, the family could not go forward with their suit.
This ruling is another reminder of how important it is to keep on top of your rights under an oil and gas lease. It is risky to sit on your rights, let suspicious payments slide, or let a land man or company agent explain away issues which may actually be a violation of the lease. Be aware that most disputes regarding royalties end up being settled, and do not end up in a lawsuit in court. However, the four year cutoff is going to apply in a negotiated settlement, as well as in a lawsuit.
With the four year statute of limitations period firmly set in Texas oil and gas law, if you are suspicious or concerned about low royalty payments, or about royalty payments that you should be getting but are not, it is imperative to talk to a Texas oil and gas attorney right away to protect your interests. Waiting too long could very well forfeit your rights to missing, underpaid or unpaid royalties.
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