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Texas Supreme Court Again Reverses Jury Verdict Favoring Royalty Owners

The Texas Supreme Court has once again overturned a jury verdict in favor of royalty owners, finding “no evidence” to support the jury’s finding. The court’s opinion in the case, BP America Production Company, Atlantic Richfield Company and Vastar Resources, Inc. v. Stanley G. Marshall, Jr., et al., No. 09-0399, was issued last week. The case evidences the Court’s continued hostility to royalty owners’ claims of lease termination.

The important facts are as follows:

The Marshalls owned a mineral interest in 17,000 acres, and in the 1970’s they leased their interest to Atlantic Richfield (ARCO, subsequently acquired by BP). Two weeks before the Marshalls’ lease was to expire on July 11, 1980, ARCO commenced drilling a well on the lease. The lease provided that it would not expire if a well was being drilled at the end of the primary term as long as such operations continued with no cessation of more than 60 consecutive days. ARCO continued working on the well for the rest of 1980 and into 1981. In March 1981 ARCO made an agreement with Sanchez-O’Brien Oil & Gas for Sanchez to drill a well on the lease. Sanchez drilled a productive well on the lease in April 1981, and ARCO plugged its well as a dry hole.

The Marshalls asked ARCO what it was doing with its well after the end of the primary term of the lease, and whether those operatons were sufficient to keep the lease in force. ARCO replied with a three-page letter documenting its continued operations on the well since the end of the primary term, implying that good-faith efforts were being made to try to complete the well.

In 2001, as a result of a different lawsuit brought by another mineral owner on the same property, the Marshalls learned facts through discovery showing that ARCO had abandoned any real efforts to complete its well shortly after it was drilled, and that it continued operations on the well into 1981 only to hold the lease until it could make its deal with Sanchez. The Marshalls then sued BP, successor to ARCO, for fraud in misleading them into thinking in 1981 that the lease had not expired.

A cause of action for fraud is ordinarily barred if not brought within two years of the fraud. But the Marshalls contended that the letter they got from ARCO fraudulently concealed its true intent, and that they did not have to bring their suit until 2001, when they reasonably should have discovered the fraud. The Marshalls also argued that limitations should not bar their claim under the “discovery rule,” a doctrine previously announced by the Texas Supreme Court providing that certain types of claims do not have to be brought until the injured party actually discovered (or reasonably should have discovered) the existence of the claim. The Supreme Court’s discovery rule says that the rule applies only to claims that are “inherently undiscoverable” and “objectively verifiable.”

In the jury trial, the jury found that ARCO had fraudulently concealed the cessation of good faith operations on its well and had fraudulently concealed from the Marshalls the facts necessary for them to know that they had a cause of action to declare the lease terminated; and that the Marshalls did not have knowledge “that would have required a reasonable and prudent person to make inquiry that … would have led to the discovery of” the cessation of operations or ARCO’s fraud until June 2000. Based on these findings, the trial court concluded that the Marshalls’ cause of action was not barred by the 2-year statute of limitations.

Reversing the jury verdict and the decision of the San Antonio Court of Appeals, the Supreme Court held that there was “no evidence” to support the jury’s finding that the Marshalls had no reason to make inquiry that would have let to the discovery of the true facts about ARCO’s well. The Court held “as a matter of law” that “the Marshalls would have been able to discover BP’s fraud through the use of reasonable diligence.” The Court also held that the “discovery rule” had no application in this case. The Court’s reasoning: ARCO filed the log for its well with the Railroad Commission in October 1982, thereby making the log publicly available. The Marshalls’ expert testified at trial that, based on his review of the log and the plugging report of the well, ARCO’s efforts to try to continue to complete the well were not carried out in good faith — in other words, ARCO had no reasonable basis to think that it could complete the well as a producer. The Court said that “While the … well log contained highly technical information regarding the resistivity, conductivity, and spontaneous potential at various intervals in the formation, it was this information regarding the reservoir’s geology that led the Marshalls’ expert to conclude that [ARCO’s] continued activities on the well were not in good faith. … The expert acknowledged that anyone would have been able to obtain copies of the log and the report from the Commission records and reach the same conclusions. Although technical, the public documents concerning [ARCO’s] operations were available to the Marshalls.” “These public documents, the well log and the plugging report, read together, would have led the Marshalls to discover that [ARCO] conducted operations at an interval incapable of production. … Consequently, as a matter of law, the Marshalls would have been able to discover [ARCO’s] fraud through the use of reasonable diligence. We therefore hold that the Marshalls’ claims are barred by the statute of limitations, and reverse and render for BP.”

This case is reminiscent of another case recently decided against royalty owners by the Supreme Court, Exxon Corporation v. Emerald Oil and Gas Company. I discussed that case when it was originally decided by the Court, and the Court recently issued a new opinion in the case confirming its earlier opinion. In that case, like BP v. Marshall, the Court reversed a jury verdict, finding “as a matter of law” that there was “no evidence” to support the verdict.

Under Texas’ jury system, it is the exclusive province of the jury to decide disputed facts. This is done by submitting to the jury the specific fact questions that are in dispute. Once those facts are determined, the trial court must apply the law in accordance with the facts so found. Another important aspect of the Texas judicial system is that the Texas Supreme Court has no jurisdiction to review the sufficiency of the evidence to support a particular fact found by the jury. Intermediate appellate courts in Texas can review the evidence in support of the facts found by the jury, and they can reverse and remand a case if they find that there were not sufficient facts to support the jury’s findings. But the Texas Supreme Court may reverse a case based on an erroneous jury finding only if it concludes that there is no evidence to support the finding. (The Court’s use of the terms “no evidence” and “as a matter of law” are legal terms of art used to show that it is invoking its jurisdiction to overturn a jury’s fact finding.) The Court cannot substitute its judgment about the true facts for the judgment of the jury. Or at least it is not supposed to.

As a practical matter, the result in BP v. Marshall must serve as a warning to royalty owners: they cannot rely on assurances by their lessees as to the existence or effect of operations conducted on the lease after the end of the primary term. They must make their own independent investigation, including hiring experts to review Railroad Commission records and well logs, to determine whether a lease has been held in effect by the lessee’s operations. Claims must be brought within the period of the applicable statute of limitations, and any reliance on statements by the operator, even if fraudulent or misleading, will not excuse delay in bringing suit.

BP v. Marshall also addresses the proper interpretation of an earlier Supreme Court case of interest to royalty owners, Natural Gas Pipeline Co. of America v. Pool, 124 S.W.3d 188 (Tex. 2003). In Pool, the Court held, to everyone’s surprise, that a lessee could “revive” a lease that had expired because of lapses in production by continuing to produce from wells on the property and paying royalties, under the “adverse possession” statutes. Until Pool, no one thought that the adverse possession statutes applied to oil and gas leases. In BP v. Marshall, the Court held that the lessee’s continued payment of royalties after the lease had expired, and the royalty owner’s acceptance of those payments, served as notice to the royalty owner that the company was claiming adverse possession title to a new leasehold estate on the property — even though the lessee had misled the royalty owner by claiming that continuous operations had been conducted on the lease sufficient to keep it in force after the end of the primary term. It has long been the law in Texas that a royalty owner’s acceptance of royalty payments after a lease has terminated does not prevent the royalty owner from later claiming that the lease has terminated. But the Court makes clear that, if the royalty owner does not make that claim in a timely fashion, its acceptance of royalties will allow the lessee to in effect “revive” an expired lease by claiming adverse possession title, even if the lessee claims that the lease has remained in effect.

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