Shell Oil Company, SWEPI LP D/B/A Shell Western E&P, Successor in Interest to Shell Western E&P, Inc. v. Ralph Ross

Opinion Issued February 25, 2010

In The

Court of Appeals

For The

First District of Texas

NO. 01-08-00713-CV

SHELL OIL COMPANY AND SWEPI LP D/B/A SHELL WESTERN E&P,

SUCCESSOR IN INTEREST TO SHELL WESTERN E&P, INC. , Appellants

V.

RALPH ROSS, Appellee

On Appeal from the 133rd District Court

Harris County, Texas

Trial Court Cause No. 2003-17162

DISSENTING OPINION

I respectfully dissent. I would hold that this lawsuit is barred by limitations

because no evidence establishes fraudulent concealment. Between 1988 and 1997 ,

Shell Oil Company (“Shell Oil”) and Shell Western E&P (“Shell Western”)

(collectively “Shell”) sent to Gertrude T. Reuss, the grandmother of appellee, Ralph

Ross (collectively “the Rosses”), royalty payments accompanied by statements

describing how the payment was calculated. Satisfied that the payments were correct,

the Rosses accepted the royalty payments without complaint. After the limitations

period expired, the Rosses filed suit in 2002 for underpayment of royalties. The

Rosses contend that the limitations period was tolled by Shell’s fraudulent

concealment based on representations made in a 1995 letter and in royalty statements.

See Shah v. Moss , 67 S.W.3d 836, 841 (Tex. 2001) (fraudulent concealment tolls

limitation). I conclude that (I) the evidence conclusively shows that a reasonably

diligent examination of documents would have revealed any misstatements within the

period of limitations, and (II) no evidence shows that Shell used deception to conceal

the wrong, nor that the Rosses relied on any representations by Shell. See id .

I. No Evidence of Reasonable Diligence

I conclude that there is no evidence of fraudulent concealment because with

reasonable diligence the Rosses could have discovered any error in the royalty

payments by (A) examining the lease; (B) understanding the royalty statements; (C)

reviewing the Texas Natural Resources Code; and ( D) requesting information from

Shell. See Kerlin v. Sauceda , 263 S.W.3d 920, 925 (Tex. 2008) ( fraudulent

concealment will not bar limitations when plaintiff could have discovered wrong

through exercise of reasonable diligence).

A. The Lease

The Rosses should have examined their own lease to determine what royalty

payments they were due. See HECI Exploration Co. v. Neel , 982 S.W.2d 881 ,

886–87 (Tex. 1998) (in context of analogous discovery rule, stating that royalty

owners should examine records). According to the lease here, Shell shall pay royalty,

as follows:

To pay lessor on gas and casinghead gas produced from said land (1)

when sold by lessee, one-eighth of the amount realized by lessee,

computed at the mouth of the well, or (2) when used by said lessee off

said land or in the manufacture of gasoline or other products, the market

value, at the mouth of the well, of one-eighth of such gas and casinghead

gas.

See Bowden v. Phillips Petroleum Co. , 247 S.W.3d 690, n.2 (Tex. 2008) (analyzing

identical language in lease). This type of lease is described by the Supreme Court of

Texas, as follows:

. . . [T]he leases . . . contain gas royalty clauses providing for an

amount-realized basis if the gas is sold at the well by Phillips and a

market-value basis if Phillips sells or consumes the gas off the premises

or uses the gas to manufacture gasoline. This provision is called a

"two-pronged" clause and provides different methods for calculating gas

royalties for the same well depending on the circumstances of the sale.

Id . at 699. “‘Proceeds’ or ‘amount realized’ clauses require measurement of the

royalty based on the amount the lessee in fact receives under its sales contract for the

gas.” Id . “By contrast, a ‘market value’ or ‘market price’ clause requires payment

of royalties based on the prevailing market price for gas in the vicinity at the time of

sale, irrespective of the actual sale price.” Id . “The market price may or may not be

reflective of the price the operator actually obtains for the gas.” Id . Under the

Rosses’ lease, therefore, if the gas was sold at their well, they were entitled to

royalties from the amount Shell actually received under its sales contract for the gas,

but if the gas was sold off premises or to manufacture gasoline, then they were

entitled to royalties based on the prevailing market price . See id.

Until the end of 1993, Shell paid royalty to the Rosses on production from the

G.T. Reuss #1 and Reuss A wells based on the amount paid by the company

purchasing the gas from Shell. The two Reuss wells were drilled on lands covered

by the lease. Beginning in January 1994, Shell paid the Rosses based on an amount

that was different than either the sales price to its affiliate or the sales price received

from a third party. In October 1995, Shell implemented a policy to pay royalty based

on the price received by its affiliate, and Shell sent a letter to 2,246 royalty owners

at that time explaining the changed policy. Although the letter suggested royalties

would be based on the “transfer price,” Shell instead used some other price to

calculate royalties on the Reuss wells after 1995. Out of the 45,000 royalty owners,

nine or ten of them with the same type of lease or with nearby leases had been

erroneously paid by using something other than the transfer price or market price.

The royalty payment, therefore, was erroneous for the Reuss wells in that it was based

on something other than the actual sales price or market price.

During all the periods at issue in this appeal, Shell paid royalty to Reuss on

production from the Lasater and Houston wells using a weighted average price. The

Lasater and Houston wells were not drilled on lands covered by the lease. The

Rosses’ expert testified that it was improper to take the weighted average prices that

Shell and Forest Oil had received from the sale of gas from the Lasater well, and that

Shell, Forest Oil, and Marathon had received from the sale of gas from the Houston

well. In short, the Rosses assert that only the sales related to parties in their same

lease should have been considered for the market price. In contrast, Shell’s expert

testified it was proper and common to consider market prices in the vicinity at the

time of the sale. Shell’s position finds support in a recent decision by the Supreme

Court of Texas that states that the market price “requires payment of royalties based

on the prevailing market price for gas in the vicinity at the time of the sale,

irrespective of the actual sales price.” Bowden , 247 S.W.3d at 699 . The royalty

payment on the Lasater and Houston wells, therefore, was properly calculated.

Regardless of whether the royalty payments were properly calculated for these

leases, the royalty owner would not be able to tell from the lease alone what method

was used to calculate the royalties because the lease provides for either the sales price

or the market price depending on the circumstances surrounding the sale of the gas.

Although he would need to examine the terms of the lease to be reasonably diligent

in understanding the two ways that royalties could be properly calculated under the

lease, a royalty owner would need additional information outside the lease, such as

information concerning whether the sale took place at the well or somewhere else, to

determine whether the royalty payment was correct.

B. The Royalty Statements

The royalty statements use the terms “unit price” and “value,” but those terms

are not defined anywhere in the statement. The term “unit price” is not defined in the

Natural Resource’s Code, as explained in section C below. Because the term is not

defined, “unit price” could refer to the actual price received, the market price, or some

other price. As used by Shell, the “unit price” is the mathematical result of Shell’s

computer system dividing the “value” column by the “volume” column. As early as

1998, close examination of the statements would have shown the Rosses that the “unit

price” for each of the pooled wells was less than the “unit price” for each of the two

non-pooled wells, alerting them to the fact that the prices were being calculated

differently for the wells. For example, in April 1992, the price for production from

the Reuss wells was about $1.37 per MCF, but for the same month the price for

production from the Houston well was about $1.00, and for the Lasater well it was

about $0.86. From the fact that prices were different for the same period of time, a

royalty owner would be alerted that the price was calculated differently depending on

various circumstances. Although he would need to closely examine the data in the

royalty statements, to be reasonably diligent a royalty owner would need to obtain

additional information outside the royalty statements to determine whether the royalty

payment was correct.

C. The Natural Resources Code

The Rosses contend they did not question whether the royalty payments were

correct because Shell was statutorily required to disclose the price that it received for

the gas, which the Rosses contend relieved them of any duty to affirmatively seek

information about the sales price of the gas. The Rosses accurately note that under

the Natural Resources Code, payors must give royalty owners certain information in

the statement that accompanies the payment, but they are incorrect that the Code

relieves them of the obligation to obtain information from their contract partner. See

Tex. Nat. Res. Code Ann. § 91.501 (Vernon Supp. 2009) (if payment is made to

royalty interest owner from proceeds derived from sale of oil or gas production

pursuant to division order, lease, servitude, or other agreement, payor shall include

information required by Section 91.502 of the code on the check stub, attachment to

payment form, or another remittance advice). Under section 91.502 of the code, the

royalty statement must include information identifying the lease, the time of the sale,

the total amount of gas sold, the “price . . . per MCF of . . . gas sold, the total amount

of taxes, the windfall profit tax paid,” “any other deductions or adjustments,” the net

value of total sales after deductions, the owner’s interest in sales from the lease, the

owner’s share of the total value of sales before any tax deductions, and the owner’s

share of the sales value less deductions. Id . § 91.502 ( Vernon Supp. 2009). T he

Code does not specify whether the price per MCF of gas sold means the actual price

that the gas was sold for by Shell at the well or the market price. See id . I n a lease

like this one that has a “two-pronged clause,” a royalty owner could not reasonably

rely on the Code’s required reference to the price because the price could refer to

actual price or market price, depending on the circumstances of the sale. Although

he would need to examine the Natural Resources Code to be reasonably diligent, a

royalty owner would need to do more than that because information required to be

produced by the Code would not explain how the royalties were calculated here.

D. Information Requested from Shell

In explaining that the burden to check the accuracy of statements falls on the

parties to the lease, the Supreme Court of Texas states,

Horwood and Glass claim that royalty owners should not bear the

burden of discovering injuries of the sort asserted here. But expecting

parties to discover improper charges like those alleged in this case is no

more onerous than expecting software companies to detect the theft of

trade secrets. . . . [T]hose who receive statements listing fees charged

should be alerted to the need to perform additional investigation to

protect their interests.

See Wagner & Brown, Ltd. v. Horwood , 58 S.W.3d 732, 737 (Tex. 2001) . The

Rosses, however, contend that if they had contacted Shell they would not have

received accurate information because, according to the Rosses’ expert’s opinion,

“Shell is not cooperative with royalty owners.” The expert’s opinion is no evidence

of fraudulent concealment for three reasons.

First, Shell is required by law to respond to requests for information made by

its contracting partners. The Rosses could have discovered the errors in the amounts

paid by asking their contract partner, Shell , for the information Shell used to

determine the amount of the payment. See id . (in context of analogous discovery

rule, stating, “Royalty owners may seek information necessary to assess the propriety

of royalty calculations from the lessee”). T he Code requires that statements

accompanying royalty payments include “an address and telephone number at which

additional information regarding the payment may be obtained and questions may be

answered.” See Tex. Nat. Res. Code Ann. § 91.502 . “ Since 1986, section 91.504

of the Texas Natural Resource Code has required parties paying royalties to explain,

upon a royalty owner’s request, any deductions or adjustments that are not explained

on check attachments.” See Horwood , 58 S.W.3d at 736 . The Code requires a lessee

to respond to requests made by certified mail within thirty days of receiving the

request. Id.

Second, evidence in the record shows that Shell would have provided the

financial information to the Rosses if they had asked for it. Garrison, Shell’s manager

of the royalty owner’s relations department, testified that if any of the Rosses had

called Shell with questions about the methods used to calculate their royalties, Shell

would have provided them with “information, pricing, volumes, and value.” Garrison

also testified,

If the royalty owner wanted to know what the basis of the price was, we

would provide them with that data, either sales receipts or a spreadsheet.

It would depend on what they were asking and what the terms of their

lease and contracts were.

Garrison testified that he spoke with royalty owners “constantly,” but never received

any inquiries concerning the Rosses’ lease. Garrison reviewed his telephone call log

and “found no evidence that anybody had called concerning [the Rosses].”

Third, deposition testimony by Garrison is no evidence of fraudulent

concealment. The record shows the following testimony from Garrison.

[Attorney]: All right. So at your first deposition, you testified that the

unit price on the monthly statement represented the higher

transfer price that was paid to SWEPI for Coral’s ultimate

sale price, correct?

[Garrison]: That’s correct, in my first deposition.

In explaining why the deposition testimony was incorrect, the record shows, Garrison

testified,

[Attorney]: . . . How did you learn that the early testimony that you

gave was false . . .?

[Garrison]:. . . [W]hen we went back and collected that additional

information to provide it to you, that’s when we found out

that we had not paid them on that price.

Although Garrison’s deposition testimony given after the lawsuit was filed in 2002

was initially inaccurate, that is no evidence that Shell would have refused to provide

information upon request or would have provided inaccurate information during the

time the events were occurring between 1988 and 1997 or within four years of the

events. Furthermore, the evidence shows that when the Rosses asked for “additional

information,” Shell’s search for the requested information produced accurate results.

If a request for “additional information” had been made within the period of

limitations, it would have revealed the information necessary to timely file this

lawsuit. The reason this lawsuit was not timely filed is because the Rosses slumbered

on their rights by failing to use reasonable diligence to determine whether their

contract partner was abiding by the terms of their agreement. Had the Rosses made

an inquiry to Shell and had Shell refused to provide information or provided

erroneous information, then fraudulent concealment would be shown, but the Rosses

failure to inquire does not equate to fraudulent concealment by Shell. See Horwood ,

58 S.W.3d at 735–37; see, e.g. , Via Net v. TIG Ins. Co . , 211 S.W.3d 310, 314 (Tex.

2006) (holding failure to ask for information from contract partner to verify

contractual performance was not due diligence under discovery rule, but i f “a

contracting party responds to such a request with false information, accrual may be

delayed for fraudulent concealment” ).

E. Summary of Analysis

The Rosses made no effort to determine whether Shell was complying with the

terms of their lease. Royalty owners are not entitled to “make[ ] no inquiry for years

on end,” and then sue for contractual breaches that could have been discovered within

limitations period through the exercise of reasonable diligence by examination of

documents available to them. See Neel , 982 S.W.2d at 887–88. The Rosses, as the

“nonparticipating royalty interest owner[, were] a party to a contract and [were]

charged with the duty of protecting [their] own interests.” See Harrison v. Bass

Enters. Prod. Co. , 888 S.W.2d 532, 538 (Tex. App.—Corpus Christi 1994, no writ).

Ross could have discovered the wrong through the exercise of reasonable diligence.

See Kerlin , 263 S.W.3d at 925 ; Houston Endowment Inc. v. Atlantic Richfield Co. ,

972 S.W.2d 156, 163 (Tex. App.—Houston [14 Dist.] 1998, no pet.) (holding no

evidence supported fraudulent concealment because plaintiff “should have looked

further” when record showed HEI asserted Arco failed to disclose under payments,

presented tax severance information that implied royalties were based on 100 percent

of production, and concealed its actions) . I would hold that Ross failed to exercise

reasonable diligence, and therefore the limitations period was not tolled . II. No Evidence of Deception to Conceal or Reliance on Representation

Fraudulent concealment is not established because the Rosses cannot show

Shell used deception to conceal its wrong, nor that the Rosses reasonably relied on

representations made in the letter or statements. See Shah , 67 S.W.3d at 841 (stating

elements of fraudulent concealment). Evidence that Shell sent a letter in 1995 to

royalty owners explaining its change in how royalty payments were calculated shows

it was not attempting to conceal information about royalty payments. Furthermore,

as the majority opinion points out, no evidence shows that the Rosses could have

reasonably relied on representations in the 1995 letter because Ralph Ross, the person

who handled all the correspondence related to the royalty payments, denied that he

relied on it.

As explained above, the lease allowed for royalty payments to be based on the

actual sales price at the well or on the market price, depending on the circumstances

of the sale. The royalty statements referred to “unit price,” but they did not describe

to what that referred, and nothing in the lease or Natural Resources Code defines the

term. Similarly, the Natural Resources Code calls for information about price, but it

does not specify whether that should be based on the actual sales price at the well or

on the market price. T he Rosses made no effort to contact Shell for more

information, even though the Code gave them the express right to the information.

At best, the Rosses have shown misstatements by Shell. But misstatements alone do

not equate to use of deception to conceal a wrong. I would hold that no evidence

supports Ross’s assertion of fraudulent concealment. See Velsicol Chem. Corp. v.

Winograd , 956 S.W.2d 529, 531 (Tex. 1997) (holding respondent could not rely on

tolling doctrine of fraudulent concealment because respondent was aware of

hazardous nature of chemical at time it accused petitioner of concealing dangers of

chemical at issue) ; Harrison , 888 S.W.2d at 538 ( holding no evidence supported

Harrison’s assertion of fraudulent concealment because Harrison had memo

indicating production on tract and inspection of his own accounts would have

revealed no royalty payments from Bass) .

Conclusion

I would hold that the trial court erroneously denied the motions for directed

verdict and for judgment notwithstanding the verdict because the evidence

conclusively shows Shell did not fraudulently conceal underpayment of royalties. I

would reverse and render judgment in favor of Shell.

Elsa Alcala

Justice

Panel consists of Justices Jennings, Alcala, and Higley.

Justice Alcala, dissenting.