On May 31, 2012, the First Court of Appeals in Houston issued an opinion in an oil and gas royalty dispute that amounted to an almost total reversal of the trial court’s multi-million-dollar verdict. The underlying lawsuit concerned three oil and gas leases in Jefferson and Hardin Counties, Texas. Charles Hooks and his estate sued operator Samson Lone Star for breach of contract, fraud, fraudulent inducement, and several other causes of action related to the three leases. While the trial court sided with Hooks on nearly all of his causes of action, the appeals court concluded that most his actions were untimely and brought well past the statute of limitations. Moreover, on one of the claims, the court found that Hooks ratified Samson’s actions by accepting royalty checks from Samson, thus estopping him from claiming breach of contract. The court’s ruling reiterated the more stringent discovery rule followed by Texas courts in resolving royalty disputes.
Hooks was a party to three separate leases with Samson, one for a gas well in Jefferson County, and two for gas wells in Hardin County. The Jefferson County lease contained a section entitled “Offset Obligation” where Samson agreed to operate the lease as a reasonably prudent operator and where Samson agreed to certain obligations in the event of potential drainage. This section also provided that if a gas well were completed within 1,320 feet of the leased premises, then Samson must take one of three actions: drill an offset well; pay Hooks compensatory royalties from that well, in addition to the well on Hooks’s lease; or release the offset acreage.
In April 2000, Samson drilled a gas well on a lease adjacent to Hooks’s Jefferson County lease. The July 2000 survey filed with the Texas Railroad Commission showed that this well, the Black Stone Mineral or BSM No. 1 well, bottomed at 1,184 feet, within the 1,320 buffer zone of the lease. Rather than complying with the offset provisions of the Jefferson County lease with Hooks, Samson sought to pool Hooks’s interest in the production from the BSM No. 1 well with those of other mineral owners. Samson filed a pooling-authority form with the railroad commission in December 2000 related to the BSM No. 1 well. It attached to the form a plat of the pooling unit. The plat contained the same surface and bottom-hole locations as the original plat, but Samson had changed the configuration of the acreage of the unit compared to what had been originally filed with the railroad commission.
In February 2001, Samson sent Hooks a letter offering to pool 50 acres covered by Hooks’s Jefferson County lease into the BSM No. 1 gas well. Hooks contacted Samson’s landman, Glenn Lanoue, to obtain more information on the well’s location. Lanoue told Hooks the BSM No. 1 unit was approximately 1,500 feet from the western line of his Jefferson County lease. Hooks requested a copy of a plat showing where his acreage would lie within the BSM No. 1 unit. Lanoue sent him a copy of the reconfigured plat filed with the railroad commission in December 2000. The plat contained ambiguous notations about the bottom-hole location that created confusion regarding whether the BSM No. 1 unit was within the buffer zone. Hooks testified at trial that Lanoue orally told him that the BSM No. 1 well was 1,500 feet from the western line of his Jefferson County lease. He looked at the plat and concluded that the bottom-hole location was approximately 1,400 feet west of the property line and thus outside the buffer zone. Hooks, an oil and gas lawyer, did not make any other inquiries regarding the plat or the location of the bottom hole.
Following the pooling agreement with Hooks, Samson sent royalty checks to Hooks for his unit interest and did so up until the start of trial. Hooks cashed these royalty checks. However, these checks did not include any additional compensatory royalties under the offset obligations of the lease due to the well drilled within the buffer zone.
Hooks’s two Hardin County leases originally contained provisions that allowed pooling. However, Samson did not have authority to pool under its leases with the two owners of the mineral interests on the land, Black Stone Minerals and FirnBank. Samson negotiated with the two companies, concluded they were in agreement, and filed a unit designation with the railroad commission for the new unit, now called BSM A-1. BSM A-1 unitized the Black Stone Minerals/FirnBank lease, Hooks’s Hardin County leases, and a few other tracts, including one owned by the state of Texas. In May 2001, Samson obtained written consent to pool these leases from all of the relevant leaseholders except Black Stone Minerals.
The BSM A-1 well began producing in June 2001. In December 2001, Samson completed another well, called DuJay No. 1, which produced from some of the same land designated to the BSM A-1 well, only at a lower horizon. In February 2002, after it failed to receive Black Stone Mineral’s consent to the BSM A-1 pooling unit, Samson amended the BSM A-1 unit designation. It executed and recorded a designation for a new unit, the DuJay No. 1 unit. The DuJay No. 1 unit pooled its leases as to gas wells that were producing from a deeper strata than those for the BSM A-1 well. Thus, the DuJay No. 1 unit included the DuJay No. 1 well but not the shallower BSM A-1 well. The designated acreage for this unit included Hooks’s Hardin County leases and the leases controlled by the state of Texas, but it did not include the Black Stone Minerals/FirnBank lease.
Samson never obtained consent from Hooks to vacate or amend the BSM A-1 unit or to “unpool” his interests from the BSM A-1 unit or well. Instead, Samson told Hooks that the BSM A-1 unit had been amended and its name had been changed to the DuJay No. 1 unit. Following this change, Hooks accepted royalties from Samson from the date of first production until after trial began. Meanwhile, the BSM A-1 well produced as a lease well on Samson’s Black Stone Minerals/FirnBank leases and was not included in any unit. Samson did not pay Hooks any royalties on the BSM A-1 well, and Hooks never took any action to enforce his rights regarding the original BSM A-1 unit.
Samson drilled another well on the DuJay tract, the DuJay A-1 well, and created a separate pooling agreement for it. The DuJay A-1 unit differed from the Dujay No. 1 unit by depth limitation and acreage. Hooks’s Hardin County leases were pooled into the DuJay A-1 unit. Hooks accepted royalties on the unit from September 2002 until trial began in this case.
In November 2006, Hooks attended a seminar for oil and gas lawyers. While at the meeting, he met an attorney handling multiple royalty actions against Samson. Shortly thereafter, Hooks joined the lawsuits against Samson and alleged a number of causes of action, including that Samson breached the Jefferson County lease by not paying compensatory royalties based on the bottom hole of the BSM No. 1 unit being within the buffer zone. Hooks also claimed Samson improperly “unpooled” the BSM A-1 unit, and sued to claim all royalties he would have received from that unit had all the lessors, including Black Stone Minerals, agreed to pool, to be added to the royalties he received from the DuJay No. 1 and DuJay A-1 units. In May 2007, Hooks added fraud claims related to the Jefferson County lease, including allegations that Samson made false representations about the configuration of the BSM No. 1 unit and the location of the BSM No. 1 well to avoid triggering the offset obligations in the lease.
Prior to trial, the parties filed several motions for summary judgment. Included in those motions were both parties’ motions for summary judgment with respect to Hooks’s unpooling claim. The trial court granted the motion in favor of Hooks and awarded him over $750,000 in damages. The case went to trial solely on the fraud claims related to the Jefferson County lease. The jury found for Hooks and awarded him over $20 million in damages. The jury also found that Hooks should have discovered the fraud by April 2007. The jury did not award punitive damages, as it did not find that the harm to Hooks resulted from Samson’s fraud or that Samson had actual awareness of the falsity of the representations or promises that the jury had found to be fraud.
Samson appealed. With respect to Hooks’s fraud claim related to the Jefferson County lease, Samson claimed there was factually and legally insufficient evidence that Hooks could not have discovered the fraud until April 2007 and that the statute of limitations barred Hooks’s claim. The appeals court agreed with Samson and reversed the jury’s verdict on this point, finding that Hooks should take nothing on this claim.
The appeals court took issue with the jury’s finding that Hooks could not have reasonably discovered Samson’s fraud until April 2007. The court quoted from Little v. Smith, 943 S.W.2d 414 (Tex. 1997), where the court stated, “Generally, in a case of fraud the statute of limitations does not commence to run until the fraud is discovered or until it might have been discovered by the exercise of reasonable diligence.” Id. at 420. The court concluded that Hooks had not exercised reasonable diligence to uncover the fraud. It noted that there was contradictory information on the plat related to the location of the bottom hole of the well but that Hooks did not inquire into these notations further. The court also pointed out that had Hooks exercised reasonable diligence, he should have known the exact position of the bottom hole, based on the directional survey filed with the railroad commission in July 2000. Lanoue had certified the plat to Hooks in December 2000, based on his own knowledge, but Hooks, an experienced oil and gas lawyer, never bothered to look at the directional survey. Hooks also never sought the plat of the originally designated BSM No. 1 well, which was certified by a surveyor in March 2000 and filed with the railroad commission in July 2000. The court said if Hooks consulted both of these publicly available documents when Samson proposed the pooling arrangement, then he would have discovered the actual location of the bottom hole of the BSM No. 1 well and, thus, Samson’s fraud.
The court concluded Hooks knew or should have known information that led to the discovery of the fraud no later than February 2001 because the necessary information for uncovering the fraud was a matter of public record by then. The court cited to previous Texas Supreme Court decisions in oil and gas matters where it refused to extend the discovery rule when the litigants had access to public records and other information that would have revealed the issue. The court said it was undisputed that both Samson and the railroad commission had documentation proving the BSM No. 1 unit was within the buffer zone of Hooks’s lease. The court also said that the plat contained sufficient information, in the form of the ambiguous annotations, to put Hooks on inquiry notice regarding the issue. Because the statute of limitations for a fraud claim is four years and Hooks did not file his fraud claim until over six years after he should have discovered the fraud, then his claim fell outside of the statute of limitations and could not stand.
The appeals court also sided with Samson on whether it improperly “unpooled” the BSM A-1 unit in which Hooks’s Hardin County leases had an interest, and reversed the trial court’s summary-judgment ruling. The court concluded that Hooks accepted and ratified the amendment and redesignation of the BSM A-1 unit into the DuJay No. 1 and DuJay A-1 units because he accepted Samson’s royalty checks related to those new units and because he never asserted any rights or claims to the original BSM A-1 unit.
The court’s decision rested primarily on equitable estoppel. Under equitable estoppel, mineral-interest owners cannot reject a unit designation after accepting royalties attributable to that unit. In the instant case, the appeals court agreed with Hooks that, unless Samson had obtained agreement from all the lessors to “unpool” the unit, Samson had breached the Hardin County leases with Hooks by continuing to produce from the BSM A-1 well without paying royalties to Hooks. However, Hooks did nothing to assert his rights under the originally designated BSM A-1 unit in response to the amendment and redesignation of the BSM A-1 unit until Hooks filed his breach of contract action over four years later. Rather, Hooks expressly agreed to the amendment and redesignation and accepted royalty checks for his share in the DuJay No. 1 and DuJay A-1 units. The court concluded that because Hooks ratified the redesignated units, he was estopped to claim royalties on the original unit.
The theme woven throughout the appeals court’s opinion is that oil and gas leaseholders who fail to act do so at their own peril. Despite Samson’s deception, Hooks had no remedy because he failed to perform further research into the operator’s actions and ratified Samson’s actions by cashing his royalty checks. The lesson for oil and gas leaseholders is to be vigilant in their dealings with operators to ensure that any misdeeds are timely uncovered.