Texas’ drilling bonanza can mean long-lasting windfalls for mineral owners in the state’s hottest shale plays – if those lessors make sure oil and gas operators pay what they promise. But doing so can prove incredibly difficult, as shown in a case the Texas Supreme Court will soon decide.
The court heard arguments on Wednesday in an East Texas dispute over just how much “due diligence” a mineral owner must show in auditing his or her payments. The case concerns whether a mineral owner should get extra time to sue for fraud after discovering that an operator provided false information about drilling plans. The legal team for Charles Hooks, the plaintiff, calls the matter “perhaps the single most important policy issue in Texas oil and gas today.”
A Jefferson County jury returned a verdict in Hooks’ favor, saying Samson Lone Star, an oil and gas partnership, owed him more than $21 million for withholding royalties. The First Court of Appeals in Houston reversed the ruling, saying Hooks waited too long to file the suit, and could have discovered payment discrepancies years earlier by poring over public records.
Samson, backed by Texas’ biggest energy groups, argues that the four-year statute of limitations on fraud cases is appropriate, and that mineral owners should take more initiative in auditing their royalty payments. Looser limits would create uncertainty for oil and gas operators, the company argues, making it difficult for them to balance their books.
The Texas Supreme Court has set a high bar for mineral owners in past disputes. John McFarland, an oil and gas attorney who filed a brief in support of Hooks, said he knows of no similar case in which the mineral owner prevailed. The court last addressed the issue in a 2011 royalty dispute, when it overturned a jury verdict favoring a mineral-owning family to rule in favor of British Petroleum (BP).
On Wednesday, the justices did said little to reveal their leanings. They asked pointed questions to attorneys on both sides about how the case differed from the BP dispute and how the court could craft a ruling that does not encourage fraud in cases where fact-checking can prove difficult.
In the complicated case, Hooks argues that Samson shortchanged him after violating provisions of its lease of his land along the Pine Island Bayou, which divides Jefferson and Hardin counties. Under the contract, Samson, which was also leasing adjacent land from other owners, agreed it would not drill a well within 1,320 feet of Hooks' property for fear that it would drain Hooks' resources. Under that agreement, if the company did drill within that buffer, it would have to pay Hooks “compensatory royalties,” drill an “offset well” to prevent drainage or release its claim on the adjacent properties.
But in 2000, Samson drilled a slanted well that bottomed out 1,080 feet away from Hooks’ property – without following any of the other terms of its agreement. Hooks did not ask about the well until a year later, when Samson presented him with another offer.
Before accepting that offer, Hooks, a veteran oil and gas attorney, asked about the location of the nearby well. Glenn Lanoue, Samson's landman, told Hooks the well was 1,500 feet away from his property line, according to Hooks’ testimony. Later, at Hooks’ request, Lanoue sent him “a true and correct plat based on the best of my knowledge” showing the well 1,400 feet from Hooks’ acreage – still outside of the buffer zone listed in Hooks’ lease.
Taking Lanoue’s information at face value, Hooks agreed to Samson's offer and he collected royalties on it. Hooks did not discover the error until 2006. He scrutinized the map after learning that several mineral owners had sued Samson for issues unrelated to that well.
In 2007, Hooks sued Samson for a variety of offenses, including fraud. The suit came well after the statute of limitations allows.
Hooks argues he should get extra time to sue under the state’s “discovery rule,” saying that Samson’s false information kept him from discovering the fraud for years.
“Samson showed an utter disdain for the truth and its contract obligation to the Hooks,” Shannon Ratliff, Hooks’ attorney argued on Wednesday.
But Samson’s legal team argues that Hooks and other mineral owners in such disputes should get no extension. They say lessors should take more initiative in auditing their royalty payments and consulting official state records – rather than taking operators at their word.
“This court has always expected people to act with reasonable diligence in the conduct of their affairs,” Cynthia Keely Timms, Samson’s attorney, told the justices. “There are public records, and if you’re exercising reasonable diligence, you can go to the public record.”
Checking public records is easier said than done because those records often depend – at least partially – on information submitted by oil and gas operators. In Hooks’ case, several different maps were on file with the Railroad Commission of Texas, the state’s oil and gas regulator, and many were incorrect. Ratliff told the justices that Samson also filed false information with the General Land Office, Jefferson County and Hardin County.
The false information popped up in the public record "like popcorn,” Ratliff said.
Timms said that Hooks, as an oil and gas attorney, should have known which information was accurate, and that one particular map on file from a third-party operator was a “gold standard.”
“You’re suggesting that if your client just filed a few fraudulent documents, that’s okay?” Justice Debra Lehrmann asked Timms.
“That’s not what I’d call it,” Timms answered.
Justice Don Willett asked Timms: “How would a court craft a holding that would not incentivize or encourage deceit?”
The attorney replied: “It’s not like we benefited in anyway from this,” and the litigation “cost millions of dollars.”
“With all these Railroad Commission filings, with all these public records, it’s really hard to get away with anything,” Timms added.