Alcala Dissent in Shell Oil Co. v. Ross (Tex.App. - Houston [1st Dist.] Feb. 25, 2010)(disagrees on finding of fraudulent concealment by defendant and would grant JNOV for Shell)

Alcala Dissent in Shell Oil Co. v. Ross (Tex.App. - Houston [1st Dist.] Feb. 25, 2010)
(disagreeing on finding of fraudulent concealment by defendant)

DISSENTING OPINION BY ALCALA

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).
The 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. In 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”). The 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 if “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. The
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.

Shell Oil Company v. Ross (Tex.App.- Houston [1st Dist.] Feb. 25, 2010)(Jenning)
(oil & gas law litigation, royalties dispute, breach of contract, unjust enrichment, and fraud theories)
(fraudulent concealment as tolling theory, constructive notice based on public record)
AFFIRM TRIAL COURT JUDGMENT: Opinion by Justice Jennings
Before Justices Jennings, Alcala and Higley
01-08-00713-CV Shell Oil Company, SWEPI LP d/b/a Shell Western E&P, Successor in Interest to
Shell Western E&P, Inc. v. Ralph Ross
Appeal from 133rd District Court of Harris County
Trial Court Judge: Hon. Lamar McCorkle
Dissenting Opinion by Justice Alcala in Shell Oil Co. v. Ross (would hold that lawsuit is
barred by limitations because no evidence establishes fraudulent concealment)