In a case that highlights the challenges Texas mineral owners face in ensuring oil and gas operators pay what they promise, the Texas Supreme Court has revived the claim of a man who alleges he was shortchanged on royalties.
Charles Hooks III may continue his suit against Samson Lone Star, the oil and gas partnership he accuses of breaking a lease to drill on his East Texas land, the court ruled Friday.
The partnership, backed by Texas’ biggest energy groups, argued that a four-year statute of limitations on fraud cases kicked in before Hooks filed his suit, and that mineral owners should take more initiative in auditing their royalty payments. Hooks argued that Samson filed false information to the state regulators that hid the breach for years.
A Jefferson County jury returned a verdict in Hooks’ favor. But the the 1st Court of Appeals in Houston reversed the ruling in 2012, saying Hooks waited too long to file suit, and could have discovered payment discrepancies years earlier by poring over public records.
The Supreme Court reversed that and other parts of the appellate court’s opinion, sending the case back down for consideration.
“Though reasonable diligence should lead to information in the public record, here, the fraudulent information itself taints the public record,” Justice John Devine wrote. “To require, as a matter of law, that Hooks double-check the more recent filings against earlier filings is a higher burden than reasonable diligence requires.”
The complicated case concerned just how much “due diligence” a mineral owner must show in auditing his or her payments.
Hooks argued 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.
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 argued 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.
But Samson’s legal team argued 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.
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. Samson also filed false information with the General Land Office, Jefferson County and Hardin County, Hooks’ legal team claimed.
The false information popped up in the public record "like popcorn,” Shannon Ratliff, Hooks' attorney, told the justices in September.