Court Reverses Jury Decision on Oil Lease Fraud Case

The Texas Supreme Court, in December 16, 2011, reversed a lower court ruling in favor of Shell Oil Company et al, as Petitioners, in an interesting case where the plaintiff sued Shell Oil claiming that the oil company had underpaid on lease royalties using a scheme which was purposely designed to prevent the lessor, a trust of the Ross family, from discovering the underpayment until the statute of limitations had run out. The court, in essence, held that the lessor had had ample opportunity to discover and realize the error, and demand remedy.

The plaintiffs in the trial case, which was held in Harris County, had sued Shell Oil claiming that they had been underpaid royalties on oil and gas leases originally signed in 1961. For years, Shell Oil had sent royalty checks along with the required stub showing the amount Shell Oil had been paid for the retrieved resources. However, as Shell did reveal in the trial, the basis amount was, in fact, not the actual price Shell Oil was paid for the oil and gas, but instead was based on “a weighted-average method calculation.” Shell could not explain why this method was used, suggesting that the “arbitrary price” may have been a computer glitch or an accounting error.

The Rosses had argued that they had no reason to suspect a calculation error until after the statute of limitations for discovery had expired, and therefore were allowed an exception to the limitations period because of Shell’s “elaborate scheme to allow it to [underpay] royalties, then made multiple misrepresentations to cover up this scheme.” The trial jury and the appeals court both ruled in favor of the Rosses, awarding the family trust $72,532.09 plus prejudgment interest, attorney’s fees and court costs.

However, the Supreme Court ruled that since gas and oil prices are generally available to the Rosses, and that additional discovery during the period in question could have uncovered the discrepancy, the court held that “as a matter of law, the doctrine of fraudulent concealment cannot apply to toll the statute of limitations.” In its conclusion, the court held that “evidence conclusively established that Shell’s alleged fraud could have been discovered by the Rosses through the exercise of reasonable diligence.”

The ruling should give notice to all oil and gas lessors to carefully review royalty statements paid by lessees, and to do their own research to verify the basis on which the royalties are paid.

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