Texas Supreme Court Decision Revisits the State's Fraudulent Concealment Tolling Doctrine

On January 30, 2015, the Texas Supreme Court revisited the "reasonable diligence" standard applicable to Texas's fraudulent concealment tolling doctrine.  Although the court's holding in Hooks v. Samson is tied closely to the facts of that case, it is a significant development in oil and gas claims involving fraud allegations and may relax the tolling requirements for a subset of fraud plaintiffs.  With this new decision, operators must now be especially wary of any potential inaccuracies in publicly filed documents, as they may be used to toll the statute of limitations.

In Texas, a cause of action does not accrue until the injury reasonably could have been discovered.¹ Correspondingly, a defendant's fraudulent concealment of the facts giving rise to the plaintiff's cause of action tolls the statute of limitations, but only "until the fraud is discovered or could have been discovered with reasonable diligence."²  Plaintiffs bear the burden of proving fraudulent concealment, including proving that they could not have discovered the fraud within the prescribed limitations period with reasonable diligence.³  Although reasonable diligence is normally a fact issue, the Texas Supreme Court in 2011 opened the door for defendants to argue that fraudulent concealment can be determined as a matter of law when there are facts in the public record that would have alerted a reasonable plaintiff to his cause of action.

In BP v. Marshall, the jury found that a mineral-lease operator had fraudulently omitted facts in its correspondence with the plaintiffs that would have alerted the plaintiffs to their claim.  In rendering judgment for the operator, the Texas Supreme Court held that the plaintiffs could and should have reviewed the publicly available well log and plugging report that, read together, showed that the operator's efforts to obtain production were not in good faith.⁴  The Court ruled that it was not reasonable, as a matter of law, for the plaintiffs to rely on the operator's letter in light of public records available from the Texas Railroad Commission that would have alerted them to their potential claim.⁵

After Marshall, numerous operators defeated fraudulent concealment claims and obtained dismissals on limitations grounds where facts in the public record arguably should have alerted lessors to their claims.  For example, in Shell v. Ross, the Texas Supreme Court held that the fraudulent concealment doctrine does not apply as a matter of law when royalty underpayments could have been discovered from readily accessible and publicly available information before the limitations period expired.⁶  Although a jury found that the operator had fraudulently concealed its underpayments to the Rosses, the Texas Supreme Court noted that the plaintiffs had received royalty payments on production from certain wells that were much higher than those from other wells within the same reservoir.⁷  This disparity, the Court held, "triggered the Rosses' duty to investigate the royalty payments."⁸  Had the Rosses conducted an investigation of "[r]eadily accessible and publicly available information," they could have discovered within the limitations period that the operator was underpaying royalty.⁹ 

In late January, the Texas Supreme Court appears to have relaxed the high standard of "reasonable diligence" established in Marshall and reinforced in Ross.  In Hooks v. Samson, a mineral owner filed suit against Samson, alleging, among other things, that Samson misrepresented the bottom-hole location of a well and filed fraudulent plats with the Texas Railroad Commission that contained the same misrepresentation.¹⁰  The jury found that Samson committed fraud and statutory fraud, and awarded the plaintiff more than $20 million in damages.¹¹  On appeal, the Texas First Court of Appeals reversed in reliance on Marshall and Ross, concluding that the mineral owner's fraud claims were barred by the four-year statute of limitations as a matter of law.¹² The First Court of Appeals reasoned that the fraudulent concealment doctrine did not toll the statute of limitations because the mineral owner could have uncovered Samson's fraud through the exercise of reasonable diligence-namely, by searching the Railroad Commission files to verify that no older records contradicted the (apparently false) bottom-hole location listed on the most recently filed plat.¹³  One judge on the panel "reluctantly concur[red]" because the court of appeals is "bound to follow the [Texas Supreme] Court's rulings," but noted that he "believe[d] the Texas Supreme Court has placed an unnecessary and very heavy burden on lessors by its ruling in [Marshall]."¹⁴

The Texas Supreme Court reversed and remanded, holding that the fraudulent concealment doctrine's reasonable diligence standard does not require as a matter of law that potential plaintiffs fact-check more recent public records against earlier filings.¹⁵  Drawing a distinction between the facts presented in Hooks and those at issue in Marshall and Ross-namely, that "in those cases, the public record itself was not tainted by the fraud"-the court held that under such circumstances the reasonableness of the plaintiff's diligence "remains a fact question."¹⁶  The court then remanded the case to the First Court of Appeals for consideration of the sufficiency of the evidence regarding when the plaintiff should have discovered the fraud.¹⁷

Hooks thus establishes a narrow exception to the strict diligence standard set forth in Marshall and Ross.  Whereas Marshall and Ross held that the fraudulent concealment doctrine does not apply as a matter of law where the plaintiff "could have discovered [the] wrongdoing by reviewing information available in the public record,"¹⁸Hooks takes a small step backwards by clarifying that "[a]lthough reasonable diligence should examine readily available information in the public record, it may stop at more recent filings with the Railroad Commission, without needing to double-check more recent filings against earlier filings."¹⁹ 

Despite the narrowness of the exception, Hooks may nonetheless result in a substantial increase in trials of fraudulent concealment claims and a decrease in summary judgment dismissals on limitations grounds.  Hooks makes clear that there are circumstances in which a potential plaintiff is not charged with knowledge of the certain portions of the public record, representing a marked deviation from Marshall and Ross.  Hooks thus opens the gate, at least theoretically, for more flexible, fact-dependent inquiries, as opposed to the categorical, legal minimum requirements for "reasonable diligence" under Marshall and Ross.²⁰ Whereas, under Marshall and Ross, mineral interest owners had the obligation to check the public record, Hooks shifts some of this obligation back to the operators, who must make certain that all filed documents are accurate and consistent or risk the revival of otherwise stale claims. 

We anticipate that enterprising mineral-rights owners will exploit Hooks and argue that any inaccuracy taints the public records with fraud such that otherwise stale claims may escape the limitations bar.  Given the current upheaval in the energy market and the anticipated uptick in oil and gas litigation and corresponding fraud claims, the Hooks decision likely will play an important role in determining which claims are time-barred and which move forward to trial.  Oil and gas operators should therefore eye their regulatory filings with even greater scrutiny lest an inadvertent inaccuracy open the door to litigation over old claims.