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Texas Supreme Court to Decide Oil Royalties Case

The Supreme Court of Texas will be considering an interesting case about oil and gas royalties for a Texas mineral owner. The case is Charles G. Hooks III et al. v. Samson Lone Star L.P.

The case arises from a dispute over oil and gas leases in Jefferson County and Hardin County, Texas. The mineral and land owner is Charles G. Hooks, III, who is also an oil and gas attorney. The Jefferson County lease provided that the lessee, Samson Lone Star LLC pay compensation to Mr. Hooks if drilling occurred within 1,320 feet of his property line. Samson drilled a directional well that bottomed out within that distance, but Samson never compensated Mr. Hooks as the lease required. With the two Hardin County leases, Mr. Hooks gave Samson permission to pool his mineral interests, but Mr. Hooks contended that Samson did not pay him for all production within the pool. Mr. Hooks also claimed that Samson was required to pay both royalties on the sale of oil and gas and on the same oil and gas as it existed in the reservoir, so called “formation production”.

In the trial court, Mr. Hooks was awarded more than $21 million on these claims. The case was appealed to the Houston Court of Appeals, which reversed the judgment of the trial court in a majority decision written by Justice Evelyn V. Keyes in 2012. The Houston Court of Appeals determined that, as to the Jefferson County lease, Mr. Hooks’ claim was barred by the statute of limitations and was based on an incorrect interpretation of his oil and gas lease. The Court noted that surveys on file for this well at the Texas Railroad Commission in 2000 and publicly accessible put Hooks on notice of the location of the bottom of Samson’s directional well, and as an oil and gas lawyer, Hooks should have been aware of his claim if he reviewed both those surveys. Unfortunately, Hooks did not file the lawsuit against Samson until after the four year statute of limitations that applied to his claim had expired.

On the Hardin County leases, the Court also determined that Mr. Hooks’ claim was barred by the statute of limitations. The Court wrote: “We conclude that Hooks knew or should have known of information that would have led to the discovery of the alleged fraud no later than February 2001, as the necessary information was a matter of public record at that time.” In addition, the Court of Appeals determined that Mr. Hooks other claims were based on misinterpretations of the leases.

The appeal to the Texas Supreme Court is set for oral argument on September 17, 2014. The Texas Supreme Court’s summary of the issues states that the principal issue is “whether a mineral-rights owner exercised reasonable diligence, to avoid limitations, by obtaining a copy of the Samson plat filed with the Texas Railroad Commission but not a third-party survey in Railroad Commission records that would have shown the operator’s fraud.” Other issues are whether Mr. Hooks ratified the pooling agreement by accepting royalties from the new unit; whether Samson Lone Star must pay royalties on the “most favoured nation” clause in these leases; whether an agreement for attorney fees is applicable on Hooks’ claims when liability and damages were stipulated and not pled; and whether post-judgment interest on royalties paid late should be 18% or the normal Texas judgment rate of 5%.

Whatever the Texas Supreme Court decides, the facts of this case illustrate an important caution: if you think there’s a problem with your oil and gas lease, your royalties or the activities of the operator, investigate your suspicions now rather than later. If you wait, the statute of limitations may prevent you from correcting the situation or from recovering damages to which you may otherwise be entitled.

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