Shell Oil Company v. Ross (pdf) (Tex.App.- Houston [1st Dist.] Feb. 25, 2010)(Jennings)
(
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)
By calculating the Reusses’ royalties based on a weighted average price, Shell
breached its contract by paying royalties on a price less than the amount that
Shell realized from the sale of the gas. Accordingly, we hold that the trial court did
not err in concluding that Shell breached its contract with the Reusses by paying
royalties based on a weighted average price.
AFFIRM TRIAL COURT JUDGMENT: Opinion by Justice Terry 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)

OPINION

Appellants, Shell Oil Company (“Shell Oil”) and Shell Western E&P (“Shell Western”) (collectively
“Shell”), challenge the trial court’s judgment, entered after a jury trial, in favor of appellee, Ralph Ross,
in Ross’s suit against Shell for breach of contract, unjust enrichment, and fraud concerning the
underpayment of oil and gas royalties to Ross’s grandmother, Gertrude T. Reuss. Shell presents six
issues for our review. In its fourth issue, Shell contends that the trial court erred in entering judgment
and denying Shell’s motion for judgment notwithstanding the verdict in which Shell asserted that it
properly used a “weighted average price” in calculating the royalty payments it made to Ross and his
predecessors (collectively “the Rosses”). In its first, second, third, and fifth issues, Shell contends that
the trial court erred in denying its motions for directed verdict and for judgment notwithstanding the
verdict in which Shell asserted that the evidence is legally insufficient to support the jury’s finding that
Shell fraudulently concealed its underpayment of royalties to the Rosses and the jury’s findings on
when the Rosses should have discovered Shell’s underpayment of royalties. In its sixth issue, Shell
contends that the trial court erred in not including Shell’s proposed instruction on constructive notice in
the jury charge.

 We affirm.

Factual and Procedural Background

In his fifth amended petition, Ross alleged that he is the “current owner of one-third of the mineral
interests reserved” in the Oil, Gas and Mineral Lease that Shell Oil and G.T. Reuss and Gertrude T.
Reuss entered into on August 22, 1961 (the “Reuss Lease”). Ross claimed that Shell is “expressly
obligated under the [Reuss] Lease to pay . . . an undivided 1/8 royalty, valued in accordance with the
royalty provisions, . . . [which state that the] valuation of the royalty on unprocessed gas is based on ‘. .
. the amounts realized . . .’ from sales of the gas.” Because Shell “failed to pay royalty in accordance
with the express royalty provisions and covenant of the [Reuss] Lease,” Shell “breached the express
obligations under the lease.” Ross also claimed that Shell “created a fraudulent scheme to deprive
[Ross] of royalties” by paying royalties “based on an arbitrary amount even below the internal transfer
price.” Shell “concealed this scheme by sending statements with [Ross’s] royalty checks that contained
false representations that the royalties were based on the actual sales prices.”

At trial, Bryan Garrison, who managed Shell’s royalty payment obligations from “1995 to around 2000,”
testified that Shell Oil “originally assumed the obligations to pay royalties under the [Reuss Lease].”
Garrison agreed that, under the Reuss Lease, Shell was obligated to pay, as a royalty, one-eighth of
the market value of the natural gas realized at the mouth of the well. Shell divided this one-eighth
royalty payment between the Reusses and the State of Texas, so Shell was ultimately obligated to pay
the Reusses “1/16th of the amount realized at the mouth of the well.” Garrison explained that under the
Reuss lease, Shell is required to calculate and pay the royalty based upon the sale price of the natural
gas.

Garrison noted that in making royalty payments to the State of Texas, Shell reported the sale price of
the natural gas to the Texas General Land Office (“Land Office”), where “you can look at the records.”
However, he conceded that the actual receipts were in Shell’s possession and not publicly available and
the “amount paid to the State can very well be quite different than . . . what the Reuss landowners were
entitled to.”

Garrison further testified that in 1970, Shell entered into the Lasater pooling agreement with Forest Oil.
Under the pooling agreement, Shell and Forest Oil allocated the natural gas produced from a well on
the Lasater’s property based on the amount of land that they contributed to the agreement. Based on
the share of land that Shell contributed,  it received 62.5% of the natural gas produced by the Lasater
well. Thus, as per Garrison, if the Lasater well produced 10,000 mcf  of natural gas, Shell received
6,250 mcf of natural gas and Forest Oil received 3,750 mcf.

Garrison explained that in order to calculate the royalty payments on gas produced from the Lasater
well, Shell did not use the price that it realized from selling the natural gas. Instead, Shell used a
“weighted average price,” which it calculated by weighting its sale price and Forest Oil’s sale price,
according to their respective shares of gas, and then averaging these weighted prices. For example, if
the Lasater well produced 10,000 mcf of natural gas and Shell sold its share of the natural gas for
$1.20 per mcf and Forest Oil sold its share of the natural gas for $.90 per mcf, then Shell would “weight
the average” by giving “the $1.20 price the weight of 6,250” and “the 90-cent price a weight of 3,750.”
Thus, Shell would have paid royalties to the Rosses based on a price closer to “90 cents than $1.20.”
Shell stipulated that from January 1988 through February 1997, Shell had paid the Rosses
approximately $60,000 less by using the weighted average price than if Shell had used its sale price.
Garrison agreed that the Reuss Lease does not state that “Shell can pay Ms. Reuss based on a
weighted average or blended price.”

In 1983, Shell Oil formed Shell Western and transferred a number of active oil and gas leases,
including the Reuss Lease, to Shell Western, which assumed all obligations under the leases.

In October 1995, Shell sent a letter to 2,246 royalty owners in Texas with an enclosed check. In the
letter, Shell stated that it had enclosed the check as “an adjusted calculation for the period from
September, 1986 through August, 1995.” Shell also stated that it had made this “retroactive adjustment
as a result of disputes that [had] arisen with a few of [its] royalty owners” because Shell had been
calculating royalties based on the transfer price to Shell Gas Trading Company (“SGT”) instead of the
price Shell actually realized from its sale to a third party. Shell further stated that the check amount
reflected “the difference between index prices and the net prices [SGT] received from third parties, plus
interest.” However, Garrison explained that the “letter did not disclose . . . that [Shell] had not in the past
even been paying the transfer price.”

Shell also indicated in the letter that “future royalty payment calculations [would] be based upon the net
prices the new venture receives from third parties for the gas.” Garrison explained this to mean that,
according to the letter, future royalty calculations would be based on what Shell “sold the gas for in an
arm’s-length sale.” However, Garrison conceded that, after sending this letter, Shell continued to pay
royalties based on an amount that was less than “the transfer price, [and] much less [than] the third-
party sale price, despite the representation in this letter.” Garrison did not discover this underpayment
until after his first deposition. He had understood that a letter had been sent to Shell’s accounting
department with “specific instructions on how to pay the royalty owners” in accordance with the October
1995 letter.

Garrison further 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.” He had reviewed his telephone call log and “found no evidence that anybody had called
concerning [the Rosses].”

Robert Bridges, a Shell employee, testified that he supervised his staff in setting the transfer price of
natural gas sold by Shell Western. In setting the transfer price, he attempted to “protect the Shell house
with a very clear, transparent methodology of pricing that would be fair.” Bridges agreed that in
protecting the “Shell house,” he was both “representing [Shell Western], the [Shell] affiliate; and . . .
representing the purchaser, [SGT].” He also agreed that the transfer price was unrelated to “what the
gas was actually sold for by SGT.”

Ross’s father, Ralph Louis Ross, the son of G.T. Reuss and Gertrude T. Reuss, testified that he
administered his mother’s oil and gas interests beginning in 1980. Ross’s father did not learn that Shell
had been underpaying the royalties due under the Reuss Lease until sometime in 2002, when David
Scott, an attorney who had formerly been employed by the Land Office, informed him that the Land
Office had received a settlement from Shell based on underpayment of royalties on natural gas
produced from the Reuss tract. When he learned of the underpayment, Ross’s father assigned “all legal
rights that the estate had,” including the rights to pursue a lawsuit against Shell, to Ross. The royalty
statements sent by Shell included the unit price of the natural gas, which Ross’s father understood to
be the price that Shell received from selling the gas to a third party. Ross’s father explained that he did
not remember receiving the October 1995 letter from Shell.

Charles Graham, Ross’s expert witness, testified that under the Reuss Lease, Shell should have made
royalty payments based on the price that Shell “actually sold the gas for.” He explained that the Rosses
would not have known that their royalty payments were incorrect even had they known that the Land
Office’s royalty payments differed from the Rosses’ payments because the Land Office is “free to
negotiate a different royalty obligation with Shell.” The only documents which indicated to Graham that
the Rosses had been underpaid were Shell and El Paso Natural Gas internal documents, which were
not publicly available. Graham noted that the published gas price index is an estimated value of gas
prices on average during a period of time and would not reflect the selling price that Shell actually
received for its gas.

Graham further testified that from 1994 through 1997, Shell had used an arbitrary price to calculate the
Reusses’ royalty payments. He calculated that this resulted in an underpayment of $10,000.78.
Additionally, Shell had improperly used a weighted average price to calculate the Reusses’ royalty
payments from 1988 through 1997 for the Lasater and Houston wells. Graham calculated that this had
resulted in an underpayment of $62,531.31.

John Berghammer, Shell’s expert witness, testified that Shell’s use of a “weighted average/blended
price” calculation “was appropriate, and also . . . completely consistent with . . . industry practice for the
same sort of an accounting situation involving unit or pooled-type production.” He explained that some
oil and gas publications collect price information and set an index, which can be used to approximate
the price of gas in an area. Also, the El Paso Permian Basin Index, published privately, is commonly
used in the area of the Reuss tract. When Berghammer compared the price used to calculate the
Rosses’ royalty payments and compared that price to the index, he determined that the unit price on the
royalty statements from 1988 to 1993 was “obviously” much lower than the index price.

Before presenting their closing arguments to the jury, the parties provided the trial court with
stipulations regarding damages calculations. They stipulated that if limitations did not bar Ross’s claims,
his damages were at least $10,000.78 based on the underpayment of royalties. The parties further
stipulated that if Shell’s use of a weighted average price in calculating royalties had breached the
Reuss Lease, then Ross’s damages were $72,532.09, plus interest.

The trial court found, as a matter of law, that Shell had “breached the contract with [Ross] as it relates
to the ‘weighted average/blended price’ issue.” The jury found that Shell had fraudulently concealed its
“fail[ure] to pay royalties between 1994 and 1997 for reasons other than the ‘weighted average/blended
price’ issue” and that the Rosses should have discovered this underpayment, in the exercise of
reasonable diligence, in “2002.” The jury also found that Shell had fraudulently concealed its “fail[ure]
to pay royalties between 1988 and April 1994 because of the ‘weighted average/blended price’ issue”
and the Rosses should have discovered this underpayment, in the exercise of reasonable diligence on
“Feb. 6, 2006.”

Based on the jury’s fraudulent concealment findings, the trial court ordered that Ross recover actual
damages of $72,532.09, prejudgment interest, attorneys’ fees, and court costs.

Weighted Average Calculation of Royalty Payments

In its fourth issue, Shell argues that the trial court erred in concluding that Shell breached the Reuss
Lease by using a weighted average royalty calculation  because paragraph 13 of the Reuss Lease
indicates that the royalty payments should be calculated based on the sale price of the natural gas sold
by Shell and any other working interest owners.

When a written contract is not ambiguous, the trial court should interpret the contract as a question of
law. MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 650–51 (Tex. 1999). We review the
trial court’s legal conclusions de novo. Id. Here, the parties do not contend that the contract is
ambiguous, nor do they dispute the relevant facts. The parties have stipulated that if Shell’s use of a
weighted average royalty calculation violates the Reuss Lease then it underpaid the Reusses by
$72,532.09.

Paragraph 13(a) of the Reuss Lease allows Shell to “pool or unitize all or any part of [the Reusses’]
land.” In 1968, Shell entered into a pooling and unitization agreement with Marathon Oil and Forest Oil,
under which it pooled 320 acres of the Reuss tract into the Houston Unit. Then, in 1970, Shell entered
into another pooling and unitization agreement with Forest Oil, under which it pooled 240 acres of the
Reuss tract into the Lasater Unit.

For both the Houston and Lasater wells, Shell received its share of the natural gas produced, based on
the amount of land it contributed to the pooled unit, and sold the gas to third parties. For example, Shell
received 62.5% of the natural gas produced by the Lasater well because it had contributed 62.5% of
the land to the Lasater Unit. When Shell calculated the royalty payment due to the Reusses, it did not
calculate the royalty payment based on the price that Shell received for the gas. Instead, Shell
calculated the weighted average price of all the gas produced at the mouth of the well by averaging the
sale price that it had received with the sale prices that any other working interest owners, e.g., Forest
Oil, had received. Before averaging the sale prices, Shell first weighted the working interest owner’s
sale prices based on their respective shares of the natural gas.

Shell argues that paragraph 13(b) of the Reuss Lease demonstrates that its weighted average
calculation of the unit price is permitted because this “provision does not say that it was only that
portion produced and sold by [Shell Western]; in fact, the implication is that it is the defined portion of all
of the production, including that sold by the other working interest owners.”

Paragraph 13(b) controls the allocation of natural gas to the Reuss tract when included in a larger,
unitized tract of land:

Any operations conducted on any part of such unitized land shall be considered, for all purposes,
except for the payment of royalty, operations conducted under this lease. There shall be allocated to
the land covered by the lease included in any such unit that proportion of the total production of
unitized minerals from wells in the unit, after deducting any used for lease or unit operations, which the
number of surface acres in the land covered by this lease included in the unit bears to the total number
of surface acres in the unit. The production so allocated shall be considered for all purposes, including
the payment or delivery of royalty, overriding royalty, and any other payments out of production, to be
the entire production of unitized minerals from the portion of said land covered hereby and included in
such unit in the same manner as though produced from said land under the terms of this lease.

(Emphasis added.) This provision requires that Shell pay the Reusses’ royalty based on the production
of natural gas allocated to the Reuss tract. The provision further provides that the amount of natural
gas allocated to the Reuss tract should represent the percentage of the natural gas produced that
corresponds to the percentage of “the total number of surface acres in the unit” contributed by the
Reuss tract. However, nothing in this provision addresses how the natural gas, so allocated, should be
valued for purposes of royalty payments. Instead, the provision states that royalty payments should be
made “in the same manner as though produced from said land under the terms of this lease.”

Under paragraph 4 of the Reuss Lease, Shell agreed to pay royalties to the Rosses,

. . . on gas and casinghead gas produced from [the Reuss tract] (1) when sold by [Shell], one-eighth of
the amount realized by [Shell] computed at the mouth of the well, or (2) when used by [Shell] 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.”

Shell argues that the royalty payment should be calculated based on the amount realized by all the
working interest owners who are part of the pooling and unitization agreement because each working
interest owner received a portion of the natural gas “produced from” the Reuss tract. However, the
Reuss Lease expressly requires Shell to calculate royalty payments based on the amount realized by
Shell. It does not contain any language that would allow Shell to calculate royalty payments based on
the amount realized by any other working interest owner. In using a weighted average calculation, Shell,
to its benefit, calculated the Reusses’ royalty payments in a manner that contradicts the express
language of the contract.

Due to the fluid character of natural gas, the working interest owners could not divide the gas among
themselves based on which contributing tract produced the gas. Instead, they decided to allocate the
gas in proportion to the percentage of land contributed by that working interest owner. Similarly,
paragraph 13(b) of the Reuss Lease allocates the gas on which Shell pays a royalty to the Reusses in
proportion to the percentage of land contributed by the Reuss tract. Although the natural gas that Shell
received from the unitized tract could not be identified specifically and uniquely with production from the
Reuss tract, the amount of natural gas allocated to Shell from the unitized tract is directly proportional to
the amount of land it contributed to the unitized tract. Therefore, in the context of the Reuss Lease and
this pooling and unitization agreement, the natural gas that Shell sold was produced from the Reuss
tract.

By calculating the Reusses’ royalties based on a weighted average price, Shell breached its contract
by paying royalties on a price less than the amount that Shell realized from the sale of the gas.
Accordingly, we hold that the trial court did not err in concluding that Shell breached its contract with the
Reusses by paying royalties based on a weighted average price.

We overrule Shell’s fourth issue.

Fraudulent Concealment

In its first and second issues, Shell argues that the trial court erred in denying its motions for a directed
verdict and for judgment notwithstanding the verdict because the evidence is legally insufficient to show
that Shell fraudulently concealed its underpayment of royalties to the Rosses.

We will sustain a legal sufficiency or “no-evidence” challenge if the record shows one of the following:
(1) a complete absence of evidence of a vital fact, (2) rules of law or evidence bar the court from giving
weight to the only evidence offered to prove a vital fact, (3) the evidence offered to prove a vital fact is
no more than a scintilla, or (4) the evidence establishes conclusively the opposite of the vital fact. City
of Keller v. Wilson, 168 S.W.3d 802, 810 (Tex. 2005). In conducting a legal sufficiency review, a “court
must consider evidence in the light most favorable to the verdict, and indulge every reasonable
inference that would support it.” Id. at 822. If there is more than a scintilla of evidence to support the
challenged finding, we must uphold it. Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors,
Inc., 960 S.W.2d 41, 48 (Tex. 1998). If the evidence offered to prove a vital fact is so weak that it only
creates a “mere surmise or suspicion” of the existence of the fact, “the evidence is no more than a
scintilla and, in legal effect, is no evidence.’” Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex.
2004) (quoting Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex. 1983)). However, if the evidence at
trial would enable reasonable and fair-minded people to differ in their conclusions, then jurors must be
allowed to do so. Keller, 168 S.W.3d at 822; see also King Ranch, Inc. v. Chapman, 118 S.W.3d 742,
751 (Tex. 2003). We may not substitute our judgment for that of the trier-of-fact “so long as the
evidence falls within this zone of reasonable disagreement.” Keller, 168 S.W.3d at 822.

Generally, a defendant’s fraudulent concealment of wrongdoing will toll the running of limitations. Kerlin
v. Sauceda, 263 S.W.3d 920, 925 (Tex. 2008) (citing Shah v. Moss, 67 S.W.3d 836, 841 (Tex. 2001));
see also
Seureau v. ExxonMobil Corp., 274 S.W.3d 206, 228 (Tex. App.—Houston [14th Dist.] 2008, no
pet.) (“[T]he fraudulent-concealment doctrine is an affirmative defense to limitations that resembles
equitable estoppel”). To prove fraudulent concealment, a plaintiff must show that the defendant actually
knew a wrong occurred, had a fixed purpose to conceal the wrong, and did conceal the wrong. Shah, 67
S.W.3d at 841; see also Seureau, 274 S.W.3d at 228 (stating that plaintiff must demonstrate defendant
had “(1) actual knowledge that a wrong occurred, (2) a duty to disclose the wrong, and (3) a fixed
purpose to conceal the wrong”); Santanna Natural Gas v. Hamon Operations, 954 S.W.2d 885, 890
(Tex. App.—Austin 1997, pet. denied) (defining elements of fraudulent concealment as “first, actual
knowledge by the defendant that a wrong has occurred, and second, a fixed purpose to conceal the
facts necessary for the plaintiff to know that it has a cause of action”). Accordingly, the “gist of the
fraudulent concealment defense is the defendant’s active suppression of the truth or its failure to
disclose the truth when it is under a duty to speak.” Hay v. Shell Oil Co., 986 S.W.2d 772, 778 (Tex. App.
—Corpus Christi 1999, pet. denied).

Importantly, however, fraudulent concealment will not “bar limitations when the plaintiff discovers the
wrong or could have discovered it through the exercise of reasonable diligence.” Kerlin, 263 S.W.3d at
925; see also Shah, 67 S.W.3d at 841 (“Fraudulent concealment tolls limitations until the plaintiff
discovers the fraud or could have discovered the fraud with reasonable diligence.”). Determining when
a plaintiff knew or reasonably should have known of the cause of action is normally a question of fact.
Santanna Natural Gas, 954 S.W.2d at 892.

In its first issue, Shell asserts that there is no evidence of the Rosses’ “reliance on the October 18,
1995 letter.” Garrison testified that Shell sent the October 1995 letter to “2,246 Texas royalty owners,”
but no one testified that the Rosses were among the royalty owners to whom Shell sent the letter. Ross’
s father testified that if Shell had sent the letter to the Rosses, he would have received the letter on his
mother’s behalf because in 1980, when his mother moved to Florida, he began receiving her royalty
checks and depositing them for her. However, Ross’s father did not remember ever having received the
letter, and he stated that he had not relied on it. Additionally, the copy of the letter in the record is
addressed to “Royalty Owner,” not specifically to the Rosses.

Viewing the evidence in the light most favorable to the verdict, we hold that there is no evidence that
the Rosses received or relied upon the October 1995 letter. Nevertheless, the trial court did not err in
denying Shells’ motions for directed verdict and judgment notwithstanding the verdict if the check stubs
that Shell enclosed with its royalty statements support a finding of fraudulent concealment.

In its second issue, Shell asserts that there is no evidence that the Rosses relied on Shell’s royalty
statements or that “[Shell] knew that the ‘unit price’ on the Reuss check stubs was not the ‘transfer
price.’” Shell also asserts that the Rosses “could have, with the exercise of reasonable diligence,
discovered that the ‘unit price’ on the Reuss check stubs did not reflect the ‘transfer price’ once Reuss
received the October 18, 1995 letter.” Shell contends that it had no “duty to state or disclose the exact
price [it] received in an arms’ length sale” in its royalty statements.

First, because there is no evidence that the Rosses received the October 1995 letter, the Rosses
could not have discovered that the unit price in the royalty statements did not reflect the transfer price
based on the October 1995 letter.

Second, regarding Shell’s assertion that there is no evidence that the Rosses relied on the royalty
statements, Ross’s father testified that Shell usually enclosed royalty statements with his mother’s
royalty checks. He explained that he believed that the royalty statement provided a unit price of the gas
that represented “whatever it was sold for.” He did not “expect that [Shell] could pay [him] just any price
they wanted to.” Viewing the evidence in the light most favorable to the verdict, we hold that the
evidence is legally sufficient to support the jury’s implied finding that Ross’s father relied on Shell’s
misrepresentations in the royalty statements regarding the unit price of the gas.

Third, regarding Shell’s assertion that there is no evidence or insufficient evidence that Shell knew that
its royalty statements contained misrepresentations and that it knowingly underpaid royalties, we note
that the evidence reveals that Shell underpaid royalties in at least two separate ways over a course of
many years. There is evidence that Shell engaged in a practice of underpaying royalties by paying an
arbitrary price, which was even different than an internal transfer price that Shell may have intended to
base the price upon. There is also evidence from which a reasonable juror could conclude that Shell
purposefully set up the internal transfer price as part of an effort to underpay royalties for its own
benefit. In regard to the October 1995 letter, although there is no evidence that the Rosses received or
relied upon the letter, the jury could have considered it as some evidence of Shell’s continuing
knowledge that it was underpaying royalties. Moreover, there is also evidence that, even after issuing
the October 1995 letter to a number of royalty owners, Shell continued to underpay royalties owed to
the Rosses and that it based the amounts of its payments on an arbitrary price.

In addition to the evidence showing that Shell had underpaid royalties in violation of the lease based
upon an arbitrary price, there is also evidence, as discussed above, that Shell underpaid royalties using
a “weighted average price” rather than the contracted-for actual price. Based upon the evidence
presented, the jury could have reasonably concluded that this weighted average price was
unauthorized under the lease. Although Shell argued that the lease should have been interpreted to
authorize such a pricing mechanism, the jury was free to completely reject this and reasonably conclude
that this mechanism was used by Shell to conceal the actual amount of royalty payments owed under
the plain language of the lease and that Shell continued to make underpayments over the course of
many years.

Finally, Shell argues that “an incorrect ‘value’ or ‘unit price’ reflected on a royalty owner’s check stub
cannot be fraudulent concealment” because Shell had no “duty to state or disclose the exact price [it]
received in an arms’ length sale” in its royalty statements. Ross argues that Shell had a duty to disclose
“the actual sale price of [the] gas” because “the Natural Resources Code requires disclosure of the sale
price of the gas under a proceeds lease.”

When a person makes a payment to “a royalty interest owner from the proceeds derived from the sale
of oil or gas production . . . the person making the payment shall include” certain information in a “check
stub or on an attachment to the payment form.” Tex. Nat. Res. Code Ann. § 91.501 (Vernon Supp.
2009). The check stub or attachment must include, among other things, the unit price, i.e., “the price
per barrel or per MCF of oil or gas sold.” Id. § 91.502 (Vernon Supp. 2009). However, the unit price may
vary depending on the method used to calculate its price. See Yzaguirre v. KCS Res., Inc., 53 S.W.3d
368, 372 (Tex. 2001). For example, the unit price of gas may be calculated based on its market value or
on the amount realized from its sale. See id. “Market value may be wholly unrelated to the price the
lessee receives as the proceeds of a sales contract.” Id. The statute does not explain whether the price
of the oil or gas should be calculated based on market value, the amount realized, or some other
method; nevertheless, the statute certainly requires that the royalty statement include the price of the
gas sold, not an arbitrary number. See Tex. Nat. Res. Code Ann. § 91.502.

Viewing the evidence in the light most favorable to the verdict, the unit price that Shell provided in its
royalty statements did not reflect the price of the gas sold according to any method of calculation.
Garrison testified that the unit price that Shell provided in its royalty statement, and used to calculate
the Reuss royalties, was lower than both the “third-party sale price” and the transfer price. Additionally,
Berghammer, Shell’s expert witness, testified that the unit price “wasn’t even close to being reflective of
the index prices.” Shell did not present any evidence that the unit price it provided in the Reuss royalty
statements reflected the actual price of the gas sold using any method of calculation. Shell did have a
duty to provide a unit price that was not arbitrary, and the evidence is legally sufficient to show that the
unit price represented in the royalty statements did not reflect the actual price of the gas sold.

Accordingly, we hold that the trial court did not err in denying Shell’s motions for a directed verdict and
for judgment notwithstanding the verdict on the ground that the evidence is legally insufficient to show
that Shell fraudulently concealed its underpayment of royalties to the Rosses.

We overrule Shell’s first and second issues.

Limitations

In its third and fifth issues, Shell argues that the trial court erred in denying its motion for judgment
notwithstanding its verdict because there is no evidence to support the jury’s finding that the Rosses,
“in the exercise of reasonable diligence, [should] have discovered that Shell failed to pay royalty in
accordance with the Reuss Lease” for royalty payments “between 1994 and 1997 for reasons other
than the ‘weighted average/blended price’ issue” in 2002 and “between 1988 and April, 1994 because
of the ‘weighted average/blended price’ issue” in “Feb. 6, 2006.” Shell argues that the Rosses should
have discovered Shell’s underpayment of royalties sooner through the exercise of reasonable diligence
because (1) the October 1995 letter provided the Reusses’ with notice that Shell had been calculating
their royalties on the basis of index prices, not sale prices; (2) the prices used to calculate the Land
Office’s royalties were different than the prices used to calculate the Reusses’ royalties; and (3) the
prices used to pay royalties on the Lasater and Houston wells, which were subject to the unitization and
pooling agreements, were substantially lower than the prices on the other two wells.

Ross’s breach of contract claim is governed by a four-year statute of limitations. Tex. Civ. Prac. & Rem.
Code Ann. § 16.051 (Vernon 2008); Stine v. Stewart, 80 S.W.3d 586, 592 (Tex. 2002). The limitations
period begins to run when a contract is breached. Stine, 80 S.W.3d at 592. However, a defendant’s
fraudulent concealment of the breach tolls the statute of limitations until the fraud is discovered or
should have been discovered with reasonable diligence. Kerlin, 263 S.W.3d at 925.

A party should discover a defendant’s fraudulent concealment when the party learns of facts,
conditions, or circumstances which would cause a reasonably prudent person to make inquiry, which, if
pursued, would lead to discovery of the fraud. Borderlon v. Peck, 661 S.W.2d 907, 909 (Tex. 1983).
“Knowledge of such facts is in law equivalent to knowledge of the cause of action.” Id.

First, having held that there is no evidence that the Rosses received the October 1995 letter, we
conclude that there is no evidence that the letter provided the Rosses with facts which would cause a
reasonably prudent person to make an inquiry which would lead to a discovery of the fraud. See id.

Second, regarding the difference between the gas prices used to calculate the Land Office’s royalties
and those used to calculate the Reusses’ royalties, there is no evidence that any of the Rosses learned
that Shell was using a higher price to calculate the royalties it paid to the Land Office than it used to
calculate the Reusses’ royalties. Thus, the Rosses could not have discovered Shell’s fraudulent
concealment merely because the Land Office received royalties on a higher gas price absent their
knowledge of these facts.

Finally, regarding the lower unit prices of the Lasater and Houston wells, Shell provided the unit price
information for the Reusses’ wells in the royalty statements. Shell asserts that if Ross’s “father looked
carefully at the [statements], he would have seen there was a significant difference in the prices [Shell
Western] used to pay royalties for the Lasater and Houston wells.” In support of its argument that this
fact would have caused a reasonably prudent royalty owner to inquire why these unit prices were lower,
Shell relies on three cases: Kerlin, 263 S.W.3d 920; Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732
(Tex. 2001); and HECI Exploration Co. v. Neel, 982 S.W.2d 881 (Tex. 1998).

In Kerlin, the Texas Supreme Court determined that the plaintiff, Sauceda, or her predecessors in
interest, should have discovered the existence of her claims through the exercise of due diligence, even
though the defendant, Kerlin, had fraudulently concealed the basis of the claims. Kerlin, 263 S.W.3d at
925. In 1937, Kerlin had contacted Primitivo Balli, who assisted him in collecting, from various family
members, eleven general warranty deeds containing a reserved royalty interest. Id. at 922. Kerlin told
the family members that he would use the deeds “to clear title to Padre Island, and that each deed
would reserve a 1/64th of 1/8th royalty in each grantor.” Id. In an ensuing lawsuit, Kerlin and his
opposing parties reached a settlement agreement under which Kerlin received “the mineral interests in
1,000 acres of Padre Island located in Nueces County and fee simple title to 20,000 acres of land in the
southern division of the island.” Id. at 923. In 1953, thirteen years after the settlement agreement was
reached, Primitivo Balli wrote two letters to Kerlin requesting documents showing Kerlin’s interest in
Padre Island. Id. Kerlin responded that he had not received title under the Ballis’ deeds and that the
Ballis had no claim to the land. Id. In 1985, a descendant of one of the Balli deed-holders, contacted
Kerlin about the mineral interests reserved in the Balli deeds. Id. at 924. “Kerlin told her that the deeds
were invalid, and that she would have the burden of proof in an expensive, time-consuming lawsuit to
prove otherwise.” Id.

In evaluating the circumstances in Kerlin, the court reasoned that “Kerlin’s receipt of more than 20,000
acres in fee simple and 1,000 mineral acres were matters of public record more than forty years before
the Ballis filed this lawsuit” and the Ballis “were on notice that the warranty deeds their predecessors
executed contained royalty reservation, yet they never received any royalties”; therefore, “[a]s a matter
of law, the Ballis could have discovered the existence of any claims before limitations expired through
the exercise of reasonable diligence.” Id. at 926.

We note that, in Horwood and HECI, the Texas Supreme Court analyzed the discovery rule, not the
doctrine of fraudulent concealment.  Horwood, 58 S.W.3d at 734–35; HECI, 982 S.W.2d at 886–87.
However, in Kerlin, the supreme court determined that its prior discovery rule cases were “instructive” in
addressing the defense of fraudulent concealment and, more specifically, in determining when a plaintiff
could discover claims through the exercise of reasonable diligence. See Kerlin, 263 S.W.3d at 925–26
(“Like fraudulent concealment, the discovery rule does not apply to claims that could have been
discovered through the exercise of reasonable diligence. While the discovery rule differs from
fraudulent concealment in that its applicability is determined on a categorical basis, HECI is
nevertheless instructive in this case.”). Accordingly, we agree with Shell that we should consider
Horwood and HECI in our analysis of the applicability of fraudulent concealment.

In Horwood, royalty owners brought claims against a lessee for the underpayment of royalties as a
result of the lessee’s allegedly improper post-production charges that appeared on royalty statements
that were provided to the owners. 58 S.W.3d at 736–37. In determining the applicability of the discovery
rule, the supreme court noted that royalty owners have “some obligation to exercise reasonable
diligence in protecting their interests,” they may not rely on implied covenants to dispense with the need
to exercise due diligence in enforcing their contractual rights, they should exercise due diligence to
determine whether charges made against royalty payments are “proper and reasonable,” and they
should be “alerted to the need to perform additional investigation to protect their interests” when they
receive statements listing fees charged. Id. at 735–36. The court further noted that royalty owners “may
seek information necessary to assess the propriety of royalty calculations from the lessee” and other
sources. Id. at 737. Turning to the facts before it, the supreme court then concluded that the royalty
owners could have sought information about the improper post-production charges, which appeared on
the royalty statements, from the lessee and from the gas purchasers. Id. (stating that “there were
several sources of information available to [the royalty owners] from which they could have discovered
the propriety of post-production charges”). In sum, the supreme court held that because the
underpayments could have been discovered with the exercise of reasonable diligence, the royalty
owners’ injury was not inherently undiscoverable and, thus, the discovery rule did not apply. Id.

Similarly, in HECI, the supreme court considered the applicability of the discovery rule to royalty
owners’ claims against a lessee for breach of an implied covenant to notify them of a potential claim
against a third party for damage to a common reservoir. 982 S.W.2d at 885. The lessee in HECI had
discovered that a third-party producer on an adjoining lease had damaged the common reservoir
through overproduction, and the lessee had filed, and eventually settled, a lawsuit against the third
party related to this damage. Id. at 884. More than four years after the damage, the royalty owners filed
suit against the lessee, alleging that the lessee violated an implied covenant by failing to notify them of
the need to sue the third party producer. Id. In concluding that the damage to the common reservoir
was not inherently undiscoverable and that the discovery rule did not apply, the court stated that the
royalty owners “had some obligation to exercise reasonable diligence in protecting their interests,”
including exercising reasonable diligence in determining whether a third party operators inflicted
damage to the common reservoir. Id. at 886. The court explained that royalty owners could not remain
“oblivious to the existence of other operators in the area or the existence of a common reservoir” and
noted that “wells visible on neighboring properties may put royalty owners on inquiry.” Id. The court also
noted that “[r]ecords about operations in a common reservoir are also generally available at the
Railroad Commission.” Id. at 886–87.  

 In contrast to the facts presented in Kerlin, Horwood, and HECI, the evidence presented in this case
supports the jury’s findings as to Shell’s fraudulent concealment of its wrongful conduct and as to when
the Rosses, with the exercise of reasonable diligence, could have discovered the wrongful conduct and
their claims. Ross’s father testified that he could not know that Shell was using an arbitrary unit price on
its royalty statements until 2002, when Scott informed him that the unit price “was not what it should
have been.” Although the evidence presented at trial showed that the Rosses could have used
available records to discover that the unit price on the Houston and Lasater wells was lower than the
unit price on their other wells, the fact that the unit price was lower for these two wells would not have
necessarily caused a reasonably prudent person to inquire about the lower price. Graham testified that
the price of the natural gas could have been affected by the heat value, i.e., BTU, of the gas. Although
the royalty statements contained Shell’s representations about the amount of gas produced, they did
not state the BTU of the gas. Graham testified that without knowing the BTU of the gas, an ordinary
royalty owner would have no reason to believe that the unit price is incorrect. Berghammer, Shell’s
expert, also testified that “you would need the BTU to do an accurate comparison.”

Accordingly, we hold that the evidence is legally sufficient to support the jury’s finding that the Rosses
should, “in the exercise of reasonable diligence, have discovered that Shell failed to pay royalty in
accordance with the Reuss Lease” for reasons “other than the ‘weighted average/blended price’ issue”
in “2002.”

 Regarding the “February 6, 2006” finding, Graham testified that, by reviewing Shell and El Paso
Natural Gas internal documents, he first discovered Shell’s use of a weighted average price after he
began working on the Ross’s case in November 2005. Plaintiff’s Exhibit 27, the billing records for Ross’s
trial counsel, indicates that the first meeting between Graham and Ross’s trial counsel occurred on
February 6, 2006. In sum, unlike Kerlin, Horwood, and HECI, there is evidence in the record from which
the jury could have reasonably concluded that there were no other sources of information from which
the Rosses could have discovered (prior to the dates found by the jury) that Shell was under paying
royalties under the lease for the reasons described above.  

Accordingly, we further hold that the evidence is legally sufficient to support the jury’s finding that the
Rosses should, “in the exercise of reasonable diligence, have discovered that Shell failed to pay royalty
in accordance with the Reuss Lease” on the weighted average issue on “Feb. 6, 2006.”

We overrule Shell’s third and fifth issues.

Constructive Notice Instruction

In its sixth issue, Shell argues that the trial court erred in not including its instruction on constructive
notice because actual knowledge of Shell’s underpayment of royalties “could have been acquired by
examining public records.”

It is well-established that litigants have a right to a fair trial before a jury that is properly instructed on
the issues authorized and supported by the law governing the case. Harris County v. Smith, 96 S.W.3d
230, 234 (Tex. 2002). It is the duty of the trial court to submit only those questions, instructions, and
definitions raised by the pleadings and the evidence. Id. at 236; see Tex. R. Civ. P. 278. A trial court’s
refusal to submit an instruction is reversible error if it “probably caused the rendition of an improper
verdict.” Tex. R. App. P. 44.1(a)(1).

Constructive notice creates an irrebuttable presumption of actual notice in some circumstances. HECI
Exploration Co, 982 S.W.2d at 887. In support of its argument that the Rosses could have been found
to have had constructive notice because actual knowledge of the fraud could have been acquired by
examining public records available at the Land Office, Shell relies on Mooney v. Harlin, 622 S.W.2d 83
(Tex. 1981), and Sherman v. Sipper, 152 S.W.2d 319 (Tex. 1941). However, these cases involve
specific types of public records in specific situations. See Mooney, 622 S.W.2d at 85 (“Persons
interested in an estate admitted to probate are charged with notice of the contents of the probate
records.”); Sherman, 152 S.W.2d at 321 (“Equally well settled is the rule that where a person had a
right to property, and he claims fraudulent statements were made concerning the title to such property,
when the records relating to such title are open to him he must exercise reasonable diligence to
discover such defect . . . .”). In both cases, the Court found a compelling rationale for imposing
constructive notice. HECI Exploration Co., 982 S.W.2d at 886–87. However, when the rationale for
imposing constructive notice is lacking, public records have not been held to create an irrebuttable
presumption of notice. Id. at 887; see Andretta v. West, 415 S.W.2d 638, 642 (Tex. 1967); see also
Little v. Smith, 943 S.W.2d 414, 421 (Tex. 1997).

Having concluded that the Rosses could not have reasonably discovered Shell’s fraudulent
concealment based on public records at the Land Office, we further conclude that these public records
did not create an irrebuttable presumption of notice. Therefore, the proposed instruction was
inapplicable to the situation presented by the evidence in this case. Accordingly, we hold that the trial
court did not err in not submitting Shell’s proposed instruction on constructive notice.

We overrule Shell’s sixth issue.

Conclusion

We affirm the judgment of the trial court.

                                                              
Terry Jennings

                                                              Justice

Panel consists of Justices Jennings, Alcala, and Higley.

Justice Alcala, dissenting.