Cite as 2021 Ark. 179 Reason: I attest to the accuracy and integrity of this document SUPREME COURT OF ARKANSAS Date: 2022.06.15 13:49:40 No. CV-21-163 -05'00' Adobe Acrobat version: 2022.001.20117 Opinion Delivered: October 14, 2021
DAN LARRY PENNINGTON; NORMA J. BRYANT; AARON A CERTIFIED QUESTION FROM PARISH BLACK, AS TRUSTEE OF THE UNITED STATES DISTRICT THE RALPH J. AND REBA J. FAMILY COURT FOR THE EASTERN TRUST; AND AARON PARISH DISTRICT OF ARKANSAS BLACK, AS TRUSTEE OF THE REBA J. PARISH TRUST, INDIVIDUALLY HONORABLE LEE P. RUDOFSKY, AND ON BEHALF OF A CLASS OF UNITED STATES DISTRICT SIMILARLY SITUATED COURT JUDGE INDIVIDUALS PETITIONERS/PLAINTIFFS CERTIFIED QUESTION ANSWERED. V.
BHP BILLITON PETROLEUM (FAYETTEVILLE), LLC; AND MMGJ ARKANSAS UPSTREAM, LLC RESPONDENTS/DEFENDANTS
RHONDA K. WOOD, Associate Justice
The five-year statute of limitations for breach of contract starts when a plaintiff can
first bring the cause of action to a successful conclusion. Here, the contract required monthly
oil-and-gas royalty payments. Plaintiffs alleged defendants had been underpaying those
royalties for more than five years. We accepted a certified question from federal court
whether Arkansas law prevents plaintiffs from pursuing their breach-of-contract claim when
the first breach occurred outside the statute-of-limitations period. We conclude a separate
statute-of-limitations period began as each monthly royalty payment became due. I. Factual Background
This case arose when oil-and-gas royalty holders, plaintiffs, sued their lessees,
defendants, in federal district court. Their primary cause of action was breach of contract.
Under the contract, defendants would extract natural gas from wells, prepare it for shipment,
and transport it for sale at an interstate pipeline. Once the natural gas arrived at the pipeline,
the gross proceeds were calculated based on the weighted average sales price, or WASP.
Then, either defendants or their agents would pay plaintiffs a monthly royalty based on the
gross proceeds.
According to the complaint, defendants improperly deducted certain costs from the
WASP for “midstream services.” Examples of these services are gathering, treating, and
transporting the natural gas from the wells to the pipelines. This deduction led to a lower
monthly gross-proceeds total and lower royalty payments. Plaintiffs alleged this post-
production cost deduction breached defendants’ contractual obligations. In response,
defendants raised the affirmative defense of statute of limitations.
Following the affirmative defense, the federal court faced an unsettled question of
law. The parties agreed the five-year statute of limitations for written contracts applied. Ark.
Code Ann. § 16-56-111(a) (Repl. 2005). Still, they disagreed over interpreting Arkansas
law to their contract. Defendants argued any alleged breach began when the first
underpayment occurred, which was more than five years before plaintiffs filed their
complaint. Plaintiffs countered that every monthly underpayment was a separate breach, and
they could pursue any breaches within five years of their action.
2 The federal district court then found no Arkansas case definitively settled the issue. Out of
deference to our state supreme court, it certified the following question of law:
In the oil and gas leases at issues in this case, does the five-year statute of limitations set forth in Arkansas Code section 16-56-111(a) bar Plaintiffs from bringing a breach of contract lawsuit for alleged underpayments of monthly royalties that occurred within the statute of limitations period because similar underpayments of monthly royalties took place outside of the limitations period?
We accepted certification and answer the question in the negative.
II. Law and Analysis
We agree with the parties that the relevant statute of limitations for written
instruments is five years: “Actions to enforce written obligations, duties, or rights . . . shall
be commenced within five (5) years after the cause of action shall accrue.” Ark. Code Ann.
§ 16-56-111(a). And a cause of action for breach of contract accrues “when the plaintiff
could have first maintained the action to a successful conclusion.” Dupree v. Twin City Bank,
300 Ark. 188, 191, 777 S.W.2d 856, 858 (1989). Said another way, “[a] cause of action
accrues the moment the right to commence an action comes into existence, and the statute
of limitations commences to run from that time.” Ray & Sons Masonry Contractors, Inc. v.
U.S. Fid. & Guar. Co., 353 Ark. 201, 216, 114 S.W.3d 189, 198 (2003).
The issue before us is, when did plaintiffs’ cause of action begin on any alleged breach
of monthly royalty payments? Typically, for contracts that require installment payments like
promissory notes, we have held that a discrete cause of action arises from each
underpayment. See Linke v. Kirk, 204 Ark. 393, 162 S.W.2d 39 (1942); Karnes v. Marrow,
315 Ark. 37, 864 S.W.2d 848 (1993). In Linke, the borrowers promised to repay a $300
promissory note in six annual installments of $50; the first installment was due in October
3 1930, and the last was due in October 1935. 204 Ark. at 394, 162 S.W.2d at 40. Borrowers
never made payments, but creditors did not sue until October 1940. Id. In this instance, we
held that the five-year statute of limitations did not bar recovery for the final installment
from 1935 because “[w]here a note or a bill is made payable by installments, the statute
attaches to and begins to run upon each installment as it become due.” Id. at 395, 162
S.W.2d at 40–41. We applied this rule in Karnes, holding that a deficiency judgment
following foreclosure could not include any underpayments exceeding five years from when
the lawsuit was filed. 315 Ark. at 44, 864 S.W.2d at 851. Both cases hold that the statute of
limitations begins each time a borrower fails to meet a monthly obligation under a
promissory note; assuming the five-year limitations period has not expired from that date,
the creditor can recover.
This certified question is different because the parties are not in a debtor-creditor
relationship. And no Arkansas case has directly addressed whether the above principle applies
to underpayments of monthly oil-and-gas royalties. Defendants alleged the breach accrued
outside the limitations period because their conduct amounted to a failure to perform. This
alleged breach violated a single obligation to properly calculate royalty payments. Any failure
in that regard started more than five years before plaintiffs filed their complaint, and thus
the limitations period had expired. Defendants cite two court of appeals cases as support.
But we decline to apply these cases to the current facts as neither case involved the monthly
payment obligations like those at issue here. See Beckworth v. Diamante, Priv. Membership Golf
Club, 2010 Ark. App. 814, 379 S.W.3d 752 (involving lawsuit against property developer
4 over sale of lots to third parties); Phillips v. Union Pac. R.R. Co., 89 Ark. App. 223, 201
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Cite as 2021 Ark. 179 Reason: I attest to the accuracy and integrity of this document SUPREME COURT OF ARKANSAS Date: 2022.06.15 13:49:40 No. CV-21-163 -05'00' Adobe Acrobat version: 2022.001.20117 Opinion Delivered: October 14, 2021
DAN LARRY PENNINGTON; NORMA J. BRYANT; AARON A CERTIFIED QUESTION FROM PARISH BLACK, AS TRUSTEE OF THE UNITED STATES DISTRICT THE RALPH J. AND REBA J. FAMILY COURT FOR THE EASTERN TRUST; AND AARON PARISH DISTRICT OF ARKANSAS BLACK, AS TRUSTEE OF THE REBA J. PARISH TRUST, INDIVIDUALLY HONORABLE LEE P. RUDOFSKY, AND ON BEHALF OF A CLASS OF UNITED STATES DISTRICT SIMILARLY SITUATED COURT JUDGE INDIVIDUALS PETITIONERS/PLAINTIFFS CERTIFIED QUESTION ANSWERED. V.
BHP BILLITON PETROLEUM (FAYETTEVILLE), LLC; AND MMGJ ARKANSAS UPSTREAM, LLC RESPONDENTS/DEFENDANTS
RHONDA K. WOOD, Associate Justice
The five-year statute of limitations for breach of contract starts when a plaintiff can
first bring the cause of action to a successful conclusion. Here, the contract required monthly
oil-and-gas royalty payments. Plaintiffs alleged defendants had been underpaying those
royalties for more than five years. We accepted a certified question from federal court
whether Arkansas law prevents plaintiffs from pursuing their breach-of-contract claim when
the first breach occurred outside the statute-of-limitations period. We conclude a separate
statute-of-limitations period began as each monthly royalty payment became due. I. Factual Background
This case arose when oil-and-gas royalty holders, plaintiffs, sued their lessees,
defendants, in federal district court. Their primary cause of action was breach of contract.
Under the contract, defendants would extract natural gas from wells, prepare it for shipment,
and transport it for sale at an interstate pipeline. Once the natural gas arrived at the pipeline,
the gross proceeds were calculated based on the weighted average sales price, or WASP.
Then, either defendants or their agents would pay plaintiffs a monthly royalty based on the
gross proceeds.
According to the complaint, defendants improperly deducted certain costs from the
WASP for “midstream services.” Examples of these services are gathering, treating, and
transporting the natural gas from the wells to the pipelines. This deduction led to a lower
monthly gross-proceeds total and lower royalty payments. Plaintiffs alleged this post-
production cost deduction breached defendants’ contractual obligations. In response,
defendants raised the affirmative defense of statute of limitations.
Following the affirmative defense, the federal court faced an unsettled question of
law. The parties agreed the five-year statute of limitations for written contracts applied. Ark.
Code Ann. § 16-56-111(a) (Repl. 2005). Still, they disagreed over interpreting Arkansas
law to their contract. Defendants argued any alleged breach began when the first
underpayment occurred, which was more than five years before plaintiffs filed their
complaint. Plaintiffs countered that every monthly underpayment was a separate breach, and
they could pursue any breaches within five years of their action.
2 The federal district court then found no Arkansas case definitively settled the issue. Out of
deference to our state supreme court, it certified the following question of law:
In the oil and gas leases at issues in this case, does the five-year statute of limitations set forth in Arkansas Code section 16-56-111(a) bar Plaintiffs from bringing a breach of contract lawsuit for alleged underpayments of monthly royalties that occurred within the statute of limitations period because similar underpayments of monthly royalties took place outside of the limitations period?
We accepted certification and answer the question in the negative.
II. Law and Analysis
We agree with the parties that the relevant statute of limitations for written
instruments is five years: “Actions to enforce written obligations, duties, or rights . . . shall
be commenced within five (5) years after the cause of action shall accrue.” Ark. Code Ann.
§ 16-56-111(a). And a cause of action for breach of contract accrues “when the plaintiff
could have first maintained the action to a successful conclusion.” Dupree v. Twin City Bank,
300 Ark. 188, 191, 777 S.W.2d 856, 858 (1989). Said another way, “[a] cause of action
accrues the moment the right to commence an action comes into existence, and the statute
of limitations commences to run from that time.” Ray & Sons Masonry Contractors, Inc. v.
U.S. Fid. & Guar. Co., 353 Ark. 201, 216, 114 S.W.3d 189, 198 (2003).
The issue before us is, when did plaintiffs’ cause of action begin on any alleged breach
of monthly royalty payments? Typically, for contracts that require installment payments like
promissory notes, we have held that a discrete cause of action arises from each
underpayment. See Linke v. Kirk, 204 Ark. 393, 162 S.W.2d 39 (1942); Karnes v. Marrow,
315 Ark. 37, 864 S.W.2d 848 (1993). In Linke, the borrowers promised to repay a $300
promissory note in six annual installments of $50; the first installment was due in October
3 1930, and the last was due in October 1935. 204 Ark. at 394, 162 S.W.2d at 40. Borrowers
never made payments, but creditors did not sue until October 1940. Id. In this instance, we
held that the five-year statute of limitations did not bar recovery for the final installment
from 1935 because “[w]here a note or a bill is made payable by installments, the statute
attaches to and begins to run upon each installment as it become due.” Id. at 395, 162
S.W.2d at 40–41. We applied this rule in Karnes, holding that a deficiency judgment
following foreclosure could not include any underpayments exceeding five years from when
the lawsuit was filed. 315 Ark. at 44, 864 S.W.2d at 851. Both cases hold that the statute of
limitations begins each time a borrower fails to meet a monthly obligation under a
promissory note; assuming the five-year limitations period has not expired from that date,
the creditor can recover.
This certified question is different because the parties are not in a debtor-creditor
relationship. And no Arkansas case has directly addressed whether the above principle applies
to underpayments of monthly oil-and-gas royalties. Defendants alleged the breach accrued
outside the limitations period because their conduct amounted to a failure to perform. This
alleged breach violated a single obligation to properly calculate royalty payments. Any failure
in that regard started more than five years before plaintiffs filed their complaint, and thus
the limitations period had expired. Defendants cite two court of appeals cases as support.
But we decline to apply these cases to the current facts as neither case involved the monthly
payment obligations like those at issue here. See Beckworth v. Diamante, Priv. Membership Golf
Club, 2010 Ark. App. 814, 379 S.W.3d 752 (involving lawsuit against property developer
4 over sale of lots to third parties); Phillips v. Union Pac. R.R. Co., 89 Ark. App. 223, 201
S.W.3d 439 (2005) (involving lawsuit between employee and employer).
Instead, the royalty payments here are more like monthly installment payments in a
debtor-creditor relationship. Each monthly underpayment constituted a separate cause of
action for breach of contract. This view tracks our authority from Linke and Karnes.
Other jurisdictions reached similar conclusions on this issue. For example, the Sixth
Circuit addressed an issue where plaintiffs alleged defendants underpaid gas royalties for
more than ten years. Lutz v. Chesapeake Appalachia, LLC, 717 F.3d 459, 462 (6th Cir. 2013).
Applying Ohio law, the court held each monthly underpayment created a separate cause of
action. Id. at 470. The court reasoned that each underpayment caused a separate wrong that,
on its own, satisfied all the elements of a breach-of-contract claim. Id. at 469.
In addition, Texas and California courts reached the same conclusion about monthly
oil-and-gas royalty underpayments. The Texas court noted that “if the terms of an
agreement call for periodic payments during the course of the contract, a cause of action for
such payments may arise at the end of each period, before the contract is completed.” Lyle
v. Jane Guinn Revocable Tr., 365 S.W.3d 341, 355 (Tex. Ct. App. 2010). The California
court held that a monthly underpayment constituted breach of contract and cause of action
accrued once the lessee “made the incorrect payment or delivery for that month.” Armstrong
Petroleum Corp. v. Tri-Valley Oil & Gas Co., 116 Cal. App. 4th 1375, 1391 (Cal. Ct. App.
2004).
Here, the contracts required defendants to make a monthly royalty payment to
plaintiffs. The provisions required defendants to remit payment based on gross proceeds, a
5 monthly calculation. Plaintiffs alleged defendants allowed improper deduction of costs. This
alleged breach happened during the monthly calculation and payment remittance. The
damages element of breach of contract would have been established monthly and,
potentially, in a different amount each month. We find these are separate and singular
breaches under Arkansas law. Thus, plaintiffs would have a separate claim for each month
that an underpayment occurred. And the clock would begin to run, for statute-of-limitations
purposes, each time defendants made an underpayment. The existence of monthly
underpayments of royalties outside the limitations period does not bar recovery for
underpayments within the limitations period under Arkansas law.
Certified question answered.
Barton and Burrows, LLC, by: George A. Barton; and Davidson Law Firm, by: Stephen
L. Gershner, for appellants.
Quattlebaum, Grooms & Tull PLLC, by: Michael B. Heister and R. Ryan Younger, for
appellees.