Shell Oil Co. v. Ross

357 S.W.3d 8, 2010 WL 670549
CourtCourt of Appeals of Texas
DecidedApril 23, 2010
Docket01-08-00713-CV
StatusPublished
Cited by6 cases

This text of 357 S.W.3d 8 (Shell Oil Co. v. Ross) is published on Counsel Stack Legal Research, covering Court of Appeals of Texas primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Shell Oil Co. v. Ross, 357 S.W.3d 8, 2010 WL 670549 (Tex. Ct. App. 2010).

Opinions

OPINION

TERRY JENNINGS, Justice.

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 [12]*12insufficient 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 “l/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,1 it received 62.5% of the natural gas produced by the Lasater well. Thus, as per Garrison, if the Lasater well produced 10,000 mcf2 of natural gas, Shell received 6,250 mcf of natural gas and Forest Oil received 3,750 mcf.

[13]*13Garrison 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.

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357 S.W.3d 8, 2010 WL 670549, Counsel Stack Legal Research, https://law.counselstack.com/opinion/shell-oil-co-v-ross-texapp-2010.