Opinion ID: 2829261
Heading Depth: 3
Heading Rank: 1

Heading: Conclusive Evidence of Emerald’s and

Text: the Miesches ’ Knowledge of Problems in the Field We do not reach the question of the impact of the discovery rule or fraudulent concealment on the limitations period for the pending claims because Emerald and the royalty owners had actual knowledge more than two years before they filed suit of Exxon’s alleged wrongful actions and that those actions caused problems or injuries to their interests. The evidence of their actual knowledge is in documents written by or on behalf of Emerald and the Miesches , and it is conclusive. We review the relevant, undisputed facts. Exxon completed 121 wells in the O’Connor Field and produced both oil and gas over the nearly forty years the parties did business together. By the mid 1980s mineral prices dropped, and production in the Lease declined. Exxon believed the Field was becoming unprofitable at the fifty percent royalty and attempted to negotiate a lower royalty with the Miesches . The effort was unavailing, and in the late 1980s Exxon plugged wells in anticipation of terminating the Lease. The royalty owners were not obligated to accept a lower royalty and they were not convinced that the Field was uneconomic. The Miesches advised Exxon by letter dated September 12, 1990 that they had received notice that it intended to plug and abandon six wells referenced in the letter. The letter was a “formal demand not to plug the above referenced six wells, as such would cause us irreparable harm and commit waste,” and “would be contrary to public policy and laws.” Two weeks earlier, counsel for the Miesches had also warned Exxon in writing that it would “be sued under the terms of the lease and the common law, both for present breach of contract and anticipatory damages” if it plugged and abandoned wells in the Field capable of producing in paying quantities. In their Fourth Amended Petition in Intervention (the live pleading at trial), the royalty owners alleged, separate from their claim for breach of an implied covenant under the Lease to reasonably develop the Field, that they “lost royalties due to [Exxon’s] holding the lease but plugging wells instead of producing them.” Therefore, by September 1990, the royalty owners had actual knowledge of facts underlying their claim of waste by Exxon for failure to produce available reserves of oil and gas from existing wells on the O’Connor Lease. Notwithstanding this evidence, even if we assume that the royalty owners were not aware of problems allegedly impacting their lease interests by Exxon’s plugging the wells by the time of the September 1990 letter, they assuredly were aware by August 16, 1991. That is the date of Exxon’s letter advising them that it had completed plugging and abandoning the remaining wells in the O’Connor Field. Accordingly, limitations forecloses the royalty owners’ waste claim. On rehearing, the royalty owners argue that their claim for waste actually focused on intentional damage or sabotage to wells in the Lease. 8 The first claim, discussed above, was waste occasioned by abandoning wells that were alleged to still be capable of producing in paying quantities. The second claim was for waste allegedly caused by sabotaging the wells as they were plugged. The royalty owners alleged that Exxon intentionally damaged the wells to hinder or preclude subsequent re-entry of the wells causing increased re-entry costs, loss of some wells necessitating drilling new wells in some instances, and reduction in revenues they could recover from the O’Connor Field. The wrongful conduct alleged included improperly cutting production casing in the wells, placing junk in the wells, placing plugs in the wells below the surface at undisclosed locations, and pumping contaminants into the wells. They pled that Exxon’s conduct damaged the leasehold and interfered with the business opportunity of the royalty owners to further develop the Field with another operator. Assuming these allegations are true, which we must for limitations analysis, Emerald and the royalty owners were aware of or suspected problems resulting from Exxon’s conduct well before they filed suit. In a June 8, 1994 report, Emerald advised the royalty owners that it discovered that Exxon improperly cut casing in a number of wells and there was “junk” in at least one well Exxon had plugged. The Miesches also acknowledge that Emerald had discovered junk in at least one other well. The royalty owners argue that Emerald’s report to them in June 1994 discussing cut casing and junk in a wellbore did not raise suspicion and does not constitute knowledge of damage to the wells. They also claim that the June 1994 letter does not say that Exxon put junk in the wells. The royalty owners’ arguments contradict conclusive evidence from the trial, which we set forth in some detail below. The royalty owners hired Emerald to redevelop a portion of the O’Connor Field after the Lease was terminated. Emerald prepared the June 1994 report for the royalty owners on the status of its efforts to reopen part of the Field. It states, in relevant part: • “casing had been cut by Exxon at 1400'” for the M.E. O’Connor A-8 well, • “[c] asing had been cut by Exxon” for the M.E. O’Connor B-11 well, • “[c] asing had been cut by Exxon” for the M.E. O’Connor E-3 well, • “[c] asing was cut by Exxon when plugged” for the M.E. O’Connor A-5 well, • “[c] asing was cut when plugged. . . Could not drill past cuts at 1350'” for M.E. O’Connor B-1 well, • “[c] asing cut by Exxon when plugged” for M.E. O’Connor E-6 well, • “[c] asing cut by Exxon when plugged. . . . Casing shifted and collapsed” for M.E. O’Connor A-3 well, and • Emerald “encountered junk in hole” for the M.E. O’Connor A-10 well. 9 In addition to junk in well A-10, the report points out that Emerald discovered cut casing in seven wells prior to June 8, 1994. Emerald’s principal, Glenn Lynch, testified at length at trial that leaving cut casing in oil wells before sealing them with cement is an improper plugging technique that creates costly and time-consuming problems to re-entering the well for further mineral production, rendered some plugged wells impossible to re-enter and, he believed, was prohibited by Railroad Commission rules. 1 0 Lynch testified that if casing is cut in the wellbore, it should be pulled. Emerald found cut casing in “the first couple of wells” it attempted to re-enter when it began re-entry of the Field in May 1993. The alleged junking of the wells and cutting of production casing in the wellbores prior to capping the wells is the conduct that Emerald and the royalty owners characterize as deliberate sabotage of the wells, as violations of Texas laws and Railroad Commission regulations, and as constituting “illegal steps to intentionally and systematically damage the wells to prevent re-entry.” There is no dispute that Exxon was responsible for plugging the wells in the Field, and the June 1994 report identifies Exxon throughout the report as the party that had cut well casing in plugging the wells in the O’Connor Field. That was no surprise to Emerald or the royalty owners because Exxon had been the operator in the O’Connor Field for nearly four decades. The royalty owners argue that they did not appreciate the significance of the statements in the report Emerald sent to them in June 1994. Neither the Miesches nor Emerald contest that the damages Exxon allegedly caused to the leasehold occurred before 1992 or that Emerald and the Miesches knew of improper plugging, cut casing, and junk placed in capped wells in the Field before August 1994, at least to the extent documented in the June 1994 report. The Miesches contend that the evidence of cut casing is not notice that the wells were damaged or the Field was impaired. However, their live pleadings alleged that junk was left in the wellbores, casing was cut in multiple places in the well holes, and these acts of Exxon were the proximate cause of damages to the royalty owners. By June 1994, the royalty owners had actual knowledge of this alleged injury-causing conduct. The September 1990 letter (from the Miesches to Exxon threatening to sue for waste if wells were plugged) and the June 1994 report (the Emerald report to the Miesches alleging damage to the wells) by their terms conclusively establish that the royalty owners knew or suspected there were problems or damages allegedly caused by Exxon to their interests in the O’Connor Lease. The limitations period began to run no later than September 1990 on the first waste claim and no later than June 1994 on the second waste claim. Having actual notice of such problems, the royalty owners had two years under the applicable statutes of limitations to investigate the problems and file suit, or not. Emerald contracted with the royalty owners in May 1993 to re-enter wells and further develop a portion of the Field. It admits to encountering problems in its initial re-entry attempts in 1993. The June 1994 report, which lists the re-entry date for some of the wells, expressly notes that re-entry was commenced in the prior year (1993) for several wells (A-5, B-1, and E-6) and that Exxon had cut the casing in these wells. Emerald also acknowledges that it performed “due diligence in accord with industry practice by reviewing Exxon’s sworn Railroad Commission filings” before entering the lease with the Miesches in May 1993. And, Glenn Lynch, a principal in Emerald, testified that eighty to ninety percent of the Commission filings, on which Emerald relied, were inaccurate and that cut casing caused significant problems to re-entry. Thus, Emerald’s 1994 report indicates its belief that Exxon’s actions allegedly caused further development in the Field to be more difficult, more costly, or impossible and that many problems in the wells were not listed in Railroad Commission reports, at least some of which Emerald had admittedly reviewed prior to entering the lease in 1993. Emerald filed suit in July 1996, more than two years after the accrual of its causes of action for tortious interference with business opportunity and for negligent misrepresentation arising from allegedly false Railroad Commission filings. The Miesches claimed damages for waste when they intervened in August 1996, more than two years after the September 1990 letter and the June 1994 report. These claims were untimely. The court of appeals concluded that the royalty owners were not on notice of the damage to the Lease until January 1995 when the “[royalty owners] knew of enough damage to know that the problems regarding the wells were not isolated.” 180 S.W.3d at 317 (citation omitted). The applicable legal standard is the statute of limitations begins to run when a party has actual knowledge of a wrongful injury. Knott , 128 S.W.3d at 221 . Once a claimant learns of a wrongful injury, the statute of limitations begins to run even if the claimant does not yet know “the specific cause of the injury; the party responsible for it; the full extent of it; or the chances of avoiding it.” PPG Indus., Inc. v. JMB/Houston Ctrs . Partners Ltd. P’ship , 146 S.W.3d 79, 93-94 (Tex. 2004) (internal citations omitted); Velsicol Chem. Corp. v. Winograd , 956 S.W.2d 529, 531 (Tex 1997) (holding that the statute of limitations on claim for damage to real property ran as soon as property owner knew of presence of a hazardous chemical on the property, not when the residue exceeded regulatory contamination levels). Emerald and the Miesches had actual knowledge by June 1994 that there were problems re-entering a number of wells in the O’Connor Field due to cut casing or junk. After being put on notice of the alleged harm or injury-causing actions, the claimant must exercise reasonable diligence to investigate the suspected harm and file suit, if at all, within the limitations period. HECI Exploration Co. v. Neel , 982 S.W.2d 881, 886 (Tex. 1998) (holding that “[r] oyalty owners cannot be oblivious” to potentially injurious activity taking place in the field); KPMG Peat Marwick v. Harrison Cnty . Housing Fin. Corp. , 988 S.W.2d 746, 750 (Tex. 1999) (noting that a plaintiff’s known loss from a wrongful premature sale of assets should have caused the plaintiff to investigate the mismanagement of the assets as well as a different defendant’s involvement in the mismanagement); Mooney v. Harlin , 622 S.W.2d 83, 85 (Tex. 1981) (holding that the statute of limitations runs from the time fraud could have been discovered). Knowing that there were problems with re-entering wells in 1993 and documenting them in the June 1994 report, put Emerald and the Miesches on notice of actual or potential injury-causing conduct. Therefore, for limitations purposes, they had a duty to diligently investigate the suspected similar harm by the same operator in the O’Connor Field and file suit on these claims within two years of such notice. The logic of the court of appeals’ holding would create serious issues with application of legislated deadlines for filing actions where injury-causing conduct is known but the full extent of the damages may not be known. In this case, the law accorded both Emerald and the Miesches the statutory two-year period to investigate the problems raised by Emerald and to file claims for damages arising from Exxon’s alleged conduct in the Field. The limitations period began when facts came into existence that authorized them to seek a judicial remedy. See Knott , 128 S.W.3d at 221 . A different rule that delays accrual of the cause of action until the putative claimant knew of enough damage to know the problems regarding the wells were not isolated, would cause inconsistent and illogical results. Such a rule would extend the limitations period for a suit arising from the eight wells, known from the June 1994 report to be damaged, beyond the two-year period because, even though those wells were known to be damaged, limitations would not run until many more wells were known to be damaged. Alternatively, application of such a rule would mean that limitations may begin to run on the wells with known damage but not on other wells in the Field, setting up multiple limitations periods to be applied to different wells in the same Field for the same types of damage caused by the same operator during the same period of time, and undermining or eviscerating the legal duty of an injured party to be diligent in protecting his interests. This is not to mention the difficult and litigious problem of determining when there are enough problems that they are not considered to be isolated. Here, unlike PPG Industries , Emerald alleged consistent problems with a high percentage of wells from the beginning of its re-entry efforts. See 146 S.W.3d at 93–94. For these and other reasons, we have held that when a person is on notice of injury-causing conduct, the claimant has a duty to use reasonable diligence to discover if he has a claim and, if so, to file it within the limitations period to preserve his right to recover . HECI Exploration Co. , 982 S.W.2d at 886 .