The Oklahoma Supreme Court Granted Certiorari to Decide the Issue of When the Statute of Limitations Begins to Run For Disputes Arising Over the Payment of an Overriding Royalty Interest.
The Oklahoma Supreme Court granted certiorari on a case appealed from the District Court of Beaver County to determine if the plaintiff timely asserted their claim to payments of overriding royalties on production from a recently-developed formation.1 "In other words, does a statute of limitations defeat their claim for payment of oil-and-gas royalties?"2 The plaintiff argued that its cause of action arose in 2012, when the current operator refused to pay plaintiff overriding royalty interest on leases which were filed in 1973, which the plaintiff argued were valid leases. However, the defendant claims that leases which were filed in 1984 gave the plaintiff notice of a competing claim, so the statute of limitations began to run as of the filing date of the 1984 leases. The District Court found that the cause of action accrued in 2012.3 The Court of Civil Appeals reversed, finding the statute of limitations began to run in 1984.4 Consequently, the claim was barred. The Oklahoma Supreme Court reversed the decision of the Court of Civil Appeals, holding that the lawsuit was timely filed as the action did not accrue until after the request for payment was denied from production in the disputed formation.5
BACKGROUND
The predecessors to the plaintiff (hereinafter collectively referred to as “Arnold") obtained oil and gas leases in Beaver County in 1973. Subsequently, these leases were assigned, and Arnold reserved an overriding royalty interest burdening the leases. Prior to the expiration of the primary term, two wells were drilled and completed producers from the Chester formation. These wells have continuously produced since that time “and at no point since then has Arnold ever stopped receiving payments on its overriding royalty interest in those producing wells."6 It was also noted that these leases contained a surrender clause and an unusual exception clause.7 This clause will be the cause of conflict in later years.
In 1984, the operator of the wells obtained new leases and a well was recompleted as to the Chester formation, which had originally been completed as to the Lower Chester formation. In 1999, Arnold was informed that the 1984 leases were held as to the deeper rights, but the Chester formation and shallower rights were still held by the 1973 leases.8 Therefore, Arnold continued to receive payments pursuant to the reserved overriding royalty interest.
In 2012, Cabot Oil & Gas (hereinafter “Cabot"), the successor operator of the wells, completed two horizontal wells as to the Marmaton formation. Arnold claimed it was owed payments by virtue of the overriding royalty interest reserved in the 1973 leases, which were held as to the Marmaton formation as a result of the exception clause.9 Cabot denied the request and Arnold filed suit. A key argument before the trial court was if the statute of limitations had run out on Arnold’s claim. The District Court found that the case was timely filed. However the Court of Civil Appeals reversed it, holding that the 15-year statute of limitations had expired prior to the time Arnold filed suit. Arnold appealed this decision and the Oklahoma Supreme Court granted certiorari.
The Oklahoma Supreme Court determined that the primary issue was “when did Arnold’s cause of action arise?"10 In its analysis, the Court reviewed its prior holdings and based on those holdings, held that the cause of action arose when the injury occurred, which was in July 2012 when Arnold claimed rights to the Marmaton formation and was denied payment. The existence of the 1984 leases and the mere fact that they were recorded was not enough to give rise to this dispute. The Marmaton formation had not yet been produced. Also, the Court pointed out that Arnold had never stopped receiving payments on the overriding royalty interest attributable to the Chester formation.11 It was also established that in 1999 Arnold had inquired about the 1984 leases and was told the interests impacted were only the deep rights, not the shallow rights which had been reserved by Arnold.12 Because the Marmaton formation was neighboring the Chester formation and therefore held by the older leases, there was no reason for Arnold to file suit. There was not a controversy at that time. The controversy only arose in 2012 when Cabot refused to pay Arnold.
The court further went into further analysis as to the impact the exception clause had on its decision.13 Ultimately, the Court held that based on the plain language in the leases, due to the conflict with existing production from the Chester formation, the Marmaton formation would remain held by production as to the leases in question. Neither Cabot nor its predecessors could have unilaterally released the leases as to the Marmaton formation.14 Especially when Arnold was continuously paid on those leases for over 40 years.15
IMPLICATIONS
This case addresses head on the holdings of the Oklahoma Supreme Court in Scott v. Peters, 2016 OK 38, and Calvert v. Swinford, 2016 OK 100, each ruling on a statute of limitations as to deeds filed of record. However, the Court distinguished those cases, in that in the Scott and Calvert cases, the grantors were attempting to subvert the statute of limitations.16 The grantors in those cases were in a position to understand everything that was negotiated and have every opportunity to review the documents. In the case under discussion, Arnold did have notice of the leases, but there was not anything in the leases, nor anything discussed in conversations with the operator, that would have indicated the Marmaton formation was released. Therefore, the first time there was notice of such a release was in 2012 after payments were refused. The dealings between the parties and the record did not offer any notice such that Arnold should have been aware of such a release. Ultimately, the injury did not occur until Arnold inquired about the payment of the overriding royalty interests and was denied. It was at that point, opined the Court, that the statute of limitations began to run.
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1 Claude C. Arnold Non-Operated Royalty Interest Properties v. Cabot Oil & Gas, 2021 OK 4, ¶ 1, __ P.3d __.
2Id.
3Id. at ¶ 8.
4Id. at ¶ 9.
5Id. at ¶ 2.
6Id. at ¶ 5.
7This clause stated “provided, however, that Lessee shall not be obligated to release any formation, horizon or zone, the production from which would conflict with any existing producing horizon, formation or zone." Id. at ¶ 4.
8Id. at ¶ 6.
9The argument from Arnold was that there was a conflict that was caused as a result of the continuous production from the 1973 wells completed as to the Chester formation, so the Marmaton formation was held by those leases. Id. at ¶ 7.
10Id. at ¶ 12.
11Id. at ¶ 16.
12Id.
13Id. at ¶ 17.
14Id. at ¶ 18.
15Id.
16Id. at ¶ 15.