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Sixth Circuit Refuses to Toll Statute of Limitation in Oil and Gas Royalty Case

By Jay Carr

The United States Court of Appeals for the Sixth Circuit recently ruled that a certain group of landowners were not entitled to have Ohio's 4-year oil and gas royalty statute of limitation tolled against Chesapeake Appalachia, LLC, finding that Chesapeake did not engage in fraudulent concealment.

In Lutz v. Chesapeake Appalachia, L.L.C., No. 19-3315, certain landowners sued Chesapeake claiming that the company improperly calculated gas royalty payments. The landowners did not sue until 2009. However, they alleged that Chesapeake started miscalculating gas royalty payments as far back as 1993. Ohio has a 4-year statute of limitation with respect to oil and gas royalty claims. Thus, unless an exception applied, the landowners would not be able to potentially recover royalties that were payable before 2005.

The landowners claimed that the Court should toll the statute of limitation because Chesapeake fraudulently concealed the basis for the landowners' pre-2005 royalty claims. After extensive discovery, the trial court ruled that the landowners failed to substantiate their claim. In particular, the landowners admitted two key facts. First, the landowners admitted that they did not confirm the information in their royalty check stubs (e.g., pay rate, market price, deductions). Second, the landowners admitted that they did not reach out to Chesapeake with questions about their royalty payments. The landowners' admissions undermined their claim that Chesapeake fraudulently concealed the alleged underpayments to prevent their discovery.

The landowners appealed and the Sixth Circuit Court of Appeals affirmed the trial court's decision. In order to toll the statute of limitation on grounds of fraudulent concealment, the landowners had to prove four elements:  (1) a factual misrepresentation; (2) that the misrepresentation is misleading; (3) that the misrepresentation induced actual reliance that was reasonable and in good faith; and (4) that it caused detriment to the relying party. Even if the landowners established the first two elements, the Court found that the landowners failed to establish the last two elements. Certain landowners admitted that they did not read the royalty check stubs they received. Others admitted that they only read the net amount. Based on these admissions, the Court found the landowners failed to establish that they relied upon any purported misrepresentation in their royalty check stubs. Finding no reliance, the Court also found that the figures in the landowners' royalty check stubs had no detrimental effect on the landowners' behavior. "All told, it was not the stubs that 'kept [the landowners] from timely brining suit.' It was their own conduct."

The landowners countered that it was reasonable for them to do nothing with respect to their pre-2005 royalty claims. They alleged that there was nothing in the royalty check stubs to suggest to a reasonable person that wrongdoing was afoot. However, the Court rejected this proposition noting the availability of public information concerning gas prices and production and the fact that the landowners undertook no investigation to confirm the information in their royalty check stubs.

You can read the Court’s decision here

Tags: Tolling, Ohio, Statute of Limitation, Oil and Gas, Fraudulent Concealment, Energy, Royalty, Deductions

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