Recent Cases

Published on: February 23, 2015

Another Major Suit Challenges Chesapeake’s Royalty Practices

A team of lawyers in Pennsylvania has filed an anti-trust suit against Chesapeake and Williams Partners (Formerly Access Midstream Partners) alleging that they conspired to restrain trade in the market for gas gathering services in and around Bradford County, Pennsylvania. The plaintiffs also sued Anadarko, Statoil, and Mitsui, all of whom own interests in Chesapeake’s leases. The suit alleges violation of the oil and gas leases granted by the plaintiffs, violations of ant-trust law, and violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). A copy of the complaint, filed in federal court in Pennsylvania, can be found here.

The team of lawyers who filed this suit have their own website, “Marcellus Royalty Action.” They say that their approach differs from other suits against Chesapeake in that they will not seek class action status, they intend to pursue discovery before negotiating settlements, and they will sue all working interest owners responsible for royalty payments.

Royalty owner suits against Chesapeake have become a growth industry for attorneys. Recently, Chesapeake requested that multiple royalty owner suits against it in the Barnett Shale region of Texas be assigned to a pretrial court for consolidated and coordinated pretrial proceedings. (Defendants Joint Motion for Transfer and Request for Stay) The request says that more than 3,200 landowners have filed 97 separate suits in Johnson, Tarrant and Dallas Counties alleging that Chesapeake and Total E&P, USA, Inc. (Chesapeake’s working interest partner in the Barnett Shale) have charged excessive post-production costs. This request results primarily from multiple suits filed by the McDonald Law Firm. See http://royaltyripoff.com/. McDonald has said he does not oppose Chesapeake’s request.

Published on: February 16, 2015

Supreme Court Ducks Issue of Injection Well-Subsurface Trespass

By John McFarland

On February 6, 2015, The Supreme Court of Texas released its second opinion in FPL Farming Ltd. (“FPL”) v. Environmental Processing Systems, L.C. (“EPS”). The Beaumont court of appeals had held that injected fluids that migrate beyond the boundary of the land owned by the surface owner constitute a trespass on a neighbor’s property. The Supreme Court declined to address whether or not subsurface wastewater migration is actionable as a common law trespass in Texas, and instead focused on consent as a general element of a trespass cause of action.

Until recently, subsurface wastewater migration had never been addressed by a Texas appellate court, and the assumption in the disposal industry was that such incursion was not actionable. But the Beaumont Court of Appeals, in FPL v. EPS, concluded that the neighbor does have a trespass claim. The Beaumont Court issued two opinions in the case; the first was appealed to the Supreme Court which reversed and remanded to the Court of Appeals, and the second resulted in the opinion released February 6.

The facts in FPL are these: EPS operates an injection well for non-hazardous waste on land adjacent to the land owned by FPL. FPL had previously objected to an amendment of EPS’s permit that increased the rate and volumes allowed to be injected. The Austin Court of Appeals affirmed the permit amendment over FPL’s objections, ruling that “the amended permits do not impair FPL’s existing or intended use of the deep subsurface.” FPL Farming Ltd. v. Tex. Natural Res. Conservation Comm’n, 2003 WL 247183 (Austin 2003, pet. denied). FPL then sued EPS for trespass and negligence, alleging that injected substances had migrated under FPL’s tract causing damage. FPL lost a jury trial and appealed. The Beaumont Court affirmed, holding that because EPS held a valid permit for its well, “no trespass occurs when fluids that were injected at deep levels are then alleged to have later migrated at those deep levels into the deep subsurface of nearby tracts.” FPL Farming Ltd. v. Environmental Processing Systems, L.C., 305 S.W.3d 739, 744-745 (Tex.App.-Beaumont). The Supreme Court reversed, holding that Texas laws governing injection well permits “do not shield permit holders from civil tort liability that may result from actions governed by the permit.” FPL Farming Ltd. v. Environmental Processing Systems, L.C., 351 S.W.3d 306, 314 (Tex. 2011). But the court was careful to say it was not deciding that owners of injection wells could be guilty of trespass if their injected fluids migrated onto other lands. “We do not decide today whether subsurface wastewater migration can constitute a trespass, or whether it did so in this case.” The court remanded to the court of appeals for it to consider the other issues raised by the appeal. Continue reading →

Published on: February 16, 2015

Texas Supreme Court Rules for Mineral Owner in Hooks v. Samson

By John McFarland

On January 30, the Supreme Court issued its opinion in Hooks v. Samson Lone Star, Limited Partnership, No. 12-0920. In doing so, it kept alive a $21 million verdict against Samson and limited its prior holdings barring suits by mineral owners based on the statute of limitations.

The principal claim the Hooks made against Samson alleged breach of a lease provision intended to protect the Hooks’ lease against drainage from wells on adjacent lands. The lease provided that, if a gas well is drilled within 1,320 feet of the lease, Samson must either drill an offset well, release sufficient acreage for an offset well to be drilled, or pay “compensatory royalty” – the amount of royalty the Hooks would be entitled to if the well on adjacent lands had been drilled on their lease.

In 2000, Samson permitted a well on lands adjacent to the Hooks lease, and it approached the Hooks asking permission to pool portions of the Hooks land with that well. Mr. Hooks asked Samson how close the well would be to the Hooks lease boundary. Samson sent him a plat showing that the location of the well would be 1,400 feet from the lease. Based on this, the Hooks agreed to the pooling.

In 2007, in connection with related litigation, the Hooks discovered that the adjacent well in fact was located within 1,320 feet of the Hooks lease, and the Hooks sued Samson for misrepresenting the well’s location and inducing them to agree to the pooling. They sought damages under the lease compensatory royalty clause – the royalty they would have received had the offending well been located on the Hooks’ lease. They argued that the four-year statute of limitations applicable to their claim should not apply because Samson had fraudulently induced them to believe that the well was 1,400 feet from their lease. The jury found that the Hooks should not have discovered the true facts until less than four years before bringing suit. It awarded more than $20 million damages to the Hooks. Continue reading →

Published on: December 18, 2014

TLMA and NARO Texas File Amicus Brief in Chesapeake v. Hyder

By John McFarland

As I have written, Chesapeake has asked the Texas Supreme Court to reverse the San Antonio Court of Appeals’ decision in Chesapeake v. Hyder. The court of appeals ruled that Chesapeake could not deduct post-production costs from the Hyders’ royalty.

The Texas Land & Mineral Owners’ Association and the National Association of Royalty Owners – Texas have filed an amicus brief in Hyder supporting the Hyders’ case. The brief can be viewed here. Final Amicus_Brief_Chesapeake_v__Hyder.pdf It was authored by my firm and by Raul Gonzalez, who was a member of the Texas Supreme Court when the court decided Heritage v. NationsBank, the case relied on by Chesapeake as authority for its deduction of post-production costs.

Published on: November 3, 2014

Trespassing on the Mineral Estate

By John McFarland

Last week the San Antonio Court of Appeals decided Lightning Oil Company v. Anadarko, No. 04-14-001152-CV, a case involving “mineral trespass.” What is interesting about the case is what the court did not decide.

Lightning Oil Company owns two oil and gas leases covering 3,250 acres within the Briscoe Ranch in Dimmit County. The Briscoe Ranch owns the surface but not the minerals in this 3,250 acres. To the south of Lightning’s leases is the Chaparral Wildlife Management Area, a wildlife sanctuary managed by Texas Parks and Wildlife Department. TPWD owns the surface and 1/6 mineral interest in the Chaparral WMA. The Light family (some of whom own Lightning Oil) own the other 5/6 mineral interest. Anadarko holds oil and gas leases on the Chaparral WMA.

The TPWD lease to Anadarko prevents use of the surface of the Chaparral WMA for oil and gas wells except with TPWD consent, and says that Anadarko must use off-site drilling locations “when prudent and feasible.” Anadarko made an agreement with Briscoe Ranch to use the surface of the Ranch to drill horizontal wells under the Chaparral WMA. The first location Anadarko chose is located on the land covered by the Lightning Oil Company leases. So Anadarko proposed to drill a horizontal well from a surface location on Lightning’s lease; the well would penetrate the Eagle Ford formation on Lightning’s lease, but no perforations, or “take points,” in the well would be located on Lightning’s lease.

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Published on: October 20, 2014

Steadfast v. Bradshaw – Supreme Court and NPRI’s

By John McFarland

Last week the Texas Supreme Court heard oral arguments in Steadfast Financial v. Bradshaw, No. 13-0199. The case presents the court with another opportunity to grapple with an issue that Texas courts have struggled with since the court first addressed it in 1937 – what duty does the owner of the mineral estate owe to a non-participating royalty owner?

The term “non-participating royalty owner” is the name commonly given to a royalty interest in minerals created by a grant or reservation in a deed. “Non-participating” is really redundant; it means that the holder of the royalty estate has no right to lease the mineral estate or to receive any bonus for a lease. In fact, that is true of all royalty interests. A better name for this type of royalty interest might be “fee royalty interest,” to distinguish it from a royalty interest reserved by the mineral owner in an oil and gas lease.

The owner of a fee royalty interest, having no right to lease or to drill wells, is dependent on the owner of the mineral estate out of which his/her royalty interest must be paid; the royalty interest has no value unless the mineral interest is leased and wells are drilled. In recognition of this fact, court decisions have imposed a duty on the mineral owner to protect the royalty owner’s interest. How this duty is defined, and in what situations the duty is imposed, have been issues Texas courts have struggled with for many years. The cases that have addressed this issue over the years show how the common law develops — very slowly, and with varied results for the litigants involved.

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Published on: October 9, 2014

Supreme Court Refuses to Hear Appeal of Trail Enterprises v. City of Houston

By John McFarland

Trail Enterprises’ efforts to collect an inverse condemnation judgment against the City of Houston have finally come to an end. The US Supreme Court has refused to hear its case. Trail Enterprises’ story is instructive to parties who may be thinking of challenging cities’ decisions to ban drilling within their boundaries.

The dispute has a long history. Lake Houston is a major source of drinking water for the City of Houston. In 1967, the City passed an ordinance restricting the drilling of new oil and gas wells in a “control area” around the lake. That restriction has remained in place except for an eleven-month gap in 1996-97, when the lake was annexed into the City and the City passed a new ordinance protecting the lake.

In 1995, Trail Enterprises, an owner of mineral interests in the restricted area around the lake, sued the City, claiming that the 1967 ordinance restriction amounted to a “taking” of the mineral interests in violation of the US Constitution. The trial court dismissed that suit, and the Houston Court of appeals affirmed. Trail Enters., Inc. v. City of Houston, 957 S.W.2d 625 (Tex.App.-Houston [14th Dist.] 1997, writ denied). In 1999, Trail sued again, this time arguing that the City’s 1997 ordinance resulted in a taking of its property. The trial court held that the ordinance did not constitute a taking. This time the Houston Court of Appeals reversed and remanded the case for a trial. Trail Enters., Inc. v. City of Houston, 2002 WL 389448 (Tex.App.-Houston [14th Dist.] Mar. 14, 2002, no pet.). But the parties decided to dismiss that case.

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Published on: September 3, 2014

Potts v. Chesapeake

By John McFarland

Last month I wrote about two cases recently decided by the U.S. Court of Appeals for the 5th Circuit in which Chesapeake defeated royalty owners’ efforts to prevent it from reducing their royalties by deducting post-production costs. One of those cases is Potts v. Chesapeake. The plaintiffs in that case have asked the Court of Appeals to reconsider its appeal “en banc,” meaning that it has asked the other judges on the court to grant its petition for rehearing and reconsider the decision of the three-judge panel who decided the case. Plaintiffs’ Petition for Rehearing may be viewed here: Potts Petition for Rehearing En Banc.pdf

Yesterday, our firm filed a friend-of-the-court brief in the Potts case, on behalf of the Texas Land and Mineral Owners Association and the National Association of Royalty Owners – Texas, asking the Court to grant the plaintiff’s motion for rehearing and either consider the case en banc or refer the question to the Texas Supreme Court for its consideration. A copy of our brief may be viewed here: Potts v. CHK Amicus Brief.pdf

Meanwhile, in Pennsylvania, suit has been filed against Chesapeake claiming that its conduct in selling gas to its affiliate company at prices well below market, and then selling its affiliate company for a substantial profit, constituted fraud on its royalty owners in violation of the Racketeer Influenced and Corrupt Organizations Act, known as RICO. That petition can be viewed here: Suessenbach v. Chesapeake.pdf

Published on: August 7, 2014

Two Wins for Chesapeake in 5th Circuit

By John McFarland

The 5th Circuit Court of Appeals in New Orleans has ruled for Chesapeake in two cases, holding that it can deduct post-production costs from gas royalties. Potts v. Chesapeake Exploration, No. 13-10601, and Warren v. Chesapeake Exploration, No. 13-10619. Both cases were decided by the same three judges, and both opinions were written by Judge Priscilla R. Owen. In both cases, Judge Owen relied on the Texas Supreme Court case of Heritage Resources v. NationsBank, 939 S.W.2d 118 (Tex. 1996). Judge Owen was on the Texas Supreme Court when Heritage v. NationsBank was decided, and she wrote an opinion in that case. Judge Owen cites her own opinion in Heritage as the principal precedent for her opinions in Potts and Warren.

The Potts and Warren cases were tried in federal district court. Because Chesapeake’s home office is in Oklahoma, it has the right to remove suits filed against it in Texas to federal court. Federal courts have “diversity” jurisdiction over cases between citizens of different states. In diversity cases, federal courts must follow the law of the states. No federal law is involved. So, in deciding Potts and Warren, the 5th Circuit judges were attempting to predict what a Texas court would do, following prior precedent from Texas courts — in this case, Heritage v. NationsBank.

Heritage v. NationsBank is a seminal case in oil and gas law, some would say infamous. The question in Heritage was whether Heritage, the lessee, could deduct transportation costs for gas from royalties owed to NationsBank. NationsBank’s lease provided that royalties on gas would be “the market value at the well of 1/5 of the gas so sold or used, … provided, however, that there shall be no deductions from the value of the Lessor’s royalty by reason of any required processing, cost of dehydration, compression, transportation or other matter to market such gas.” The Texas Supreme Court held that Heritage could deduct transportation costs from NationsBank’s royalty. In her concurring opinion, Justice Owen said that the no-deductions proviso on NationsBank’s lease was “circular” and “meaningless”:

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Published on: July 29, 2014

Jimmy McAllen’s Judgment Against Forest Oil Affirmed

By John McFarland

Jimmy McAllen’s battle against Forest Oil has moved one step closer to conclusion. Last week the Corpus Christi Court of Appeals affirmed an arbitration award of more than $20 million against Forest Oil for environmental and other damages to the McAllen Ranch and personal injuries to Mr. McAllen.

The fight began in 2004, when McAllen sued Forest. He claimed that Forest had buried mercury-contaminated iron sponge wood chips on the 27,000-acre McAllen Ranch. The wood chips are waste from Forest’s gas plant on the Ranch. He also claimed that he had contracted cancer from pipe containing naturally occurring radioactive material (NORM) that Forest had given him to build pens on his Santillana Ranch. The pens were built to house endangered rhinoceroses. McAllen contracted cancer that required amputation of his leg.

Forest responded that McAllen was bound by a prior settlement agreement that required him to arbitrate any claims arising out of Forest’s operations on his ranch. McAllen opposed arbitration. The trial court denied Forest’s motion to require arbitration, and the Corpus Christi Court of Appeals affirmed. Forest appealed to the Texas Supreme Court, which held that McAllen was bound by the arbitration agreement. Forest Oil v. McAllen, 268 S.W.3d 51 (Tex. 2008).

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