Articles Posted in Recent Cases

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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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Last week, the Amarillo Court of Appeals issued its opinion inn City of Lubbock v. Coyote Lake Ranch, LLC, No. 07-14-00006-CV, holding that the accommodation doctrine did not apply to restrict the City’s use of Coyote’s land to develop the City’s groundwater under the land.

In 1953, the City of Lubbock bought the rights to groundwater under the land now owned by Coyote Lake Ranch. In that deed, the City acquired all groundwater rights, and “the full and exclusive rights of ingress and egress in, over and on said lands so that the Grantee of said water rights may at any time and location drill water wells and test wells on said lands for the purpose of investigating, exploring, producing, and getting access to percolating and underground water.” The deed granted the right to lay water lines, build reservoirs, booster stations, houses for employees, and roads, “together with the rights to use all that part of said lands necessary or incidental to the taking of percolating and underground water and the production, treating and transmission of water therefrom and delivery of said water to the water system of the City of Lubbock only.”

In 2012, the City proposed a well field plan for the property and began testing and development under that plan. Coyote sued, asking for a temporary injunction to halt the City’s activity. Coyote claimed that the City failed to accommodate Coyote’s existing uses of the property (the opinion does not say what those uses are), and that the City could use alternatives that would lessen damage to Coyote’s use of the land. The trial court granted the temporary injunction, holding that Coyote was likely to be able to show at trial that the City’s plan could be “accomplished through reasonable alternative means that do not unreasonably interfere with [Coyote’s] current uses.” The City appealed from that order.

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The Texas Supreme Court last week decided Key Operating & Equipment, Inc. v. Hegar, No. 13-0156, reversing the courts below and holding that Key Operating has the right to use a road crossing Hegar’s tract to produce from a well on adjacent lands.

The legal principle the Court applied is not surprising and did not substantially change existing precedent. But the unusual facts of the case illustrate how far the Court will go to protect the rights of mineral lessees when those rights conflict with interests of the surface owner.

The legal precedent the Court followed is this:  when two tracts are combined to create a pooled unit, the operator of the unit has the right to use the surface of all of the land covered by the leases included in the unit to operate wells located anywhere on the unit, regardless of the location of the well.

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A jury has awarded damages in a second nuisance case against an operator, this time against Chesapeake Energy.  In Crowder et al. v. Chesapeake Operating Inc., case number 2011-008169-3, in Tarrant County Court at Law, the jury awarded the Crowders $20,000 for what the jury found to be a temporary nuisance – drilling operations conducted by Chesapeake in a field behind their house, where Chesapeake has drilled 13 wells. The Crowders complained of offensive odors and extensive noise. The jury failed to find that Chesapeake’s operations created a permanent nuisance, which would have entitled the Crowders to additional damages. The Crowders filed their suit in 2011.

While the jury award in Crowder will not excite plaintiffs’ attorneys to look for additional such cases — unlike the $2.9 million verdict recently awarded in another case, Lisa Parr v. Aruba Petroleum, Cause No. 11-01650-E, in the County Court at Law No. 5 of Dallas County — the case does show the viability of nuisance claims aimed at oil and gas operations near residences, especially in urban areas.

The Dallas city council recently adopted a drilling ordinance prohibiting well locations within 1,500 feet of any residence, effectively prohibiting most drilling within the city limits. The setback in Fort Worth is 600 feet. There are more than 1,700 wells in the City of Fort Worth.

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The Texas Supreme Court has granted the plaintiffs’ petition to review a case important for Texas mineral owners, Hooks v. Samson Lone Star. I wrote about this case when it was decided by the Houston First Court of Appeals in 2011. The court of appeals’ opinion reversed a judgment for $21 million against Samson Lone Star in a case involving alleged bad-faith pooling and fraudulent misrepresentations by the Hooks’ lessee. The court of appeals threw out the judgment, holding that Texas Supreme Court precedent required it to hold that the Hooks’ claims were barred by the applicable statute of limitations.

The statute of limitations bars claims if they are not filed within four years (or two years for some claims) of the event that caused the damages or injury for which the claim is brought. In some cases, courts have excused the delay in filing claims if the damage or injury was not discovered until a later date. Under this “discovery rule,” the statute of limitation is “tolled” until the plaintiff discovered or, with reasonable diligence, should have discovered, her injury. Also, courts have held that the statute of limitations is tolled where the defendant fraudulently conceals the facts giving rise to the damage or injury.

Over the last several years, the Supreme Court has severely narrowed the circumstances under which plaintiffs can invoke the discovery rule or claim fraudulent concealment to toll limitations on a claim, particularly in suits by mineral owners against their lessees. In Exxon v. Emerald in 2009, the Supreme Court reversed an $18 million judgment against Exxon on the basis that the mineral owners’ claims were barred by limitations — despite an express finding by the jury that the plaintiffs had filed their claim within four years after they discovered or should have discovered Exxon’s fraudulent conduct. In 2011, the Supreme Court in BP v. Marshall overruled a jury verdict in favor of royalty owners, holding that their claim was barred by limitations as a matter of law even though the jury had found that the lessee had fraudulently concealed the facts and that the plaintiffs had no reason to discover the true facts until less than two years prior to filing suit.

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There’s lots of buzz about a recent verdict in a case filed by a landowner in Dallas County alleging injuries from air emissions from drilling and production of Barnett Shale wells in Wise County. The case is Lisa Parr v. Aruba Petroleum, Cause No. 11-01650-E, in the County Court at Law No. 5 of Dallas County. The jury returned a verdict for personal injury and property damages of $2.9 million. According to the petition (Parr – 11th Amended Petition.pdf), Aruba had 22 wells within two miles of the Parrs’ 40 acres, including one within 800 feet.

CNN quotes the plaintiff, Lisa Parr, as saying that says she’s not opposed to the work oil companies do. She simply wants them to do their business responsibly.

“We are not anti-fracking or anti-drilling. My goodness, we live in Texas. Keep it in the pipes, and if you have a leak or spill, report it and be respectful to your neighbors. If you are going to put this stuff in close proximity to homes, be respectful and careful.”

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Last Friday I spoke on a panel at the E.E. Smith Advanced Oil and Gas Institute in Houston, discussing allocation wells. The segment was in the form of a debate, actually more like an oral argument. After an introduction of the topic by Bob Goldsmith, Bryan Lauer with Scott Douglas presented the case for the legality of allocation wells, and I presented the case for their illegality. We discussed the precedential value of Browning Oil v. Luecke and Humble Oil v. West and the challenges to allocation wells in the Klotzman proceeding before the Texas Railroad Commission and in Spartan v. EOG, now pending in district court in Harris County.

I can now report that EOG and the Klotzman family have reached a settlement in the Klotzmans’ challenge of an allocation well permit on their lands. So the Railroad Commission’s authority to issue the Klotzman allocation well permit will not be decided by a District Court in Travis County.

Here is a recent article in the Texas Tech Law Review about allocation wells.

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I recently have learned of a suit brought by landowners against EOG Resources involving “allocation wells,” of which I have written before. The case is Spartan Texas Six Capital Partners, Ltd., Spartan Texas Six-Celina, Ltd., and Dion Menser v. EOG Resources, Inc., Cause No. 2011-27476, in the 11th Judicial District Court of Harris County.  Although the case is in Harris County, it involves wells drilled by EOG in Montague County. The EOG wells are shown on the sketch below; the plaintiffs’ tract is in yellow:

 

Spartan v. EOG.JPG

EOG filed pooled unit designations for the Knox, Howard, Howard A, and Wylie A units, even though the plaintiffs’ leases did not allow pooling. EOG then calculated the plaintiffs’ royalties based on the portion of each well’s lateral length located on plaintiffs’ tract – allocation based on lateral length. I understand that most companies drilling allocation wells calculate royalties owed on non-pooled tracts on this lateral-length yardstick.

I have reviewed some of the pleadings in the Spartan case, including a motion for partial summary judgment filed by EOG last month. EOG asks the court to rule that “royalties in this case should be based on a reasonable allocation of the total production attributable to the lands covered by the [plaintiffs’] leases,” citing Browning Oil Company, Inc. v. Luecke, 38 S.W.3d 625 (Tex.App.-Austin 2000, pet. denied).

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Last week, the Fourth Court of Appeals in San Antonio issued its opinion in Chesapeake v. Hyder.pdf, on gas royalties owed to the Hyder family for production in Johnson and Tarrant Counties, in the Barnett Shale. The court upheld a judgment against Chesapeake for more than a million dollars, including $250,000 in attorneys’ fees. The result is not surprising considering the language in the lease, but the case is interesting because it reveals Chesapeake’s structure for marketing of gas in the Barnett Shale, obviously designed to reduce its gas royalty obligations.

The principal issue on appeal was whether Chesapeake could reduce the Hyders’ royalty by the amount of transportation costs paid by Chesapeake to unrelated pipeline companies. The trial court and court of appeals held that it could not. As I have written before (here, here and here), deductibility of post-production costs is a continuing issue for gas royalty payments in Texas. Prior Supreme Court cases have held that such costs are deductible under most standard gas royalty clauses.

The Hyders’ royalty clause was not a standard lessee-form lease. It provided:

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Julia Trigg-Crawford, a landowner in Lamar County, has asked the Texas Supreme Court to hear her case arguing that TransCanada has no right to condemn her property for the Keystone XL Pipeline.  The Crawford Family Farm Partnership v. TransCanada Keystone Pipeline, L.P., No. 13-0866. Although other segments of the pipeline await federal approval, the segment from Oklahoma across Texas has now been completed and is in operation.  Crawford lost her case in the trial court and the Texarkana Court of Appeals, 409 S.W.3d 908, and has asked the Supreme Court to review the case. The Supreme Court asked TransCanada to reply to Crawford’s petition, and Texarkana filed its reply on February 6. 

Crawford’s argument is that Texas law does not grant eminent domain powers to interstate pipelines.  TransCanada argues that Crawford’s appeal presents the same issues as Rhinoceros Ventures Group, Inc. v. TransCanada Keystone Pipeline, L.P., 388 S.W.3d 305 (Tex. App.–Beaumont 2012, pet. denied), which the Supreme Court declined to review.

Crawford has become a symbol of opposition to the Keystone pipeline, drawing national attention to her cause.

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John McFarland
 Graves, Dougherty, Hearon & Moody, P.C.
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