Articles Posted in Recent Cases

For those following this case, our reply to the parties’ exceptions to the proposal for decision can be viewed here.  Protestants Replies to Exceptions to the PFD and Mtn to Strike.PDF

For those following the Klotzman protest of EOG’s allocation well permit (our firm represents the protestants), here are the exceptions to the examiners’ proposal for decision filed by EOG and by Intervenors Devon, Pioneer, Laredo Petroleum and BP America:

EOG Exceptions to PFD.pdf

Devon et al Exceptions to PFD.pdf

Last Friday, the Texas Supreme Court affirmed judgment in favor of XTO in its battle with Homer Merriman over whether XTO’s well should have been moved so as to accommodate his cattle-working operation.

I wrote about this case when the Supreme Court decided to hear it. Mr. Merriman owns 40 acres in Limestone County. When he bought the land, the seller reserved the mineral estate and the land was then subject to an oil and gas lease. Merriman built his home on the land. Although he works full-time as a pharmacist, Merriman also runs cattle. He leases land in Limestone County for grazing, and once a year he uses his 40 acres to round up and work his cattle, with portable pens that are assembled for the operation and then taken down. The rest of the year he grazes cattle on the 40 acres, where he also lives.

In 2007, XTO Energy approached Mr. Merriman and told him it intended to drill a well on his tract. Merriman objected to the proposed well location, arguing that it would prevent him from using the 40 acres for his cattle working operations. XTO discussed with Merriman moving the location to the southwest corner of his tract, where Merriman said it would be acceptable, but XTO ultimately decided not to accommodate Merriman’s request. Merriman then sued XTO seeking an injunction to prevent the drilling of the well at its chosen location. Despite the suit, XTO drilled the well. The trial court granted summary judgment for XTO, and the Waco Court of Appeals affirmed, holding that Merriman “has alternative uses of his land that are not impracticable or unreasonable. Merriman further has alternative methods of conducting his cattle operation [on other lands] that are not impracticable or unreasonable.”

The Texas Supreme Court has recently refused to hear Friddle v. Fisher, 378 S.W.3d 475 (Tex.App.-Texarkana 2012). The court of appeals’ opinion has an interesting discussion of the duties of a mineral owner to owners of non-participating royalty interests burdening the mineral estate and of the application of the discovery rule to claims that such duties were breached.

These are the facts of the case:  In 1949, M.L. Friddle conveyed 84.7 acres in Hopkins County to Barney Martin, reserving 1/4 of the royalty. The reserved royalty interest later came to be owned by M.L. Friddle’s son Marvin.  In 1995, Barney Martin conveyed 1/4 of the royalty in the 84.7 acres to Mable Robinson, and 1/4 of the royalty to Helen Warde. The following day, Martin conveyed the land to Fred and Ruth Fisher.  Later, Marvin Friddle acquired from Mable Robinson and Helen Warde the royalty interests that were conveyed to them. So, at the time this controversy arose, the Fishers owned the land and minerals, subject to a NPRI owned by Marvin equal to 3/4 of the royalty.

In 1998, the Fishers signed an oil and gas lease on the 84.7 acres, reserving a 1/8 royalty. Valence Operating Company formed a pooled unit, the Ames-Antrim Gas Unit, and pooled the 84.7 acres into the unit. Valence drilled a well on the unit, but the well was not located on the 84.7 acres. Neither Valence nor the Fishers notified Marvin of the granting of the lease, the formation of the pooled unit, or the drilling of the well. Valence paid all of the royalty attributable to the 84.7 acres to the Fishers.

The Texas Supreme Court has agreed to hear arguments in a case that could have important implications for landowners and oil and gas exploration companies: Merriman v. XTO Energy, No. 11-0494. Merriman’s attorneys are asking the Court to reverse the 10th Circuit Court of Appeals, at Waco, which they contend has consistently mis-interpreted the Supreme Court’s rulings on the accommodation doctrine.

The “accommodation doctrine” is a court-made doctrine relating to the mineral owner’s right to use the surface estate to drill for and produce minerals. The mineral estate is the “dominant estate,” meaning that the owner of the mineral estate has the right to use so much of the surface estate as is reasonably necessary for exploration and development of the minerals, without compensation to the surface owner for such use. (This includes the right to use groundwater for oil and gas operations, even though the groundwater belongs to the owner of the surface estate.) The Supreme Court has held that, notwithstanding the mineral owner’s right to use the surface, the mineral owner must under some circumstances “accommodate” the surface owner’s existing use of his land. The doctrine requires a balancing of the interests of the surface and mineral owner. In 1993, the Supreme Court said: “if the mineral owner has reasonable alternative uses of the surface, one of which permits the surface owner to continue to use the surface in the manner intended (especially when there is only one reasonable manner in which the surface may be used) and one of which would preclude that use by the surface owner, the mineral owner must use the alternative that allows continued use of the surface by the surface owner.” Tarrant County Water Control & Impr. Dist. No. 1 v. Haupt, Inc., 854 S.W.2d 909, 912 (Tex. 1993).

Homer Merriman, the plaintiff in this case, owns 40 acres in Limestone County. When he bought the land, the seller reserved the mineral estate and the land was then subject to an oil and gas lease. Merriman built his home on the land. Although he works full-time as a pharmacist, Merriman also runs cattle. He leases land in Limestone County for grazing, and once a year he uses his 40 acres to round up and work his cattle, with portable pens that are assembled for the operation and then taken down. The rest of the year he grazes cattle on the 40 acres, where he also lives.

Last week, a Texas district court ruled that Jimmy McAllen could keep his $20 million arbitration award against Forest Oil Corp. This fight goes back to 1992, when Forest Oil gave McAllen used drilling pipe to build animal enclosures on his exotic wildlife ranch, on which McAllen kept rhinoceroses. The pipe had scale that contained radioactive materials, and McAllen claimed that it made the animals ill. McAllen also contracted cancer, which he blamed on the pipe. McAllen also alleged that Forest secretly buried mercury, drilling waste and other radioactive material on his property. McAllen sued Forest in 2005. Forest claimed that McAllen was required to arbitrate the dispute under the terms of a prior settlement agreement between Forest and McAllen arising out of a suit for unpaid royalties. Forest’s argument eventually made it to the Texas Supreme Court, which held that the prior settlement agreement was binding on McAllen and required him to arbitrate the dispute. Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008).

The case then went to an arbitration panel consisting of Houston attorney Daryl Bristow and South Texas attorneys Clayton J. Hoover and Donato D. Ramos. On February 29, 2012, the panel issued a split decision, 2-1, awarding McAllen $21.9 million plus $5 million in attorneys’ fees and additional injunctive relief requiring Forest to post a $10 million bond for the life of the lease to assure cleanup of any pollution found on the ranch. In a 40-page dissent, Daryl Bristow said that the panel’s award “turn[ed] the law on its ear” and “fabricate[s] a damages number without any principled foundation in the record.”

Forest then filed suit to overturn the award. On September 19, Judge Jeff Shadwick, of the 55th District Court in Harris County, denied Forest’s motion to overturn the award. The court’s order said that “the panel reached its conclusions based on little to no admissible evidence,” but that this “is one of the unfortunate hazards of arbitration.” “The court is not at liberty to substitute its judgment for that of the arbitrators merely because it would have reached a different decision.” Judge Shadwick did overturn the arbitration panel’s requirement that Forest post a bond for future cleanup, saying that the panel had no jurisdiction to issue such relief.