MAZUREK & HOLLIDAY 2017 TEXAS OIL AND GAS CASE LAW UPDATE

Transcription

1 MAZUREK & HOLLIDAY 2017 TEXAS OIL AND GAS CASE LAW UPDATE

2 MAZUREK & HOLLIDAY STANDS FOR MORE. Mazurek & Holliday P.C. is more than just a law firm. We ve been in your shoes and understand your business. At Mazurek & Holliday, we don t deliver a cookie cutter product we deliver more by solving problems with creative solutions. Title Examination Regulatory & Operational Compliance Acquisition Support & Guidance Mineral/Royalty Receivership Services What more could you ask for? San Antonio 8015 Broadway, Suite Austin 1604 Rio Grande MHenergylaw.com

3 2017 TEXAS OIL AND GAS CASE LAW UPDATE Prepared by MAZUREK & HOLLIDAY P.C. An Energy Law Firm Focused on Oil and Gas Title Examinations February 2018

4 Interest in Texas s natural resources continues to be an ongoing concern. Though long a producer of oil and gas, the pace and nature of development continues to challenge Texas s jurisprudence in the field of oil and gas law. In some areas, it is becoming increasingly difficult to apply old law to new facts modern, unconventional (e.g., horizontal) development techniques not previously contemplated by the courts and legislature are challenging the existing legal frameworks originally constructed to address concerns with conventional development. To that end, Texas courts and the Texas Legislature are increasingly called upon to settle many of these unknowns. In order to keep pace with the current jurisprudence, our firm compiled a list of the most notable Texas oil and gas cases from the past year. Our goal is that you find this information useful in your endeavors. Sincerely, Thomas Chance Mazurek, IV Founding Shareholder Mazurek & Holliday P.C. Texas Bar No cmazurek@mhenergylaw.com Benjamin B. Holliday Founding Shareholder Mazurek & Holliday P.C. Texas Bar No bholliday@mhenergylaw.com A very public thank you to and recognition of Hillary Holdsworth, Senior Associate at Mazurek & Holliday P.C., is due for her extraordinary efforts in leading this project. Mazurek & Holliday P.C. is a San Antonio, Texas-based law firm focused on transactional oil and gas matters, particularly in the fields of title examination, merger and acquisition due diligence, and regulatory advising. MH represents clients in Texas, New Mexico, Oklahoma, Ohio, North Dakota, Colorado, Nebraska, and Illinois. To find out more about how Mazurek & Holliday P.C. can add value to your operations, please visit: MHenergylaw.com. 2

5 TABLE OF CONTENTS A. Supreme Court of Texas Cases... 5 ExxonMobil Corporation v. Lazy R Ranch, LP... 5 BP America Production Co. v. Laddex, LTD... 6 Forest Oil v. El Rucio Land and Cattle Company... 8 BP America Production Company v. Red Deer Resources, LLC... 9 Lightning Oil Company v. Anadarko E&P Onshore, LLC Davis v. Mueller Wenske v. Ealy Samson Exploration, LLC v. T.S. Reed Properties, Inc B. Texas Appellate Court Cases First District Court of Appeals Houston Jinkins v. Jinkins Leavitt v. Ballard Exploration Second District Court of Appeals Fort Worth This update does not address any opinions issued by the Second District Court of Appeals in the 2017 term. 3. Third District Court of Appeals Austin This update does not address any opinions issued by the Third District Court of Appeals in the 2017 term. 4. Fourth District Court of Appeals San Antonio Reed v. Maltsberger/Storey Ranch, LLC Texas Outfitters Limited, LLC v. Nicholson ConocoPhillips Company v. Ramirez Fifth District Court of Appeals Dallas Aruba Petroleum, Inc. v. Parr Sixth District Court of Appeals Texarkana This update does not address any opinions issued by the Sixth District Court of Appeals in the 2017 term. 7. Seventh District Court of Appeals Amarillo This update does not address any opinions issued by the Seventh District Court of Appeals in the 2017 term. 8. Eighth District Court of Appeals El Paso Ring Energy v. Trey Resources, Inc BNSF Railway Company v. Chevron Midcontinent, L.P Apache Deepwater, LLC v. Double Eagle Development, LLC Ninth District Court of Appeals Beaumont

6 This update does not address any opinions issued by the Ninth District Court of Appeals in the 2017 term. 10. Tenth District Court of Appeals Waco This update does not address any opinions issued by the Tenth District Court of Appeals in the 2017 term. 11. Eleventh District Court of Appeals Eastland Bradley v. Shaffer Twelfth District Court of Appeals Tyler Chambers v. San Augustine County Appraisal District XTO Energy Inc. v. Elton Goodwin Thirteenth District Court of Appeals Corpus Christi-Edinburg Burlington Resources v. Texas Crude Energy Spellmann v. Love Fourteenth District Court of Appeals Houston This update does not address any opinions issued by the Fourteenth District Court of Appeals in the 2017 term. C. Index

7 A. SUPREME COURT OF TEXAS CASES ExxonMobil Corporation v. Lazy R Ranch, LP 1 This case dealt with relief for soil and groundwater contamination due to oil and gas operations. In particular, the court addressed whether a plaintiff s claims were barred by the statute of limitations and whether the discovery rule tolled limitations when ongoing oil and gas operations were contaminating the land. In determining that the discovery rule did not toll the statute of limitations, the court relied on the standard that the discovery rule rarely applies in continuing nuisance cases, including those caused by oil and gas operations. 2 This case arose out of oil and gas operations conducted by ExxonMobil Corporation on the Lazy R Ranch ( the Ranch ). The two parties had a working relationship for nearly 60 years before ExxonMobil sold their oil and gas operations on the ranch in Upon ExxonMobil s sale of their operations, the Ranch hired an environmental manager to investigate whether ExxonMobil had contaminated the land. The environmental manager s report, dated March 31, 2009, identified four areas previously under ExxonMobil s control where hydrocarbon contamination exceeded levels set by state law and could lead to contamination of the groundwater. 3 In October 2009, the Ranch initiated suit for environmental damages claiming that ExxonMobil had contaminated the land. The Ranch later amended its pleadings to include a claim for injunctive relief and remediation by ExxonMobil at whatever cost. ExxonMobil filed a motion for summary judgment claiming the statute of limitations barred the Ranch s claims, that the Ranch was not entitled to its requested relief, and that there was no evidence of a diminution of the value of the property. The Ranch maintained that because the surface contamination was spreading and would eventually contaminate the groundwater, it was a continuing nuisance, and therefore, its claim for injunction and abatement of the contamination was not subject to the statute of limitations. The trial court granted ExxonMobil s motion for summary judgment. The Ranch appealed and the Court of Appeals for the Eighth District of Texas reversed and remanded the case. The Supreme Court of Texas granted ExxonMobil s petition for review. In reviewing whether the statute of limitations barred the Ranch s suit, the court looked to when the cause of action for surface contamination accrued. The court noted that, a cause of action accrues and limitations begin to run when facts exist that authorize a claimant to seek judicial relief, 4 and not when the full extent of the injury is known. 5 The court stated that the discovery rule applies only when the type of injury is objectively verifiable and inherently undiscoverable. 6 The court reasoned that although soil contamination is objectively verifiable, it is not inherently undiscoverable. In supporting its decision, the court relied on the deposition testimony of one of the ranch owners, Helen McDaniel. In her deposition, McDaniel stated that she knew of several oil spills on the Ranch that had occurred prior to 2005, 7 which was well before 2- or 4-year statute of limitations. The court also noted that two of the four contaminated sites had been abandoned by ExxonMobil at least 10 to 20 years prior to the suit being filed. With this 1 ExxonMobil Corp. v. Lazy R Ranch, LP, 511 S.W.3d 538 (Tex. 2017). 2 Id. at * Id.at * Id. at * Id. at * Id. at * Id.at *541. 5

8 evidence in mind, the court held that the discovery rule did not apply because there was nothing inherent in the possibility of contamination that kept the Ranch from hiring an environmental manager sooner and within the limitations period. The court did not address the Ranch s contention that its claim for injunctive relief requiring abatement or stabilization of the contamination was not subject to the statute of limitations because ExxonMobil failed to address the availability of injunctive relief in its motion for summary judgment; therefore, that issue was not before the court. 8 It is worth noting that if the court should find on remand that the Ranch was entitled to injunctive relief along with abatement on its claim, it would raise additional issues dealing with the cost of the abatement of the contaminations versus the damages cap of the economic feasibility exception. Through the court s analysis, it held that the discovery rule rarely applies in nuisance suits caused by oil and gas operations absent a finding of fraudulent concealment. Lazy R Ranch has not appealed the holding of the Supreme Court of Texas. The holding of the court will help attorneys and landmen gauge when a cause of action for nuisance accrues. BP America Production Co. v. Laddex, LTD 9 This case discusses two issues. The first issue is whether the rule against perpetuities invalidates a top lease on the subject property. The second issue examines a jury charge on a question of production-in-paying-quantities. 10 In this case, BP America Production Co. ( BP ) acquired by assignment an oil and gas lease that was held by production in Roberts County, Texas. BP continued to produce from the Mahler D- 2 well for approximately fifteen months. From 2005 to 2006, production drastically slowed from the Mahler D-2 well. However, by November of 2006, production levels had risen back to where they were prior to the slow-down period. Then, in March 2007, the lessors of the lease held by BP executed a top lease to Laddex, Ltd. covering the same subject lands. 11 A month later, Laddex sued BP claiming that BP s lease had terminated for lack of production in paying quantities during the slow-down period from 2005 to BP moved for summary judgment on the grounds that the Laddex top lease was invalid and that Laddex lacked standing because the lease violated the rule against perpetuities. The trial court denied the motion for summary judgment, and the case proceeded to a jury trial where the jury found in favor of Laddex. On appeal, the court of appeals agreed with Laddex as to their standing argument, but also agreed with BP s argument that jury charge was improper. The court of appeals remanded the case for a new trial based on the error in the jury charge. Both parties filed a petition for review to the Texas Supreme Court, and both were granted. 13 Issue One: Rule Against Perpetuities On review, the supreme court first addressed the Rule Against Perpetuities issue. The commonlaw rule states that no interest is valid unless it must vest or fail to vest within 21 years of the death 8 Id at BP America Production Co. v. Laddex, LTD, 513 S.W.3d 476 (Tex. 2017). 10 Id. at * Id. at * Id. 13 Id. at *479. 6

9 of someone or some persons at the time of the conveyance. 14 Because an oil and gas lease can be held by production indefinitely, it is not certain that lease will end within the 21-year time frame. Thus, the top lease would not certainly vest or fail to vest within the 21-year time frame. The court noted that the rule against perpetuities does not apply to present interests or future interests that are vested upon their creation. The court explained that at the creation of an oil and gas lease, the landowner or mineral owner typically conveys to the oil company his mineral rights in exchange for a royalty. However, the landowner retains a possibility of reverter throughout the term of the lease. The possibility is that that lease will end, usually through non-production, after the primary term. If the lease ends, then the mineral rights revert back to the landowner. Thus, even though the landowner does not have a present possessory interest, he does have a presently vested interest, called a possibility of reverter, at the time the lease is executed. A landowner may sell or assign his possibility of reverter as real property. 15 Laddex argued that the language in dispute conveys a present possibility of reverter, and therefore, the Rule Against Perpetuities does not apply. BP argued that this same language delays the vesting of that interest until after the expiration of the BP lease, thus making this lease invalid. 16 Specifically, the lease contained the following language in dispute: This Lease is intended to and does include and vest in Lessee any and all remainder and reversionary interest and after-acquired title of Lessor in the leased Premises upon expiration of any prior oil, gas or mineral lease 17 When interpreting this language, the court propounded that if there are two equally acceptable constructions of a lease, one of which would be invalid, the general rule is that the construction which would make the lease valid will be the one accepted by the court. The court opined that both the BP interpretation and the Laddex interpretation are plausible given the language of the lease. 18 Under BP s interpretation, the provision in dispute would serve no purpose other than to invalidate the lease; thus, the court adopted the Laddex interpretation in order to make the lease valid. The court was forced to conclude that the language in the lease was an ambiguous attempt at avoiding the Rule Against Perpetuities; therefore, the court deemed that it was a valid lease and did not violate the Rule Against Perpetuities. Issue Two: Production in Paying Quantities The court next addressed how to determine production in paying quantities. The court plainly states that there can be no limit as to time when considering whether paying production has ceased. 19 BP and Laddex both produced evidence as to the profitability and non-profitability over various periods of time; however, it was determined to be error that the jury charge instructed the jury to make their determination with respect to a specific period of time as to the lease s profitability. 20 The court elaborated that it is acceptable for parties to enter evidence supporting their contentions about the profitability or lack thereof concerning a well; 21 however, the problem 14 Peveto v. Starky, 645 S.W. 2d 770, 772 (Tex. 1982). 15 BP America Production Co., at * Id. 17 Id. at * Id. at * Clifton v. Koontz, 325 S.W.2d at *690 (Tex. 1959). 20 BP America Production Co., at Id. at *484. 7

10 rested with the charge given to the jury, which specified a time period over which their determination was to be made. 22 The court held that any jury charge that instructs the jury to consider a particular period of time disturbs the precedent set by Clifton v. Koontz and is improper. The court determined that the Laddex lease was a valid conveyance of a present vested interest and does not violate the rule against perpetuities. It additionally held that both sides can present and refute evidence with regards to certain periods of greater or lesser profitability, but the jury charge must not focus on a specific period for determining the question of whether a lease was terminated for failure to produce in paying quantities. The court affirmed the court of appeals holding and remanded the case to the trial court for new trial because of the error in the jury charge. This holding emphasizes the care one must take when drafting up a top lease while also reaffirming fair process in the courtroom for oil and gas disputes. 23 One must be clear not to violate the rule against perpetuities by specifically laying out what interests are to be presently conveyed and which interests will vest in the future. Forest Oil v. El Rucio Land and Cattle Company 24 In this case, The Supreme Court of Texas considered whether the Railroad Commission (RRC) has the exclusive or primary right to handle claims over environmental contamination and if judicial relief is available to would-be plaintiffs. In particular, the court decided if various awards won in arbitration should be vacated due to the RRC s potential exclusive jurisdiction. In its determination that the RRC does not have exclusive or primary jurisdiction over environmental contamination to preclude judicial relief, the court relied on the fact that the legislature did not intend to make the RRC s authority exclusive. 25 This case centered around a 27,000-plus-acre ranch owned by the McAllen family and under the control of James A. McAllen. A 1,500-acre portion of the ranch is leased by Forest Oil Corporation, who has produced natural gas on the ranch for approximately 30 years. 26 Due to the gas production on the property, the ranch had problems with contamination from naturally occurring radioactive material. The McAllen s claim that Forest caused the environmental contamination after they were tipped by a former Forest employee and James McAllen was diagnosed with cancer. Specifically, McAllen sued Forest for environmental contamination, improper disposal of hazardous material, and maliciously donating contaminated material for James McAllen s personal use. 27 McAllen sued Forest in 2004 based on the above described claims. Forest motioned to compel arbitration and McAllen objected. 28 The trial court denied Forest s motion, but the court of appeals reversed and arbitration ensued. A panel of neutral arbitrators was selected, and despite Forest s request to obtain an RRC ruling, McAllen was awarded several million dollars in damages. 29 In addition to the monetary award, the arbitrators ordered numerous additional actions by Forest 22 Id. at * Id. at * Forest Oil Corp. v. El Rucio Land & Cattle Co., Inc., 518 S.W.3d 422 (Tex. 2017). 25 Id. at * Id. at * Id. 28 Id. 29 Id. 8

11 regarding future contamination issues and required Forest to provide a $10,000,000 bond as a guarantee. Forest appealed the decision of the arbitrators to the trial court who vacated the bond but left the rest of the award intact. The court of appeals affirmed the trial court s ruling. 30 Forest then appealed to the Texas Supreme Court. At issue on appeal is whether the RRC has exclusive jurisdiction over oil and gas related contamination claims in Texas or if judicial remedies are available. 31 Generally, agencies have exclusive jurisdiction over a topic when it is clear that the legislature granted that power to the agency and along with sole decision-making authority. If an agency has exclusive jurisdiction, then injured parties must seek remedies provided by the agency rather than courts. In such a situation, judicial remedies, such as damages or specific performance, are only available after parties go through the agency s judicial processes. Here, the court determined that the legislature never intended to make the RRC s authority absolute or bar other judicial remedies. 32 Grasping for a solution, Forest based its argument on of the Texas Natural Resources Code as well as (a)(1) of the Texas Water Code. Forest argued these sections demonstrate legislative intent to abrogate common law judicial claims. 33 The court rejected this argument and explained that legislative intent must be expressed clearly either explicitly or by necessary implication. Finally, Forest argued that the current system is bad public policy arguing operators are in effect liable for both the RRC and judicial remedies. 34 The court rejected this argument by saying that the system is under the operators control and that the operators are the parties who can promptly comply with RRC clean-up provisions and reduce net damages payable to the landowner. Regarding primary jurisdiction, the court stated that primary jurisdiction is irrelevant in situations where claims are inherently judicial in nature and pointed out that many claims McAllen raised were judicial in nature. Therefore, they were not barred by any primary jurisdiction the RRC could hold. 35 The Texas Supreme Court affirmed the judgment of the court of appeals and determined that the RRC does not have exclusive jurisdiction or primary jurisdiction over McAllen s contamination and related claims. This holding will help companies understand their risk regarding environmental contamination and demonstrates that injured parties may seek judicial relief for environmental damages. BP America Production Company v. Red Deer Resources, LLC 36 This case dealt with the interpretation of savings events in an oil, gas, and mineral lease as well as the termination date of a lease based on whether or not a well was producing in paying quantities. The court looked primarily at the language in the bottom lease. 37 This case arose out of the shutting-in of the Vera Murray #11 ( #11 Well ) gas well in BP America Production Company ( BP ) acquired the Vera Murray lease ( Lease ) to the subject lands in In 2011, Red Deer Resources, LLC ( Red Deer ) obtained a top lease after discovering the low production of the wells on the property. 38 On June 12, 2012, BP shut off the 30 Id. 31 Id. at * Id. 33 Id. at * Id. 35 Id. at * BP America Production Company v. Red Deer Resources, LLC, 526 S.W.3d 389 (Tex. 2017). 37 Id. at * Id. at *392. 9

12 valve to the #11 Well. The next day, BP sent the lessors notice of the shut-in and enclosed a check for the amount owed to the lessors pursuant to the shut-in clause in the lease. Seeking a determination that the Lease had terminated, Red Deer sued BP in August of 2012, more than two months after BP had shut in the #11 Well. Red Deer brought two arguments before the court as to why the Lease had terminated: 1) BP s lease terminated because of a failure of production in paying quantities, measured over a period ending June 12, 2012; and 2) BP s lease terminated because of a total cessation of production, and the shut-in clause did not save it because the #11 Well was incapable of producing in paying quantities on June 13, The trial court entered judgment in favor of Red Deer stating that BP s lease had lapsed as the wells were incapable of producing in paying quantities when the #11 Well was shut-in. The court of appeals affirmed the trial court s judgment. 40 Thereafter, BP appealed to the Texas Supreme Court who granted review on September 2, In order to rule on if the Lease had terminated, the court considered the plain language of the Lease, which provided that where gas from any well... capable of [production in paying quantities]... is not sold or used after the primary term... [BP] may pay or tender [a] shut-in royalty... payable annually on or before the end of each 12-month period during which gas is not sold or used. 41 Under the Lease, payment of the shut-in royalty caused a de facto determination that the well was producing in paying quantities for the 12-month royalty period. Accordingly, [a]t the heart of the parties dispute [was] the date on which the capability of production in paying quantities determination [was] to be made under the [Lease]. 42 If before the shut-in occurred, then the lease was terminated; if after, it is necessary to determine if the shut-in clause acted to save the lease. The Supreme Court first addressed Red Deer s contention that BP s lease had terminated because the lease had not been producing in paying quantities leading up to the shut-in on June 12, The court found for BP as there was obviously production in paying quantities from the #11 Well as recently as June 4, 2012, and brief interruptions in production do not cause a lease to terminate. The Supreme Court then turned to Red Deer s second argument, that BP s cessation of production was unable to be saved by the shut-in clause. The shut-in royalty clause preserves the lease upon payment of the negotiated shut-in royalty. In this case, as long as payment was made within a year from the last time gas was sold or used from a well, on the lease, capable of producing gas, the lease is preserved. The parties dispute was over when the proper date to start the accrual period is for the 12 months. The Lease states: 39 Id. at * Id. 41 Id. at * Id. 10

13 Lessee may pay or tender as shut-in royalty, payable annually on or before the end of each twelve month period during which such gas is not sold or used and this lease is not otherwise maintained in force 43 The court interprets this language to mean that the 12-month period starts on the last day oil or gas is sold or used from the well. June 4, 2012, was the final date gas was sold or used from the well, BP shut-in the #11 Well on June 12, 2012, and BP paid the shut-in royalty on June 13, The court found that the language of the lease unambiguously determines June 4, 2012, as the date on which the 12-month accrual period begins. Therefore, BP s shut-in payment was made well within the 12-month timespan the Lease allowed for BP to tender the shut-in royalty payment to the Lessor. 44 A shut-in royalty clause acts to provide constructive production if properly tendered to the lessor after actual production has ceased. This Lease s shut-in clause provided for retroactive constructive production. That means that even if BP did not pay the shut-in royalty until the last day of the 12-month period, the payment would retroactively apply to the prior 12 months that the wells were shut-in. The court then dismissed Red Deer s second issue as BP had properly invoked the shut-in clause, and paid the shut-in royalty. The Supreme Court dismissed both of Red Deer s theories as invalid and unable to terminate BP s Lease. The #11 Well was capable of production on June 4, 2012, Red Deer failed to show evidence of the #11 Well s inability to produce on June 12, 2012, and BP properly invoked the shut-in clause and tendered payment thereby creating constructive production for a 12-month term and holding the Lease. The court further concluded that because Red Deer never sought a determination as to the #11 Well s productivity, they did not meet their burden of proof. In order for Red Deer to prevail here they would have had to show proof that the #11 Well was incapable of production in paying quantities at the time the well was shut-in in order to overcome the clear language in the Lease about the shut-in clause. In the future, the holder of a top lease must be able to show proof of lack of production capabilities or be able to show that the payment of the shut-in royalty was not made in accordance with the terms of the lease to overcome a shut-in clause. 45 Lightning Oil Company v. Anadarko E&P Onshore, LLC 46 This case dealt with subsurface trespass. More specifically, the case dealt with the characteristics of mineral ownership and whose permission is needed to drill through a mineral estate that an oil and gas operator does not own to reach minerals they do own in an adjacent tract of land. In concluding that it is the surface owner, not the mineral owner, who owns non-mineral structures under the earth, the court held that permission is solely needed from the surface estate holder for offsite drilling so long as the mineral owner s right to extract their minerals is not invaded. The dispute in the case arises out of mineral leases on adjoining tracts of land. Briscoe Ranch, Inc. owns the surface rights on the tract of land where Lightning Oil Company (hereinafter Lightning ) executed a mineral lease with the mineral estate owner, the Hurd Family. Anadarko 43 Id. 44 Id. 45 Id. at * Lightning Oil Company v. Anadarko E&P Onshore, LLC, 520 S.W.3d 39 (Tex. 2017). 11

14 E&P Onshore, LLC, ( Anadarko ) executed a mineral lease with the State of Texas on the Chaparral Wildlife Management Area, which is the adjoining tract of land to the Briscoe Ranch property. Anadarko s lease with the state had several restrictions, which included: Drilling locations will be established off the Chaparral when prudent and feasible. Any drilling site locations on the [Chaparral] must be planned and authorized by [TPWD s Chaparral area] manager. 47 Due to this restriction, Anadarko entered into a Surface Use and Subsurface Easement Agreement with Briscoe Ranch, Inc. 48 Anadarko planned to locate wells on the Ranch and drill through Lightning s lease to get to the Chaparral minerals. Lightning objected to any such drilling on the Ranch, and this suit commenced. Lightning initiated suit against Anadarko for trespass and tortious interference with a contract seeking a temporary injunction to prevent the drilling. Both parties filed traditional and noevidence motions for summary judgment. Without specifying their reasons, the trial court granted Anadarko s motion for partial summary judgment. Lightning appealed to the San Antonio Court of Appeals, who affirmed. Lightning then appealed to The Supreme Court of Texas and argued that Texas law firmly establishes that the dominant mineral estate has the right to exclude those seeking to pass though it and to hold otherwise will transform the absolute rights of a mineral owner or lessee in oil and gas in place into a mere license to hunt for the minerals. 49 Additionally, Lightning argued the decision by the San Antonio court greatly expands the accommodation doctrine by requiring a mineral lessee to accommodate surface uses that benefit an adjacent mineral estate. 50 The court began their analysis by declaring that Lightning s claims turn on whether their right in the mineral estate includes the right to prevent Briscoe Ranch Inc. or Anadarko from activities that are not intended to take Lightning s minerals but are only intended to pass through the formations where Lightning s minerals are located. 51 In determining whether a trespass will occur, the court first noted that ownership of property does not necessarily include the right to exclude every invasion or interference. 52 Looking at just the reservoir space where oil and gas are located, they determined that Texas law establishes that the surface owner, and not mineral owners, own the structures beneath the surface that are not made of mineral molecules. The problem is, however, that Anadarko will in fact extract some of Lightning s minerals while drilling to the Chaparral minerals. Therefore, even though Lightning does not own the non-mineral structures beneath the surface, the question remained as to whether mineral owners have the right to prevent surface owners and their licensees from drilling through subsurface areas containing minerals and extracting some of those minerals during drilling operations. 53 Still in search of whether Anadarko s proposed activities would constitute a trespass, the court looked at the rights of a severed mineral estate holder because a trespass is not just a physical interference with property but also an unauthorized interference with one of the rights the property owner holds. 54 When mineral estates are severed, there are five general rights conveyed with the estate: (1) the right to develop, (2) the right to lease, (3) the right to receive bonus 47 Id. at * Id. at * Id. at * Id. 51 Lightning, 250 S.W.3d at * Id. 53 Id. at * Id. at *49. 12

15 payments, (4) the right to receive delay rentals, and (5) the right to receive royalty payments. 55 However, as a mineral lessee, Lightning was only granted the right to develop the land. This right to develop typically is described as only giving the lessee the right to explore, produce, obtain, and possess the minerals under the lease. The court noted that this right to develop does not encompass the right to possess the specific place or space where the minerals are located. 56 Therefore, the court stated a trespass to the mineral estate, in regard to the place where the minerals are actually located only occurs if it impedes the lessee s ability to exercise its rights. To rebut the argument that they would impede on Lightning s ability to exercise their rights, Anadarko argued that they will still be subject to the regulations and rules imposed by the Texas Railroad Commission (hereinafter Railroad Commission ). The court agreed with the argument, noting that Lightning s rights will be adequately protected by the Railroad Commission from actual interference when they permit Anadarko to drill. Additionally, through their agreement with Briscoe Ranch Inc., the surface owner, Anadarko essentially had the same rights as that of a surface owner. Therefore, as the assignee of the surface owner, Anadarko is subject to the accommodation doctrine when it comes to their activities, which affords Lightning additional protection. Thus, the mineral estate s dominance is not diluted, because the court has simply made this an accommodation doctrine issue. Lastly, the court addressed the amount of minerals that Lightning would lose by way of Anadarko s drilling, in the cuttings that will rise to the surface, and determined that the interests of drilling, specifically efficient drilling, outweighed the minimal amount of minerals that Lightning would lose. Therefore, the court affirmed the court of appeal s summary judgment for Anadarko. Through the court s analysis, it determined that surface owners own non-mineral structures beneath the surface, that the mineral estate only suffers a trespass by an adjacent lessee drilling through their formations when their ability to exercise their rights are infringed, and that those rights are not infringed because the Railroad Commission, as well as the accommodation doctrine, afford protection of those rights. Lastly, the court held that the amount of minerals extracted by the drilling itself is nominal compared to society s interest in efficient drilling. Lightning has not appealed the decision of the Supreme Court of Texas. This case is extremely important to attorneys and landmen when determining whether a subsurface trespass has occurred, as well as clarifying the rights of a surface estate and mineral estate owners. Davis v. Mueller 57 In this case, the Supreme Court of Texas upheld the validity of an unambiguous county-wide conveyance in mineral deeds by holding that a general grant s conveyance is not impaired by its proximity to a Mother-Hubbard clause. In 1991, Virginia Cope ( Cope ) conveyed to JD Minerals (together with James H. Davis, individually, Davis ) her mineral interest in 10 vaguely described tracts of land in Harrison County, Texas. 58 The deed contained the following paragraph: The Lands subject to this deed also include all strips, gores, roadways, water bottoms and other lands adjacent to or contiguous with the lands specifically described above and 55 Id. Quoting Hysaw v. Dawkins, 483 S.W.3d 1, 9 (Tex. 2016). 56 Lightning, 520 S.W.3d at * Davis v. Mueller, 528 S.W.3d 97 (Tex. 2017). 58 Id. at *99. 13

16 owned or claimed by Grantors. If the description above proves incorrect in any respect or does not include these adjacent or contiguous lands, Grantor shall, without additional consideration, execute, acknowledge, and deliver to Grant[ee], its successors and assigns, such instruments as are useful or necessary to correct the description and evidence such correction in the appropriate public records. Grantor hereby conveys to Grantee all of the mineral, royalty, and overriding royalty interest owned by Grantor in Harrison County, whether or not same is herein above correctly described. 59 Around the same time as Cope, James Hammond Mills ( Mills ) conveyed a separate mineral interest in Harrison County to Davis on an identical form deed (together the 1991 Deeds ). In 2011, Cope and Mills, independently, deeded to Mark J. Mueller, the interests they had already conveyed to Davis in Subsequently, Mueller sued Davis to quiet title to the mineral interests. 61 Among other claims, Mueller asserted that the property descriptions and general granting clause in the 1991 deeds were insufficient to satisfy the Statute of Frauds specifically, that the property conveyed could not be identified with reasonable certainty. 62 In response, Davis argued that the general granting clause was sufficient to pass title of all the grantors mineral interests in Harrison County. 63 The trial court denied Mueller s motion and granted judgment in favor of Davis. The court of appeals considered the 1991 Deeds to be ambiguous and reversed the lower court s ruling. 64 The Supreme Court of Texas granted Davis s petition for review. 65 The court acknowledges that, typically, a general grant is effective to convey land except when the general grant itself is ambiguous or is made ambiguous by its context. The court quickly concluded that the general grant in the 1991 Deeds was not ambiguous on its own. Accordingly, the court reviewed Mueller s claim that the general granting clause was invalid due to ambiguity created by its context, an issue to which the court addressed previously in J. Hiram Moore, LTD. v. Greer. 66 In Greer the court concluded that a deed in which a party conveys nothing, and... conveys everything, is ambiguous and ineffective to convey title. 67 Mueller s argument that the general granting clauses in the 1991 Deeds were ambiguous was based on the proximity of the general granting clauses to the Mother Hubbard Clauses. Here, the court did not take issue with the general grant being located within the same paragraph as the Mother-Hubbard clause and confirmed the independent function of each clause. The court noted the inclusion of the general grant in the paragraph would be useless under Mueller s argument, as the Mother-Hubbard clause already covered the small pieces of overlooked land; instead, the court concluded that the 1991 Deeds should be read as to give independent meaning to each clause. As such, the court held that unlike Greer, the general grant here was clear and unambiguous, not effected by its proximity to the Mother Hubbard clause, and was effective to convey all of Cope and Mills land in Harrison County. 59 Id. 60 Id. at * Id. 62 Id. 63 Id. 64 Id. 65 Id. 66 Id. at * Id. 14

17 Mueller also raised additional sub-arguments with the first being a discussion of what the court held in Texas Builders v. Keller. 68 Mueller argued that a reference to an unidentified portion of a larger, identifiable tract is not sufficient to satisfy the Statute of Frauds. 69 The court agreed with the rule stated in Texas Builders; however, the court explained that rule was inapplicable to this case because the general grant conveyed all of the land in Harrison County, not merely an unidentifiable portion. 70 Additionally, Mueller argued that Cope and Mills express agreement to execute any supplemental instrument to give a more accurate description of the land is evidence that the parties contemplated that additional separate tracts would be conveyed by subsequent instruments. This argument was rejected as well. 71 Finally, Mueller attempted to argue that Davis was a bad actor who had a history of fraudulent transactions; however, the court found no weight in this argument, and the Texas Rules of Evidence actually prohibited it. 72 After dismissing all of Mueller s arguments, the Supreme Court of Texas concluded the general grants in the deeds from Cope and Mills to Davis are valid and unambiguous specifically, that mere proximity to a Mother Hubbard clause does not impair a general grant confirming Davis superior title. 73 This case is of importance to landmen and attorneys when determining ownership and completing title research for the oil and gas industry and confirms the rule that, in Texas, general grants of land are valid forms of conveyances. It appears that for a general grant to be considered ambiguous and thus, invalid the grant s context must directly conflict with the granting language. Wenske v. Ealy 74 The issue in this case is whether a deed passed the entire burden of an outstanding nonparticipating royalty interest ( NPRI ) to the grantees or whether the NPRI proportionally burdened the grantor s reserved interest. The Supreme Court emphasized that Texas values effectuating the true intent of the parties, rather than resorting to the application of default or arbitrary rules. 75 The court determined the intent of the parties by examining the deed in its entirety and did not restrict themselves to the default rule from Pich v. Lankford, 76 nor the prior interpretation from Bass v. Harper. 77 In 1988, Benedict and Elizabeth Wenske bought a 55-acre mineral tract from Marian Vyvjala, Margie Novak, and others. Vyvjala and Novak each reserved a 1/8th NPRI for 25 years, totaling a 1/4th NPRI (hereinafter 1988 NPRI ). In 2003, the Wenskes sold the tract to the Ealys. The Wenskes conveyed to the Ealys all of the surface estate, reserving a 3/8ths mineral interest unto themselves (hereinafter 2003 Deed ). The 2003 Deed contained the following subject to language: 68 Id. at * Id. 70 Id. 71 Id. 72 Id. 73 Id. at * Wenske v. Ealy, 521 S.W.3d 791 (Tex. 2017). 75 Id. at * Pich v. Lankford, 302 S.W.2d 645, 650 (Tex. 1957). 77 Bass v. Harper, 441 S.W.2d 825 (Tex. 1969). 15

18 Reservations from Conveyance: For Grantor and Grantor s heirs, successors, and assigns forever, a reservation of an undivided 3/8ths of all oil, gas, and other minerals in and under and that may be produced from the Property. If the mineral estate is subject to existing production or an existing lease, the production, the lease, and the benefits from it are allocated in proportion to ownership in the mineral estate. 78 Exceptions to conveyance and Warranty: Undivided one-fourth (1/4) interest in all of the oil, gas and other minerals in and under the herein described property, reserved by Marian Vyvjala, el al for a term of twentyfive (25) years in instrument recorded in Volume 400, Page 590 of the Deed Records of Lavaca County, Texas, together with all rights, express or implied, in and to the property herein escribed arising out of or connected with said interest and reservation, reference to which instrument is here made for all purposes. Grantor, for the Consideration and subject to the Reservations from Conveyance and the Exceptions to Conveyance and Warranty, grants, sells, and conveys to grantee the Property, together with all and singular the rights and appurtenances thereto in any way belonging, to have and to hold it to Grantee and Grantee s heirs, successors, and assigns forever. Grantor binds Grantor and grantor s heirs and successors to warrant and forever defend all and singular the Property to Grantee except as to the Reservations from conveyance and the Exceptions to Conveyance and Warranty. 79 In 2011, the Wenskes and Ealys both executed oil and gas leases, and in 2013 a dispute arose as to whose share would be burdened by the 1/4th NPRI. In 2013, the Wenskes sought a declaratory judgment that their 3/8ths interest was unburdened by the 1988 NPRI. The Ealys counterclaimed that both the Wenskes and Ealys mineral interest should be equally burdened by the 1988 NPRI. The Trial court concluded that the deed burdened both parties and that the parties must share the burden of the NPRI in proportion to their mineral interests. The court of appeals affirmed. The Supreme Court affirmed the court of appeals but on different grounds. 80 The court stated the general rule that when ascertaining the construction of a deed, the parties intent will prevail over arbitrary rules. 81 The Wenskes reserved a 3/8ths mineral interest in the 2003 Deed. The Wenskes also clearly identified the existing 1/4th reservation by Vyvjala. Thus, there is no question that the Ealy s interest is burdened by the Vyvjala s reservation. However, the court concluded that the Wenske s interest was also burdened by the 1988 NPRI. The 2003 Deed s reference to the Vyvjala interest emphasized the fact that the reservation was made for 78 Wenske, at * Id. 80 Id. 81 Harris v. Windsor, 294 S.W.2d 798, 800 (Tex. 1956). 16

19 all purposes. 82 The portion of the 2003 Deed that referenced mineral reservations concluded that if the mineral estate is subject to existing production or an existing lease, the production, the lease, and the benefits from it are allocated in proportion to ownership in the minerals. 83 The Supreme Court held this to be determinative language signifying the parties intent to proportionally allocate the existing reservation. 84 Additionally, the court noted: Further, the exceptions to conveyance and exceptions to warranty are combined into one clause in this deed ( Exceptions to Conveyance and Warranty ). That combined clause, read with the subject-to clause and compared with the reservations-fromconveyance clause, indicates an intent to avoid breach of warranty (and therefore an over-conveyance problem), rather than a clear attempt to reserve a full 3/8ths interest, free of the Vyvjala NPRI. 85 Giving the deed s words their plain meaning, the court could not construe the language to solely burden the grantees with the NPRI. The Supreme Court determined that the analysis used in Bass was not applicable here because of the location of the subject-to language in the deed. The subject-to language in Bass was tied specifically to the grant. Thus, the subject-to language operated to limit the estate granted rather than solely protecting Bass against warranty claims. 86 Importantly, the court did not criticize the decision in Bass but stated that it was applicable to the specific deed language in that case. Additionally, the Supreme Court opted not to follow the rule in Pich as the court believed the intent was sufficiently clear within the four corners of the 2003 deed to avoid relying on the default rule laid out in Pich. 87 The Supreme Court ruled in favor of the Ealys, deciding that the intent of the parties was to proportionally allocate the 1988 NPRI between the Wenskes and the Ealys. In reaching its conclusion, the court relied solely on the intent of the parties as indicated in the language of the 2003 Deed. The unambiguous 2003 Deed, although far from clear, did present a sole reasonable interpretation of the intent of the parties, of which the court gave effect. In this case, the court emphasizes the importance of clearly expressing the parties intent within the four corners of the instrument because Texas courts should favor ascertaining and giving effect to that intent over employing arcane rules of construction. 88 Samson Exploration, LLC v. T.S. Reed Properties, Inc. 89 This case dealt with whether an oil company can inadvertently create overlapping units that cover the same depths, and the consequences of such an action on the payment of royalties. In determining that vertically overlapped pooling units are valid, the Supreme Court of Texas held that none of the asserted affirmative defenses held weight, and the oil company must bear the burden of their mistake in creating the overlapped unit by paying royalties to the underpaid stakeholders out of their own working interest. 82 Wenske, at * Id. at * Id. 85 Id. at * Bass, at * Wenske, at * Id. at * Samson Exploration, LLC v. T.S. Reed Properties, Inc., 521 S.W.3d 766 (Tex. 2017). 17

20 There are two groups of plaintiffs in this case, the Overlapping Stakeholders and the Unpooling Stakeholders, and each of their complaints centered around royalty payments by Samson Exploration, LLC s (hereinafter Samson ) after-unit redesignations. In 2001, Samson created the Black Stone Minerals A No. 1 Gas Unit (hereinafter Unit 1 ); 90 the subsurface boundaries of the unit were from 6,000 to 13,800 feet. Two wells produced within Unit 1: the first well produced from 12,304 to 12,332 feet, the second from 13,150 to 13,176 feet. 91 Samson unilaterally amended Unit 1 after production from both wells was obtained; the amended unit was named the Joyce DuJay No. 1 Gas Unit (hereinafter Unit 2 ). Unit 2 changed the pooling depths of Unit 1 to 12,400 feet and below. By setting the top boundary of the Unit at 12,400 feet, the amendment excluded the first well from the unit. The plaintiffs who were affected by the loss of the first well in Unit 2 are the Unpooling Stakeholders. Following the creation of Unit 2, Samson did not include production from the first well in royalty payments to the Unpooling Stakeholders. Samson then drilled a third well that produced from the depths of 12,197 to 12,342 feet. 92 Ten months after the third well was drilled, Samson retroactively designated a new unit the Joyce DuJay A No. 1 Gas Unit (hereinafter Unit 3 ) which included the same surface as Unit 2 as well as surface acreage from other properties. Unit 3 contained depths from 12,000 feet and below, which directly overlapped with the depths of Unit 2; this created the Overlapping Stakeholders who now had a portion of their interest included in two separate units. The second well was included in the overlapped depths of Unit 2 and 3; as such, royalties from that well should have been apportioned to both unit stakeholders. However, Samson never made royalty payments from the second well to the Overlapping Stakeholders in Unit 3. Upon the discovery of these issues, the Unpooling Stakeholders and the Overlapping Stakeholders filed suit. The Unpooling and Overlapping Stakeholders filed suit in 2004 and sought recovery on several grounds. All parties filed various motions for summary judgment with the trial court. In 2013, the trial court issued a final judgment that awarded damages for breach of contract in the amount of $450,000 to the Unpooling Stakeholders, and $2.5 million to the Overlapping Stakeholders. The amount awarded to the Overlapping Stakeholders included a reduction based on the proportionate reduction clauses in their leases. All parties appealed the judgment to the Beaumont Court of Appeals. The Beaumont Court reversed the judgment in favor of the Unpooling Stakeholders based on Samson s defense of ratification. Additionally, the Beaumont Court affirmed the holding for the Overlapping Stakeholders but concluded their damages were excessive. Neither party was satisfied with the ruling of the Beaumont Court, thus this appeal ensued. The parties appealed several issues to the Supreme Court. Samson argued the Overlapping Stakeholders were not entitled to recovery based off: contract invalidity, quasi-estoppel, scrivener s error, and the cross-conveyance theory of title. Samson also argued that if the Overlapping Stakeholders were entitled to recovery, Sampson was owed a right of reimbursement from the Unit 2 stakeholders as it applied to paying the Unit 3 stakeholders royalties from the second well. The Unpooling Stakeholders argued the Beaumont Court erred when they determined the Unpooling Stakeholders ratified the unit agreement based off the holding in Hooks. 93 Lastly, the Overlapping Stakeholders argued the lower courts misapplied the proportionate-reduction clause in reducing the amount of damages owed to them. 90 Id. at * Id. 92 Id. at * Hooks v. Samson Lone Star, Ltd. Partnership, 457 S.W.3d 52 (Tex. 2015). 18