Hot Topics for Trial Lawyers
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Coastal v. Garza
Posted 9/15/08 Koy R. Killen, Winstead, P.C.
On August 29, 2008, almost two years after the case was argued, the Texas Supreme Court issued its long-awaited opinion in Coastal Oil & Gas Corp. v. Garza Energy Trust, et al., No. 05-0466, 2008 Tex. LEXIS 771, (Tex. August 29, 2008) (internal citations omitted). Perhaps the most important issue on appeal was the validity of the Plaintiffs' trespass cause of action against a natural gas producer ("Coastal"), whose hydraulic fracturing operations extended across a lease property line and underneath the Plaintiff's property.1 At trial in Hidalgo County, the jury awarded $1 million in lost royalties due to drainage of natural gas from the Plaintiffs' property resulting from the trespass.2 On appeal, Coastal argued that hydraulic fracturing is not an actionable trespass. The Court received amicus curiae briefs from "every corner of the industry," including regulators, landowners, royalty owners, operators, and hydraulic service providers opposing trespass liability for hydraulic fracturing.
On this issue, the Supreme Court ultimately held that mineral interest lessors hold only a royalty interest with the possibility of reverter, but "no right to possess, explore for, or produce the minerals," which is similar to a landlord's reversion interest in the surface estate. As such, the Plaintiffs were required to prove actual, permanent harm to the property. In its opinion, the Supreme Court sidestepped the issue of whether or not subsurface fracturing operations could conceivably constitute a trespass under a different set of facts by ruling that the Plaintiffs' cause of action is precluded by the famous "rule of capture." Under this rule, a mineral rights owner is given title to all of the oil and gas produced from a lawful well bottomed on the property, even if the oil and gas flowed to the well from beneath another owner's tract. Therefore, the Court reasoned that the gas the Plaintiffs claimed to have lost simply did not belong to them. The Plaintiffs also made no claim and admitted no evidence at trial that the Defendant's fracturing operations caused any actual, physical damage to any part of their property.
As further justification for the ruling, the Court's majority opinion reasons that the law already affords an owner claiming drainage full recourse because he can drill wells and institute fracturing operations on his own property to offset drainage, sue his lessee for failure to drill an offset well to protect against drainage, offer to pool interests in the area and/or apply to the Texas Railroad Commission for forced pooling. Furthermore, the Court's majority voiced concerns that allowing recovery for the value of gas drained by hydraulic fracturing would usurp the Railroad Commission's lawful authority to regulate oil and gas production in Texas.
For the moment at least, natural gas producers should be able to breathe a sigh of relief, because the precedent set by Garza opinion should prevent a multitude of post-fracturing trespass suits seeking royalties for drained gas from neighboring properties that would have most likely been filed had the outcome been different. However, as addressed above, the Supreme Court's opinion does not address the ultimate question of whether or not subsurface fracturing operations could constitute an actionable trespass under a different set of facts. For example, the Court left open the possibility that landowners may still be entitled to recover "nondrainage" damages if they present evidence of actual damage to any specific portion of their property, which could include damage to subsurface gas-bearing formations such as the Barnett Shale.
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1 It is important to note that in this case the wellbore did not extend across the property line, and that the only evidence of any alleged trespass was that fracing fluid and granulated slurry crossed underneath the Plaintiff's property.
2 The total award was over $15 million, including $10 million in punitive damages, all of which was either reversed and judgment rendered for the Defendant or remanded to the trial court for a new trial based upon other issues on appeal.