MINERAL LAW

Winter 2009-2010

City of Houston v. Trail Enterprises, W.L. 3494980; LEXIS 872 (Tex. 2009)

Inverse Condemnation, City Ordinance Prohibiting Drilling for Minerals: A City Ordinance prohibited drilling for minerals in an area in the City’s extraterritorial jurisdiction near Lake Houston. Owners of the minerals in that area were unsuccessful in getting a variance in 1994, and their suit for inverse condemnation was dismissed as barred by limitations. In 1996, the City annexed the area which removed it from the extraterritorial jurisdiction ordinance. The owners again wrote the City about the possibility of drilling and the City responded by amending its ordinance to include the drilling control provisions on land within the city limits. The owners, without seeking a variance, filed claims for regulatory takings or inverse condemnation. The jury awarded damages of approximately $17,000,000 to the land owner. However, the trial court granted summary judgment against the landowner because of the absence of a variance request. The Court of Appeals reversed on the basis that the action was ripe for decision and that a futile variance request or reapplication was not required. Rather than remanding the case, however, the Court of Appeals rendered judgment on the jury verdict based on the trial court’s finding of liability. Held: The Supreme Court held it was improper for the Court of Appeals to have entered judgment based on the jury verdict, rather than remanding the case for additional findings by the trial court, i.e., whether additional exploration was warranted and whether the owners have met their burden of proof demonstrating a taking under the balancing test, and other issues.

Bomar Oil & Gas v. Loyd, W.L. 3319849; LEXIS 8007(also see prior opinion in W.L. 2136404; LEXIS 5505)(Tex. App.—Waco 2009)

Cotenants’ Right to Produce, Liability for Costs: This case reconfirmed a cotenant’s right to extract minerals from common property without first obtaining the consent of his cotenants; however, he must account to them on the basis of the value of any minerals taken, less the necessary and reasonable costs of production and marketing. In the earlier opinion published in W.L. 2136409; LEXIS 5505, the Court of Appeals explained that the right of a cotenant to mine or acquire the minerals was sanctioned because the nature of the mineral estate was such that the rights of one cotenant must be interfered with if another cotenant was permitted to exercise his rights in those properties. The rule of accountability of the mining cotenant required his payment of a proportionate part of the market value of the product less the proportionate necessary and reasonable costs of producing and marketing. The Court stated that in cases like this it was implied that the person seeking contribution for expenses had authority from his cotenant to expend the money that was actually spent, just like he had been actually instructed by his cotenant to expend that much money for the cotenant in improving the property. That right of the cotenant to recover a proportionate part of the expenses incurred did not include the right to a personal judgment against the cotenant for reimbursement, as the right to reimbursement was limited to reimbursement out of production if and when production resulted. The case also discussed issues for reasonable expenses, including interest, expense, administrative overhead, supervision fees, etc., and the necessity for such expenses.

ERG Resources v. Merlon Texas, Inc., W.L. 3491049; LEXIS 8346 (Tex. App.—Houston [1^st Dist.] 2009) (memo. op.)

Oil and Gas Assignment, Personal Property, Production: The assignment in question included the “right, title and interest in the land . . . , together with . . . the personal property thereon, appurtenant to, or used or obtained in connection with said properties and/or oil and gas units.” Oil, once severed from the land by production, is personal property. Therefore produced oil was personal property and was conveyed by that portion of the assignment.

Houchins v. Devon Energy Production, W.L. 3321406; LEXIS 8064 (Tex. App.—Houston [1^st Dist.] 2009) (memo. op.)

Mineral Deed, Reservations: The grantor conveyed the land, subject to a reservation or exception which provided “to the extent that Grantor maintains any mineral rights to the subject property, Grantor expressly retains such mineral rights to the subject property and exempts same from the conveyance herein.” The grantees claimed that the provision was merely an exception to warranty of title and not a reservation, or at least the language was ambiguous. Held: The Court discussed the Four Corners Doctrine, and confirmed that a reservation of minerals must be made by clear language to be effective as courts do not favor reservation by implication. Nevertheless, the Court determined that the language was sufficient to reserve all mineral rights in the warranty deed, as any other interpretation would not reasonably harmonize and give effect to all provisions of the contract. The Court concluded that the deed unambiguously included a reservation of the mineral rights for the Grantor.

Grisham v. Lawrence, W.L. 3287585; LEXIS 7977 (Tex. App—Tyler 2009)

Will Interpretation, Mineral Bequest: The testator owned a 1/2 interest in a mineral estate that he and his wife had reserved in a 500 acre tract of land. Section 7 of his will provided for a bequest of two tracts of land containing 1000 acres “…Save and Except from said two tracts of land that certain five hundred (500) acre tract of land conveyed by . . . to . . . , by deed dated . . . , which said five hundred acre (500) acre tract of land is described as follows . . . ” Held: The Court noted it was significant that the Testator used the word “conveyed” in this Save and Except clause. The Court felt that wording confirmed Testator’s intent to except the “land” that had actually passed under the deed. The Court also noted the term “land” in its legal sense, included minerals in place; therefore the “land” previously conveyed including the surface and 1/2 interest of the mineral estate, but not the ½ interest in the minerals reserved by the Testator and the wife. The Testator’s intent to devise the ½ minerals he owned in the 500 acre tract under the provisions of Section 7 was further confirmed by another provision in Section 7 of the will stating “it being my intention . . . to give, bequeath and devise to . . . all interest I have in and to said tracts of land herein described that has not heretofore been sold by Anna McKnight and me.” Section 9 of the will was held to be a residuary clause covering all minerals owned and not disposed of by the other provisions in the will. Since the interest in question was devised in Section 7; it would not pass under Section 9.

Enerlex, Inc. v. Amerada Hess, Inc., W.L. 3212554; LEXIS 7827 (Tex. App.—Eastland 2009)

Mineral Deed, Warranty, Quitclaim: The controlling issue was whether or not the mineral deed was a warranty deed or a quitclaim deed. It conveyed “all right, title and interest in and to all the oil, gas . . . including any future or reversionary interest, in and under and that may be produced from the … described land… “ as well as confirming the intent of Grantor to convey all interests in … said county whether or not the section or surveys are specifically described herein” or not. The deed also contained a provision that warrants “said title to Grantee . . . against every person whomsoever claiming or to claim the same or any part thereof.” Held: The Court recognized that the deed contained a general warranty, but said that the deed contained no specific representation concerning title as it did not purport to convey any specific interest, but instead just broadly conveyed all of Grantor’s interest.

Texas Independent Exploration, LTD., v. Peoples Energy Production, W.L. 2767037; LEXIS 6941 (Tex. App.—San Antonio 2009) (memo. op.)

Farmout, Depth Limitation: This case involved a controversy arising over whether there was a depth restriction on some overriding royalty interest in an assignment. It would need to be read in full to understand. It did include a number of cites regarding the interpretation of “subject to” clauses” and confirmed that they did not convey an interest nor do they reserve or retain an interest.

Rosenthal v. Railroad Commission of Texas, W.L. 2567941; LEXIS 6522 (Tex. App.—Austin 2009) (memo. op.)

Surface Estate, Right to Use Subsurface: This was an administrative appeal of a Railroad Commission order authorizing the operation of a commercial disposal well on a tract of land over the objections of the owner of the mineral estate. The Court recognized it’s review of the Commission’s final order was governed by the substantial evidence standard of the Administrative Proceeding Act and their review was limited to determination as to whether the mineral owners’ substantial rights had been prejudiced because of (1) the violation of any statutory or constitutional provision, (2) any order in excess of the Commission’s statutory authority, (3) made through unlawful procedure, (4) affected by some other error of law, (5) are not reasonably supported by substantial evidence, or (6) are capricious or characterized by abusive discretion or clearly unwarranted exercise in discretion. Held: The Court recognized the Railroad Commission’s assertion that the interest between surface owners and mineral owners was not simply defined along rigid lines of what was above ground and what was below ground, and recognized that Texas Courts have a long history of balancing the competing interests of surface and mineral owners and requiring reasonable accommodation between them. After discussing the applicable rules, the Court upheld the Railroad Commission order determining that the surface owner possessed a good faith claim of the right to use the well for disposal of salt water “into non-productive zones.”

H&S Production, Inc. v. Dorchester Minerals, LP, W.L. 2478089; LEXIS 6386 (Tex. App.—Dallas 2009) (memo. op.)

Compensatory Royalty, Lease Termination: The lease had several provisions which were discussed at length in the opinion. One of the provisions gave the Lessor, in the event of Lessee’s failure to pay compensatory royalty due, the option to “(i). terminate the lease, (ii) terminate the lease and collect from Lessee all monies due hereunder or (iii) collect from Lessee all moneys due hereunder.” Held: The Court held that the contract showed the parties provided a specific provision for breach of the obligation to pay compensatory royalties which was enforceable.

Pounds v. Jurgens, et al., W.L. 2232070; LEXIS 4729 (Tex. App.—Houston [14th Dist.] 2009)

Ad Valorem Taxes, Tax Foreclosure: The Trial Court declared a 1986 – 87 judgment of foreclosure and tax sale void to the extent the judgment and sale purported to convey the mineral interest in a 20-acre tract. The issue was whether the tax foreclosure judgment and order of sale gave the sheriff authority to sell the royalty interest for delinquent taxes on the surface estate, but not on the royalty interest. Held: The Court pointed out that minerals in place were realty and that a grant or reservation of the mineral interest by the fee owner affected a horizontal severance and created two separate and distinct estates, which could be done by a regular deed or by a lease, leaving the Lessor only the possibility of reverter and the right to receive royalty. The Court noted that a Lessor’s right to receive royalties was non-possessory but nevertheless considered an interest in real property and was taxable as such. (The possibility of reverter was nontaxable interest.) While Texas Courts have held that rents or royalties payable under oil and gas leases and the right of reverter were property rights and were severable from the ownership of the surface estate, in this case the owner’s interest in the royalty and the possibility of reverter were never severed from the surface estate. The Court stated that to say that the royalty and the possibility of reverter had not been severed from the surface estate did not, however, resolve the question as to whether the royalty interest and possibility reverter were subject to foreclosure and covered by the sheriff’s deed. The tax lien extended only to the particular realty against which the taxes had been assessed. Under the tax law, the mineral interest of the property would have had to have been taxed with the surface in order to be subject to the foreclosed tax lien. Those circumstances were not present in this case. The court therefore concluded that the judgment of foreclosure and order of sale did not extend to the royalty interest in this case. However, the surface estate carried with it the unsevered, nontaxable possibility of reverter in the mineral estate.