Face Challenges Confidently

162 Mission Resources, Inc. v. Garza Energy Trust

Tuesday, September 1st, 2015

Richard F. Brown

Mission Resources, Inc. v. Garza Energy Trust [166 S.W.3d 301 (Tex. App. – Corpus Christi 2005, pet. filed)] imposes $10,000,000 in punitive damages in a case involving subsurface trespass, bad faith pooling, and breach of the implied covenants to develop and to protect against drainage. The case arose in South Texas where Coastal operated two tracts – Share 12 in which it owned 100%, and Share 13 in which it owned 84%. Coastal conducted a large frac job on Share 12, but Coastal was slow in pursing additional development on Share 13. The jury verdict was almost completely against Coastal, and the court affirmed on all issues.
This is the first case in Texas to hold an operator liable for subsurface trespass by hydraulic fracture stimulation treatment of a well. There was contradictory evidence as to whether the trespass had actually occurred and the extent of the drainage, but there was sufficient evidence for the court to affirm the jury’s verdict. On the legal issue of subsurface trespass, the court acknowledged that Geo Viking, Inc. v. Tex-Lee Operating Co., which appeared to hold that fracing could not be a trespass, could not be reconciled with the Mission court’s reading of the Texas Supreme Court’s opinion in Gregg v. Delhi-Taylor Oil Co. The Corpus Christi court concluded it would follow the Texas Supreme Court’s opinion as expressed in Gregg. The court also expressly ruled that the royalty owners could sue for trespass, even though their ownership was only a non-possessory interest.
The land owners obtained a favorable jury verdict on the tort claim for trespass. This tort claim was the basis for punitive damages. To support a verdict of malice, the landowners had to prove by clear and convincing evidence either that Coastal specifically intended to cause substantial injury or harm, or that Coastal’s acts or omissions involved an extreme degree of risk, considering the probability and magnitude of the potential harm to others. Because the court found “specific intent,” it did not rule on “gross negligence.” The evidence of specific intent to cause substantial injury was, in this case, essentially circumstantial. The most significant facts appeared to be that Coastal owned a larger interest in Share 12, Coastal’s engineers did not really consider the extent of the fractures relative to the lease lines, and it was a really large frac. The statutory cap on punitive damages of two times economic damages would have limited punitive damages to $1,087,532. However, the landowners secured a favorable finding on felony theft, which made the cap inapplicable.
The case is significant because it is the first case supporting trespass based on hydraulic fracturing. It has been appealed, and review has been granted.