695 XTO Energy Inc. v. Goodwin, No. 12-16-00068-CV, 2017 WL 4675136 (Tex. App.—Tyler Oct. 18, 2017, pet. denied)

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.

XTO Energy Inc. v. Goodwin, No. 12-16-00068-CV, 2017 WL 4675136 (Tex. App.—Tyler Oct. 18, 2017, pet. denied), held that there is no depth limitation on a cause of action for a subsurface trespass. Goodwin owned at least some of the minerals in three small tracts that were included in a lease eventually acquired by XTO. The opinion does not discuss Goodwin’s surface rights, but apparently Goodwin owned at least some surface rights. There was an underpayment of bonus on the lease, and at all relevant times Goodwin contended the lease was void. XTO acknowledged a mistake in payment of bonus, but XTO disagreed that the lease was void. In 2010, XTO formed the “North Unit,” purported to pool Goodwin’s lease, and completed a unit well. In 2012, Goodwin began receiving royalties on the North Unit, which Goodwin kept. At about the same time, XTO formed the “South Unit” including lands adjacent to and immediately south of the North Unit. Goodwin’s land was right on the south boundary of the North Unit. XTO drilled the vertical leg of its horizontal well on the South Unit very close to the boundary line between the units. On April 25, 2012, the South Unit well bit was within 60 feet of the boundary. On May 5, the path of the wellbore had entered Goodwin’s tract at a depth of 10,000 feet and bored 126 feet through Goodwin’s tract. On May 8, about halfway through the ultimate total trespass path and after casing had been set, XTO decided to just keep going. The well exited Goodwin’s tract at a depth of 13,200 feet after trespassing for 2,900 linear feet.

Goodwin refused to grant a subsurface easement to XTO. XTO suspended Goodwin’s royalties on the North Unit, alleging Goodwin had been overpaid. The well was drilled to total depth and perforated, but never produced, while XTO awaited the outcome of the dispute.

During the subsequent litigation, Goodwin obtained a partial summary judgment, which voided the lease for underpayment of lease bonus. The court did not review the trial court’s ruling on the lease. Therefore, for purposes of all the other issues in the opinion, Goodwin was effectively unleased. After obtaining the partial summary judgment voiding the lease, Goodwin tried the case to a jury on trespass, bad faith trespass, conversion, fraud, and bad faith pooling. The jury found for Goodwin on all claims, but also found that XTO did not act with malice or commit fraud. Goodwin accepted the damages awarded for trespass and bad faith pooling, totaling over $2,000,000. There was also a directed verdict that Goodwin was not obligated to repay XTO for $386,000 in royalties Goodwin received and retained for production attributable to the North Unit.

XTO contended that “Goodwin did not have a legally protected ownership interest in the subsurface two miles below the surface of his property sufficient to support a trespass cause of action.” One of the issues in Coastal v. Garza was “whether the incursion of hydraulic fracturing fluid and proppants into another’s land two miles below the surface constitutes an actionable trespass.” The court in Garza did not decide that issue, but in dicta, it recited that the ad coelom doctrine (ownership in land extends to the sky above and down to the center of the earth) “has no place in the modern world.” Relying on Garza, XTO argued that a deep subsurface intrusion alone will not support a trespass claim. In Environmental Processing v. FPL Farming, one issue before the court was whether the “subsurface migration of wastewater onto an adjacent property” would support a cause of action for deep subsurface trespass. Again the court decided the case on other grounds and did not comment on the ad coelom statement in Garza. The court also cited Lightning v. Anadarko and Humble v. West for the holdings that the surface owner owns and controls the non-mineral subsurface and is allowed to permit drilling through the mineral estate to access production on another tract. None of these Supreme Court cases actually impose a depth limitation on actionable subsurface trespass. “Regardless of the depth that XTO’s wellbore entered or exited Goodwin’s subsurface, the approximately 2,900 linear feet the cased wellbore intruded into Goodwin’s property constitutes an actionable trespass.”

Goodwin then lost his cause of action for subsurface trespass by failing to prove damages. XTO argued generally that Goodwin’s damage model was focused more on the value of the well to XTO, rather than the traditional damage model for permanent injury to land. However, the opinion focused more on Goodwin’s expert testimony and held that there was no evidence on damages because the basis of the expert’s opinion was so unreliable. The expert’s damage model was: Trespass Feet/Wellbore Feet x Value of Well = Damages. For the value of the well, the expert used XTO’s valuation forecast in its SEC filing. There was no evidence on how XTO arrived at its forecast, so the court found the valuation unreliable. Further, there was no evidence of actual production from the well, and XTO does not have the legal right to transport production through the wellbore without obtaining an easement from Goodwin (apparently Goodwin owns the surface). Therefore, the well had no value.

After losing his trespass claim, Goodwin also lost on bad faith pooling. The court held that the implied duty to pool in good faith originates with the lease, and if there is no lease, there is no duty. “Bad faith pooling is the failure of a lessee to act fairly and in good faith as to a lessor.” “To be liable for bad faith pooling, an operator must have the contractual authority to pool before it can breach the implied duty of fairness and good faith as to non-producing tracts in the exercise of its pooling powers.” Goodwin argued Wagner & Brown v. Sheppard (which held a pooled unit did not expire when a lease in the pool expired because the lands were pooled) was controlling. The court found Wagner & Brown did not apply because the lease in that case was in effect at the time the operator created the unit, whereas here, there was never a valid lease.

XTO counterclaimed to recover $386,000 it paid to Goodwin as unit royalties on the North Unit. The producing well was a unit well, not a lease well. Given that Goodwin sought to declare the lease void, and the lease was declared void by the court, XTO contended that Goodwin was contractually bound by implied covenants in the lease and contractual provisions in the division order to return the royalties, or alternatively, Goodwin was equitably bound to return the royalties as money had and received to prevent Goodwin from being unjustly enriched. There was no evidence as to who would receive the benefit of reimbursement of the royalties Goodwin received, so the court simply presumed XTO would receive the benefit. The court then relied upon Gavenda v. Strata on division orders, which it says holds that operators cannot rely upon division orders to profit from their own errors in preparing division orders. This is probably a fundamental misunderstanding of Gavenda. Gavenda holds that the underpaid owner who signed a division order must seek recovery against the overpaid owner, not the operator, but if the overpaid owner is the operator, the division order will not protect the operator from accounting to the underpaid owner for the operator’s share of the overpayment. Goodwin was not an underpaid owner.

The court then concedes that when the lease was voided, Goodwin was not entitled to royalties on the North Unit and therefore Goodwin “has been unjustly enriched by the receipt of the royalties from that [North Unit well].” This would seem to justify an equitable recovery by XTO under XTO’s theory of money had and received. However, the court affirmed the windfall to Goodwin on the theory of voluntary payment. “Money voluntarily paid on a claim of right, with full knowledge of all the facts, in the absence of fraud, deception, duress, or compulsion, cannot be recovered merely because the party at the time of the payment was ignorant of or mistook the law as to his liability.” The voluntary payment rule may be a defense to a suit for restitution, and the court here relied upon that rule to deny XTO’s counterclaim.

The significance of this case is the holding that there is no depth limitation on the surface owner’s rights in the subsurface.