Face Challenges Confidently

698 VirTex Operating Co. v. Bauerle, No. 04-16-00549-CV, 2017 WL 5162546 (Tex. App.—San Antonio Nov. 8, 2017, no. pet. h.), rule 53.7(f) motion granted) (Jan. 25, 2018)

Wednesday, August 29th, 2018

Richard F. Brown

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

VirTex Operating Co. v. Bauerle, No. 04-16-00549-CV, 2017 WL 5162546 (Tex. App.—San Antonio Nov. 8, 2017, no. pet. h.), rule 53.7(f) motion granted) (Jan. 25, 2018) (mem. op.), held that an oil and gas lessee could not install overhead power lines to producing wells under the accommodation doctrine. Bauerle owned the surface estate of an 8,500-acre ranch upon which it ran a commercial hunting business and cattle operation. VirTex acquired an oil and gas lease on the ranch covering about 3,000 acres and drilled nine oil wells. The pump jacks were running on temporary portable generators. VirTex proposed drilling 45 more wells. VirTex asked Bauerle to grant to VirTex an easement for VirTex to install a gridwork of overhead power lines on the lease to reach the existing and proposed wells. Bauerle refused, insisting that such overhead power lines would substantially impair the airspace of the property, which included use of helicopters for game management and other operations. Hunting leases were the main source of income for the ranch, and the lessee hunters used helicopters for extreme flying, five feet off the ground, to herd the deer into areas where they could be captured with a net gun. Bauerle asked VirTex to halt construction plans, and VirTex agreed. Bauerle then filed a declaratory judgment action against VirTex, seeking judgment that the proposed use would substantially impair Bauerle’s pre-existing use of the surface and the airspace.

The issue was whether the accommodation doctrine prevented VirTex from installing the overhead power lines. Under the accommodation doctrine, if the mineral owner or lessee has only one method for developing and producing minerals, then that method may be used regardless of whether it precludes or substantially impairs the surface estate owner’s existing use of the surface. However, if the mineral owner has reasonable alternative uses of the surface, one of which permits the surface estate owner to continue to use the surface in the manner intended, then the mineral owner must use the alternative method. The mineral owner’s absolute right to use the surface is preserved if there is only one way to produce the minerals. The accommodation doctrine and the burden of proof is now defined as follows:

[T]he surface owner has the burden to prove that (1) the lessee’s use completely precludes or substantially impairs the existing use, and (2) there is no reasonable alternative method available to the surface owner by which the existing use can be continued. If the surface owner carries that burden, he must further prove that given the particular circumstances, there are alternative reasonable, customary, and industry-accepted methods available to the lessee which will allow recovery of the minerals and also allow the surface owner to continue the existing use.

In this case, under the first prong of the accommodation doctrine, the court examined whether the proposed power line grid would completely preclude or substantially impair leasing to helicopter hunters. It held that it would. The court found the testimony of the lessee hunter helicopter pilots to be sufficient evidence that the installation of the power lines would create “a very dangerous situation,” and that the testimony was legally and factually sufficient to prove the power lines would substantially impair the existing use of helicopters over the airspace of the property. Further, the court held that the impairment need not actually be in place (no overhead lines were in place) for the impairment to be considered under the accommodation doctrine.

The second prong of the accommodation doctrine requires an inquiry as to whether there exists any reasonable alternative method to Bauerle to continue its existing surface use. The court found that there was not. Testimony produced by Bauerle established that the proposed alternatives to helicopters were so inconvenient, expensive, and inadequate so as to make any proposed alternative method (e.g., use of four-wheelers) unreasonable. In summary, the lessee helicopter hunters testified that installing power lines would make it unsafe to fly, and if they could not fly, they would not lease. VirTex argued the evidence merely showed other leases would be less economically beneficial to the surface owner. VirTex’s argument relied on Merriman v. XTO Energy Inc., which held that the surface owner could be required to use other corrals and pens to conduct its cattle operations. This opinion appears to be focused on whether the helicopter hunters had a reasonable alternative.

The court then turned to whether Bauerle had proved an alternative reasonable, customary, and industry-accepted method was available to VirTex to recover the minerals. The court concluded there was an alternative for VirTex. VirTex presented some evidence that use of natural gas would require an easement across an adjoining tract and that there was no evidence that the easement could be obtained, that gas would cost $200-$300 more per well per month, and that burying electric powerlines would be even more expensive. The court ruled there was “more than a mere scintilla of evidence” that burying the power lines or using natural gas were reasonable, industry-accepted alternative methods that VirTex could use, and that while the available alternative may not be the preferred or most economical method, under the accommodation doctrine, it need only be shown to be a reasonable and industry-accepted alternative.

The opinion seems to assume that the “reasonable” industry alternative is a technology question, without any consideration of economics. There is nothing in the opinion aggregating, comparing, or weighing the relative economic consequences for the surface owner and the mineral owner. The accommodation doctrine is not yet fully developed. Is the surface “use” generic or specific? What weight should be given to “first” use? Should there be a cost/benefit balancing test? Moving away from dominant mineral estate to accommodation inevitably means more fact questions.

There was also a procedural point of some significance. VirTex contended that the awarding of attorney’s fees to Bauerle under the Uniform Declaratory Judgments Act (“UDJA”) was in error. Under Section 37.009 of the Texas Civil Practice & Remedies Code, “a court may award costs and reasonable and necessary attorney’s fees in a proceeding brought under the UDJA.” However, a party cannot use the UDJA as a vehicle to obtain otherwise impermissible attorney’s fees. VirTex argued that Bauerle’s request for relief was effectively injunctive as opposed to declaratory and thus outside the scope of the UDJA. In support, it argued that every other accommodation doctrine case was a case of injunctive relief. However, the court held that in this case Bauerle properly requested declaratory relief instead of injunctive relief because VirTex had already voluntarily ceased installation of the power lines. Bauerle correctly sought a declaratory judgment action because there was “an active dispute with regard to their rights and obligations” and there was nothing in the record to suggest Bauerle sought a declaration solely for the purpose of recovering its attorney’s fees.

The significance of the case is limited because it is essentially an evidence case, and perhaps that is why it is a memorandum opinion. It focuses on whether the lessee helicopter hunters have an alternative use, rather than on whether the land can be leased to others for hunting, which could be merely inconvenient or less economically beneficial to the surface owner than the existing method of use (see, e.g., Merriman). That is, was the “existing use” a hunting lease, or a helicopter hunting lease?