Face Challenges Confidently

173 Texas Genco, LP v. Valence Operating Co.

Friday, September 4th, 2015

Richard F. Brown

Texas Genco, LP v. Valence Operating Co.1 discusses the accommodation doctrine and approves a broad-form jury question on the reasonableness of directional drilling.       Surface owner sued to enjoin mineral owner from straight-hole drilling a gas well on a tract which was a part of surface owner’s ash-disposal landfill for its nearby electrical power generation plant.    The tract in question was part of a landfill approved by the Texas Commission on Environmental Quality, and there was ample evidence of the uniqueness of the use and the serious consequences for surface owner of drilling in the landfill. Surface owner offered to mineral owner compensation for the additional cost of directional drilling and a corridor to drill just outside the landfill.       Negotiations failed, mineral owner began constructing a pad, surface owner obtained a temporary injunction, and trial proceeded on surface owner’s suit for a permanent injunction and mineral owner’s counterclaim for damages. The trial court submitted three questions, rather than a broad-form submission, and based on the jury’s answers, denied the permanent injunction and awarded mineral owner $400,000 in damages.  The court of appeals reversed.2
1. 187 S.W.3d 118 (Tex. App.—Waco, 2006, pet. filed).
2.  Id. at 120-21.
In Texas, the dominant mineral estate has the right to reasonable use of the surface estate to produce minerals, but the right must be exercised with due regard for the rights of the surface estate owner. The accommodation doctrine takes the concept of “due regard” and balances the rights of the surface and mineral owners in the use of the surface.3 The court relied heavily on its previous experience in Haupt I and Haupt II, and it discussed in detail the accommodation doctrine, the elements, the burden of proof, and the form of submission.
“Where there is an existing use by the surface owner which would otherwise be precluded or impaired, and where under the established practices in the industry there are alternatives available to the [mineral owner] whereby the minerals can be recovered, the rules of reasonable usage of the surface may
require the adoption of an alternative by the [mineral owner]” (emphasis added).4    The mineral estate is the dominate estate, and if there is but one way to produce the minerals, the mineral owner has the right to pursue his use, but the court emphasized
3.  Id 121-22, citing the leading cases of Getty Oil Co. v. Jones, 470 S.W.2d 613 (Tex. 1971) (“Getty”), Tarrant County Water Control & Improvement Dist. No. 1 v. Haupt, Inc., 854 S.W.2d 909 (Tex. 1993) (“Haupt I”), and Haupt, Inc. v. Tarrant County Water Control & Improvement Dist. No. 1, 870 S.W.2d 350 (Tex. App.—Waco 1944, no writ) (“Haupt II”).
4.  Id. Texas Genco, 187 S.W.3d at 122 quoting both Haupt I and Getty.
that if there is another way to produce the minerals, the mineral owner may be required to use it.5
The surface owner has the burden of proof on all the elements and the burden of obtaining the findings necessary to carry that burden. In order to prove the mineral owner should use the alternative industry practice, the surface owner must first show “that any alternative uses of the surface, other than the existing use, are impracticable and unreasonable under all the circumstances”.6       The surface owner must next show that the surface use by the mineral owner being challenged is not reasonably necessary to the mineral owner under all circumstances.    This may be done by proving that the mineral owner has available other reasonable means of production that will not interfere with the surface owner’s existing use.7
The case was submitted on three questions the court of appeals disapproved, stating that the trial court should have submitted a broad-form charge.8                     The court of appeals ruled on the effect of the jury finding as a legal question under a denovo standard of review.  The entire focus of the opinion was on the court’s analysis of that verdict and its conclusion that there was sufficient evidence and an adequate finding to satisfy

5. Texas Genco, 187 W.3d at 122.
6. Id
7. Id at 123.
8. Id at 123 f.n.2.
the second element:  the mineral owner had available other reasonable means of production that would not interfere with the surface owner’s existing use.  The mineral owner argued that the surface owner failed to submit or secure a finding on the first element (any alternative use is impractical), and therefore, it should be deemed found against the surface owner.  The court held that there was no fact issue, it was not contested at trial, and the evidence conclusively established that the surface owner’s only reasonable use of the tract was as a part of the landfill.9   Therefore, although this case went against the mineral owner on difficult facts and a procedural issue, it appears that in most cases the surface owner could have a difficult time proving that “any alternative uses of the surface, other than the existing use, are impracticable and unreasonable under all the circumstances.”
Because a directional well is almost always a theoretical alternative, but with increased risk, time, and expense, there has been speculation as to whether a directional well would be a reasonable alternative (as contemplated by Jones, Haupt I, and Haupt II) and as to who would bear the increased burden. Apparently, under Texas Genco, the mineral owner is required to bear the entire burden and risk.  The court held that directional drilling is a reasonable, industry-established, alternative method to gain access, and there was a jury finding that it was a “reasonable” alternative.10
The opinion says:
On the issue of the reasonableness of directional drilling as an economically viable alternative, which Valence disputed because of the increased cost and alleged decreased yield, Genco presented evidence that Valence’s cost estimates were too high and that Valence could extract all of the gas.  Moreover, the evidence showed that regardless of the costs and decreased yield, the projected $15 to $25 million in gas reserves in Holmes No. 8 warrant Valence’s directional drilling, regardless of the increased costs.    In conclusion, legally sufficient evidence supports the jury’s answers to Questions 1 and 1(a).11
If the mineral estate is truly the dominate estate, it would seem more logical that the surface owner must compensate the mineral owner in damages for forcing the alternative use. Texas Genco will encourage every surface owner to litigate, because they have nothing to lose except litigation costs, and they might get lucky on a jury finding of a “reasonable” alternative.  The mineral owner has always been at risk in damages for excessive or unreasonable surface use, but
10                Id. at 123-24.
11                Id. at 125.
apparently the surface owner who establishes an existing use gets a free pass.   However, if the surface owner must first prove “that any alternative uses of the surface, other than the existing use, are impracticable and unreasonable under all the circumstances,” then it should be a rare occurrence for a surface owner to force an alternative surface use by the mineral owner.