Face Challenges Confidently

455 Kadane Corp. v. Cholla Petroleum, Inc.

Tuesday, September 8th, 2015

Richard F. Brown

The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
Kadane Corp. v. Cholla Petroleum, Inc., No. 11-11-00236-CV, 2013 WL 3336612 (Tex. App.—Eastland June 27, 2013, no pet.) held that a mineral lessee’s pipeline easement was not an existing use of the surface and another operator’s connection to the same pipeline did not unreasonably interfere with any existing surface use.  Kadane Corporation (“Kadane”) operated wells on a peninsula in Possum Kingdom Lake and utilized a pipeline owned by Enbridge.  Cholla Petroleum, Inc. (“Cholla”) obtained production from under Possum Kingdom Lake and connected to the Enbridge pipeline under a surface use agreement obtained from the surface owner.  Cholla’s wells connected to the pipeline at a separate location from Kadane’s connection.  The surface use agreement provided that Cholla must “not unreasonably interfere with the existing use of such land by [Kadane]. . . .”  Kadane claimed that it used the surface of the land for the entire length of the Enbridge pipeline to gather and market Kadane’s gas and that for Cholla to tie into the pipeline was an unreasonable interference with Kadane’s rights.  Under the original line use agreement, Kadane was required to add 1,500 feet to the then existing pipeline of 12,000 feet.  However, the only existing use of the surface alleged by Kadane in this controversy with Cholla concerned the surface of the land over the entire length of Enbridge’s pipeline.  Kadane’s suit was for breach of the surface use agreement brought by Kadane as a third party beneficiary of that contract.
It was undisputed that Kadane, as the mineral lessee, had dominant rights to the surface estate which precluded interference with its existing uses.  The question was whether Cholla interfered with an “existing use” of the surface by Kadane.  The court questioned whether Kadane had any existing use of the surface and cited to Cole v. Anadarko Petroleum Corp. (explaining that a mineral lessee uses the surface during installation of a pipeline and that once installed, the use becomes a pipeline easement).  In any event, Kadane’s obligations to use “due regard” and the duty “to accommodate” prevented Kadane from claiming Kadane was using all of the surface along the pipeline so as to exclude any other operator from connecting to the pipeline.  Therefore, as a matter of law, Cholla did not unreasonably interfere with an existing use of the surface by the mineral lessee.
This was a breach of contract case, but the implications of the decision on the accommodation doctrine are interesting.  The court focused on the then “existing use” of the surface and did not consider whether Cholla’s use might in the future interfere with Kadane’s existing or future use of the pipeline.  Although the court did not expressly reference the accommodation doctrine, it did apparently assign some weight to Kadane’s duty of accommodation.  To determine that a use was reasonable or unreasonable ordinarily requires a fact finding, but the court upheld the summary judgment as a matter of law.  This must mean there was no “existing use” of the surface by Kadane.