X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Click here for the full text of this decision FACTS:The Garza and Salinas own a tract of land called Share 13 in Hidalgo County. They have a lease with the company that used to be called Coastal Oil and Gas Corp., but which now goes by the name of El Paso Production Oil & Gas Co., for a royalty interest in mineral rights to Share 13. Coastal is the lessee of the Share 13 mineral estate, and it owns both the surface and mineral estates of a neighboring tract, called Share 12. Coastal conducted a “frac job” on Share 12, whereby liquid is pumped into the oil well to break up rock formations that trap gas. According to the two families, the frac job was greater than necessary, and caused fractures and cracks two miles away, across the lease line, in Share 13. The cracks allowed gas and gas condensate to be drained from Share 13 to the Share 12 well. The families brought suit against Coastal, claiming subsurface trespass to Share 13. They also claimed that Coastal breached the duty of good faith pooling, as well as the implied covenants to market, develop the leasehold, and protect against drainage. During trial, a 1977 memo written by a Coastal employee was entered into evidence over Coastal’s objection. The memo dealt only with title issues and was introduced to rebut Coastal’s defensive theory on the families’ claim that Coastal had failed to develop the families’ lease. One passage in the memo explained that the reason Coastal was having difficulties settling the title to the lands was because “possession of these lands began over 200 years ago and the people in possession were mostly illiterate Mexicans and later Mexican-Americans who had large families.” In subsequent testimony, a member of the Salinas family said he was insulted and humiliated by the statement. During closing arguments, Coastal’s attorney, a Mexican-American, implored the jury to remember that it was once commonplace for Mexicans in Texas to be illiterate, as were probably “80 percent of the gringos,” and that it was nothing to be ashamed about because people back then were of the land, not “of the letter.” He stressed his status as a Mexican-American, spoke a Spanish-language phrase and touted the courageousness of “our” ancestors. The jury was instructed that malice had to be proved either by showing specific intent or by showing gross negligence. The jury returned a verdict in favor of the families on each of their claims except breach of the implied covenant to market. A jury awarded the families $1 million, but the trial court reduced the award to $543,776 to conform to the evidence. In connection with its trespass finding, the jury found that Coastal had acted with malice and awarded $10 million in punitive damages. The jury also found that Coastal had committed “felony theft,” which rendered inapplicable the statutory cap on punitive damages. The trial court awarded attorneys’ fees and prejudgment interest, too, resulting in a $14 million total recovery. HOLDING:Affirmed in part; reversed and remanded in part. Coastal first argues that Texas does not recognize a cause of action for subsurface trespass based on the hydraulic fracture stimulation treatment of a well. According to Coastal, no Texas court has ever held that “fracing” can support a cause of action for trespass damages. Examining the two relevant cases, Gregg v. Delhi-Taylor, Co., 344 S.W.2d 411 (Tex. 1961), and Geo-Viking, Inc. v. Tex-Lee Operating Co., 817 S.W.2d 357 (Tex. App. Texarkana 1991), writ denied per curiam, 839 S.W.2d 357 (Tex. 1992), the court agrees that the two seem contradictory, and that some courts have ruled that Geo-Viking, which does not recognize such a cause of action, is controlling. This court, however, concludes that Geo-Viking did not overrule Gregg, and it is not up to this court to reconcile the two. Instead, Gregg still has precedential value, so there may be a cause of action for subsurface trespass based on fracing. The court disagrees with Coastal that the families do not have standing to sue for subsurface trespass. The families have alleged that the subsurface trespass caused an injury in the form of drained gas in which they have a royalty interest. Monetary damages would redress the situation. Therefore, the families have standing to sue, the court holds. Next, the court reviews the sufficiency of the evidence regarding malice. The court takes note of 10 specific evidentiary points that supported the jury’s finding, which included evidence that Coastal did not seek the families’ consent before conducting the frac job, that it closed down another well on Share 13 before starting the frac job, and that the design of the frac job did not consider lease-line boundaries (that is, the fracture treatment far exceeded the length necessary to stay within Share 13′s boundaries. The court finds these and other evidentiary facts contain more than a scintilla of evidence to establish Coastal’s specific intent to cause substantial harm to the families. On the pooling finding, on which the jury awarded $1 million, the court observes that one of the families’ expert witnesses testified that Coastal had formed a pooled unit in a manner that financially penalized the families, even though there were other ways to pool without creating such a penalty. The court agrees that a lessee shouldn’t have to subordinate its own interest to the lessor’s interests, but by the same token, a lessee is prohibited from subordinating the lessor’s interests entirely to its own when it comes to the duty of good-faith pooling. The court then reviews the evidence supporting punitive damages. First, Coastal argues that the punitive damages exceed the statutory cap for punitive damages. The court, however, points out that the families could avoid the statutory cap by alleging that Coastal was guilty of felony theft. They had to prove that when Coastal fractured its well, it intended to and did unlawfully deprive the families of their property in an amount in excess of $20,000. The jury’s affirmative finding on this point removed the cap that otherwise would have limited any punitive damage award to $1,087,532, or twice the actual economic damages awarded for trespass. “The jury’s award of damages in the amount of $543,776 establishes that the value of the property taken from [the families] exceeded $20,000. This is more than a scintilla of evidence to prove, beyond a reasonable doubt, that when Coastal fractured its well, it intended to and did unlawfully deprive [the families] of their property in an amount in excess of $20,000.” The court reviews the sufficiency of the evidence supporting the amount of punitive damages awarded. The court disagrees with Coastal’s argument that one of the jury questions did not inquire about damages for Coastal’s alleged conduct as a trespasser, only about damages based in contract. The court instead finds that the tort and contract damages in this case necessarily overlap because Coastal played two different roles in causing the families’ damages: As an adjoining landowner, Coastal trespassed onto Share 13, and as the lessee of Share 13, it failed to protect against the substantial drainage caused by its trespass. “Although Coastal’s two different roles created two distinct injuries, one sounding in tort and one sounding in contract, the damages from both injuries are the same: diminished royalties caused by the drainage of gas and gas condensate from Share 13. Not only are the damages the same, they are inseparably linked to the two different injuries that caused them.” The court then considers whether the amount awarded in punitive damages was excessive to the point of being a violation of due process. The court applies the three factors enunciated in BMW of N. Am. v. Gore, 517 U.S. 559 (1996): 1. the degree of reprehensibility of the conduct; 2. the disparity between the harm or potential harm suffered by the plaintiff and his punitive damages award; and (3) the difference between this remedy and the civil or criminal penalties authorized or imposed in comparable cases. Though Coastal did not cause physical injuries, there was a substantial amount of economic harm. Coastal undertook the frac job with malice, and the harm Coastal caused resulted from an abuse by Coastal of its dual roles as a landowner and lessee. Therefore, Coastal’s conduct was sufficiently repugnant to justify the punitive damages. Though the ratio of punitive to actual damages was 20-1, the court finds that the ratio is lower than the ratio struck down in Gore, and further notes that the U.S. Supreme Court has said that “ratios are not binding” and that cases should be evaluated one by one. Here, too, the “highly unlawful” nature of Coastal’s conduct militates against a finding that the 20-1 ratio was excessive, the court states. Additionally, the maximum fine Coastal could have been subjected to if prosecuted for felony theft under the criminal code is less than what was awarded in punitive damages. Thus, considering all of the Gore factors, the court rules that the punitive damage award was not so excessive so as to deprive Coastal of its due process rights. The court next takes up the 1977 memo. Though the memo dealt only with title issues, the court finds the memo relevant to the issue of the families’ failure-to-develop claim. The memo can fairly be characterized as stating that development of Share 13 would be reasonable despite any title problems. As to whether the memo created unfair prejudice, the court first finds that the memo was probative of Coastal’s unreasonableness in delaying product of Share 13. The court then considers whether that probative value was outweighed by unfair prejudice. The court agrees with Coastal that some courts have thrown out cases that have appealed to race either positively or negatively. The court distinguishes those cases, though. The phrase “illiterate Mexicans” is not as inflammatory as some of the phrases that have been thrown out (such as “yellow nig,” and “wetback”). Second, race was a central issue in the other cases, but not here. Furthermore, when weighing the probative value against the prejudicial effect, the court reminds Coastal that its own attorney made comments that were “ostensibly designed to align the jury” to Coastal based on the attorney’s Hispanic heritage. “In sum, we find that Coastal brings [this] issue with unclean hands, for it is guilty of the very wrong of which it complains. . . . Our disposition of this issue . . . hinges not on Coastal’s calls for ethnic unity but on our inability to conclude, based on the facts of this case, that the trial court’s admission of the 1977 memo amounted to an abuse of discretion. The trial court balanced the probative value of the memo against the danger of unfair prejudice and concluded that the balance favored admission of the memo. We have reached the same conclusion, and in disposing of this issue, we note that even if we had not reached the same conclusion, we would not necessarily be able to find an abuse of discretion.” The court upholds the trial court’s decision not to abate this case (two other, somewhat related lawsuits have previously been filed), and holds that a repudiation instruction was properly given. The court also upholds the award of prejudgment interest. The court reverses, however, the award of attorneys’ fees. The trial court should have segregated the attorneys’ fees for the breach of the implied covenant to market, on which the jury found for Coastal, from the rest of the families’ claims found their favor. OPINION:Dori Contreras Garza, J.; Hinojosa, Yanez and Garza, JJ.

Want to continue reading?
Become a Free ALM Digital Reader.

Benefits of a Digital Membership:

  • Free access to 1 article* every 30 days
  • Access to the entire ALM network of websites
  • Unlimited access to the ALM suite of newsletters
  • Build custom alerts on any search topic of your choosing
  • Search by a wide range of topics

*May exclude premium content
Already have an account?

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.