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Energy & the Law

Hydrocarbon Exposure Reconsidered

Posted in Litigation, Pollution

Co-author Maryann Zaki

You might recall previous entries (here is one) discussing the $2.9 million Dallas County verdict and judgment in Parr v. Aruba. Not all similar suits have the same result.

Michael and Myra Cerny sued Marathon Oil Corp. and Plains Exploration & Production Company, alleging, as in Parr,  private nuisance, negligence, and negligence per se. As in Parr, among  the allegations were:

  • continuous release of “ … strong odors and noxious chemicals into the environment, including the plaintiffs’ property, causing injury and harm to the plaintiffs’ property and to their persons;” and
  • health problems, including headaches, rashes, chest pain, “strange nerve sensations,” high blood pressure, nausea, difficulty breathing, and nosebleeds.

Plains’ defense was that in order to prevail, the Cernys had to prove exposure specifically to Plains’ hydrocarbons, not just hydrocarbons in general.

The trial court observed that proving causation – that Plains’ operations and not something else - caused injury was a “high hurdle that has to be jumped”, and dismissed all defendants. Gray Reed attorneys, led by Jim Ormiston, represented Plains.

Parr and Cerny are on appeal to different courts. The question for those courts is likely to be: What evidence is necessary to prove causation in a hydrocarbon exposure case?

What Does the Texas Supreme Court Say?

The Texas Supreme Court held in Bostic v. Georgia Pacific Corporation that where multiple sources of exposure exist, the plaintiffs must prove substantial factor causation. Proof of “some exposure” or “any exposure” will not establish causation. There must be defendant-specific evidence relating to the approximate dose of the defendant’s product to which the plaintiff was exposed, along with evidence that the dose was a substantial factor in causing the plaintiff’s disease. The dose must be quantified but need not be established with mathematical precision.

Also, under Merrell Dow Pharmaceuticals, Inc. v. Havner, to establish substantial factor causation plaintiffs must prove with scientifically reliable expert testimony that a plaintiff’s exposure to the defendant’s product more than doubled the plaintiff’s risk of contracting the disease.

Bostic involved exposure to asbestos, but the decision could be a factor in any multiple-exposure case, including claims alleging exposure to emissions from oil and gas operations.

In light of this precedent one thing remains clear: Texas plaintiffs asserting toxic tort claims must show that their injuries were caused by exposure to the defendant’s activities. Their success will depend on how well they present reliable epidemiological and scientific evidence.

Cerny, Parr and other Texas hydrocarbon injury cases have drawn attention. See Lawyers and Settlements.com (discussing these kinds of cases generally), the San Antonio Express News (discussing the ruling), Texas Lawyer (discussing inconsistent results in Texas courts) and Inside Climate News (misunderstanding the judicial system and the defendants’ legal position).

Keep watching. These issues, and the future of hydrocarbon exposure claims, are not going to be resolved soon.

What’s Going On in Denton, Texas?

Posted in Energy Policy, Hydraulic Fracturing

As you probably know, the Denton City Council denied a petition signed by several thousand citizens to ban hydraulic fracturing within the city limits. The denial sent the question to the November 4 general election ballot.  Here is the proposition, its legalese in full bloom:

SHALL AN ORDINANCE BE ENACTED PROHIBITING, WITHIN THE CORPORATE LIMITS OF THE CITY OF DENTON, TEXAS, HYDRAULIC FRACTURING, A WELL STIMULATION PROCESS INVOLVING THE USE OF WATER, SAND AND/OR CHEMICAL ADDITIVES PUMPED UNDER HIGH PRESSURE TO FRACTURE SUBSURFACE NON-POROUS ROCK FORMATIONS SUCH AS SHALE TO IMPROVE THE FLOW OF NATURAL GAS, OIL, OR OTHER HYDROCARBONS INTO THE WELL, WITH SUBSEQUENT HIGH RATE, EXTENDED FLOWBACK TO EXPEL FRACTURE FLUIDS AND SOLIDS

The players

Supporters and detractors of the ban are divided into two predictable groups: Local and national environmentalists on the one hand and producers and local royalty owners on the other. Who’s who and what they say can be seen from their websites:

In support of the ban you have FrackFree Denton.

Against the ban you have Denton Taxpayers for a Strong Economy.

Dig a little deeper, say into campaign finance filings, and you can see whose money is behind the campaigns.  Here is the local Denton Record Chronicle on where the bulk of the money is coming from on both sides.

In the news

Want news on the election? The Denton Record Chronicle evaluates the claims of both sides.

Here is a report from StateImpact, a publication of National Public Radio member stations.

And a comprehensive and pretty fair article from the New York Times.

There is no shortage of opinions

Here is one from the Dallas Morning News.

In another, Eagle Ridge Energy presents a forceful case for the benefits of hydraulic fracturing. They have every reason to have an opinion. Eagle Ridge has been the target of litigation by homeowners and opprobrium by bloggers for their operations in the city limits.

Here is one from Energy in Depth, a non-local group with an interest in fracking everywhere.

The Texas Railroad Commission also has an opinion.

In the spirit of open debate, on these web sites you can read about the “evils” of fracking. I’m not of this mindset, but it’s helpful to know what the uninitiated are hearing.

One from “Texas Sharon“.

And from the environmental group Earthworks, which is working hard in Denton and worldwide to pass the  ban. (Disclaimer:  The photo is Earthwork-like in its extremism, but it is not from Denton.)

Let’s have a live debate?

A debate is scheduled in Denton between FrackNation Producer Phelim McAleer and environmental activist Calvin Tillman on Monday, October 27. Here is the link.

What does it mean?

If the ban passes, litigation.

Failure would be a retreat from overreaction, and maybe a debate about whether Denton needs more neighborhood-friendly drilling oversight.

In the spirit of universal suffrage …

Today’s musical interlude has nothing to do with the topic, unless it’s divine guidance you are seeking (in which case, why are you reading this blog?).  We all get to vote. How do you like your Amazing Grace, … Celtic, …  African, … or Country?

Special thanks to Tricia Davis of the Texas Royalty Council for her help on this post.

Delay Strikes Down Another Plaintiff

Posted in Land Titles, Litigation

Another in our cavalcade of ugly college football uniforms

Why am I always reporting on plaintiffs who wait too long to file their lawsuit? See below for a few possible answers.

In the latest Texas case, Trahan v. Mettlen, the Trahans sued in 2010 on a 2006 warranty deed.

The earnest money contract for the sale of property from the Mettlens to the Trahans didn’t mention reservation of mineral rights. The warranty deed included a “clear and unequivocal” reservation. Mr. Trahan testified that he did not read the deed at the closing and a deed was not given to him at closing. More than four years later, when leasing activity began, the Trahans realized that the minerals had been reserved.

The clear and unequivocal reservation

The court’s first duty was to ask, When did the cause of action accrue? A mistake plainly evident or clearly disclosed on the face of a deed (such as this reservation of minerals) means that all parties are chargeable with knowledge of the contents of the deed. The court’s view was that a mutual mistake was plainly evident on the face of the deed. The statute began to run on the day the deed was executed by the grantor or on the date it was delivered to the grantee.

The discovery rule is sometimes available to the plaintiff. If the mutual mistake was not plainly evident but related instead to the legal effect of the material term, the statute will begin to run when the mistake was or in the exercise of due diligence should have been discovered. Subsequent conduct of the parties might rebut the presumption that all parties are chargable with immediate knowledge of the mistake. None of that happened in this case. The discovery rule was inapplicable.

What could have been

Game over, which is unfortunate for the Trahans because there might have been a legitimate claim to reform the deed for mutual mistake. A Texas court will find a mutual mistake when (1) there is a mistake of fact; (2) held mutually by the parties; (3) which materially affects the agreed upon exchange.

There is another way to go about it. A Texas court will consider a unilateral mistake by one party coupled with knowledge of that mistake by the other party as the equivalent of that mutual mistake.

Why do these things happen? 

I’m tempted to offer platitudes: Read and understand your contract, act if and when you need to. But the downfall of many unsuccessful plaintiffs is neglect. Your delay in acting is not forgiven if your mistake is about a term that isn’t important at the time. I suspect the Trahans didn’t act sooner because the didn’t think about the minerals until the landman came knocking on the door bearing bonus payments.

The second culprit is trust. Trust has two components: Integrity and competence. Your counterparty can be honest, but he also must be trusted to prepare a document correctly. Ronald Reagan had the right attitude on this subject.

A musical interlude. Don’t let this be you.

Faulty Property Description Haunts Louisiana Servitude

Posted in Land Titles, Royalty Disputes, Title Issues

Co-author Brooke Sizer

Halloween is approaching, so let’s talk poltergeists – troublesome spirits that haunt a specific location. Where do they come from? In Quality Environmental Processes, Inc. v I.P. Petroleum Company, Inc., it was from a faulty property description that lay dormant for 30 years before beginning its vexations.

The Demon is Spawned

A 1966 mineral deed conveyed rights in the oil and gas under certain tracts outlined in blue on Tobin maps. Another exhibit described known producing sands within the tracts by depth and geographical location. Accurate surveys of the areas outlined in blue would be made and, when approved by the parties, would become part of the agreement. The surveys were never obtained and the deed was never supplemented.

By a 1992 cash sale the St. Martins purchased a portion of the property. They later conveyed a 10% mineral interest to Quality.

The Demon Haunts

In 1994, I.P. Petroleum drilled and produced a well and began paying royalties to the St. Martins. I.P. then ceased those payments and began paying the current owners of the 1966 mineral servitude. The St. Martins and Quality sued. The question: Did the 1966 mineral deed create a mineral servitude, or did the 1992 cash sale grant the purchasers the surface and the minerals?

The trial court held that the 1966 mineral deed did not create a valid mineral servitude because it did not contain an accurate survey or map, nor any measurements, dimensions, bearings, angles, or distances which would accurately describe the mineral interests listed and conveyed. Thus, a third party would not be on notice of a conveyance.

The Spookiest Part

Unpaid royalties were $817,000. Judgment was rendered for plaintiffs against IP for $6.725 million for unpaid royalties, treble damages for violation of the Louisiana Unfair Trade Practices Act, double royalties due for violation of  the Mineral Code, interest, and attorney’s fees. Judgment against IP’s lawyers was for $4.5 million. Talk about a long drive home from the courthouse.

The Demon is Exorcized

The appeals court reversed. The 1992 cash sale expressly stated that no mineral rights were conveyed. The record was sufficient to give purchasers notice that they did not obtain ownership of any mineral rights by virtue of the 1992 cash sale. Even without a complete written description of the property the 1966 deed was susceptible of conveying the servitude, because the location could be ascertained with certainty with the aid of extrinsic evidence.

The Supreme Court affirmed. The 1966 deed was sufficiently specific to identify the property to be conveyed and, thus to create a valid mineral servitude and to place third parties on notice of its existence. The general rule is that the description in a deed must be such that the property intended to be conveyed can be located and identified. The description must fully appeae within the four corners of the instrument itself, or the deed should refer to some map, plat, or deed as a part of the description.  However, the description need not be with such particularity as to make extrinsic evidence unnecessary.

The Takeaways

Document drafters can control the demons that could vex future owners (the ones in your personal life are your own business).  Finish what you started. The parties should have followed through on their  agreement to supplement the descriptions.

Precisely what description is sufficient to place third parties on notice must be made on a case by case basis.  The good news for parties wanting to enforce a conveyance is that Louisiana courts tend to construe property descriptions so as to sustain, rather than defeat, a conveyance.

Caveat: The court reiterated that the liberal approach won’t work with misleading descriptions, but only faulty or inaccurate ones.

Today’s musical interlude.

Easements: Roads Traveled, Less Traveled, and Not Traveled

Posted in Land Titles, Title Issues

Why would anyone buy property without access to a public road? Because it seemed like a good idea at the time, I guess. And often it is, until things change, “things” often being new and unfriendly ownership of the surrounding property. The Texas Supreme Court has addressed this situation.  Hamrick v. Ward clarified the law for two different kinds of implied easements: the easement by way of necessity and the easement by prior use. Texas courts are now to use the standard for easements by necessity when deciding whether there should be a road easement over property surrounding a landlocked parcel. That was not always the case.

To establish an easement by necessity the plaintiff must prove:

1. Unity of ownership of the dominant and servient estates prior to severance;

2. Access is a necessity, not a convenience;

3. The necessity existed at the time the two estates were severed.

To prove a prior use easement:

1. Same unity of ownership as above;

2. Use of the claimed easement was open and apparent at the time of the severance;

3. Use was continuous, so the parties must have intended that its use pass by grant;

4. Use must be necessary to the use of a dominant estate.

What’s the difference?

• Prior use easements are easier to prove because of the requirement of necessity at all times.

• For a prior use easement the plaintiff will not have to demonstrate a “strict necessity” for the easement.

• The burden of proof for a necessity easement is the “less forgiving” requirement for strict and continuing necessity.

• Prior use easements will now be reserved for burdens such as cattle grazing, pipelines, sewer lines, drainage, and the like. The rationale is that these items are not as much of an encumbrance on the land as a road.

There is a better way

Get it in writing, even if it is from Grandma and Grandad, or Momma, and especially if its from the in-laws.

Having myself just completed a title case involving easements, here’s one I learned about that the court in Hamrick did not address:

Easement by reference to a map or plat

You don’t see this one often. Conveyance of land by reference to a map or plat showing abutting roads or streets can result in the purchaser (or one holding under him – very important) acquiring a private easement in the roads or streets showing on the plat. Reliance is required, although some cases hold that reliance can be inferred from the language in the deed itself.

Will the loser at the next trip to the trial court  feel bad, perhaps enough to regret their previous actions?

Truth and Illusion in the Fracking Debate

Posted in Energy Policy, Environmental Policy, Hydraulic Fracturing

“What is it like to live inside your head with Peter Pan and the Easter Bunny?” So asks the sister in “Bridges of Madison County” after the brother wonders if the Meryl Streep and Clint Eastwood characters had sex all those years ago.

And so it is from certain quarters in the hydraulic fracking debate who continue to insist, hysterically and despite the evidence, that the process is a threat to Civilization As We Know It. This post is a summary of several discussions.  Read the articles themselves for details.

Gas Flaring

According to Earthworks, gas flaring in the Bakken and Eagle Ford Shale is out of control and tons of greenhouse gases are being fired into the atmosphere; therefore, we should ban fracking. According to Energy in Depth, Earthworks fails to address that the flaring is significantly decreasing in the Bakken both in percentage of gas produced and actual volume, all as production increases. There is flaring because pipeline capacity hasn’t caught up with new gas production. Flaring will continue to go down as pipeline capacity comes on line. Does anyone seriously believe that the industry is not focused on finding a solution?

Methane Leaks

Speaking of inflammatory emissions, Bill McKibben points to methane leaks as one more reason to ban hydraulic fracturing, now and entirely. This is reported by the Energy Exchange, a publication of the Environmental Defense Fund. To its credit, the EDF disagrees, and also sees methane leaks as bad thing and lobbies for stronger, smart regulations.  Most people can go along with “smart”.

Lest you believe people like McKibben are not a menace to common sense and a safe, abundant and clean energy supply, Energy In Depth reveals the folly of his ideas and the bad “science” on which they are based. Among other points: Hydraulic fracturing has contributed the decrease in GHGs in the United States, a fact proclaimed by the IPCC, of all people, and surveys by McKibben and his colleague Ingraffea have been discredited by organizations such as the US IEA, MIT and other mainstreamers.

“Science” With a Political Agenda

And while we are on the topic of misleading “science”, the Hill published a reply by Isaac Orr of the Heartland Institute to an earlier piece by one Helen Slotttje, who wrote about the perils of fracking. (Preview: It’s Bush’s fault and FDR is on her side. I don’t have enough space here to unpack that point of view.)  Among her other errors is a report on the dangers of fracking by the Colorado School of Public Health that was repudiated by the Colorado Department of Health and Environment.

A musical interlude to accommodate the dark vision  of the likes of Earthworks.

How Much Are Your Trees Worth?

Posted in Construction, Litigation

In Texas, more than your dog. Gilbert Wheeler, Inc. v. Enbridge Pipelines (East Texas), L.P. is good news for landowners. The Texas Supreme recognized the intrinsic-value-of-trees exception to the general rule for damages to real property, so that landowners are compensated for the loss of the ornamental (esthetic) and utilitarian (shade) value that trees bring to the property.

What About Fideaux?

PETA might not approve, but an owner can only recover the objective economic value for the negligent loss of his canine, no matter how much you loved the cuddly little ball of fur. Sentimental value and the owner’s subjective emotions are not to be considered.

The Facts Drive The Law

Whether the law is good or bad depends on your perspective. Wheeler and Enbridge had an easement by which Enbridge would construct a pipeline across Wheeler’s 153 acre tract by boring underground in order to preserve the trees and a natural stream on the property. The FUBAR was created when Enbridge failed to tell the contractor about the plan. The contractor cut down several hundred feet of trees, bulldozed the ground, and channelized the stream that once “meandered through the woods”.

The court set out to “clarify an area of the law that has been muddled for decades”. Read the decision for the muddled history. The law now is this:

permanent injury:  It cannot be repaired, fixed or restored or even though the injury can be repaired, fixed or restored it is substantially certain that the injury will repeatedly, continually, and regularly recur such that future injury may be reasonably evaluated. Generally rule: If the injury is permanent, the owner is entitled to the loss of fair market value to the property as a whole.

temporary injury: It can be repaired, fixed or restored and any anticipated recurrence would be only occasional, irregular, intermittent and not reasonably predictable such that future injury could not be estimated with reasonable certainty.  General rule: If the damage is temporary the owner is entitled to costs of restoration.

The exception to the rules allows compensation for the landowner even if the destruction of trees results in no diminishment of the fair market value or so little diminishment that the loss is essentially nominal. Beware: The court has a history of carefully avoiding what it considers to be overcompensating the landowner.

Inside Baseball

This part is for lawyers. The court held that whether injury to property is temporary or permanent is a question of law for the court, although the jury must decide the facts on which the question of law is decided.

Wheeler actively opposed a jury question whether the injury was temporary or permanent. He believed that it didn’t matter in a breach of contract context, because he was seeking benefit-of-the-bargain damages.  The court agreed, but not quite for the same reason. Because the temporary vs. permanent distinction is a question of law, that jury question was not necessary. Because the court deemed the injury permanent, the trial court improperly instructed the jury to calculate damages based on the cost to restore the property. The jury awarded Wheeler $288,000 in damages for the intrinsic value of the trees that were destroyed. Because of the destruction of the trees had not diminished the value of the property (or at most, according to Enbridge, $3,000) diminution in the fair market value was either zero or negligible. Thus, the intrinsic-value exception was allowed.

A musical interlude the Wheelers might relate to (except for the “my ole man” part).

 

What Does “Sprawling Litigation” Look Like?

Posted in Land Titles, Lease Disputes

It looks like what you’d expect: a bunch of litigants spending lots of time at a courthouse in Goliad, Texas, with no end in sight. After much ”sprawl” in Harkins v. Northshore Energy it came down to the meaning of this property description (call it Tract 2): “Being 1,210 acres of land, more or less, out of 1,673 acres out of the … Survey, … , being the same land described in [the Export Lease]”.

To answer the question you have to ask, What does “being the same land described …” modify? the 1,210 acres or the 1,673 acres?  Both interpretations are reasonable, said the court.

The Northshore Option

Northshore had the exclusive right to acquire one or more leases on a portion of Harkins’ property described above.

With the objective of securing a lease on a 169.9 acre tract within Tract 2, Northshore paid Hawkins money but the parties never signed a formal lease. Nevertheless, Northshore spent $700,000 drilling and completing a successful well on the 169.9 acres.

Hawkins, on advice from his landman, came to believe that the well had been drilled on a 400.15 acre tract excluded from the Option Agreement.

Dynamic Arrives

Harkins gave Dynamic a seismic permit on the 1673.69 acres and a lease on the 400.15. The lease was based on the form that was part of the Option Agreement. With the smell of litigation in the air, Harkins assigned its causes of action against Northshore to Dynamic and Dynamic agreed to indemnify Harkins for liability arising out the Option Agreement.

The Litigation

Northshore sued Harkins and Dynamic to quiet title, contending that the Option Agreement contained a scriviner’s error in that the parties intended the agreement to cover the land on which the well was drilled. Northshore later changed its theory and contended that the 400.15 acre tract was in fact included in the Option Agreement. Northshore also accused Dynamic of tortious interference, “conscious and malicious geophysical trespass” and other claims. Not to be outdone, Harkins and Dynamic counterclaimed.

Everybody moved for summary judgment, each requesting relief on more legal issues than you care to read about in this short post.

The trial court ruled:

  • Dynamic did not have a right to conduct exploratory operations on either tract identified in the Option Agreement,
  • The lease from Harkins to Dynamic covering the 400.19 acres was removed as a cloud on Northshore’s title,
  • Harkins shall execute and return leases to Northshore on 570.941 acres and on 169.9 acres.

After all that hard work, the parties went to trial, where Northshore won a verdict for $709,000 in actual damages, $1,.148,000 in exemplary damages, and $400,000 in legal fees. To no one’s surprise, Dynamic appealed.

Back to the Beginning

Read the opinion for the court’s analysis of “… being the same land as …”. Of the myriad of rules to guide a court when construing property descriptions, several applied here. The court concluded that the description was ambiguous and remanded the entire case to the trial court to, essentially, start over. Everything after the summary judgment was for naught.

The Takeaway

In retrospect, which is where we are now, the scrivener could have simplified the description. A period after “Texas” and then “The 1,210/1,673 acres being the same land described in the Export Lease.” might have fixed the problem.

I wish the court had explained why Northshore drilled a well without a lease.

Newsworthy posts are about judgments and verdicts, winners and losers. That’s what we trial lawyers enjoy doing if that’s what our client wants. There’s another way. Here is an ode to settlement.

North Dakota Good Faith Purchasers: At What Point is Notice Relevant?

Posted in Land Titles, Title Issues

 Co-author Katie R. English.

The Question

In order to be a good faith purchaser, a party must not have actual or constructive notice of another’s rights. Northern Oil and Gas v. Creighton asked, When should the determination of whether a party has notice be made, A: At the time the second lease is recorded, or B: When the second lessee acquires his rights? Answer: B, when the lease becomes an enforceable contract.

The Timeline

  • 10/2004: The Gundersons grant an oil and gas lease to Holt covering Section 25: S2SE4.
  • 11/2004: Holt records his lease.
  • 2/2005: Holt assigns his WI to Murex Petroleum.
  • 11/25/2007: Apparently enthralled by the notions of free enterprise and unfettered capitalism, Gundersons grant a lease to Creighton covering Section 25: N2SE4.
  • 12/20/2007: Holt records an affidavit stating that the description in the Holt lease should be N2SE4, instead of S2SE4.
  • 1/30/2008: Creighton records his lease.

Northern, successor to Creighton, sued Murex to quiet title to the leasehold estate in the N2SE4. Murex countersued and moved for summary judgment seeking reformation of the Holt lease under N.D.C.C. § 32-04-17. Reformation of a contract in cases of mutual mistake is allowed under that statute “if it can be done without prejudice to rights acquired by third persons in good faith and for value.”

The Trial Court

The court said Creighton had constructive notice of Holt’s claim from the Holt affidavit before he recorded the Creighton lease and therefore could not be a good faith purchaser. Accordingly, the only fact to determine in order to reform the Holt Lease was whether there was a mutual mistake. The parties then stipulated that there was a mutual mistake in the Holt lease and that the Gundersons intended to lease the disputed property to Holt. The trial court ordered the Holt lease be reformed based on the parties’ stipulation and entered a judgment quieting title to the oil and gas leasehold estate in Murex.

It’s Not Over Till It’s Over

 The North Dakota Supreme Court reversed. The trial court must determine whether Creighton had constructive notice when he acquired the Creighton lease (i.e., when it became an enforceable contract), not when it was recorded. The court found a factual dispute on that issue.  Therefore, the trial court erred in concluding as a matter of law that Creighton was not a good faith purchaser.

Takeaways

  • Correctly describe the property you are paying good money to lease.
  • More important: Check your work. Or ask someone who actually likes to dive into those details to do it for you.
  • Even more important: Record your lease promptly. Don’t put it in a drawer and wait around for God-know-what event to record it.
  • There are reasons to violate the last rule, but sloth isn’t one of them.
  • We don’t know Creighton, and we aren’t saying he didn’t have a good reason to delay.

Bob Crewe RIP. Don’t get it? Try this one.

Subcontractors Score a Victory in Federal Court

Posted in Contract Disputes, Title Issues

Les Miles encouraging the Tigers to read Energy and the Law

By: Martin P. Averill

On August 27, in In re Heritage Consolidated, L.L.C., the Fifth Circuit Court of Appeals granted subcontractor’s lien rights to two oil and gas drilling contractors. The Court reversed a district court ruling which upheld a summary judgment issued by a bankruptcy court denying liens to the two drilling contractors. The case was briefed and argued by Gray Reed’s own Michael Bishop and Martin Averill.

The Court held that a service provider may be both a mineral contractor and a mineral subcontractor on the same project. The provider is a mineral contractor as to any ownership interest of the party with whom it contracted, and a mineral subcontractor as to the ownership interests of non-contracting working interest owners. Previously this issue had never been expressly decided by any court applying Texas law. However, “twin” bankruptcy cases in In re Mid-Am. Petroleum, Inc., 83 B.R. 933, 935 (Bankr. N.D. Texas 1988) had held to that effect by granting contractor status in one case and subcontractor status in the second case against the working interest owners. The Fifth Circuit adopted the same approach in this case.

The Court also rejected an argument that an operator may only be a mineral contractor if the operator itself performs physical labor on the project in question. For this proposition, the bankrupt owner relied on a 1928 case concerning passive “lease watching” from a neighboring property, which the court held was not “labor” within the meaning of the statute. The Heritage opinion does not address this point expressly, but it was a primary argument by the bankrupt owner in its briefing to the Court.

The Court also reiterated settled Texas law that contracts entered into after completion of the work, to which the drillers were not parties, had no effect on the drillers’ legal rights. The Court rejected application of the “relation-back” doctrine to limit the drillers’ rights because their contracting party—the operator—later acquired a 1% ownership interest in the underlying lease. According to the Court, this doctrine applies only if the later-acquired title expands the interest to which the lien attaches. It cannot diminish it.