268 S.W.3d 1 (Tex. 2008)
Respondents, referred to collectively as Salinas, own the minerals in a 748-acre tract called Share 13 in Hidalgo County that their family has occupied for over a century.1 Petitioner Coastal Oil & Gas Corp. has been the lessee of the minerals in Share 13 and an adjacent tract called Share 15.2 Coastal was also the lessee of the 163-acre Share 12 until it acquired the mineral estate outright in 1995.3 A natural gas reservoir known as the Vicksburg T formation lies between 11,688 and 12,610 feet below these tracts.4
Title disputes have affected the area for years.5 Coastal interpleaded the Share 13 owners in a 1978 action that was resolved by agreed judgment in 1982.6 Share 13 owners sued again in 1988 and in 1995 over the boundary with Share 15; those boundary issues were not resolved until 1999.7 From 1978 to 1983 Coastal drilled three wells on Share 13, two of which produced.8
In 1994 Coastal drilled the M. Salinas No. 3 on Share 13, an exceptional producer located about 1,700 feet from Share 12.9 In 1996 Coastal drilled the Coastal Fee No. 1 well in the northeast corner of Share 12, 467 feet from the Share 13 lease line, the minimum distance permitted by Railroad Commission spacing rules.10 Coastal shut in a producing well on Share 12 to obtain permission to operate the new well.11 In February 1997 Coastal drilled the Coastal Fee No. 2 well, also near Share 13.12 All wells on both tracts were hydraulically fractured; the treatments on the Coastal Fee No. 1 and No. 2 were described as massive.13
In March 1997 Salinas sued Coastal for breach of the implied covenants to develop Share 13 and to protect against drainage.14 Several months later Salinas amended the pleadings to add a trespass claim alleging that the fracing of the Coastal Fee No. 1 well invaded the reservoir beneath Share 13 and caused substantial drainage.15 In 1997 Coastal formed an 80-acre pooled unit that included roughly 73 acres from Share 13 and seven acres from Share 12.16 At trial Salinas introduced a 1977 internal Coastal memorandum that referred to the ancestors of the Share 13 owners as "mostly illiterate Mexicans."17
Salinas's expert testified that because of the fracing operation on the Coastal No. 1 well, 25-35% of the gas it produced drained from Share 13.18 Economides calculated the value of that gas to be between $388,000 and $544,000.19 The jury found that Coastal failed to reasonably develop Share 13 after 1993, causing Salinas $1.75 million damages for interest on lost royalties.20 Coastal breached its duty to pool in good faith, causing Salinas $1 million damages in lost royalties.21 Coastal's fracing of the Coastal Fee No. 1 well trespassed on Share 13, causing substantial drainage, which a reasonably prudent operator would have prevented, and $1 million damages in lost royalties.22 Coastal acted with malice and appropriated Salinas's property unlawfully, and should be assessed $10 million punitive damages.23 The trial court rendered judgment on the verdict after reducing two damage awards to the maximum amounts supported by the evidence.24 The court of appeals reversed the attorney-fee award because it included fees for an unsuccessful claim and remanded that issue, but affirmed the judgment in all other respects.25
Whether a mineral lessor with only a royalty interest and possibility of reverter has standing to sue for subsurface trespass causing actual injury?26
At common law, a landlord may sue for injury to the reversionary interest by bringing an action on the case when there is actual permanent harm to the property affecting the value of the interest.27 Modern pleading rules permit a plaintiff to recover under the appropriate theory without being bound by rigid forms of action.28
Yes. Salinas owns only a royalty interest and the possibility of reverter in Share 13 with no possessory right to the minerals.29 The claim alleges concrete harm in the form of lost royalty revenue or diminished value to the reversion from permanent drainage caused by the fracing operation on the Coastal Fee No. 1 well.30 The established facts show that Salinas has suffered actual injury whether the leases continue or terminate, satisfying the requirement of harm to the reversionary interest.31
Salinas has standing to sue for subsurface trespass causing actual injury.32
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Justice O'Neill concurs in the judgment but writes separately to emphasize that the holding is limited to the implied covenant to protect against drainage.33 She agrees that no such covenant should be implied when the same lessee holds both leases because the lessee cannot logically be said to have a duty to itself to protect its own interests.34 However, she would not foreclose the possibility that in some circumstances a lessee might have other duties to its lessor that could be implicated in a same-lessee drainage situation, such as an action for breach of the covenant to manage and administer the lease as a reasonably prudent operator if the lessee engages in waste or other conduct that clearly harms the lessor's interest.35
Whether subsurface hydraulic fracturing that extends into another's property constitutes a trespass allowing recovery of damages equal to the value of gas drained?36
The rule of capture gives a mineral rights owner title to the oil and gas produced from a lawful well bottomed on the property even if the oil and gas flowed to the well from beneath another owner's tract. Actionable trespass requires proof of actual injury beyond mere entry.37
No. The fracing of the Coastal Fee No. 1 well extended fractures into Share 13 and caused drainage of gas valued between $388,000 and $544,000.38 The rule of capture bars recovery of damages for that drainage because the gas produced from the lawful well on Share 12 belongs to Coastal regardless of its origin.39 Salinas proved no injury to wells or the formation itself.40
Subsurface hydraulic fracturing that extends into another's property does not allow recovery of damages equal to the value of gas drained under the rule of capture.41
Related opinions on this issue
Justice Willett concurs in the judgment but would hold that hydraulic fracturing across lease lines is not a trespass at all rather than merely non-actionable.42 He applies a balancing-of-interests approach from Railroad Commission of Texas v. Manziel to conclude that the encroachment is not wrongful because it generates societal and economic benefits that outweigh harm to individual operators.43 He emphasizes that unbounded tort liability would impose exorbitant costs by discouraging essential production techniques in tight formations like the Barnett Shale and Vicksburg T, threatening tax and royalty revenue for Texas while the Railroad Commission's regulatory authority remains the preferable forum for balancing interests.44
Joined by Chief Justice Jefferson
Justice Johnson concurs in part and dissents in part, joining the opinion except for Part II-B.45 He would not apply the rule of capture to bar damages until first determining whether hydraulically fracturing across lease lines constitutes a trespass.46 He argues that the rule applies only to gas legally recovered and that an uncontested jury finding of trespass by artificial means creating channels into Share 13 means the gas was not legally captured, distinguishing this from natural drainage and urging resolution of the trespass issue before reaching capture.47
Whether the proper measure of damages for breach of the implied covenant to protect against drainage is the value of royalty lost due to the lessee's failure to act as a reasonably prudent operator?
The correct measure of damages for breach of the implied covenant of protection is the amount that will fully compensate, but not overcompensate, the lessor for the breach.48 That measure is the value of the royalty lost to the lessor because of the lessee's failure to act as a reasonably prudent operator.49
Yes. Salinas's expert testified to total drainage of 25-35% of gas from the Coastal Fee No. 1 well due to fracing.50 Salinas presented no evidence that a reasonably prudent operator should have prevented all of that drainage or the amount that could have been prevented.51 The jury instruction measuring damages by the value of royalty on all drained gas was incorrect.52 No evidence supports recovery under the proper measure.53
The proper measure of damages for breach of the implied covenant to protect against drainage is the value of royalty lost due to the lessee's failure to act as a reasonably prudent operator, and Salinas cannot recover on this record.54
Whether some evidence supported the jury's finding that the lessee breached the implied covenant to develop the lease?
Yes. After the M. Salinas No. 3 well in 1994, Coastal delayed drilling on Share 13 until suit was filed in 1997, after which it drilled eight wells in fourteen months.57 Salinas's expert calculated lost interest on royalties.58 Coastal's evidence that rising gas prices offset the delay was not conclusive, allowing the jury to find breach and damages of $1.75 million.59
Some evidence supported the jury's finding that the lessee breached the implied covenant to develop the lease.60
Whether some evidence supported the jury's finding of bad-faith pooling?
Yes. Coastal formed an 80-acre unit including 7.357 acres from Share 12 and two wells on Share 13 but none on Share 12.63 Coastal chose not to include the Coastal Fee No. 1 in the unit and located the M. Salinas No. 4 well to prevent drainage to its own well.64
This provides evidence that Coastal failed to act in good faith when it could have included only one Share 12 acre to give Salinas the same spacing benefit with higher royalties.65
Some evidence supported the jury's finding of bad-faith pooling.66
Whether admission of an internal memorandum containing a racial slur was reversible error?
Evidentiary rulings are reviewed for abuse of discretion under Texas Rule of Evidence 403.67 Admission of evidence whose probative value is substantially outweighed by the danger of unfair prejudice is reversible when the error probably caused rendition of an improper judgment, as shown by damage awards exceeding the plaintiff's claims and findings of malice and felony theft.68
Yes. The 1977 memorandum referring to Share 13 ancestors as 'mostly illiterate Mexicans' had zero probative value on any issue in the case because title problems it addressed were resolved years earlier and unrelated to the boundary dispute or development delays.69 It was used solely to inflame the jury as evidenced by Salinas's testimony about feeling infuriated and the verdict awarding more than three times the claimed damages plus $10 million in punitive damages.70 The trial court's abuse of discretion in admitting the 1977 memo was harmful error and requires a new trial.71
Admission of an internal memorandum containing a racial slur was reversible error requiring a new trial.72
Related opinions on this issue
Joined by Chief Justice Jefferson
Justice Johnson agrees that admission of the 1977 memorandum was error and harmful but would hold it incurable error without needing a harm analysis because intentional introduction of evidence appealing to racial prejudice strikes at the appearance and actual impartiality of the judicial system, citing precedents treating racist arguments and evidence as incurable and noting that the memorandum was woven into the trial through witness examination, publication to the jury, and closing arguments that emphasized ethnic solidarity.73
Whether the trial court abused its discretion by refusing to abate the case pending resolution of two related actions?
No. The 1988 and 1995 actions involved boundary disputes with Share 15 and some overlapping drainage and development claims.76 The parties were not identical.77 The boundary issue was distinct.78 The factual bases for drainage differed.79 The trial court did not abuse its discretion in refusing to abate this 1997 action.80
The trial court did not abuse its discretion by refusing to abate the case pending resolution of two related actions.81