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Energy Law Exchange

June 8, 2017

The Texas Supreme Court Opens the Door for More Oilfield Contamination Lawsuits

On April 28, 2017, the Texas Supreme Court held that landowners have a clear path to the courthouse to pursue claims against oil companies for oilfield contamination. Forrest Oil Corp., n/k/a Sabine Oil & Gas v. El Rucio Land and Cattle Co., -- S.W.3d. (Tex. 2017); Forest Oil Corp., n/k/a Sabine Oil & Gas Corp. v. El Rucio Land and Cattle Co., Inc., 446 S.W.3d 58 (Tex. App.-Houston [1 st Dist.] 2014) (pet. granted). In a case that could have far reaching impacts for the U.S.s largest oil producing state, the Texas Supreme Court affirmed an appellate courts ruling that the Texas Railroad Commission (RRC), which is the state agency that oversees oil and gas matters, did not possess exclusive jurisdiction over oilfield contamination claims by landowners. In addition, the Court affirmed that the primary jurisdiction doctrine was inapplicable and courts were not required to abate oilfield contamination lawsuits pending investigation and regulatory action by the RRC.

The case involves a 27,000 acre ranch in Hidalgo County, in which Forrest Oil (now known as Sabine Oil & Gas) leased approximately 1,500 acres for oil and gas production activities and also operated a gas processing plant on a 5 acre tract. In 2005, the landowners filed suit alleging soil and groundwater contamination from various oilfield wastes, including naturally occurring radioactive material (NORM). In addition, one of the landowners alleged that tubing, donated by Forrest Oil and used in the construction of an animal pen, contained NORM that caused a cancerous growth resulting in his legs amputation.

Forrest Oil succeeded in compelling arbitration pursuant to a written agreement between the parties to arbitrate all claims for environmental liability, surface damages, personal injury, or wrongful death occurring at any time and relating to the McAllen Ranch leases. The Arbitration Panel awarded $15,000,000 in damages for diminution in value to the property, $500,000 in damages related to amputation, $500,000 in punitive damages, and more than $5,000,000 in attorneys fees. In addition, the Panel granted declaratory relief and ordered Forrest Oil to abide by the terms of a prior agreement to remediate all contamination. On the landowners application, the trial court confirmed the arbitration award and Forrest Oil appealed.

On appeal and before the Texas Supreme Court, Forrest Oil principally argued that the legislature intended the RRC have exclusive jurisdiction over environmental oilfield disputes. As a result, the arbitration panel lacked jurisdiction to enter the award and the trial court lacked jurisdiction to confirm the award. The Court disagreed concluding that the legislature did not express a clear intent to abrogate a landowners common-law rights in favor of a statutory remedy. As such, the plaintiff landowner was free to bring common-law claims such as negligence, trespass, and breach of contract in a judicial forum against Forrest Oil.

Forrest Oil also argued that public policy warranted the RRC assuming exclusive jurisdiction over these matters. It argued that granting a judicial forum for these claims would allow landowners to recover twice for the same injury. A landowner could obtain both an order from the RRC compelling an oil company to clean-up the contamination while also obtaining a damage award for the contamination that it is the subject of the clean-up order. Moreover, with no requirement that the landowner actually use its damage award to cleanup any contamination, the RRC must still protect the public and order any contamination to be cleaned-up. The Court rejected these policy considerations stating that they were an argument for the legislature not the judiciary.

The Texas Supreme Court did offer a solution for Forrest Oil and other defendants. By seeking an RRC determination of contamination allegations and complying with RRC cleanup orders, an operator can reduce or eliminate the landowners damages. The irony of this suggestion is that, at Forrest Oils request, the RRC has been investigating the alleged contamination on the McAllen Ranch since 2007 and, as of least 2014, there was no final approved plan. Left unresolved is how the courts and the RRC are to consider competing factual determinations and the admissibility of findings. As seen in other states, an agency may well delay its own work until the conclusion of any private litigation to avoid having its investigation and conclusions subject to discovery and cross-examination.

The Forrest Oil decision has echoes of the landmark Louisiana oilfield contamination case Corbello v. Iowa Production,850 So.2d 686 (La. 2003) in which Shell oil was ultimately held liable for $33 million in damages for property valued at $108,000 with no assurances that the landowner would use the damage award to restore the property. The Louisiana Supreme Court having previously rejected the Louisiana oil and gas agencys primary jurisdiction in Magnolia Coal Terminal v. Phillips Oil Co.,576 So.2d 475 (La. 1991), rejected Shells argument that it was subject to paying twice for the same damages with no requirement that any damages actually be used to clean up any contamination. The Forrest OilCourt, like Corbello, also reinforces the landowners right to a judicial forum to resolve its claims while minimizing the role of the relevant state agency.

What followed after Corbello was a rush to the Louisiana courthouses by landowners unrestrained by agency involvement and asserting damages untethered to the value of the property. Nearly 15 years later, that rush shows no sign of abating in Louisiana

The key distinguisher between Texas and Louisiana remains the Texas Supreme Courts limitation on damages to real property. The economic feasibility doctrine generally limits property damages in tort and contract claims when the cost of required repairs or restoration exceeds the diminution in the propertys market value to such a disproportionately high degree that the repairs are no longer feasible. Gilbert Wheeler, Inc. v. Enbridge Pipelines (East Texas), L.P., 449 S.W.3d 474, 481-182 (Tex. 2014). While damage claims orders of magnitude greater than the propertys value may have fueled the Louisiana oilfield contamination litigation, one could consider the lack of agency involvement the spark that started the fire.

That is not to say the prospect of similar oilfield contamination litigation is absent in Texas. The Gilbert Wheeler Court made clear that its general rule, and potentially the economic feasibility exception, was the default rule. Of course, contracting parties are free to specify in an agreement how damage will be calculated in the event of a breach, but when they do not, both courts and parties benefit from the application of general principles with respect to calculating damages for such injury. 479. It remains to be seen whether the courts will now see contract claims premised on a damage clause in a surface use agreement that requires the oil company to compensate the landowner for all damages caused by its breach.

It is far too early to determine how broad an impact the Forrest Oil decision will have on environmental oilfield litigation in Texas. However, this decision clearly signals that the Texas courthouses are officially open for business.