OIL AND GAS DAMAGES
State Bar of Texas, Damages in Civil Litigation Conference,
Oil-and-gas law covers a wide array of litigation topics—including condemnation, real-property rights, express and implied contract obligations, and administrative issues (among many others). It would be impossible to cover every possible type of claim in the oil-and-gas legal arena in one presentation, and this paper does not attempt to do so. Rather, the intent of this paper is to present the potential damages available in many of the frequently advanced claims in oil-and-gas litigation.
Section II of the paper covers damages available in litigation brought by owners of oil-and-gas interests. Section III covers damages available in oil-and-gas litigation brought by surface owners. And Section IV covers additional and miscellaneous damages topics.
II. DAMAGES IN LITIGATION BROUGHT BY THE MINERAL LESSOR
A. Lease-Based Contract Claims
An oil-and-gas lease is a contract like any other contract and must be treated as such. Tana Oil & Gas Corp. v. Cernosek, 188 S.W.3d 354, 359 (Tex. App.—Austin 2006, pet. denied). Texas law contemplates two types of duties in oil-and-gas leases: those expressly made in the contract and those implied by law.
1. Express Royalty Obligations
Oil-and-gas leases ordinarily require lessees to pay lessors royalties based on either the “market value” of the minerals produced or the “proceeds” obtained from the sale of such minerals. See Amoco Prod. Co. v. First Baptist Church of Pyote, 611 S.W.2d 610, 610 (Tex. 1980) (“The parties can draft either a ‘market value’ or a ‘proceeds’ royalty provision, and their intent will be followed by the courts.”). “Proceeds” royalty obligations—also sometimes called “amount realized” lease obligations—“base the royalty payment [owed] on the price actually received for the gas.” Union Pac. Res. Group, Inc. v. Hankins, 111 S.W.3d 69, 72 (Tex. 2003); see also Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 698 (Tex. 2008). Because the measure of damages for breach of the obligation to pay for performance of a contract is the difference between the amount owed and the amount actually paid, damages in a proceeds-lease case are measured by the difference between the lessor’s fraction of the actual proceeds realized from mineral sales and the amount paid, if any. See Chrysler Corp. v. McMorries, 657 S.W.2d 858, 864 (Tex. App.—Amarillo 1983, no writ) (contract damages are measured by the difference between what the injured party was promised under the contract and what the injured party actually received).
A “market value” lease, on the other hand, “requires payment . . . based on the prevailing market price for gas in the vicinity at the time of sale, irrespective of the actual sales price.” Bowden, 247 S.W.3d at 699 (citing Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368, 372 (Tex. 2001)). The lease will ordinarily designate at what location (or point in the process) the minerals are to be valued—such as “at the well” or “on the lease.” The “most desirable” method of determining the market value of minerals at a certain location is the “comparable sales” method, which looks to other sales that are “comparable in time, quality, quantity, and availability of marketing outlets.” Heritage Res., Inc. v. Nationsbank, 939 S.W.2d 118, 122 (Tex. 1996). When (and only when) comparable-sales are “not readily available” at the location designated in the contract may plaintiffs demonstrate market-value by proving comparable sales downstream from the location designed, and then “subtracting reasonable post-production marketing costs from the market value at the point of sale.” Id. Thus, the measure of damages for breach of the duty to pay royalties in a market-value lease is the difference between the amount actually paid to the lessor and the lessor’s contractually specified fraction of the market-value of the minerals at the place designated in the lease. See Chrysler Corp., 657 S.W.2d at 864.
2. Implied Lease Obligations
In addition to the express duties in oil-and-gas leases, Texas law sometimes implies additional duties that may give rise to claims against lessees. The three “broad implied covenants are: (1) to develop the premises, (2) to protect the leasehold, and (3) to manage and administer the lease.” Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 567 (Tex. 1981). “The standard of care in testing the performance of implied covenants by lessees is that of a reasonably prudent operator under the same or similar facts and circumstances.” Id. at 567-68. Covenants will not be implied, however, “if a lease contains an express covenant on the same subject matter.” Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 701 (Tex. 2008).
a. Duty to Protect from Drainage
To recover against a lessee for failure to protect a lease from drainage, the lessor must demonstrate that (1) its lease was substantially drained, and (2) “a reasonably prudent operator would have acted to prevent substantial drainage” from the lease. Amoco Prod. Co., 622 S.W.2d at 568. A lease is not substantially drained simply by the act of oil or gas shifting from beneath it to beneath a neighboring lease because a lessor’s property right “does not extend to specific oil and gas beneath the property.” Seagull Energy E & P, Inc. v. R.R. Comm’n of Tex., 226 S.W.3d 383, 388-89 (Tex. 2007). Rather, a mineral-interest owner is instead entitled only to his “fair share of the minerals on and under [his] property.” Id. at 388; see also Texaco, Inc. v. R.R. Comm’n of Tex., 583 S.W.2d 307, 310 (Tex. 1979). As the Austin Court of Appeals put it, a mineral-interest owner “is entitled, and entitled only, to be accorded an equal opportunity with surrounding lessees to recover his fair share of the recoverable oil; or, stated differently, to recover the approximate amount of oil lying in place under his lease.” Atl. Oil Prod. Co. v. R.R. Comm’n of Tex., 85 S.W.2d 655, 657 (Tex. Civ. App.—Austin 1935, writ dism’d). Once he has recovered “his fair share of the oil beneath his land, . . . he is not injured and cannot complain.” Edgar v. Stanolind Oil & Gas Co., 90 S.W.2d 656, 658 (Tex. Civ. App.—Austin 1935, writ ref’d).
“Fair share” is “measured by a reasonable approximation of the amount of oil in place under [the] leasehold.” Magnolia Petroleum Co. v. R.R. Comm’n of Tex., 93 S.W.2d 587, 588 (Tex. Civ. App.—Austin 1935, writ ref’d). Nonetheless, because the amount ultimately owed is tied to the duty to prevent drainage (as opposed to the precise fair share), “[t]he 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—that is, the value of the royalty lost to the lessor because of the lessee’s failure to act as a reasonably prudent operator.” Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1, 18-19 (Tex. 2008).
b. Duty to Reasonably Develop
Where a mineral lease fails “to define the lessee’s duty as regards development after discovery of paying oil or gas, the law implie[s] the obligation from the lessee to continue the development and production of oil or gas with reasonable diligence.” W.T. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509, 19 S.W.2d 27, 29 (1929). This duty applies only after initial production has been achieved on a lease. Grayson v. Crescendo Resources, L.P., 104 S.W.3d 736, 739 (Tex. App.—Amarillo 2003, pet. denied) (citing Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684, 693 (1959)). “For breach of the development covenant, a lessee is entitled to recover ‘the full value of royalty lost to him.’” Coastal Oil, 268 S.W.3d at 19 (quoting Texas Pac. Coal & Oil Co. v. Barker, 117 Tex. 418, 6 S.W.2d 1031, 1038 (1928)). Whether a party has suffered a loss due to delay in development “is not a simple interest calculation but depends on prices and production rates. Earlier payments at lower prices plus interest may well be less than later payments at higher prices, as the current market illustrates.” Id. A party is not expected to pay royalty twice, so any royalty the lessee did pay must be credited against the royalty it should have paid had it not breached the duty to reasonably develop. See id. at 19-20.
c. Duty to Market
One of the duties “[i]ncluded within the implied covenant of management and administration is the duty to market the oil and gas reasonably.” Yzaguirre, 53 S.W.3d at 373. Although there is no implied duty in a “proceeds” lease to sell minerals at the market-value price, id. (citing Amoco Prod. Co., 611 S.W.2d at 610), Texas courts have implied a duty to reasonably market gas in a “proceeds” lease. Most recently, the Texas Supreme Court has strictly limited the operative inquiry for duty-to-reasonably-market allegations, stating that “the question under a proceeds lease [is] whether the proceeds actually received by the lessee were a fraud or a sham.” Hankins, 111 S.W.3d at 74; see also Bowden, 247 S.W.3d at 700. As a result, the inquiry focuses not “on evidence of other sale” in the market at the time, but instead “on the behavior of the lessee.” Hankins, 111 S.W.3d at 71; see Migl v. Dominion Okla. Tex. Exploration & Prod., Inc., No. 13-05-589-CV, 2007 WL 475318, at *6 (Tex. App.—Corpus Christi-Edinburg Feb. 15, 2007, no pet.) (mem. op.). Older precedent described the duty and inquiry more liberally. E.g., Cabot Corp. v. Brown, 754 S.W.2d 104, 106 (Tex. 1987) (describing the duty to reasonably market as a duty to “market the production with due diligence and obtain the best price reasonably possible”). Either way, the inquiry focuses on the conduct of the lessee and the plaintiff must demonstrate that the lessee’s misconduct caused the sales price of the minerals to be artificially low, and that alternative “reasonable” conduct by the lessee “would have yielded higher profits.” Migl, 2007 WL 475318, at *6. The measure of damages, therefore, would be the difference between what the lessor was actually paid by the lessee and what the lessor would have been paid had the lessee not engaged in “fraud or sham” conduct in selling the minerals.
d. Duty to Seek Administrative Remedies
Lessees also owe “[t]he duty to seek favorable administrative action” if a reasonably prudent operator would do so under the circumstances of a given case. Amoco Prod. Co., 622 S.W.2d at 570. This duty “may be classified under the implied covenants to protect the lease, or to manage and administer the lease.” Id. “The probability that the Railroad Commission will grant or deny the [administrative relief sought] is a consideration to be made by the prudent operator.” Id. For example, if an operator “fails to act as a reasonably prudent operator by not seeking [additional drilling] permits, [it] is liable for loss caused by the failure to drill the wells.” Id. The measure of damages for breaching the duty to seek administrative remedies, therefore, is “the value of the royalty lost to the lessor because of the lessee’s failure to act as a reasonably prudent operator.” See Coastal Oil & Gas Corp., 268 S.W.3d at 18-19.
B. Tort Claims
1. Physical Trespass to Mineral Estate
a. Good-faith Trespass
On occasion, an operator drills into a mineral estate without a legal right to do so—giving rise to a claim for trespass to the mineral estate. “When a producer trespasses and extracts oil, gas, or other minerals, the method by which damages are calculated depends on whether the producer’s actions are in good faith.” Moore v. Jet Stream Investments, Ltd., 261 S.W.3d 412, 428 (Tex. App.—Texarkana 2008, pet. denied) (citing Mayfield v. de Benavides, 693 S.W.2d 500, 506 (Tex.App.-San Antonio 1985, writ ref’d n.r.e.); Bender v. Brooks, 103 Tex. 329, 335, 127 S.W. 168, 171 (1910)). A party’s trespass is in “good faith” when it has “both an honest and a reasonable belief in the superiority of [its] title.” Mayfield, 693 S.W.2d at 504. The measure of damages in a good-faith trespass to the mineral estate “is the value of the minerals minus drilling and operations costs.” Moore, 261 S.W.3d at 428.
b. Bad-faith Trespass
On the other hand, “[t]he measure of damages for bad faith trespass” is “the value of the things mined at the time of severance without making deduction for the cost of labor and other expenses incurred in committing the wrongful act ... or for any value he may have added to the mineral by his labor.’” Moore, 21 S.W.3d at 428-29 (quoting Mayfield, 693 S.W.2d at 506; Cage Bros. v. Whiteman, 139 Tex. 522, 163 S.W.2d 638, 642 (1942)). “The measure of damages for bad faith trespass is intended to both compensate the owner and to punish the trespasser.” Moore, 261 S.W.3d at 429 (citing 1 KUNTZ, THE LAW OF OIL & GAS, § 11.3 at 309 (1987)).
c. Kishi Trespass
A third possible cause of action is sometimes referred to as a “Kishi” trespass—i.e., when a party enters a lease currently subject to dispute and drills an unsuccessful well that causes a diminution in the market value of the leasehold interest. See Humble Oil & Refining Co. v. Kishi, 276 S.W. 190 (Tex. Comm’n App. 1925), set aside on reh’g, 291 S.W. 538 (Tex. Comm’n App. 1927); Humble Oil & Refining Co. v. Luckel, 154 S.W.2d 155, 157 (Tex. Civ. App.—Beaumont 1941, writ ref’d w.o.m.). In such a case, the plaintiff must demonstrate that the defendant’s wrongful exploration of the land “proximately resulted in the loss of the market value of his property.” Thomas v. Tex. Co., 12 S.W.2d 597, 598 (Tex. Civ. App.—Beaumont 1928, no writ). That change in market value would necessarily also be the measure of damages. See id.
2. Geophysical Trespass / Assumpsit
Sometimes, mineral-interest owners attempt to recover damages against trespassers even when they have suffered no injury as a result of a trespass. Texas courts traditionally award only nominal damages in such cases. Gen’l Mills Restaurants, Inc. v. Tex. Wings, Inc., 12 S.W.3d 827, 833 (Tex. App.—Dallas 2000, no pet.). However, the Fifth Circuit has held that real-property owners may recover more than nominal damages in trespass cases despite having incurred no injury.
In Phillips Petroleum Co. v. Cowden, the Fifth Circuit was asked to determine whether a mineral-interest owner could recover against a party that trespassed on the mineral estate by conducting a seismic survey of the minerals from the separately owned surface estate above the minerals. 241 F.2d 586, 588 (5th Cir. 1957). After noting that no Texas law answered the question, id. at 590, the court ultimately held that the mineral-interest owner could “waive the trespass and sue in assumpsit for the reasonable value of the use and occupation,” id. at 592. Accordingly, the court held that even though the mineral-interest owner was not actually injured, it could recover against the geophysical trespasser “the reasonable market value of the use.” Id. at 593.
Whether Cowden accurately reflects Texas law is debatable. Some plaintiffs have claimed that support for the decision is found in Estes v. Browning, in which the Texas Supreme Court wrote in dictum that “damages for [a] trespass may be waived and the value alone of the use and occupation demanded.” 11 Tex. 237, 1853 WL 4433, at *6 (1853). Five years later, however, the Texas Supreme Court rejected the theory that a landowner could charge a trespasser “rent” based on the value that the trespasser purportedly received from the trespass. Galveston Wharf Co. v. Gulf, C. & S. F. Ry. Co., 72 Tex. 454, 10 S.W. 537, 538 (1889). Instead, the Court held that the landowner could recover only what the landowner could have leased the trespassed-upon land for on the open market, which was nominal. Id. at 538-39. That holding is more in line with the damages available for traditional temporary trespass—i.e., the cost to repair plus the value of the loss due to deprivation of use, if any. See infra Part III.A.
More recently, the San Antonio Court of Appeals held that a geophysical trespass alone is not actionable; to recover, a mineral-interest owner whose minerals were surveyed would be first required to demonstrate that the surveyors trespassed upon the surface estate above the minerals. Villarreal v. Grant Geophysical, Inc., 136 S.W.3d 265, 269-70 (Tex. App.—San Antonio 2004, pet. denied). Thus, assuming Cowden and Villarreal are both correct, the law holds that a mineral-estate owner may sue a geophysical trespasser for surveying his minerals even if he is not injured, but only if the surveyor physically trespasses upon the surface estate above the minerals—even if the mineral-estate owner does not own the surface estate. The damages recoverable would be the “ascertainable market value” of the geophysical trespass, “independent of the benefit that [the surveyors] actually received . . . .” Cowden, 241 F.2d at 593.
III. DAMAGES IN LITIGATION BROUGHT BY THE SURFACE OWNER OF LEASED LAND
One of the most frequent claims brought by landowners who do not own the minerals beneath their land against oil-and-gas operators is the ordinary physical trespass cause of action. Trespass “is defined as an unauthorized entry upon the land of another.” Mathis v. Barnes, 377 S.W.3d 926, 931 (Tex. App.—Tyler 2012, no pet.). “A trespass can be either by entry of a person on another’s land or by causing or permitting a thing to cross the boundary of the premises,” and such an unauthorized entry “is a trespass even when there is no or only slight damage.” Id. The ultimate “measure of damages in a trespass case is the sum necessary to make the victim whole, no more, no less.” Meridien Hotels, Inc. v. LHO Fin. P’ship I, L.P., 255 S.W.3d 807, 821 (Tex. App.—Dallas 2008, no pet.). The type of damages allowed in a trespass case depends on the character of the injury, if any, and the intent of the tortfeasor.
1. The Traditional Rules: Temporary v. Permanent Injury
The Texas Supreme Court has described “permanent” injuries to land as those that are “constant and continuous, not intermittent or recurrent.” Kraft v. Langford, 565 S.W.2d 223, 227 (Tex. 1978). For example, in Porras v. Craig, the defendant committed permanent injury to land by clearing plaintiff’s property, cutting down a number of large trees, and constructing a fence on the property. 675 S.W.2d 503, 504 (Tex. 1984). Temporary injuries, in contrast, were defined as being “sporadic” in nature and capable of termination. Kraft, 565 S.W.2d at 227. Examples of injuries to land deemed temporary include the removal of gravel (which could be easily replaced), Moore v. Rotello, 719 S.W.2d 372, 375 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d n.r.e.), and continuously driving over the plaintiff’s parking lot (which can be stopped), Mangham v. Hall, 564 S.W.2d 465, 466-67 (Tex. Civ. App.—Corpus Christi 1978, writ ref’d n.r.e.).
When the injury caused by trespass to real property is “a temporary injury,” compensable damages are “the cost to repair any damage to the property, loss of use of the property, and loss of any expected profits from the use of the property.” Coinmach Corp. v. Aspenwood Apartment Corp., 417 S.W.3d 909, 921 (Tex. 2013); see Bradley v. McIntyre, 373 S.W.2d 389, 391 (Tex. Civ. App.—Houston 1963, writ ref’d n.r.e.). The “cost of repair” damages are “the reasonable cost[s] of the repairs necessary to restore the property to its condition immediately prior to the injury . . . .” Z.A.O., Inc. v. Yarbrough Drive Ctr., J.V., 50 S.W.3d 531, 545 (Tex. App.—El Paso 2001, no pet.). And the “loss of use” damages are damages for any injury sustained “by being deprived of the use of the property” by the trespass. Id.
Under unique circumstances, a plaintiff may also be able to demonstrate and recover lost profits, such as when a laundromat owner proved that the defendant’s trespasses on its parking lot caused the laundromat to lose customers who could not access the establishment. Mangham, 564 S.W.2d at 466, 470. “Typically, the [plaintiff] could not recover both reasonable rent and lost profits” because doing so “would, in most cases, constitute a double recovery.” Coinmach Corp., 417 S.W.3d at 921 n.7. “Lost profits are measured by deducting operating expenses from gross earnings, resulting in net profits.” Id. “Reasonable rent” is “the value of the use of the property” of which the trespasser deprived the owner. Id.
When the injury is permanent in nature, compensable damages are measured by “the difference between the value of the land immediately before the injury and immediately after.” Gilbert Wheeler, Inc. v. Enbridge Pipelines (East Texas), L.P., No. 13-0234, 2014 WL 4252273, at *3 (Tex. Aug. 29, 2014) (quoting Fort Worth & D.C. Ry. Co. v. Hogsett, 67 Tex. 685, 4 S.W. 365, 366 (1887)). The difference between the standard measure of damages for temporary and permanent injuries reflects “the notion that the ordinary measure of damages is the cost to restore the property,” but “[w]hen restoration is not possible, . . . [courts] award damages equal to the loss in fair market value of the property as a whole.” Id.
2. A New Definition of Temporary v. Permanent
Calling the application of the temporary-versus-permanent-injury doctrine “vexing,” the Texas Supreme Court set out to provide clarification in Gilbert Wheeler. 2014 WL 4252273, at *2-4. There, the Court provided a new definition of the forms of injuries:
For the sake of clarity, we reformulate these definitions in the following way. An injury to real property is considered permanent if (a) it cannot be repaired, fixed, or restored, or (b) 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 can be reasonably evaluated. Conversely, an injury to real property is considered temporary if (a) it can be repaired, fixed, or restored, and (b) any anticipated recurrence would be only occasional, irregular, intermittent, and not reasonably predictable, such that future injury could not be estimated with reasonable certainty.
Id. at *4 (emphasis original).
3. “Flexibility” in Determining the Measure of Damages
In Gilbert Wheeler, the Texas Supreme Court did not stop at “reformatting” the definitions of temporary and permanent injuries. The Court went on to hold that its traditional measurements of damages for each are not applied with rigidity but rather with “flexibility, considering the circumstances of each case to ensure that an award of damages neither over nor under-compensates a landowner for damage to his property.” 2014 WL 4252273, at *5. The Court first acknowledged “the general rule in cases involving injury to real property is that the proper measure of damages is the cost to restore or replace, plus loss of use for temporary injury, and loss in fair market value for permanent injury.” Id. But then the Court recognized that Texas courts have applied “a number of exceptions” to this general rule to prevent a landowner from being compensated “unjustly.” Id. Based on the facts of the case, the Court focused on two of those “exceptions” to the general measurement standards for permanent versus temporary injury to land.
a. The Economic Feasibility Rule
The first exception to the general damages rules for injuries to land is the “economic feasibility exception.” Id. at *5. This rule holds that in cases of temporary injury to land, “when the cost of required repairs or restoration exceeds the diminution in the property’s market value to such a disproportionately high degree that the repairs are no longer economically feasible,” the temporary injury is “deemed permanent, and damages are awarded for loss in fair market value” rather than for cost of repair. Id. As an example, the Texas Supreme Court pointed to a case in which the cost of restoration of the land exceeded the value of the land “by more than six times.” Id. (citing N. Ridge Corp. v. Walraven, 957 S.W.2d 116, 119 (Tex. App.—Eastland 1997, pet. denied)). “As a result, the court of appeals [in that case] concluded that the repairs were not economically feasible as a matter of law, and awarded damages in keeping with the loss in the property’s fair market value.” Id.
But although the rule gets its name from circumstances in which a temporary injury will be compensated as a permanent injury (because the cost of repair greatly exceeds the loss in market value and is thus “economically infeasible”), the rule apparently applies the other way around as well. In other words, when an injury might arguably be considered permanent, the damages measure for temporary injuries will nonetheless apply when the change in market value far exceeds the cost of repair. Id. at *6. As an example of this, the Court cited a case in which a landowner’s facility was completely destroyed by a tortfeasor. Id. (citing Coastal Transport Co. v. Crown Central Petroleum, 136 S.W.3d 227, 235 (Tex. 2004)). There, the jury had determined that the cost of replacement was far cheaper than the loss in market value. Id. Thus, even though the landowner argued that the injury was permanent because “the facility had been totally destroyed,” the Court “held that the landowner was ‘entitled to recover only the amount of money necessary to rebuild its facility and to compensate for its loss of use during the interim.’” Id. (quoting Coastal, 136 S.W.3d at 235).
As a result, it appears that the economic feasibility exception will generally favor the lower measure of damages. If either measure of damages (change in market value or cost or repair) far exceeds the other, the lesser will apply.
b. The Intrinsic Value of Trees
Another exception to the general damages rules for temporary and permanent injuries is the “Intrinsic Value of Trees Exception”:
In cases involving real property injured by the destruction of trees, even when the proper measure of damages is the loss in the fair market value of the property to which the trees were attached, and the value of the land has not declined, we have held that the injured party may nevertheless recover for the trees’ intrinsic value. This exception was created to compensate landowners for the loss of the aesthetic and utilitarian value that trees confer on real property.
Gilbert Wheeler, 2014 WL 4252273, at *6. This exception is available “when a landowner can show that the destruction of trees on real property resulted in no diminishment of the property’s fair market value, or in so little diminishment of that value that the loss is essentially nominal . . . .” Id.
4. Trespasser’s Intent
Persons who trespass “under a good faith belief that they are entitled to do so” are potentially liable for those damages listed above, “but nothing more.” Coinmach Corp., 417 S.W.3d at 921. However, those “who knowingly and intentionally trespass, or who do so maliciously, may be liable for additional forms of damages.” Id. at 922. Punitive damages may be available when “actual damage has been sustained and the trespass upon the plaintiff’s property is shown to have been deliberate and intentional.” Id. (citing Pargas of Longview, Inc. v. Jones, 573 S.W.2d 571, 574 (Tex. Civ. App.—Texarkana 1978, no writ). Of course, “exemplary damages [remain] recoverable only when ‘the harm . . . results from: (1) fraud; (2) malice; or (3) gross negligence.” Coinmach Corp., 417 S.W.3d at 922 (quoting Tex. Civ. Prac. & Rem. Code § 41.003(a)). A trespasser “will not be liable for exemplary damages when the trespasser acted ‘in good faith,’ ‘without wrongful intention,’ or ‘in the belief that he was exercising his rights.’” Id. (quoting Wilen v. Falkenstein, 191 S.W.3d 791, 800 (Tex. App.—Fort Worth 2006, pet. denied)).
5. Preference in Favor of Temporary?
In describing the measurements of damages for temporary versus permanent injuries to land, the Supreme Court in Gilbert Wheeler wrote that its “rules are premised on the notion that the ordinary measure of damages is the cost to restore the property. When restoration is not possible, however, we award damages equal to the loss in fair market value of the property as a whole.” 2014 WL 4252273, at *3. This seems to suggest that the default measure of trespass damages is the cost to repair—so long as restoration is possible and so long as the cost of restoration does not greatly exceed the loss in market value. This is notable because, as discussed later herein, the Court’s preference in nuisance cases appears to be in favor of finding a permanent rather than temporary nuisance.
The elements of a negligence cause of action are “the existence of a legal duty, a breach of that duty, and damages proximately caused by the breach.” Rodriguez-Escobar, M.D. v. Goss, 392 S.W.3d 109, 113 (Tex. 2013) (quoting HIS Cedars Treatment Ctr. of DeSoto, Tex., Inc. v. Mason, 143 S.W.3d 794, 798 (Tex. 2004)). “Proximate cause has two components: (1) foreseeability and (2) cause-in-fact. For a negligent act or omission to have been a cause-in-fact of the harm, the act or omission must have been a substantial factor in bringing about the harm, and absent the act or omission—i.e., but for the act or omission—the harm would not have occurred.” Id. (citations omitted).
1. Temporary v. Permanent
The Texas Supreme Court has recognized that in cases involving injury to land, the temporary-versus-permanent injury dichotomy also applies when suit is brought under a negligence theory. Houston Unlimited, Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820, 825 (Tex. 2014) (citing, e.g., Trinity & S. Ry. Co. v. Schofield, 72 Tex. 496, 10 S.W. 575, 576-77 (1889)). As the Court recently noted in Houston Unlimited, “[g]enerally, we have permitted landowners to recover either the lost value of their land if the injury to the land is permanent or the cost to repair or remediate the land if the injury is temporary.” Id. (emphasis original). Indeed, in Kraft v. Langford, the Court had said: “The concepts of temporary and permanent injuries are mutually exclusive and damages for both may not be recovered in the same action.” 565 S.W.2d 223, 227 (Tex. 1978).
2. Unresolved Conflicts
a. Temporary and Permanent?
In Houston Unlimited, after noting the general rule that temporary and permanent injuries are mutually exclusive, the Texas Supreme Court acknowledged that it and lower courts have held that, in some cases, it is theoretically possible for plaintiff to demonstrate both: “To recover ‘an award of diminished value . . . in addition to the costs of repair,’ the ‘permanent reduction in value’ must ‘refer to that reduction occurring even after repairs are made.’” 443 S.W.3d at 826 (quoting Ludt v. McCollum, 762 S.W.2d 575, 576 (Tex. 1988)). For example, the Court had previously said that “[d]amages for diminution in value and damages for costs of repairs are not always duplicative. Diminution in value does not duplicate the cost of repairs if the diminution is based on a comparison of the original value of the property and the value after repairs are made.” Id. (emphasis original) (quoting Parkway Co. v. Woodruff, 901 S.w.2d 434, 411 (Tex. 1995)). However, while recognizing “this apparent conflict,” the Court in Houston Unlimited nonetheless did not reach the issue because it decided that there was no evidence in the record to support any damages award. Id. at 827-38.
b. Stigma Damages
Another conflict among jurisdictions recognized but not reached by the Texas Supreme Court in Houston Unlimited is whether Texas law permits the recovery of damages for the stigma associated with a tortious act. Id. at 827. “‘Stigma damages’ essentially constitute ‘damage to the reputation of the realty.’” Id. at 824 (quoting Smith v. Carbide & Chems. Corp., 226 S.W.3d 52, 55 (Ky. 2007)). Such damages are intended to compensate a plaintiff for “the market’s perception of the decrease in property value caused by the injury to the property.” Id. (quoting Jennifer L. Young, Stigma Damages: Defining the Appropriate Balance Between Full Compensation and Reasonable Certainty, 52 S.C. L. Rev. 409, 424 (2001)). However, such damages are difficult to quantify with any level of certainty. As the Court explained:
The struggle over whether to even allow recovery of stigma damages arises primarily from the ‘conflicting goals of fully compensating the plaintiff for her injury while only awarding those damages that can be proven with reasonable certainty. Even when it is legally possible to recover stigma damages, it is often legally impossible to prove them. Evidence based on “conjecture, guess or speculation” is inadequate to prove stigma damages, not only as to the amount of the lost value but also as to the portion of that amount caused by the defendant’s conduct.”
Houston Unlimited, 443 S.W.3d at 827 (citations omitted). Because the Court found in Houston Unlimited that the “evidence was legally insufficient to prove” stigma damages—“even if Texas law permits [their] recovery”—it left resolution of the conflict for another day. Id. at 827.
A nuisance cause of action seeks to recover damages for “a condition that substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities.” Barnes v. Mathis, 353 S.W.3d 760, 763 (Tex. 2011); see also Schneider Nat’l Carriers, Inc. v. Bates, 147 S.W.3d 264, 269 (Tex. 2004). “[F]oul odors, dust, noise, and bright lights—if sufficiently extreme—may constitute a nuisance.” Schneider, 147 S.W.3d at 269. The types of damages for nuisance, like those available for a trespass claim, are dependent on whether the nuisance is temporary or permanent in nature.
1. Temporary v. Permanent: the Old Rule
Prior to 2004 and “for more than a century, Texas courts . . . defined temporary and permanent nuisances along lines that are . . . close to the plain meaning of the words.” Id. at 272. A “permanent nuisance” was “one that involves ‘an activity of such a character and existing under such circumstances that it will be presumed to continue indefinitely.’” Id. (quoting Bayouth v.Lion Oil Co., 671 S.W.2d 867, 868 (Tex. 1984)). Thus, a permanent nuisance was “constant and continuous,” id., or its injury one that “constantly and regularly recurs,” id. (quoting Rosenthal v. Taylor, B. & H. Ry. Co., 79 Tex. 325, 15 S.W. 268, 269 (1891)). On the other hand, “a nuisance is temporary if it is of limited duration” or “uncertain” as to whether “any future injury will occur.” Id. A nuisance was also considered “temporary if it is ‘occasional, intermittent,” “recurrent,” or “sporadic and contingent upon some irregular force such as rain.” Id. (citations omitted).
2. Temporary v. Permanent: the New Rule
In Schneider, the Texas Supreme Court observed that these definitions “had been in place for more than a hundred years,” id.at 272, and the line between temporary and permanent nuisances “has been a continuing problem” for courts to apply, id. at 273 (quoting Nugent v. Pilgrim’s Pride Corp., 30 S.W.3d 562, 569 (Tex. App.—Texarkana 2000, pet. denied)). Noting the consequences of the distinction and the inconsistent decisions of the courts of appeals, the Court sought to clarify nuisance jurisprudence with a new rule and definitions:
[W]e hold that a nuisance should be deemed temporary only if it is so irregular or intermittent over the period leading up to filing and trial that future injury cannot be estimated with reasonable certainty. Conversely, a nuisance should be deemed permanent if it is sufficiently constant or regular (no matter how long between occurrences) that future impact can be reasonably evaluated.
Schneider, 147 S.W.3d at 281. The Court reached this conclusion after reasoning that if a nuisance is of a character that would affect property values, the injury it caused should be measured by that change in market value; but if it is impossible to tell how the nuisance would affect a property’s value, damages will compensate the plaintiff only for injury resulting from an isolated occurrence. Id. at 276. Ultimately, “whether the nuisance is temporary or permanent does not turn on the conditions on any particular day or week, but on expectations about its impact over a period of years.” Id.
3. The Effects of the Temporary v. Permanent Decision in Nuisance Cases
The consequences of the characterization of a nuisance as temporary or permanent are far-reaching. “First, the distinction between temporary and permanent nuisances determines the damages that may be recovered.” Schneider, 147 S.W.3d at 276. “[I]f a nuisance is temporary, the landowner may recover only lost use and enjoyment (measured in terms of rental value) that has already accrued.” Id. On the other hand, “if a nuisance is permanent, the owner may recover lost market value—a figure that reflects all losses from the injury, including lost rents expected in the future.” Id. Proving a diminution of market value in a permanent-nuisance case “normally requires a comparison of market value with and without the nuisance.” Natural Gas Pipeline Co. of Am. v. Justiss, 397 S.W.3d 150, 155 (Tex. 2012).
Second, the distinction determines whether a plaintiff may recover for future damages in one suit, or whether the plaintiff must sue independently for each occurrence. Schneider, 147 S.W.3d at 278. “If future harm can reasonably be predicted, the nuisance is a permanent one and a claimant must sue for all injuries in one suit. But if future harm is anyone’s guess, the nuisance is a temporary one and a claimant must bring a series of suits involving the same parties, pleadings, and issues as each injury occurs.” Id. Determining all issues in one suit is preferable as a matter of policy: “[I]f an alleged nuisance occurs often enough before trial to allow jurors to evaluate it fully in one case, we should apply the distinction in a way that allows them to do so.” Id. at 279.
And third, “characterizing a nuisance as temporary or permanent determines when limitations accrues, and thus when an injured party’s claims are barred.” Id. Nuisance “claims arise only upon a substantial interference with property use . . . .” Id. (emphasis original). Once that “interference occurs, limitations runs against a nuisance claim just as against any other.” Id.
4. Heavy Preference in Favor of Permanent
The Texas Supreme Court’s discussion of each of these consequences in Schneider appears to indicate a very heavy preference in favor of finding that a nuisance is permanent rather than temporary. Such a preference conserves judicial economy by attempting to compensate the plaintiff in one suit rather than many, and also forces plaintiffs to litigate as soon as they are affected—rather than suing many years later and claiming a nuisance was merely “temporary” all along. The Court summed up its new decision this way:
Generally, if a nuisance occurs at least a few times a year and appears likely to continue, property values will begin to reflect that impact, and jurors should be able to evaluate it with reasonable certainty. Even if a nuisance causes annoyance only during certain weather conditions or certain months, annual experience should provide a sufficient basis for evaluating the nuisance. Absent evidence that current experiences are unrepresentative or about to change, such nuisances should be considered “permanent” as a matter of law.
Schneider, 147 S.W.3d at 280.
D. Accommodation Doctrine & Overuse or Negligent Use of Surface Estate
In Texas, the surface estate of land is “servient” to the “dominant” mineral estate. Merriman v. XTO Energy, Inc., 407 S.W.3d 244, 248-49 (Tex. 2013); Gen’l Crude Oil Co. v. Aiken, 162 Tex. 104, 344 S.W.2d 668, 669 (1961). This means that “[a] party possessing the dominant mineral estate has the right to go onto the surface of the land to extract the minerals, as well as those incidental rights reasonably necessary for the extraction.” Merriman, 407 S.W.3d at 248-49 (citing Tarrant Cnty. Water Control & Improvement Dist. No. One v. Haupt, Inc., 854 S.W.2d 909, 911 (Tex. 1993); Getty Oil Co. v. Jones, 470 S.W.2d 618, 621 (Tex. 1971)). In exercising its rights to use the surface estate, mineral-estate owners (or lessees) must exhibit “due regard to the rights of the surface owners.” Gen’l Crude Oil Co., 344 S.W.2d at 669 (citations omitted). In Texas case law, we see this balancing of interests manifest itself in three types of claims.
1. Failure to Accommodate the Surface Owner’s Existing Use
A surface owner may claim that the mineral-interest owner’s use of the surface estate has failed to accommodate the surface owner’s existing use. Merriman, 407 S.W.3d at 248-49. This is a very difficult claim to prove, however, because the mineral estate is the “dominant” estate, and therefore includes the “right to use as much of the surface as is reasonably necessary to extract and produce the minerals.” Id. at 249. In fact, “[i]f the mineral owner or lessee has only one method for developing and producing the minerals, that method may be used regardless of whether it precludes or substantially impairs an existing use of the servient surface estate.” Id. (emphasis added) (citing Haupt, 854 S.W.2d at 911; Getty Oil, 470 S.W.2d at 622). “On the other hand, ‘[i]f the mineral owner has reasonable alternative uses of the surface, one of which permits the surface owner to continue to use the surface in the manner intended . . . and one of which would preclude that use by the surface owner, the mineral owner must use the alternative that allows continued use of the surface by the surface owner.’” Id. (emphasis original) (quoting Haupt, 854 S.W.2d at 911-12). Therefore, to prevail on a failure-to-accommodate claim,
the surface owner has the burden to prove that (1) the lessee’s use completely precludes or substantially impairs the existing use, and (2) there is no reasonable alternative method available to the surface owner by which the existing use can be continued. If the surface owner carries that burden, he must further prove that given the particular circumstances, there are alternative reasonable, customary, and industry-accepted methods available to the lessee which will allow recovery of the minerals and also allow the surface owner to continue the existing use.
Id. (citations omitted). And, notably, the element that the surface owner has “no reasonable alternative method” to continue his existing use “is not met by evidence that the alternative method is merely more inconvenient or less economically beneficial than the existing method. Rather, the surface owner has the burden to prove that the inconvenience or financial burden of continuing the existing use by the alternative method is so great as to make the alternative method unreasonable.” Id. (citations omitted).
Plaintiffs in failure-to-accommodate cases frequently seek injunctive relief to prohibit the mineral-estate owner’s contested development of the property (in lieu of damages). E.g., Merriman, 407 S.W.3d at 246-47. Damages may also be available, however. See Getty Oil, 470 S.W.2d at 623. In Getty Oil, the Texas Supreme Court noted that in the event a failure-to-accommodate claim is proved, the mineral-estate owner or lessee “will have the right” to cure the claimed breach. Id. “[I]n such event,” the mineral-estate owner or lessee “will not be liable in damages beyond the decrease in the value of the use of the land from the time the interfering [equipment was] installed to the time of [its] removal.” Id.
2. More Surface Use Than Is Reasonably Necessary
“The holder of an oil and gas lease, in the absence of specific clauses relating to surface use . . . has the legal right to use as much of the surface as is reasonably necessary to comply with the terms of the lease and to carry out its purposes.” Macha v. Crouch, 500 S.W.2d 902, 904 (Tex. Civ. App.—Corpus Christi 1973, no writ). A surface owner therefore may assert a claim that the lessee has used more of the surface than is reasonably necessary to conduct oil-and-gas operations. Id. However, because the lessee’s “right to use and occupy the surface of the land to the extent that the same was reasonable and necessary for the purpose of drilling and producing” is “unqualified and unrestricted,” ordinary energy-exploration uses such as “construct[ing] and maintain[ing] tank batteries, slush pits, salt water pits, roads and pipelines” will ordinarily not be actionable. Id. at 905-06. To the extent a surface owner does prove that a lessee has used more of the surface than is reasonably necessary, he must also show either “permanent or temporary injury to the land” as required in any real-property damages case. Id. at 905.
3. Negligent Injury to Surface Estate
The lessee’s duty to reasonably exercise his right to use the surface estate with “due regard” for the rights of the surface owner includes a duty “not to negligently injure such estate.” Gen’l Crude Oil, 344 S.W.2d at 669 (citations omitted); see also Humble Oil & Refining Co. v. Williams, 420 S.W.2d 133, 134 (Tex. 1967) (“A person who seeks to recover from the lessee for damages to the surface has the burden of alleging and proving either specific acts of negligence or that more of the land was used by the lessee than was reasonably necessary.”). That the surface estate was damaged—e.g., by the building of roads or cutting of trees—is insufficient to demonstrate a cause of action against the lessee. Humble Oil, 420 S.W.2d at 135. The plaintiff must plead and prove negligence in accessing the surface estate. Once negligence is established, the surface owner must demonstrate damages based on the ordinary permanent-versus-temporary-injury dichotomy. E.g., Brown v. Lundell, 162 Tex. 84, 344 S.W.2d 863, 865 (Tex. 1961) (affirming judgment for permanent injury to land due to water contamination measured by change in market value of surface estate before and after injury); Gen’l Crude, 344 S.W.2d at 672 (same).
In Texas, a plaintiff advancing a fraud cause of action must prove that:
(1) the defendant made a material misrepresentation; (2) the defendant knew the representation was false or made the representation recklessly without any knowledge of its truth; (3) the defendant made the representation with the intent that the other party would act on that representation or intended to induce the party’s reliance on the representation; and (4) the plaintiff suffered an injury by actively and justifiably relying on that representation.
Exxon Corp. v. Emerald Oil & Gas Co., L.C., 348 S.W.3d 194, 217 (Tex. 2011) (op. on rehearing); see also Am. Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 436 (Tex. 1997) (“[A] plaintiff establishes actionable fraud if the defendant makes a material representation, that is false, either known to be false when made or is asserted without knowledge of its truth, that is intended to be and is relied upon, and that causes injury.”). A plaintiff has no fraud claim absent proof of reliance to his detriment on a representation of the defendant. Am. Tobacco, 951 S.W.2d at 436-37.
Surface owners have alleged fraud claims against lessees based on reports those lessees filed with the Texas Railroad Commission. E.g., Exxon Corp., 348 S.W.3d at 217-20. However, “the mere fact that [someone] might or should rely on statements in [Railroad Commission filings] alone is not sufficient to establish an intent to induce reliance.” Id. at 218. Moreover, “[e]vidence that reliance on false public information as part of a general industry practice is [also] insufficient, as a matter of law, to prove an intent to induce reliance.” Id. at 219. Rather, “[a] plaintiff must show that ‘[t]he maker of the misrepresentation [has] information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach [the plaintiff] and will influence [his] conduct.” Id.
Damages for fraud are intended to compensate for “the actual amount of the plaintiff’s loss that directly and proximately results from the defendant’s fraudulent conduct.” Exxon Corp., 348 S.W.3d at 221 n.24 (quoting Tilton v. Marshall, 925 S.W.2d 672, 680 (Tex. 1996)). There are two measures of damages for fraud: (1) “the benefit-of-the-bargain measure”; and (2) “the out-of-pocket measure.” Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 681 (Tex. 2000); see also Baylor Univ. v. Sonnichsen, 221 S.W.3d 632, 636 (Tex. 2007). “Benefit-of-the-bargain damages are the difference between the value as represented and the value received.” Fortune Prod., 52 S.W.3d at 681. “Out-of-pocket damages compensate a defrauded party for the difference between the value of that with which he or she has parted and the value actually received.” Id.
F. Breach of Contract / Third Party Beneficiary
Surface owners who allege injury to their land in oil-and-gas cases sometimes also bring causes of action for breach of contract—under one of two theories. First, if they have entered into a surface-use agreement with the lessee, they may sue for breach of the surface-use agreement. Second, if the lease of the minerals beneath their land has a provision related to surface use, they may argue that they can sue to enforce the lease as third-party beneficiaries.
To prevail on a breach-of-contract claim, the plaintiff must prove “(1) the existence of a valid contract, (2) performance or tendered performance by the plaintiff, (3) breach of the contract by the defendant, and (4) resulting damages to the plaintiff.” Prudential Ins. Co. v. Durante, 443 S.W.3d 499, 509 (Tex. App.—El Paso 2014, pet. filed) (quoting Fieldtech Avionics & Instruments, Inc. v. Component Control.com, Inc., 262 S.W.3d 813, 825 (Tex. App.—Fort Worth 2008, no pet.)). A non-party to a contract cannot bring suit unless the contracting “parties intended to secure some benefit to that third party, and only if the contracting parties entered into the contract directly for the third party’s benefit.” Grinnell v. Munson, 137 S.W.3d 706, 712 (Tex. App.—San Antonio 2004, no pet.) (citing MCI Telecomms. Corp. v. Tex. Utilities Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999)). The contracting parties’ “intent to confer a direct benefit upon a third party ‘must be clearly and fully spelled out’” in the contract. S. Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 306 (Tex. 2007) (quoting MCI Telecomms., 995 S.W.2d at 651).
1. Permanent v. Temporary
Until recently, Texas courts disagreed over whether the permanent-versus-temporary dichotomy applied in disputes that sounded in contract rather than tort. But in Gilbert Wheeler, the Texas Supreme Court resolved the dispute: “We hold that application of the temporary-versus-permanent distinction in cases involving injury to real property is not limited to causes of action that sound in tort rather than contract.” 2014 WL 4252273, at *4. The parties, of course, may alter that rule by agreement:
[C]ontracting parties are free to specify in an agreement how damages 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
. . . . We see no reason to compensate a party differently because the wrongful conduct that caused the identical injury stems from breaching a contract rather than committing a tort. . . . Accordingly, we hold that the temporary-versus-permanent [injury] distinction underlies the determination of the proper measure of damages for both . . . trespass and breach-of-contract claims . . . .”
2. Attorneys’ Fees
Texas law holds “that attorney’s fees paid to prosecute or defend a lawsuit cannot be recovered in that suit absent a statute or contract that allows for their recovery.” Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Development & Research Corp., 299 S.W.3d 106, 120 (Tex. 2009). Thus, while attorneys’ fees are not ordinarily recoverable damages, the contract between the parties may alter the default rule and thus permit fee recovery. Id. An example of a statute permitting fee recovery is Texas Civil Practice and Remedies Code § 38.001(8), which states that a party “may recover reasonable attorney’s fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for . . . an oral or written contract.” Tex. Civ. Prac. & Rem. Code § 38.001(8). A party must prevail on his claim and recover other damages to become eligible for fee recovery under § 38.001(8). Green Int’l Inc. v. Solis, 951 S.W.2d 384, 390 (Tex. 1997).
In cases involving some claims for which fees are recoverable, and other claims for which fees are not recoverable, plaintiffs may only recover fees related to those claims for which fees are recoverable. As the Texas Supreme Court wrote in Tony Gullo Motors I, L.P. v. Chapa:
For more than a century, Texas law has not allowed recovery of attorney’s fees unless authorized by statute or contract. This rule is so venerable and ubiquitous in American courts it is known as “the American Rule.” Absent a contract or statute, trial courts do not have inherent authority to require a losing party to pay the prevailing party’s fees. As a result, fee claimants have always been required to segregate fees between claims for which they are recoverable and claims for which they are not.
212 S.W.3d 299, 310-11 (Tex. 2006). Notably, that facts or claims are arguably “intertwined” is not sufficient to depart from the rule. Id. at 313-14 (“Intertwined facts do not make tort fees recoverable; it is only when discrete legal services advance both a recoverable and unrecoverable claim that they are so intertwined that they need not be segregated.”); see also Varner v. Cardenas, 218 S.W.3d 68, 69 (Tex. 2007) (per curiam) (“In Chapa, we reestablished the rule that attorney’s fees are recoverable only if necessary to recover on a contract or statutory claim allowing them, and eliminated the exception for fees incurred solely on separate but arguably intertwined claims.”).
3. Punitive and Liquidated Damages
“While exemplary or punitive damages may generally be awarded for torts involving malicious or grossly negligent conduct, they are not available for breach of contract claims.” Safeshred, Inc. v. Martinez, 365 S.W.3d 655, 659 (Tex. 2012). In fact, because “[t]he basic principle underlying contract damages is compensation for losses sustained and no more,” “courts will not enforce punitive contractual damages provisions.” FPL Energy, LLC v. TXU Portfolio Management Co., L.P., 426 S.W.3d 59, 69 (Tex. 2014) (citing Stewart v. Basey, 150 Tex. 666, 245 S.W.2d 484, 486 (1952)). To enforce a liquidated-damages provision of a contract, the plaintiff must demonstrate that “(1) ‘the harm caused by the breach is incapable or difficult or estimation,’ and (2) ‘the amount of liquidated damages called for is a reasonable forecast of just compensation.’” Id. (quoting Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991)).
G. Costs to Investigate
Some surface owners alleging surface contamination have sought to recover damages for the costs of investigating their surface estates, but it is not clear whether such costs are recoverable under Texas law. In a sewer-construction dispute, the Corpus Christi Court of Appeals sidestepped deciding whether the cost to investigate allegedly improper sewer crossings was recoverable because such costs were not reasonably demonstrated. City of Alton v. Sharyland Water Supply Corp., 402 S.W.3d 867, 884-85 (Tex. App.—Corpus Christi 2013, pet. denied). Houston’s Fourteenth Court of Appeals held that expert investigation fees in an aircraft-manufacturing dispute were not recoverable because they were incurred to prepare the plaintiff for litigation, not to repair property. Avco Corp., Textron Lycoming Reciprocating Engine Div. of Avco Corp. v. Interstate Sw., Ltd., 251 S.W.3d 632, 657-62 (Tex. App.—Houston [14th Dist.] 2007, pet. denied). On the other hand, Houston’s First Court of Appeals held that the cost to investigate contamination on leased land was compensable in a fraud cause of action. Holmes v. P.K. Pipe & Tubing, Inc., 856 S.W.2d 530, 543 (Tex. App.—Houston [1st Dist.] 1993, no writ). Likewise, the Dallas Court of Appeals held that in a fraud case against a physician, the plaintiff could recover the cost of hiring an attorney to investigate another physician who the defendant falsely claimed injured the plaintiff. Jackson v. Julian, 694 S.W.2d 434, 437 (Tex. App.—Dallas 1985, no writ).
H. Lost Profits/Sales
Lost profits or lost sales are a form of consequential damages—i.e., “damages that ‘result naturally, but not necessarily, from the defendant’s wrongful acts.’” Stuart v. Bayless, 964 S.W.2d 920, 921 (Tex. 1998) (quoting Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997)). As such, “[t]hey must be foreseeable and directly traceable to the wrongful act and result from it.” Id. “[A] party charged with liability for such damages [must] have notice or knowledge of sufficient facts and circumstances to put him on notice of the likelihood of plaintiff’s sustaining some such damages as a natural and probable result of the [tortious conduct] charged against him.” Harris v. Christianson-Keithley Co., 303 S.W.2d 422, 427 (Tex. Civ. App.—Galveston 1957, writ ref’d n.r.e.); see also Stuart, 964 S.W.2d at 921; First State Bank, N.A. v. Morse, 227 S.W.3d 820, 829 n.6 (Tex. App.—Amarillo 2007, no pet.).
As the Texas Supreme Court recently noted, Texas’s rule on the adequacy of evidence to support lost-profit damages is “well established,” ERI Consulting Engineers, Inc. v. Swinnea, 318 S.W.3d 867, 876 (Tex. 2010):
Recovery for lost profits does not require that the loss be susceptible of exact calculation. However, the injured party must do more than show that they suffered some lost profits. The amount of the loss must be shown by competent evidence with reasonable certainty. . . . As a minimum, opinions or estimates of lost profits must be based on objective facts, figures, or data from which the amount of lost profits can be ascertained.
Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex. 1992). Evidence of “past profits, coupled with other facts and circumstances, may establish a lost-profits amount with reasonable certainty.” Helena Chem. Co. v. Wilkins, 47 S.W.3d 486, 505 (Tex. 2001) (emphasis original). Absent a history of past profits, courts require “some other objective data, such as future contracts, from which lost profits can be calculated with reasonable certainty.” Id. “It is not enough that profits merely be anticipated or hoped for; they must be established with reasonable certainty.” City of Austin v. Teague, 570 S.W.2d 389, 395 (Tex. 1978).
Lost profits may be recoverable in cases involving temporary injury to real property. E.g., Mangham v. Hall, 564 S.W.2d 465, 468 (Tex. Civ. App.—Corpus Christi 1978, writ ref’d n.r.e.). However, lost profits cannot be separately recovered in a case involving permanent injury to land because such profits would already be built into the measure of damages for permanent injury (diminution in value), and courts prohibit the double recovery of damages. City of Dallas v. Priolo, 150 Tex. 423, 242 S.W.2d 176, 427 (1951); see also Tex. Farm Bureau Mutual Ins. Co. v. Wilde, 385 S.W.3d 733, 738 (Tex. App.—El Paso 2012, no pet.).
I. Gross Negligence
Gross negligence is often alleged in an attempt to obtain exemplary damages. “Gross negligence requires a showing of two elements:”
(1) viewed objectively from the actor’s standpoint, the act or omission complained of must involve an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and (2) the actor must have actual, subjective awareness of the risk involved, but nevertheless proceed in conscious indifference to the rights, safety, or welfare of others.
Boerjan v. Rodriguez, 436 S.W.3d 307, 311 (Tex. 2014) (citing Lee Lewis Constr., Inc. v. Harrison, 70 S.W.3d 778, 785 (Tex. 2001); Tex. Civ. Prac. & Rem. Code § 41.001(11)). An “extreme risk” is “‘not a remote possibility of injury or even a high probability of minor harm, but rather the likelihood of serious injury to the plaintiff.’” Boerjan, 436 S.W.3d at 311 (quoting Mobil Oil Corp. v. Ellender, 968 S.W.2d 917, 921 (Tex. 1998)). “The harm to be anticipated from the conduct must be extraordinary harm such as ‘death, grievous physical injury, or financial ruin.’” Kinder Morgan N. Tex. Pipeline, L.P. v. Justiss, 202 S.W.3d 427, 447 (Tex. App.—Texarkana 2006, no pet.) (quoting Celanese Ltd. v. Chem. Waste Mgmt., Inc., 75 S.W.3d 593, 600 (Tex. App.—Texarkana 2002, pet. denied)); see also Rusty’s Weigh Scales & Serv., Inc. v. N. Tex. Scales, Inc., 314 S.W.3d 105, 112 (Tex. App.—El Paso 2010, no pet.). For more on exemplary damages, see infra Part IV.C.
J. Mental-Anguish Damages in Property-Damage Cases
When mental-anguish damages may be recovered, an award of such damages “must be supported by direct evidence that the nature, duration, and severity of mental anguish was sufficient to cause, and caused, either a substantial disruption in the plaintiff’s daily routine or a high degree of mental pain and distress.” Service Corp. Int’l v. Guerra, 348 S.W.3d 221, 230 (Tex. 2011) (citing Bentley v. Bunton, 94 S.W.3d 561, 606 (Tex. 2002)). Whether mental-anguish damages are recoverable in a case is a different question and can be more difficult to answer. Traditionally, American courts allowed recovery of mental-anguish damages only when “(1) accompanied by a physical injury resulting from a physical impact, or (2) produced by a particularly upsetting or disturbing event.” Parkway Co. v. Woodruff, 901 S.W.2d 434, 442 (Tex. 1995). “As a general matter, though, qualifying events have demonstrated a threat to one’s physical safety or reputation or involved the death of, or serious injury to, a family member.” Id. at 445.
Because “mental anguish is a form of personal-injury damage,” such damages are ordinarily unrecoverable in property-damage cases. Strickland v. Medlen, 397 S.W.3d 184, 190 (Tex. 2013); see City of Tyler v. Likes, 962 S.W.2d 489, 499 (Tex. 1997) (“In general, the owner of damaged property cannot recover damages for emotional distress as an element of damage to the property”) (quoting 1 Dobbs, Law of Remedies § 5.15(1) at 876 (2d ed. 1993)); Seminole Pipeline Co. v. Broad Leaf Partners, Inc., 979 S.W.2d 730, 755 (Tex. App.—Houston [14th Dist.] 1998, no pet.) (“The majority rule . . . is that damages for emotional distress are not included within actual damages merely for the loss of things.”) (citing Restatement (Second) of Torts § 911 cmt. E at 475 (1979)). For example, the Texas Supreme Court has disallowed mental-anguish damages in a case involving the mistaken euthanasia of a pet dog, Medlen, 397 S.W.3d at 190, and another involving the negligent flooding of a home, City of Tyler, 962 S.W.2d at 497 (“[W]e reaffirm today that damages measured by diminution in value are an adequate and appropriate remedy for negligent harm to real or personal property, and that mental anguish based solely on negligent property damage is not compensable as a matter of law.”).
Nonetheless, the Texas Supreme Court has explicitly left open the question of whether, and if so when, mental-anguish damages could be recovered in cases involving intentional injury to property or economic interests. Twice the Court has recognized but declined to answer that question. See Douglas v. Delp, 987 S.W.2d 879, 885 (Tex. 1999) (“We express no opinion on what standard may be appropriate when additional or other kinds of loss are claimed or when heightened culpability is alleged.”); City of Tyler, 962 S.W.2d at 497 (“[W]e need not decide whether mental anguish arising out of property damage may be legally compensable when a heightened degree of misconduct is found.”). And in another case, the Court pointed in dictum to various court of appeals opinions for the proposition that a defendant “who knowingly and intentionally” or “maliciously” injures real property “may be liable for additional forms of damages.” Coinmach Corp. v. Aspenwood Apartment Corp., 417 S.W.3d 909, 922 (Tex. 2013).
Faced with little direction from the high court, intermediate appellate courts seem to have gravitated towards a “middle ground” rule—in which mental-anguish damages can be recovered in some but not all cases involving heightened culpability. Looking to the law in other states, Houston’s 14th Court of Appeals has held that cases involving “intentional injury to property will support a claim of mental anguish where simple negligence will not.” Seminole Pipeline, 979 S.W.2d at 756. In addition, the court held that mental-anguish damages are available in cases involving “property damage resulting from gross negligence,” but only “upon evidence of some ill-will, animus, or design to harm the plaintiff personally.” Id. at 757. Later, the Austin Court of Appeals applied the Seminole Pipeline rule in denying mental-anguish damages in a case involving a dog killed in traffic after escaping from a pet groomer. Petco Animal Supplies, Inc. v. Schuster, 144 S.W.3d 554, 562 (Tex. App.—Austin 2004, no pet.).
IV. ADDITIONAL CLAIMS AND ISSUES IN OIL-AND-GAS CASES
A. Trespass to Try Title
Competing claims of title to oil-and-gas interests are ordinarily resolved through the trespass-to-try-title cause of action. See Martin v. Amerman, 133 S.W.3d 262, 267 (Tex. 2004) (holding trespass to try title is the method in Texas for adjudicating real-property title disputes). To prevail on a trespass-to-try-title claim, a plaintiff must show: (1) a superior chain of conveyances from the sovereign; (2) a superior chain of conveyances from a common source; (3) title by limitations; or (4) title by prior possession coupled with proof that possession was not abandoned. Id. at 265; Rogers v. Ricane Enters., Inc., 884 S.W.2d 763, 768 (Tex. 1994). Although plaintiffs in trespass-to-try-title suits ordinarily are only attempting to recover title to the real property in a dispute, Texas Rule of Civil Procedure 783 contemplates that they may also be entitled to recover “rents and profits or damages.” See Tex. R. Civ. P. 783. In dicta, the Texas Supreme Court has said that “damages available in a trespass to try title suit include lost rents and profits, damages for use and occupation of the premises, and damages for any special injury to the property.” Coinmach Corp. v. Aspenwood Apartment Corp., 417 S.W.3d 909, 921 (Tex. 2013). These types of damages mimic the types of damages available for temporary or permanent injuries to land. See id; see supra Part III.
B. Slander of Title
Slander of title is “a cause of action to recover damages for the failure to release a purported, though not actual, property interest
. . . .” Ellis v. Waldrop, 656 S.W.2d 902, 905 (Tex. 1983) (citations omitted). “Slander of title is a tort action with stringent pleading and proof requirements. The plaintiff must prove that the defendant made a false and malicious statement, disparaging property in which the plaintiff holds an interest, and causing special damages.” Hill v. Heritage Res., Inc., 964 S.W.2d 89, 115 (Tex. App.—El Paso 1997, pet. denied). Malice is a necessary element, Jarrett v. Ross, 139 Tex. 560, 164 S.W.2d 550, 550 (1942), requiring proof of “false statements regarding title in absence of color of title or . . . reasonable belief,” Hill, 964 S.W.2d at 127; Kidd v. Hoggett, 331 S.W.2d 515, 518 (Tex. Civ. App.—San Antonio 1959, writ ref’d n.r.e.).
The goal of damages in a slander-of-title case “is to indemnify the injured party for the pecuniary loss suffered by him, placing him as nearly as possible in the position that he would have occupied but for the injury in question”—no more and no less. Reaugh v. McCollum Exploration Co., 139 Tex. 485, 163 S.W.2d 620, 621 (1942). Accordingly, a slander-of-title plaintiff must demonstrate that the defendant’s title claim actually caused “the loss of a specific sale or sales.” Ellis, 656 S.W.2d at 905. Then—to avoid a windfall—the plaintiff must deduct from the lost-sales price “the amount for which [the plaintiff] could have sold [the property] at the time of trial with the cloud [i.e., the defendant’s title claim] removed.” Reaugh, 163 S.W.2d at 622.
C. Punitive / Exemplary Damages
As previously discussed, punitive or exemplary damages are not recoverable in a contract suit but may be recoverable in a tort claim. See infra Part III.F.3; see also Safeshred, 365 S.W.3d at 660-61. As the Texas Supreme Court said in Safeshred, “punitive damages are generally available for common law torts so long as the traditional prerequisites are met: a finding of actual damages . . . and outrageous, malicious, or otherwise reprehensible conduct.” Id. at 660.
Although this paper does not intend to comprehensively cover punitive damages, several requirements are worth noting. Foremost, unless a claim is plead under a statute that states otherwise, “exemplary damages may be awarded only if the claimant proves by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from . . . (1) fraud; (2) malice; or (3) gross negligence.” Tex. Civ. Prac. & Rem. Code § 41.003(a). For purposes of the exemplary damages statute, “malice” requires proof of “a specific intent by the defendant to cause substantial injury or harm to the claimant.” Id. § 41.001(7). “Fraud” is defined as “fraud other than constructive fraud.” Id. § 41.001(6). And “[g]ross negligence” is defined as “an act or omission: (A) which when viewed objectively from the standpoint of the actor at the time of its occurrence involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and (B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.” Id. § 41.001(11). The magnitude of which the defendant had to be aware at the time of the tortious conduct must generally be so “serious” that it is akin to “death, grievous injury, or financial ruin.” Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 57 (Tex. 1997) (discussing Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 22-23 (Tex. 1994)).
Other restrictions include:
· “Exemplary damages may be awarded only if the jury was unanimous in regard to finding liability for and the amount of exemplary damages.” Id. § 41.003(d).
· “[E]xemplary damages may be awarded only if damages other than nominal damages are awarded.” Id. § 41.004(a).
· “Exemplary damages may not be awarded to a claimant who elects to have his recovery multiplied under another statute.” Id. § 41.004(b).
· Ordinarily, “[e]xemplary damages awarded against a defendant may not exceed an amount equal to the greater of (1)(A) two times the amount of economic damages; plus (B) an amount equal to any noneconomic damages found by the jury, not to exceed $750,000; or (2) $200,000.” Id. § 41.008(b).
· The injury or harm underlying the exemplary damages award must be “‘independent and qualitatively different from the . . . compensable harms associated with [the cause of action].” Safeshred, 365 S.W.3d at 662 (quoting Moriel, 879 S.W.2d at 19).
In addition, a court ordinarily “may not award exemplary damages against a defendant because of the criminal act of another.” Id. § 41.005(a). However, that restriction does not apply if—among other exceptions—“the criminal act was committed by an employee of the defendant.” Id. § 41.005(b)(1). Even in that case, however, “the employer may be liable for punitive damages only if: (1) the principal authorized the doing and the manner of the act; (2) the agent was unfit and the principal acted with malice in employing or retaining him; (3) the agent was employed in a managerial capacity and was acting in the scope of employment; or (4) the employer or a manager of the employer ratified or approved the act.” Id. § 41.005(c).