November 21, 2011 Articles

Permitted Trespass in FPL Farming Ltd. v. Environmental Processing Systems, L.C.

The Texas Supreme Court held that a regulatory permit to drill a wastewater injection well does not absolve the permit holder from civil tort liability.

By Sara E. Mouledoux – November 21, 2011

The Texas Supreme Court has recently added another layer to the complex interplay between subsurface property rights and oil and gas operations. In FPL Farming Ltd. v. Environmental Processing Systems, L.C., the Texas Supreme Court held that a regulatory permit to drill a wastewater injection well did not absolve the permit holder from civil tort liability for the exact conduct sanctioned by the permit. 2011 WL 3796612, ---S.W.3d ---, 54 Tex Sup. Ct. J. Wainwright, (Tex. Aug. 26, 2011). Although it did not address whether the operations at issue had in fact caused any actual harm, the court went to great lengths to distinguish its recent pro-industry holding in Coastal Oil & Gas Corp. v. Garza Energy Trust. 268 S.W.3d 1 (Tex. 2008).


Background of FPL


FPL Farming Ltd. (FPL) owned two tracts of land primarily used for rice farming. Its property adjoined land owned by Environmental Processing Systems, L.C. (EPS). In 1996, EPS applied to the Texas Natural Resources Conservation Commission (now the Texas Commission on Environmental Quality) for permits to construct and operate two deep wastewater injection wells on EPS’s property. FPL initially objected to the permits, but the parties reached a settlement and the permits were ultimately issued to EPS. In 1999, EPS sought to have the permits amended to increase the injection rate. Once again, FPL objected. After a contradictory hearing, an administrative law judge determined that (1) FPL had no right to exclude others from the deep subsurface; (2) FPL’s rights were not being impaired by the issuance of the amended permits; and (3) the issuance of the permits did not amount to an unconstitutional taking. Several appeals of this decision were taken, and all of them upheld the ruling of the administrative law judge.

In 2006, FPL sued EPS in Liberty County, Texas. FPL alleged trespass, negligence, and unjust enrichment and sought a permanent injunction and damages. At trial, the jury determined that no trespass had occurred and found for EPS. FPL appealed to the Beaumont Court of Appeals on various issues. Rather than addressing FPL’s various points of error, the court of appeals focused on the threshold question of whether FPL could pursue a claim when the Texas Commission on Environmental Quality had approved the amended permits notwithstanding evidence that the increased waste plume was expected to migrate to FPL’s deep subsurface. The court of appeals concluded that EPS was shielded from civil liability by virtue of the issued permits: “[W]hen a state agency authorized deep subsurface injections, no trespass occurs when fluids that were injected at deep levels are then alleged to have later migrated at those deep levels into the deep subsurface of nearby tracts.” FPL Farming LTD v. Environmental Processing Systems, L.C., 305 S.W.3d 739, 744–45. In reaching this conclusion, the court of appeals relied on two Texas Supreme Court cases,Railroad Comm’n v. Manziel, 361 S.W.2d 560 (Tex. 1962) and Garza.

The Manziel and Garza Decisions


The Manziel case dealt with “whether a trespass is committed when secondary recovery waters from an authorized [permitted] secondary recovery project cross lease lines.” 361 S.W.2d at 567. In Manziel, the plaintiff sought to enjoin a commissioner-approved secondary recovery project. The court concluded that if the Commission validly authorized the project, “a trespass does not occur when the injected, secondary recovery forces move across lease lines,” and, therefore, “operations are not subject to an injunction on that basis.” Id. at 568. The Garza case, the more recent of those two decisions, addressed whether fracing operations on one tract that caused the release and migration of gas from another tract gave rise to an actionable claim of trespass of the non-fracking property owners’ subsurface. Acknowledging that a claim for trespass for a non-possessory interest requires actual injury, the court determined that the fundamental rule of capture precluded recovery for damages purportedly suffered from the migration of hydrocarbons from one subsurface area to another. Garza, 268 S.W.3d at 12 (referencing Lyle v. Waddle, 188 S.W.2d 770, 773 (Tex. 1945)). The Texas Supreme Court in Garza noted that “[t]he rule of capture is a cornerstone of the oil and gas industry, and it is fundamental both to property rights and to state regulation.” Id. at 13. The court went on to state that if it were to allow damages for gas “drained” by hydraulic fracking operations, it would be allowing the courts and juries to usurp the “lawful and preferable authority of the Railroad Commission to regulate oil and gas production” and that “the Commissioner’s role should not be supplanted by the law of trespass.” Id. at 15–16.

2011 FPL Decision


In August 2011, the Texas Supreme Court decided the FPL case and, to the surprise of many commentators, overturned the court of appeals. The Court began its analysis by stating that “[a]s a general rule, a permit granted by an agency does not act to immunize the permit holder from civil tort liability from private parties from action arising out of the use of the permit.” FPL, 2011 WL 3796612, at *[3]. A permit is a “negative pronouncement” that grants “no affirmative rights to the permittee.” Id. at *3 (citing Magnolia Petroleum v. RR. Comm’n, 170 S.W.2d 189, 191 (Tex. 1943)). The court then cited two examples of a permit not absolving the permittee from civil liability. The first was a Texas licensed attorney committing malpractice, and the second was a restaurant approved by the health authority, causing a patron to become ill. Id. at *3. The court went on to explain that while “statutory remedies may preempt common law actions or other standards that may set the bar for liability in tort,” a regulatory permit “is not a get out of tort free card.” Id. at *4.

Concluding that the court of appeals’ reliance on two of its previous decisions was improper, the court scolded the court of appeals for not “relying on the basic rule and the text of the Injection Water Act,” which specifically provides “[t]he fact that a person has a permit issued under this chapter does not relieve him from any civil liability.” FPL, 2011 WL 3796612, at *5 (citingTex. Water Code §27.104). In distinguishing its earlier cases, the court noted thatManziel and Garza dealt with “the extraction of minerals in the oil and gas industry, and thus the rule of capture” and that “injecting substances to aid in the extraction of minerals serves a different purpose than does injecting wastewater.” Id. at *6. “We have recognized that ‘[i]t cannot be disputed that [secondary operations to recover oil and gas] should be encouraged’ to ‘increase the ultimate recovery of oil and gas.’” Id. at *6 (citing Manziel, 361 S.W.2d at 568). Ultimately concluding that neither prior case was applicable for the type of subsurface activity being conducted by EPS, the court found that nothing in its prior opinions should dictate its analysis in a wastewater injection trespass case. Id. at*6 .

Conclusion


The Texas Supreme Court’s decisions in this area appear to comport in dicta with two cases decided by the United States Court of Appeals for the Fifth Circuit addressing subsurface trespass questions under Louisiana law and whether the Louisiana Commissioner of Conservation has the ability to permit trespass as it relates to subsurface matters. These decisions likewise suggest that the extent of such powers is dictated by the operations at issue. For example, in the recent case of EOG Resources, Inc. v. Chesapeake Energy Corp., the Fifth Circuit held that a non-operator’s claim that the operator drilled various unit wells breached the parties’ agreement was not an impermissible collateral attack of orders of the Louisiana Commissioner of Conservation. The court noted that “the Commissioner’s unitization power superseded traditional subsurface property rights” and “[u]nitization creates rights and interest in a pool of hydrocarbons beyond the traditional property lines [and] effectively amends private property laws.” 605. F.3d 260, 267 (5th Cir. 2010) (citingNunez v. Wainoco Oil & Gas Co., 488 So. 2d 955, 962 (La.), cert. denied, 479 U.S. 925 (1986)). Similarly, in Mongrue v. Monsanto Co., when addressing wastewater permits, the Fifth Circuit stated that the Louisiana legislature had not “delegated to the Commissioner of Conservation the power to limit property owners’ rights with respect to the subsurface disposal of waste by injection, but merely the police power to permit, monitor and regulate this activity.” 249 F.3d 422, 431–32 (5th Cir. 2001) (citing La. R.S. 30:4).

One could infer that some courts appear ready to defer to a regulatory agency when it comes to the exploration and production of new hydrocarbons, including pooling and unitization issues, but remain hesitant to restrict private parties’ subsurface property rights when it comes to other activities such as waste disposal. As one commentator observed, “[a] strict application of trespass law to the subsurface, particularly the ability to enjoin a continuing trespass, could in some, perhaps many, instances make the difference between an economic and uneconomic enterprise.” Owen L. Anderson, Lord Coke, the Restatement, and Modern Subsurface Trespass, La. St. Univ. 57th Ann. Inst. Min. Law (2010). As technology continues to evolve for oil and gas operations, it remains to be seen whether the courts’ position will likewise evolve on the role of regulatory agencies in different aspects of oil and gas operations including the disposal of related waste and byproducts.

Keywords: FPL Farming Ltd. Environmental Processing Systems, Manziel, Garza, hydraulic fracking

 

Sara E. Mouledoux is an attorney in the New Orleans, Louisiana, office of Gordon Arata McCollam Duplantis & Eagan LLC.


Copyright © 2011, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).