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The Texas Supreme Court recently addressed whether a lender is required to forfeit payment and interest payments made by a borrower when the lender has violated the terms of a home equity loan, and whether this a remedy is a matter of right available under the Texas Constitution or through a breach of contract action.

In the case of Garofolo v. Ocwen Loan Servicing LLC, Ms. Garofolo took out a home equity loan, and repaid the amount she borrowed plus interest in less than five years. Upon repayment, her loan holder, Ocwen Loan Servicing, recorded a release of the lien with Travis County, but failed to provide her with a copy of this release in recordable form, which was required of the lender under the home equity loan agreement.

After Ms. Garofolo notified her lender that they had not provided her with a copy of the lien release, and the lender failed to provide the document for sixty days, Ms. Garofolo sued the lender  seeking forfeiture of all the principal and interest she paid on her home equity loan, claiming this was a constitutional right afforded to her either under the Texas Constitution or because the lender had violated the loan agreement.

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Given the increase in production of natural gas in Texas, some residents end up living close to a gas compressor stations. These stations are necessary to pump natural gas under pressure over long distances, but they can be large, noisy and produce offensive odors. Some Texans who live close to these stations have sued the oil and gas producers claiming nuisance or trespass.

In Texas, the elements of a trespass cause of action are: (1) the claimant has a lawful right to possess the property, (2) the defendant physically enters the property, (3) the entry was intentional and voluntary, and (4) the defendant‟s trespass causes an injury to the claimant‟s right of possession.  The Texas Supreme Court has noted a trespass of aerial space above the complainant‟s property may be committed by causing something to physically enter or crossover the land, such as the discharge of pollutants, soot, or carbon.

A cause of action for nuisance requires evidence of  a regularly recurring condition that “substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to a person of ordinary sensibilities.”

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Collecting royalties from oil and gas production is one of the ways that a Texas landowner can generate revenue from their real estate.  Texas property owners who own their minerals can sign an oil and gas lease so that oil and gas can be produced from the land, in exchange for regular monetary payments, or royalties. However, oil and gas reservoirs are not often confined to just a single individual’s property, but instead  often stretch across multiple surface boundaries. When disputes arise over royalty payments, there is a sometimes an issue as to whether a lawsuit can be brought by just one individual landowner, or if neighboring owners who are also collecting royalties from the same oil and gas producer must necessarily be a part of the lawsuit as well. The Texas Supreme Court considered this very issue in the case of Crawford v. XTO Energy which was been appealed from the Amarillo Court of Appeals.

Why Must All Necessary Parties Be Joined in a Lawsuit?

The problem with not joining all necessary parties to a lawsuit is that a defendant could be exposed to conflicting judgements. For instance, if landowner A sues oil and gas producer X, and there is a specific outcome, and later adjacent landowner B sues oil and gas producer X, but there is a different second outcome, and the two outcomes may be inconsistent. Failure to join all necessary parties in a lawsuit can also be judicially wasteful since the court has to revisit the same issues in more than one case.

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As we discussed recently regarding the Texas Supreme Court case of Hysaw v. Dawkins, 483 SW 3d 1 (2016), old deeds, oil and gas leases, and other documents containing “1/8th royalty” clauses continue to be the source of confusion among the public, lawyers, and sometimes courts.

For decades, the standard oil royalty in Texas was one-eighth of the total royalty. The standard was so prevalent that the words “one-eighth” or “one-eighth royalty” came to be synonymous with — and a proxy for — “the total royalty interest.” In the Hysaw case, decided in 2016, the Texas Supreme Court held that the words “1/8 royalty” was used in this historical manner to mean the “total of the royalty.”

The San Antonio Court of Appeals reached a similar result in the case of Kardell v. Acker, 492 S.W.3d 837 (Tex. App.-San Antonio 2016).

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The question of “fractional royalty” vs “fraction of royalties” has historically been the source of enormous confusion for Texas mineral owners and oil and gas attorneys. The Texas Supreme Court recently provided more guidance on the question in the case of Hysaw v. Dawkins, 483 SW 3d 1 (2016). This case involved a will written in 1947, but the lessons of the case apply equally to deeds, oil and gas leases and other forms of conveyance.

The teaching provided by Hysaw concerning these “1/8th royalty” clauses is that courts and lawyers must use a case-by-case and fact specific approach to resolving questions of fractional vs. fraction of royalty questions. The courts are to effectuate the intent of the drafters; not apply a mechanistic “multiplication of double fractions” formula.

Why is This an Issue?

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EOG-Graph

Graph courtesy of EOG Resources

EOG Resources has been experimenting with enhanced oil recovery (EOR) techniques that may be good news for Texas mineral and royalty owners. Specifically, EOG has been using injections of natural gas to increase oil production on approximately 15 wells. They report that the new technique can result in producing 30% to 70% more oil from the Eagle Ford shale, at an additional cost of about $6 per barrel of oil.

EOG cautions that the technique may not be suitable for all wells in all reservoirs, however the early results from the EOG wells have resulted in attempts by scientists and other oil companies to study and duplicate the EOG results. For example, David Schechter, a petroleum engineering professor at Texas A&M University, has altered his lab that has been used to test carbon dioxide (CO2) for EOR to safely observe how natural gas affects reservoir rock. BHP Billiton and its partner Devon Energy have two EOR pilot projects in the Eagle Ford. Marathon Oil and Core Laboratories are also reportedly beginning pilot projects.

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A company known as Biodentify, based in the Netherlands, announced that it can help predict oil and gas deposits based on DNA in the soil just a foot beneath the surface! Specifically, the company claims that by analyzing the microbiological DNA of shallow soil samples, it can predict “sweet spots” in shale reservoirs with 70% accuracy.

The technology makes use of hydrocarbon micro-seepage from sweet spots. According to the Biodentify literature, bacterial DNA is extracted, producing tagged DNA data, and that data that is translated to bacterial species. The result is hundreds of thousands of biomarkers or the ‘DNA finger-print’ of the soil sample. A Biodentify spokesperson said that a single sample of soil may contain as many as 300,000 microbial species—some of which are newly discovered. But Biodentify has found that only 50 to 200 of them serve as key indicators of a positive or negative signal. The biomarkers are then inputted to a proprietary computer model, which render a sort of “sweet spot” map. The technology is similar to cutting edge technology in medicine that uses saliva to test for tumors as opposed to a much more invasive biopsy.

Biodentify

These images come from a blind validation study and include a map of producing well locations in Louisiana’s Haynesville Shale (left), where about 360 soil samples were taken for DNA analysis (middle). The map on the right was generated through DNA analysis and indicates a highly productive area in the upper-right-hand corner—matching the operator’s production history map. Two areas in the lower right are shown as false predictions, generating a map that was determined to be 72% accurate. Source: Biodentify.
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Interesting to realize that United States has overtaken Saudi Arabia and Russia to become the world’s largest oil and gas producer and continues to lead in production. On April 7, 2016, the U.S. Energy Information Administration released a report showing the United States remained the world’s largest producer in 2014 despite the decline in oil prices that occurred during the second half of 2014. In that year, the United States produced almost double the amount of oil and gas that was produced by Saudi Arabia. Saudi Arabia produces mostly oil and a small amount of gas while the production in the United States and Russia is balanced, with about half of the production coming from gas, and the other half from oil.

Why The Increase In The US?

The report credits the increase in production of both oil and gas directly to the United States’ ability to exploit tight oil and shale gas formations. Last year the United States produced over 3.1 billion barrels of crude oil, an 18% increase from the 2.7 billion barrels produced in 2013. The increase in hydrocarbon production over the last several years is credited to the increase in horizontal drilling and hydraulic fracturing which allows production from unconventional reserves which were previously uneconomical to produce.

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No question about it: Hurricane Harvey and its aftermath have been horrible. It will be a very long time before things return to anything like “normal” for a lot of people. One of the few things that bring a smile these days is the amount of volunteer effort going on in response to the hurricane. Boaters across Texas hauled out their boats, headed to Houston and have been rescuing people. Churches, businesses and public institutions open their doors to serve as shelters. Nonprofit rural water and electric co-ops all over Texas are sending their crews and equipment to help the local crews in Southeast Texas restore water and power service.

One of the things I was intrigued to learn is that Anheuser-Busch has a history of producing water for disaster situations and Hurricane Harvey is no exception. When disaster strikes the company halts their production at its Cartersville, Georgia brewery and begins canning drinking water instead. So far, they’ve delivered over 410,000 cans of safe drinking water to the Gulf Coast. According to their website, they’ve been doing this since 1988. In 2016, Anheuser-Busch produced and shipped emergency drinking water to the California wildfire area, as well as areas impacted by the Louisiana floods and Hurricane Matthew.

Yes, I realize it’s good PR. But it’s also a really nice thing to do. Texans are tough and we will recover from this. However, it sure is nice to have the help!

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What happens when a Texas family discovers that the home equity loan on their home did not satisfy the constitutional requirements for homestead liens in the Texas Constitution? In the case of Wood v. HSBC Bank, the Wood family took out a home equity loan on their home in 2004. Their loan changed hands a number of times and ended up with HSBC Bank NA. In 2012, the Woods’ notified HSBC that there were defects in the loan that did not comply with the Texas Constitution. HSBC failed to cure the defects. Although it was eight years after closing when the issue was raised, the Woods’ sued HSBC to invalidate the lien on their property securing their loan and for quiet title to the property and forfeiture of all principal and interests payments made on the loan.

The Question For the Texas Supreme Court

The question before the Texas Supreme Court was whether, once the lender declined to cure the defect, was the lien void, or merely voidable. If the lien was void, then the lien was invalid and no statute of limitations applies. On the other hand, if the lien was voidable, then the four-year statute of limitations under Texas Civil Practice and Remedies Code §16.051 applies to the Woods’ case. In other words, because they did not bring suit within four years from the date the loan closed, their claim for quite title and forfeiture of all principal and interests payments made on the loan would be time barred.

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