Bay v. Anadarko E&P Onshore LLC

Citation: 912 F.3d 1249Docket: No. 17-1374

Court: Court of Appeals for the Tenth Circuit; December 25, 2018; Federal Appellate Court

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An appeal involves a trespass claim by Plaintiffs-Appellants Marvin and Mildred Bay against Defendants-Appellees Anadarko E&P Onshore LLC and Anadarko Land Corp. The Bays allege that Anadarko, through its lessee, exceeded the easement's scope by excessively using surface land to drill for oil and gas. The district court had diversity jurisdiction and ruled against the Bays under Federal Rule of Civil Procedure 54(b). The case addresses whether a deed reserving mineral rights, including the right to use the surface as 'convenient or necessary' for mineral access, necessitates a different legal standard than that established in Gerrity Oil, Gas Corp. v. Magness for assessing trespass. The court, exercising jurisdiction under 28 U.S.C. 1291, determined that it does not and reversed the lower court's judgment, remanding for further proceedings.

The Bays, who own the surface estate of their land in Weld County, Colorado, have a deed from 1907 that reserved mineral rights to the Union Pacific Railroad Company. This deed granted rights to prospect, mine, and access the land for mineral extraction. The Bays’ property sits above the Wattenberg Field, a significant oil and gas deposit. After Anadarko acquired Union Pacific's mineral rights in 2000, it stopped negotiating surface agreements, which previously included compensation for surface damage. In 2004, Anadarko leased the mineral rights to United States Exploration, which drilled three vertical wells on the Bays' property. Noble Energy, which acquired United States Exploration, drilled four additional wells between 2007 and 2011. The Bays requested directional drilling to minimize surface impact, but Noble Energy demanded $100,000 per well for this method, leading to the drilling of seven vertical wells instead. The Bays argue that this extensive surface use constitutes trespass and filed a putative class action against Anadarko on behalf of themselves and other surface owners.

The district court issued two orders addressing key issues in the appeal: the interpretation of surface reservations in Union Pacific deeds and Anadarko's potential liability for trespasses by its lessees. It interpreted the deed's clause allowing Anadarko to use the surface as 'convenient or necessary' for mineral access from the mineral owner's perspective, allowing Anadarko to choose drilling methods even if they cause more surface disruption, provided those methods are not commercially unreasonable or contrary to industry standards. 

Regarding vicarious liability, the court acknowledged that Anadarko could be held liable but decided that such a determination required individual factual analysis for each plaintiff, leading to the decertification of the class and the selection of the Bays as bellwether plaintiffs for a jury trial. 

During the trial, the Bays presented evidence of the adverse impacts of drilling on their farmland, including space occupation by drilling equipment, crop productivity decline, and operational difficulties due to wellheads. However, they failed to demonstrate that vertical drilling was against industry practice or commercially unreasonable. After both parties rested, Anadarko moved for judgment as a matter of law, citing consent to trespass, lack of vicarious liability, and insufficient evidence of damages. The district court granted this motion, concluding that Anadarko's evidence of vertical drilling's commercial reasonableness was undisputed.

Anadarko was permitted to allow its lessees to drill vertically as per the district court's earlier rulings and the terms of the surface reservation, leading to the conclusion that the Bays could not substantiate their trespass claim. Consequently, the district court granted judgment as a matter of law (JMOL) against the Bays and issued a final judgment under Rule 54(b). The Bays appealed, contending that JMOL was improperly granted and sought a new trial. The appellate court reviews JMOL decisions de novo, applying the same standards as the district court. JMOL is appropriate if no reasonable jury could find for the nonmoving party, with all inferences drawn in favor of that party.

The district court based its JMOL on the interpretation of a 1907 deed, requiring the plaintiffs to demonstrate that the surface use was 'commercially unreasonable or contrary to accepted industry practices.' Legal conclusions are reviewed de novo, while factual findings are assessed for clear error. The interpretation of a deed is a legal question. The case referenced, Gerrity, is pivotal in Colorado law concerning mineral owners' surface use rights. It establishes that a mineral owner does not trespass if their access is reasonable and necessary for mineral extraction. In Gerrity, a surface owner alleged trespass by Gerrity Oil for failing to restore drilling sites, but the trial court dismissed the claim due to lack of expert testimony on unreasonableness, which the court of appeals later contested, asserting that reasonableness was not a requirement for the trespass claim.

The Colorado Supreme Court addressed the relevance of reasonableness in determining if an operator's surface activities constitute trespass. The court established that the inquiry for a trespass claim related to excessive surface use revolves around whether such use exceeded what was reasonable and necessary to access the mineral estate. It emphasized that mineral rights imply a right to develop those resources. The court described a reasonable use approach, allowing mineral owners to access only the surface area necessary for development while emphasizing the need for both surface and mineral owners to respect each other's rights.

Referencing the Texas case Getty Oil Co. v. Jones, the court highlighted that mineral owners must accommodate surface owners when feasible. In Getty, the court found sufficient evidence for a trespass claim when a farmer demonstrated that an oil developer's operations obstructed essential irrigation, and alternatives were impractical. Following this precedent, the Colorado Supreme Court outlined the evidentiary requirements for a trespass claim based on unreasonable surface use and introduced a three-step burden-shifting framework. A surface owner must first show material interference with surface uses; then the operator must justify its actions as reasonable and necessary; finally, the surface owner can present evidence of reasonable alternatives available to the operator. The ultimate determination of reasonableness is left to the trier of fact.

The district court interpreted the phrase "convenient or necessary" in a deed to grant Anadarko (or its lessee) the discretion to choose the most suitable drilling method, even if it caused more surface disruption, provided the choice was not "commercially unreasonable or contrary to accepted industry practices." This interpretation was made from the mineral owner's perspective, asserting that the usage should be either convenient or necessary for the mineral owner. The court inferred that Union Pacific included this language in the deed to enhance the mineral owner's rights under the established common law rule of reasonable use.

The Bays contended that the terms "convenient" and "necessary" are inconsistent when viewed solely from the mineral owner's perspective, as one is permissive and the other restrictive. The district court rejected this argument, explaining that actions can be convenient for an operator yet not necessary, and vice versa, allowing for independent readings of the terms. The court interpreted "convenient" and "necessary" based on dictionary definitions without citing a specific source, indicating a modern understanding of "convenient" as allowing Anadarko to select the most suitable alternative.

However, the conclusion reached by the district court—that the deed expanded the mineral owner's rights beyond common law—was found to be erroneous. Under Colorado law, the intent of the parties at the time of the deed's execution must be determined from the deed itself, and words should be given their plain meaning. The court noted that definitions of "convenient" from the early 1900s suggest a more constrained meaning than contemporary definitions. Specifically, the 1910 edition of Black's Law Dictionary defined "convenient" as "proper; just; suitable," while the Bays argued that the 1909 Webster's dictionary provided broader definitions, including terms that imply ease and personal comfort. This comparison indicates that the historical understanding of "convenient" likely had a narrower interpretation than what is accepted today.

The Colorado Supreme Court's interpretation of a deed containing a 'convenient or necessary' clause clarifies that this language does not extend mineral owners' rights beyond those recognized at common law. In Barker v. Mintz, the court ruled that mineral rights holders could use the land only if it was both necessary and reasonably convenient, considering factors such as land value and proximity to other available land. This indicates that the 'convenient or necessary' clause involves a reasonableness standard, contradicting the district court's broader interpretation that would allow mineral rights holders to choose surface uses without regard for their impact.

Furthermore, this understanding aligns with common law interpretations from other jurisdictions, such as in Baca Land, Cattle Co. v. Savage, which concluded that the 'necessary or convenient' clause permits only reasonable use that respects landowner interests. Similar interpretations from South Carolina suggest the clause does not grant arbitrary rights but emphasizes reasonable convenience. While jurisdictions like West Virginia and Kentucky have interpreted 'convenient' more liberally in specific cases, these interpretations differ in significant ways, particularly the use of 'deemed,' which implies broader rights not present in the Colorado context. Lastly, the Zeiler Farms case involved a modern interpretation of 'convenient' that does not apply to the current case.

Under Colorado law, a mineral reservation in a deed does not automatically expand ownership rights without clear definitions in the reservation. The case of Gerrity establishes that absent specific statutes, regulations, or lease provisions, the language of a deed is central in disputes between mineral and surface owners. However, Gerrity did not address the specific terms of the deed that severed the surface from the mineral estate, and while it referred to existing Colorado case law, it did not imply that deed language should diverge from common law principles. The court determined that the deed’s reservation did not grant the mineral owner additional rights beyond those established by common law.

The district court erred by requiring the surface owners, the Bays, to demonstrate that the operator’s actions were not commercially reasonable, interpreting a clause in the deed as expanding mineral rights. Instead, the court should have adhered strictly to the Gerrity framework, which allows a surface owner to present a reasonable alternative as evidence at the rebuttal stage, rather than imposing a higher evidentiary burden on the Bays.

According to Gerrity, the surface owner must first establish a prima facie case showing material interference with surface uses, which must be more than a minor inconvenience. While the surface owner may reference statutory or regulatory standards to suggest material interference, the main focus is on whether the interference is unreasonable from the surface owner's viewpoint. The original Gerrity facts provide clarity on material interference, highlighting issues such as inadequate restoration of drill sites and contamination. However, the current case's factual distinctions from Gerrity raise questions about the sufficiency of evidence supporting a finding of material interference. This issue remains unresolved as it was not raised on appeal, preventing affirmation of the district court on that basis.

The surface owner must initially demonstrate material interference, after which the mineral owner must provide evidence justifying its operations and aligning with industry standards. Anadarko's expert testified that vertical drilling is industry-compliant and poses less risk than horizontal drilling. Once the mineral owner meets its evidentiary burden, the surface owner can counter with evidence of reasonable alternatives. In this case, the Bays presented testimony indicating directional drilling as a viable alternative, including financial modeling by engineer Jack McCartney showing its profitability. Anadarko contended the Bays did not prove that vertical drilling was unreasonable or that directional drilling was more reasonable; however, the relevant legal precedent (Gerrity) only requires evidence of available reasonable alternatives, not that one is "more reasonable." Thus, the district court's decision to grant judgment as a matter of law (JMOL) in favor of Anadarko regarding the Bays' trespass claim was found to be erroneous. Anadarko also raised the issue of vicarious liability for Noble Energy's alleged trespasses, which the district court did not address due to its ruling on the trespass claim. Generally, a lessor is not liable for a lessee's trespasses unless it authorized or ratified the trespass. This aspect will be left for the district court to determine later. The court reversed and remanded for further proceedings. The parties have differing views on the purpose of agreements between Union Pacific and surface owners regarding mineral rights, particularly in light of the Colorado Supreme Court's clarification that "other minerals" includes oil and gas. A brief explanation of vertical versus directional drilling was included to contextualize the dispute.

A vertical well is drilled straight down from the drill pad into the subsurface directly beneath the drilling rig. In contrast, a directional well begins as a vertical well but deviates at angles of 15 to 23 degrees after 1,000 to 1,500 feet, allowing access to multiple locations from the same drill pad. Directional drilling differs from horizontal drilling, which involves turning the well 90 degrees to create a completely horizontal drill hole. The term "convenient" is defined variably across sources, with implications for mineral rights and surface owner accommodations. In the case of Gerrity, although the mineral owner was absent from the dispute, the court did not address the deed's terms, highlighting that the lessee's rights could not exceed those of the mineral owner. Mineral reservations are interpreted more strictly than grants, with ambiguities favoring the grantee. The district court and Anadarko indicated that the plaintiffs needed to meet certain trial elements related to these rights.