Real Estate

Understanding How the Development of the Barnett Shale May Affect Real Estate Transactions in North Texas

Buying real property can be compared to walking through a mine field, requiring a purchaser to avoid the hidden dangers. Now, a new challenge has arisen in the form of the Barnett Shale. The Barnett Shale is a subterranean geological formation estimated to cover an approximately 5,000 square mile area of land in North Texas counties. While the Barnett Shale has an estimated 30 trillion cubic feet of natural gas resources, it was not until recently that much of its potential began to be realized due to recent advances in the technology of horizontal drilling.

The recent boom in drilling has created issues for real estate transactions in the North Texas area, given the unique nature of Texas mineral rights, which may be severed from the surface rights. One party may own the land and improvements and another, the rights to the oil and gas located beneath that land. Sometimes, many parties will own the mineral rights. This is particularly problematic because, in Texas, the mineral estate is dominant over the surface estate. In other words, if the owner of the oil and gas rights wants to explore for gas on the property, the surface owner can do little to prevent a gas well from being drilled on his land. Any owner of a mineral interest, no matter how small a percentage that party owns, may encumber the property with a mineral lease.

Title companies have reacted to the recent boom by seeking to protect themselves from potential owner policy claims. The insurer will either place a blanket exception to title (covering any and all issues related to mineral interests) or adjust the description of the insured estate to exclude the mineral estate. Generally, the language used will cover “fee simple, save and except any and all rights, titles, and interest previously reserved, conveyed or created with respect to oil, gas, or other minerals in and under the land.” Either of these exceptions should be unacceptable to buyers, given the potential adverse affects of onsite drilling activities.

A recent bulletin by the Texas Department of Insurance has called these practices into question. On April 10, 2008, the Commissioner of the Texas Department of Insurance issued Bulletin #B-0013-08 entitled “Coverage of Mineral Estate” which requires that any special exception to minerals must include a reference to a recorded instrument. This requirement would invalidate the blanket exception discussed above. The bulletin also requires that the insured estate in a title commitment must be the same as that conveyed to the selling party. Therefore, reducing the estate by excluding minerals would be impermissible.

While this bulletin appears to solve both problems purchasers face when working with a title company’s exceptions to minerals, it must be noted that a bulletin does not carry the authoritative weight of a statute. Many title companies have been resistant to the bulletin and have not adjusted their practices to conform to its guidelines. It may require stronger action on the part of the Texas Department of Insurance to force title companies to insure the mineral estate.

Even if a purchaser is able to obtain an acceptable title policy, a mineral interest holder may still place a lease, and potentially a gas well, on the purchaser’s property. Purchasers must be careful to identify every party holding either a mineral interest or a
mineral leasehold interest in the property, as they have the capability to disrupt development of the property with drilling activities. Once a purchaser has identified each such interest holders, the purchaser must obtain waivers sufficient to remove the risk of drilling or exploration on the property. The waivers are documents that prohibit mineral interest holders from granting leases with dominant surface rights and that prevent leasehold interest holders from drilling on the property.

By Jeffrey J. Porter and Brian Baker

Insurance Defense

Recent Texas Supreme Court Insurance Decisions of Note

Over the past several months, the Texas Supreme Court has been quite active in the tort and insurance fields, handing down several important decisions which are hereinafter detailed.

As always, each case involves different facts, which may be case determinative. Accordingly, the following summaries of cases are law only as to that case, and further review and analysis of the facts and law of other cases must be conducted before relying upon the rules set out hereinafter.

Insurability of Exemplary Damages:

In Fairfield Insurance Company v. Stephens Martin Paving, LP, 04-0728, (Tex. 2008), the Texas Supreme Court held that Texas public policy does not prohibit the insuring of, and coverage for, exemplary damages under the specific type of workers' compensation and employer's liability insurance policy which was at issue in that case. In an opinion narrowly limited to the facts of that case; i.e., (1) where a corporation is held liable for conduct of its "viceprincipals," (2) where the conduct was done without the participation or knowledge of the officers or shareholders of the corporation, (3) where the insurance contract covered "all sums" and was an arms-length transaction between the insurance company and the corporation, and (4) where the policy distinguished between conduct done by employees and conduct done by the corporate entity, its shareholders and its officers, the Supreme Court held that allowing insurance coverage for exemplary damages under such limited circumstances did not violate the public policy of Texas regarding to the imposition of exemplary damages as punishment for a wrongdoer.

In partial support of its ruling, the Texas Supreme Court noted that the legislature was aware that commercial general liability insurers were also providing insurance coverage for exemplary damages and were making payments for coverage of exemplary damages, and that the legislature had not seen fit to prohibit payments by such insurers for punitive damages, thereby giving a glimpse into what the Texas Supreme Court might ultimately hold if this issue were presented as to CGL policies. Nevertheless, in Texas, the issue of insurability of punitive damages remains an open question as to other forms of insurance policies to be analyzed in light of the aforesaid criteria and applicable Texas statutes setting forth public policy.

Insurer's Right to Reimbursement From Insured – New Opinion Upon Rehearing:

In Excess Underwriters at Lloyd's, London v. Frank's Casing Crew & Rental Tools, Inc., 02-0730 (Tex. 2008), a case involving excess insurance coverage, the Texas Supreme Court withdrew its prior opinion issued May 27, 2005, and adhered to its earlier decision in Tex. Ass'n of Counties County Gov't Risk Mgmt. Pool v. Matagorda County on the issue of an insurer's right to reimbursement from an insured. Accordingly, in Texas, even in excess coverage cases where the excess carrier has no duty to defend, an insurer that settles a claim against its insured when coverage is disputed may only seek a reimbursement from the insured (should coverage later be determined not to exist) if the insurer "obtains the insured's clear and unequivocal consent to the settlement and the insurer's right to seek reimbursement." In so holding, the Texas Supreme Court refused to imply a reimbursement obligation on the part of the insured with respect to excess insurors, absent the insured's clear and unequivocal consent to both the settlement and the insurer's right to seek reimbursement.

Lack of Duty of Insuror to Notify an Additional Insured of Available Liability Coverage:

In National Union Fire Insurance Co. of Pittsburgh, PA v. Crocker, 06-0868 (Tex. 2008), the plaintiff sued a nursing home and its employee for damages. Although the insurer defended the nursing home, it did not inform the employee that he was an insured, nor did the insuror offer a defense, and the employee though served, neither forwarded suit papers to the insuror, nor requested a defense from either the insuror or his employer.

The Supreme Court held that, upon the facts presented, insurers owe "no duty to provide an unsought, uninvited, unrequested, unsolicited defense," and declined to impose an extra-contractual duty on liability insurors that would force them to keep track of potential litigants who may or may not be additional insureds, may or may not be entitled to coverage, and may or may not expect a defense to a claim. Thus, insurors need not provide coverage to additional insureds who never seek it, and an insurer has no duty to either inform an additional insured of available coverage or to voluntarily undertake a defense for the additional insured. Moreover, the insurer's actual knowledge of such a situation does not establish a lack of prejudice as a matter of law, where the additional insured provides late notice of a claim for coverage. Put simply, there is no duty to provide a defense absent a request for coverage, despite the fact that the insuror knows of the suit against the additional insured and the additional insured is ignorant
of the terms of the insuror's policy which would otherwise provide coverage for the additional insured.

Insuror's Use Of Staff Attorneys:

In Unauthorized Practice Of Law Committee v. American Home Assurance Company, Inc., et al., 04-0138 (Tex. 2008), the Supreme Court held that "an insuror may use staff attorneys to defend a claim against an insured if the insuror's interests are congruent, but not otherwise," and stated that "their interests are congruent when they are aligned in defeating the claim and there is no conflict of interest between the insuror and the insured.” In the course of the opinion, the Supreme Court noted that where insuror acquires confidential information that it cannot be permitted to use against its insured, or where an insuror attempts to compromise a staff attorney's independent, professional judgment, or in some other way the interests of the insuror and the insured diverge, then staff attorneys may not be used to defend the claim. Where staff attorneys are proper, however, their use does not constitute the unauthorized practice of law by an insuror.

Uninsured Motorist Coverage Does Not Extend To Damages Caused By Impact Of A Vehicle's Component Parts:

In Nationwide Insurance Company v. Elchehemi, 06-0106 (Tex. 2008), the Supreme Court held that where an axle-wheel assembly separated from an unidentified semitrailer truck and crashed into the insured's automobile causing damage, there was no coverage under the insured's uninsured motorist coverage for the reason that a vehicle's separated component, such as an axle-wheel assembly, does not constitute a "motor vehicle" under the Texas uninsured motorist statute, and thus does not constitute the "actual physical contact" with a motor vehicle required by the statute for coverage to exist.

Product Liability – Duty of Manufacturer to Defend or Indemnify Innocent Sellers:

In Owens & Minor, Inc. v. Ansell Health Products, Inc., 06-0322 (Tex. 2008), the Supreme Court concluded that a manufacturer that offers to defend or indemnify a distributor for claims relating to a sale or alleged sale of that specific manufacturer's product fulfills its obligation under Texas' product liability statute. In other words, an indemnifying manufacturer must hold harmless an innocent seller "only for the portion of the defense associated with that manufacturer's own products."

Product Liability – Federal Preemption of Design Defect Claims:

In Bic Pen Corporation v. Carter, 05-0835 (Tex. 2008), the Supreme Court held that Texas statutory and common law was preempted by Federal design regulations relating to cigarette lighters and that where a product design was approved by the Federal Consumer Product Safety Commission, a plaintiff's design defect claim must be dismissed. However, the Court remanded the case for consideration of whether "a manufacturing defect" existed, since such manufacturing defects are not preempted by Federal design regulations.

Products Liability – Auctioneers:

In New Texas Auto Auction Services, L.P. v Gomez, 06-0550 (Tex. 2008), the Supreme Court held that product liability law requires only those who place products in the stream of commerce to stand behind them; it does not require everyone who facilitates the stream of commerce to do the same. Accordingly, auctioneers who usually are neither buyers nor sellers, but agents for both, are not liable in strict liability, despite the fact that they are engaged in sales.

Texas Dram Shop Act:

In 20801, Inc. v. Parker, 06-0574 (Tex. 2008), the Supreme Court dealt with the "safe harbor" provisions of the Texas Dram Shop Act which provide that employers are not liable for the acts of their employees in selling alcoholic beverages to intoxicated persons, provided that: (1) the employer requires its employee to attend certain training classes, (2) the employee actually attended those classes, and (3) the employer did not "directly or indirectly encourage" the employee to violate the law. In regard to the third requirement, the Supreme Court held that a plaintiff has the burden of proof to establish "direct or indirect encouragement" and that the plaintiff's burden in that respect may be satisfied, at the minimum, by evidence of negligence on the part of the provider. The Court further held that a provider/ employer would be liable for the acts, including the negligence of the provider/ employer's vice principals and managers."

By H. Norman Kinzy

Commercial Litigation

You Take It, You Buy It: Texas Courts Require Condemning Authorities to Compensate Billboard Property Owners for their Interests

After years of Texas condemning authorities and appraisers attempting to treat billboard owners and their interests differently from other property owners and their interests, Texas courts are saying, “Enough is enough.” Three recent Court of Appeals decisions are developing a body of law in Texas confirming that the protection of the rights of billboard property owners in condemnation is on par with that afforded to owners of other real property interests.

These opinions collectively hold that a billboard property owner is entitled to just compensation for the loss of income from advertising on a sign because such income is not “business income” but rather income generated from the land. Further, this line of cases establishes that a sign structure is a real estate fixture, and the taking of the structure is thus compensable.

Procedurally, these cases support the exclusion of valuation expert testimony where the expert fails to consider the billboard owner’s full interests in valuing the land. Significantly, these decisions have also firmly rejected the arguments repeatedly attempted by condemning authorities that sign structures are not fixtures as a matter of law because they are removable and/or considered personalty by the sign owner for tax purposes or under a ground lease.

In the case of Harris County Flood Control District v. Roberts, 2008 WL 878507 (Tex. App.—Houston [14th Dist.] 2008, pet. filed), the Court of Appeals upheld the trial court’s award of compensation to the billboard property owner for the taking of its sign structure and related property interests, finding that the billboard structure was a real estate fixture at the time of the taking, and the related lease and property interests should be compensated. The Court refused the condemnor’s argument that, as a matter of law, the sign structure was not a fixture and the billboard property owner was, therefore, entitled only to the bonus value of the lease, which had a nominal value.

Further, the Court in Harris County Flood Control District rejected the condemnor’s argument that the sign structure was not a real estate fixture because the billboard property owner considered it personal property for tax purposes and had the right under the lease to remove it. The Court instead found the evidence sufficient to establish the sign structure as a real estate fixture, making it a compensable interest in condemnation and requiring an award of just compensation to the billboard property owner for the taking of the sign, which the Court found to be properly valued at approximately 1,111 times greater than the value offered by the condemning authority.

In the case of Harris County v. Clear Channel Outdoor, Inc., 2008 WL 1892744 (Tex. App.—Houston [14th Dist.] 2008, no pet. h.), the Court upheld the award of compensation to the billboard property owner for both its leasehold interest and its sign structure. Finding that the Fifth Amendment to the U.S. Constitution requires the government to compensate the billboard property owner for the taking of the billboard structure, the Court rejected the government’s argument that the sign structure was not a compensable interest. Specifically, the Court denied the government’s arguments that the sign structure was personal property as determined by the billboard property owner’s intent as implied by the terms of the lease; that the sign structure was not sufficiently affixed to the real property to become a real estate fixture; and that the only compensation to which the billboard property owner was once again entitled was the bonus value of the lease, which was nominal.

Citing the U.S. Supreme Court’s decision in Almota Farmers Elevator & Warehouse Co. v. U.S., 409 U.S. 470 (1973), the Court in Harris County found that a condemning authority, such as the government, cannot take advantage of a lease agreement designating an improvement made by lessee as personal property. Further, the condemning compensate for taking business improvements, such as a billboard, by dismissing them as worthless simply because the condemnor does not intend to use them. The Court held that if a business improvement is attached to the real estate, as with a billboard, it must be treated as real estate in determining the total award. The Court thus awarded the billboard property owner the value it requested.

Finally, in the case of State v. Central Expressway Sign Associates, 238 S.W.3d 800 (Tex. App—Dallas 2007, pet. filed), the Court addressed the valuation of a billboard site in the context of a billboard easement. The Court found that in determining the value of the easement, income dederived from advertising on the sign was not “business income,” but rather income generated by the land which should be properly considered in valuing the sign site. The Court thus upheld the award of just compensation based on an income valuation approach using the advertising income from the billboard face rentals.

These precedents reinforce established property rights of billboard property owners and show that Texas courts will not allow condemning authorities to skirt their legal obligations to pay just compensation for taking billboard property interests in condemnation. Condemning authorities should take note of these appellate decisions in making statutorily mandated pre-condemnation settlement offers in compliance with the recently adopted Texas Landowner’s Bill of Rights as prescribed by the Texas Legislature in Texas Government Code § 402.031 and Chapter 21 of the Texas Property Code.

By J. Allen Smith and Michael R. Steinmark