H.G. Sledge v. Prospective Inves. & Trading Co.

• Citation: 36 S.W.3d 597
• Parties: (Tex.App.-Austin 2000) H. G. Sledge, Inc. and Railroad Commission of Texas, Appellants v. The Prospective Investment and Trading Company, Ltd., Appellee NO. 03-99-00879-CV
• Decision Date: 09 November 2000
• Court: Court of Appeals of Texas

Page 597

36 S.W.3d 597 (Tex.App.-Austin 2000)

H. G. Sledge, Inc. and Railroad Commission of Texas, Appellants v. The Prospective Investment and Trading Company, Ltd., Appellee

NO. 03-99-00879-CV

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

November 9, 2000

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT NO. 99-06696, HONORABLE LORA J. LIVINGSTON, JUDGE PRESIDING

[Copyrighted Material Omitted] Before Chief Justice Aboussie, Justices B. A. Smith and Patterson.

Jan P. Patterson, Justice.

The issue before us concerns the proper scope of the notice provision of the Railroad Commission's rule 37 related to well spacing. See 16 Tex. Admin. Code § 3.37(a)(2) (2000). This dispute arose when the Railroad Commission ("the Commission") denied a complaint filed by The Prospective Investment and Trading Company, Ltd. ("PITCO"), which challenged the validity of a drilling permit granted to H.G. Sledge, Inc. ("Sledge"). When Sledge filed its application for a drilling permit under a rule 37 exception with the Commission, Sledge did not notify PITCO, an overriding royalty holder on an adjacent tract. PITCO challenged the validity of Sledge's permit in a complaint, which the Commission denied. PITCO contested the Commission's denial by filing suit. The district court agreed with PITCO and set aside Sledge's drilling permit. The Commission and Sledge appeal the district court's judgment. We affirm in part and reverse in part the district court's judgment, rendering judgment that affirms the Commission's order, which held PITCO was not an "affected person" entitled to notice of the rule 37 exception application.

FACTUAL AND PROCEDURAL BACKGROUND

The facts of this case are undisputed. This matter involves two oil wells, Wells No. 8 and No. 10, situated on adjacent tracts of land, which are subject to the Holly and Holly B Leases respectively. PITCO's predecessor-in-interest entered into a farmout agreement¹ with Sledge's predecessor-in-interest and reserved a 5% overriding royalty interest² in Well No. 8. Currently, PITCO holds this 5% overriding royalty interest and Sledge has the working interest.³ As a lessee under the Holly and Holly B Leases, Sledge is the designated operator of both adjoining tracts.

In 1998, Sledge submitted an application to the Commission to drill Well No. 10 on a tract covered by the Holly B Lease. This tract shares a lease line with the Holly Lease tract where Well No. 8 is situated. Because Well No. 10 was located closer to this line than the relevant field rules allow,⁴ Sledge applied for a drilling permit under an exception to the Commission's rule 37. Rule 37 requires that all "affected persons" be given notice of applications filed under the rule and an opportunity for a hearing. 16 Tex. Admin. Code § 3.37(a)(2), (3) (2000). An applicant like Sledge, who seeks an exception to the spacing requirement, must provide a list of the mailing addresses of all "affected persons" who are entitled to receive notice of the request for an exception. See id. § 3.37(a)(2)(A). Sledge did not report PITCO's overriding royalty interest to the Commission and waived notice to itself as a designated operator. Without notifying PITCO, the Commission granted the drilling permit to Sledge. Sledge completed the drilling of Well No. 10 and commenced production.

After the Commission granted Sledge's permit, PITCO filed a complaint with the Commission requesting that the agency "initiate a show-cause proceeding requiring Sledge to show cause why its Holly B Well No. 10 should not be shut in pending a hearing . . . and, upon such hearing, why the well should not be plugged and abandoned, having not been drilled pursuant to the rules and regulations of the Commission." The Commission did not place the complaint on its docket and, after finding no basis for a hearing, denied PITCO's request. PITCO filed a motion for rehearing with the Commission. PITCO's motion was overruled by operation of law. See Tex. Gov't Code Ann. § 2001.146(c) (West 2000).

Subsequently, PITCO filed suit against the Commission in Travis County district court. PITCO requested that the court revoke Sledge's permit due to insufficient notice and order that production from Well No. 10 be halted pending the outcome of the proceedings. As lessee of the adjacent tracts, Sledge intervened to defend the Commission's decision. The Commission contested the district court's jurisdiction over this case. The district court denied the Commission's plea to the jurisdiction. After a bench trial, the district court rendered judgment in favor of PITCO. The court's judgment reversed the Commission's grant of a drilling permit to Sledge for Well No. 10 and remanded the matter to the Commission to determine whether Sledge is entitled to a well permit at the current location. The Commission and Sledge appeal this final judgment. See id. § 51.012 (West 1997). We first address the threshold issue of whether the district court had jurisdiction to consider this case.

DISCUSSION

Jurisdiction

A challenge to subject-matter jurisdiction raises a question of law and therefore we review a district court's ruling de novo. Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 928 (Tex. 1998). We consider the factual allegations made in good faith by the plaintiff to determine whether the district court properly exercised jurisdiction. Brannon v. Pac. Employers Ins. Co., 224 S.W.2d 466, 469 (Tex. 1949). Unless the defendant pleads and proves that the plaintiff's allegations were made fraudulently to confer jurisdiction, we accept these allegations as true. Cont'l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 449 (Tex. 1996).

Specifically, a plea to the jurisdiction contests the district court's authority to consider a cause of action. Tsumi, Inc. v. Tex. Parks & Wildlife Dep't, 23 S.W.3d 58, 60 (Tex. App.--Austin 2000, pet. filed) (citing Amador v. San Antonio State Hosp., 993 S.W.2d 253, 254 (Tex. App.--San Antonio 1999, pet. denied), and State v. Benavides, 772 S.W.2d 271, 273 (Tex. App.--Corpus Christi 1989, writ denied)). The plaintiff bears the burden of alleging facts sufficient to demonstrate the district court has subject matter jurisdiction. Tex. Ass'n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 446 (Tex. 1993). Unless the face of the petition affirmatively demonstrates a lack of jurisdiction, the district court must liberally construe the allegations in favor of jurisdiction. Peek v. Equip. Servs. Co., 779 S.W.2d 802, 804 (Tex. 1989).

In its pleadings, PITCO asserts jurisdiction under section 85.241 of the Texas Natural Resources Code and invokes the procedures and standard of review in sections 2001.171 and 2001.174 of the Administrative Procedure Act ("APA"). The parties agree that the APA itself does not confer jurisdiction. The Commission acknowledges that in suits such as this one, jurisdiction may be available under section 85.241 of the Texas Natural Resources Code.

Section 85.241 of the Texas Natural Resources Code provides as follows:

Any interested person who is affected by the conservation laws of this state or orders of the commission relating to oil or gas and the waste of oil or gas, and who is dissatisfied with any of these laws or orders, may file suit against the commission or its members in a court of competent jurisdiction in Travis County to test the validity of the law or order.

Tex. Nat. Res. Code Ann. § 85.241 (West 1993). As a remedial statute, this section should be construed liberally. Wrather v. Humble Oil & Ref. Co., 214 S.W.2d 112, 115 (Tex. 1948); City of San Antonio v. United Gas Pipe Line Co., 354 S.W.2d 217, 224 (Tex. Civ. App.--Austin 1962, no writ).

The Commission, however, argues that the letter ruling by the assistant director of the agency's oil and gas section is "not a Commission law or order as meant by section 85.241." According to its petition, PITCO's suit arises from the Commission's decision not to consider PITCO's complaint. The Commission denied PITCO's request for a show-cause hearing in a letter ruling, which stated that the assistant director was "closing . . . [his] file on this matter." In a subsequent memorandum addressing PITCO's motion for rehearing, the assistant director recognized that this letter ruling presented a "hybrid" situation. The assistant director acknowledged that while no hearing was conducted and the letter ruling disclaimed that it was a final order of the Commission, the ruling was also "not a traditional staff interim ruling" because it "effectively dismissed PITCO's complaint and no further Commission action on the complaint was contemplated." The assistant director recommended that the Commission treat PITCO's submission as a motion for rehearing and deny the motion on its merits.

PITCO alleges in its petition that the motion for rehearing was overruled by operation of law. Appellants have not challenged PITCO's factual allegations as fraudulent. Consequently, we accept this allegation as true and, for purposes of this proceeding, conclude that a final order existed.

Relying on Shell Petroleum v. Railroad Commission, the Commission also argues that, as a matter of law, jurisdiction does not exist under this section because PITCO is not "affected." See Shell Petroleum Corp. v. R.R. Comm'n, 137 S.W.2d 797 (Tex. Civ. App.--Austin 1940, no writ). In Shell Petroleum, we noted, "Our examination of the many rule 37 opinions . . . fails to disclose that it has ever been suggested that royalty owners are necessary or even proper parties to an appeal from a Commission order granting or refusing a drilling permit." Id. at 798 (emphasis added). PITCO, however, does not contend that its suit is a direct appeal of the administrative decision to grant Sledge's permit; rather, PITCO's suit arises from the Commission's decision not to consider PITCO's complaint. Noting that the face of the petition does not affirmatively demonstrate a lack of jurisdiction and construing ...