Hunt Oil Co. v. LIVE OAK ENERGY, INC.

• Decision Date: 18 June 2010
• Docket Number: No. 05-07-01553-CV.,05-07-01553-CV.
• Citation: 313 S.W.3d 384
• Parties: HUNT OIL COMPANY, Appellant/Cross-Appellee, v. LIVE OAK ENERGY, INC., Appellee/Cross-Appellant.
• Court: Texas Court of Appeals

313 S.W.3d 384

HUNT OIL COMPANY, Appellant/Cross-Appellee, v. LIVE OAK ENERGY, INC., Appellee/Cross-Appellant.

No. 05-07-01553-CV.

Court of Appeals of Texas, Dallas.

October 19, 2009.

Rehearing Overruled June 18, 2010.

Scott P. Stolley, David R. Noteware, Thompson & Knight LLP, Dallas, TX, for Appellant/Cross-Appellee.

Charles T. Frazier, Jr., LaDawn H. Conway, Alexander Dubose Jones & Townsend LLP, Frank L. Broyles, Goins, Underkofler, Crawford & Langdon, Dallas, TX, for Appellee/Cross-Appellant.

Before Justices WRIGHT, BRIDGES, and O'NEILL.

OPINION

Opinion By Justice BRIDGES.

Live Oak Energy, Inc. sued Hunt Oil Company for negligence and breach of contract arising out of Hunt Oil's drilling in a Louisiana oilfield. A jury found Hunt Oil was negligent, and awarded Live Oak over $5 million in damages. Hunt Oil's seven issues on appeal complain the statute of limitations ran on Live Oak's claims; Live Oak had no standing to recover for an injury that occurred before it purchased the oil field in question; Hunt Oil's conduct was not a proximate cause of injury to Live Oak as a matter of law; Live Oak could not recover for its economic loss under Louisiana law; and Live Oak could not recover the replacement cost of the oil, incidental damages, or prejudgment interest. In its cross-appeal, Live Oak asserts the evidence conclusively establishes it suffered $8,772,000 for repair costs. Because the statute of limitations had run on Live Oak's negligence claim before Live Oak filed suit against Hunt Oil, we reverse the trial court's judgment and render judgment for Hunt Oil.

BACKGROUND

In 2002, Live Oak acquired a leasehold interest in the Pettit geological formation located in the East Haynesville oil field in northwest Louisiana. The East Haynesville field exceeds 8,000 acres and was discovered in 1945. The Pettit formation is approximately 15 feet thick at a depth of about 5,200 feet. In 1958, the Pettit formation was unitized. By 1972, both primary production and secondary-recovery production by water flooding had been conducted in the Pettit formation, producing approximately 11 million barrels of oil in all.

Live Oak purchased its interest from Story Oil & Gas Co. for $465,000. Live Oak planned to attempt to produce oil from the Pettit formation. Prior to Live Oak's purchase, Hunt Oil drilled some fifty wells through the Pettit formation to recover oil in formations below. After Live Oak's purchase, Hunt Oil drilled four additional wells. Live Oak contends Hunt Oil failed to protect the Pettit formation by failing to cement thirty of the previously-drilled wells and the four additional wells as required by law. Live Oak alleges these holes created a "leaky bucket" in the Pettit formation, so that Live Oak was unable to recover oil. In its trial brief on damages, Live Oak described the "leaky bucket damages" it sought as "damages caused by the ability of fluids within the Pettit to escape out of the Pettit."

In late September 2004, Live Oak purchased the Butler well in the East Haynesville field from Hunt Oil. After the sale, Live Oak obtained the file for the Butler well from Hunt Oil. Live Oak contends it learned when it reviewed the file that Hunt Oil had not cemented off the Pettit formation in that well. Live Oak completed several wells, including the Butler well, that produced almost exclusively water. Live Oak alleges, "because Hunt failed to protect the Pettit, it is not a closed system, and Live Oak could not, and cannot, obtain permission from the State of Louisiana to waterflood it." Live Oak asserts that as a result, it lost "substantial oil reserves."

Live Oak sued Hunt Oil on June 23, 2005. At trial, the jury found Hunt Oil's negligence proximately caused damage to Live Oak. The jury awarded Live Oak $925,000 in "incidental damages," and found the "current replacement cost of Live Oak's oil reserves lost" to be $4.3 million. The jury also determined that by October 1, 2004, the operator of the Pettit Unit should have discovered in the exercise of reasonable diligence that Hunt Oil did not "cement off" the formation. The jury found in favor of Hunt Oil, however, on Live Oak's claim for breach of contract. The trial judge entered judgment in favor of Live Oak based on the jury's findings.

APPLICABLE LAW

Although this case was filed and tried in Texas, the causes of action asserted by Live Oak arose in Louisiana. The parties agree that Texas law applies to procedural issues, and Louisiana law applies to issues of substantive law. See Intevep, S.A. v. Sena, 41 S.W.3d 391, 394 (Tex.App.-Dallas 2001, no pet.) ("As a general rule, questions of substantive law are controlled by the laws of the state where the cause of action arose, but matters of remedy and procedure are governed by the laws of the state where the action is sought to be maintained."). They disagree, however, on whether the application of the statute of limitations to Live Oak's negligence claim presents a substantive issue or a procedural issue. Hunt Oil argues the law of the forum state determines whether a question is substantive or procedural, and Texas law provides that limitations presents a procedural question. Live Oak counters that the "real question is which state's law governs the accrual of a cause of action," and that question is substantive, so Louisiana law applies.

We agree with Hunt Oil. As Live Oak concedes, "generally what is a matter of substance and what is a matter of procedure is determined by the law of the forum state according to its own laws." PennWell Corp. v. Ken Assocs., Inc., 123 S.W.3d 756, 764 (Tex.App.-Houston 14th Dist. 2003, pet. denied). Texas courts have held that limitations presents a procedural issue. See Baker Hughes, Inc. v. Keco R. & D., Inc., 12 S.W.3d 1, 4 (Tex. 1999); Intevep, 41 S.W.3d at 394. Live Oak does not distinguish these cases, but instead relies on Willis v. Maverick, 760 S.W.2d 642, 644 (Tex.1988), for the proposition that "the phrase `accrues' embodies a substantive law concept...." As we explained in Intevep, however, the statute of limitations is considered substantive "when the statute that creates a right of action incorporates an express limitation upon the time within which the suit may be brought." Intevep, 41 S.W.3d at 394. Therefore, if a Louisiana statute created the right of action Live Oak asserts in this case and provided a limitations period, Louisiana law would apply. Id. If not, we follow the general rule. See id. (general rule is that matters of remedy and procedure are governed by law of state where action sought to be maintained). Live Oak does not argue it is asserting a cause of action under a Louisiana statute that provides a limitations period. We follow the general rule and apply Texas law regarding limitations. Cf. id. at 395-96 (Venezuelan law applied where Venezuelan statute created right of action and provided limitations period).

STATUTE OF LIMITATIONS

In its first issue Hunt Oil complains that Live Oak's negligence claim is barred by limitations, and Live Oak cannot avoid limitations by invoking the discovery rule. Live Oak argues that its negligence claim is timely under both Louisiana and Texas law. Because we have determined Texas law applies to the issue of limitations, we consider the parties' arguments under Texas law.

Hunt Oil alleges the trial judge erred in denying its objections to the charge, its motion for judgment notwithstanding the verdict, its motions to modify the judgment, and its motions for new trial, all asserting Live Oak's negligence claim is barred by the statute of limitations. This is a legal question we review de novo. See, e.g., Burke v. Ins. Auto Auctions Corp., 169 S.W.3d 771, 776 (Tex. App.-Dallas 2005, pet. denied) (statute of limitations begins to run when cause of action accrues; determination of when cause of action accrues is question of law); COC Services, Ltd. v. CompUSA, Inc., 150 S.W.3d 654, 662 (Tex.App.-Dallas 2004, pet. denied) (we review questions of law de novo).

Negligence claims must be brought "not later than two years after the day the cause of action accrues." TEX. CIV. PRAC. & REM.CODE ANN. § 16.003 (Vernon Supp. 2008); Waxler v. Household Credit Services, Inc., 106 S.W.3d 277, 279 (Tex.App.-Dallas 2003, no pet.). Live Oak's original petition was filed on June 23, 2005. Hunt Oil argues Live Oak's action for negligence accrued more than two years prior to that date.

Live Oak alleged in its original petition that "starting in 1988 and continuing through 2004," Hunt Oil drilled more than 50 wells through the Pettit Unit into formations below. Live Oak further alleges that 34 of these wells were not cased or cemented to protect the producing formations above. In addition, Live Oak complained that Hunt Oil improperly disposed of drilling pit fluids into the Pettit formation. For its negligence claim, Live Oak alleged Hunt Oil "failed to exercise ordinary care in its operations inside the geographical confines of the Pettit Unit" from which both Live Oak and Hunt Oil produce oil and gas. Although Live Oak amended its petition numerous times before trial, it continued to allege that Hunt Oil's negligent failure to protect the Pettit formation in its drilling of wells between 1988 and 2004 was the proximate cause of damages to Live Oak. Hunt Oil pleaded Live Oak's claims were barred by the applicable statutes of limitations, and argues Live Oak's own proof establishes that Hunt Oil drilled thirty of the allegedly unprotected holes between November 1990 and 2002, creating the "leaky bucket" more than two years before suit was filed.

Live Oak pleaded that the discovery rule applied to its claims, contending that in the exercise of reasonable diligence it could not have "discovered facts that would have triggered any limitations time period until Plaintiff obtained a well file from Defendant." The discovery rule is a very limited exception to limitations and is construed strictly. See ...