Mcneill v. Burlington Resources Oil & Gas

• Decision Date: 03 April 2008
• Docket Number: No. 30,162.,30,162.
• Citation: 182 P.3d 121,2008 NMSC 022
• Parties: William F. McNEILL, Page McNeill, Marilyn Cates, and The Black Trust, Plaintiffs-Respondents, v. BURLINGTON RESOURCES OIL & GAS COMPANY, Defendant-Petitioner.
• Court: New Mexico Supreme Court

182 P.3d 121

2008 NMSC 022

William F. McNEILL, Page McNeill, Marilyn Cates, and The Black Trust, Plaintiffs-Respondents, v. BURLINGTON RESOURCES OIL & GAS COMPANY, Defendant-Petitioner.

No. 30,162.

Supreme Court of New Mexico.

April 3, 2008.

Hinkle, Hensley, Shanor & Martin, L.L.P., Thomas M. Hnasko, Gary W. Larson, Michelle R. Haubert-Barela, Santa Fe, NM, for Petitioner.

Butt, Thornton & Baehr, P.C., Emily A. Franke, Albuquerque, NM, Law Offices of James P. Lyle, P.C., James P. Lyle, Albuquerque, NM, for Respondents.

Miller Stratvert, P.A., Marte D. Lightstone, Kelsey D. Green, Albuquerque, NM for Amicus Curiae New Mexico Oil and Gas Association.

OPINION

SERNA, Justice.

{1} We write, first, to clarify the proper measure of damages for negligent injury to a surface estate by a mineral lessee and, second, to analyze whether the discovery rule is applicable in the context of jurisdictional standing. We hold that evidence of the cost to repair damage to the surface estate by a mineral lessee's negligence may be relevant in analyzing the diminution in value of the property. The trial court's exclusion of the evidence of the cost to repair in the instant case was prejudicial and we therefore remand for a new trial. Whether an injury is characterized as permanent or temporary is no longer determinative of the proper measure of damages; rather, the jury should determine the most reasonable means of making the surface estate owner whole and, in doing so, may rely on evidence of the cost to repair and the diminution in value of the property. Only damage to the surface estate caused by the mineral lessee's unreasonable, excessive, or negligent use is actionable. The discovery rule is applicable in the jurisdictional standing context.

I. FACTUAL BACKGROUND

{2} This matter arises from a dispute between the surface owners and the mineral lessees of a portion of real property over alleged surface damage to that property by the mineral lessees. Plaintiffs-Respondents William F. McNeill, Page McNeill, Marilyn Cates, and the Black Trust are the owners of the surface rights of the McNeill Ranch, a 31,000-acre non-contiguous cattle ranch in Lea County. Defendant-Petitioner Burlington Resources Oil and Gas Co. is the former oil, gas, and mineral lessee under a portion of Respondents' land.

{3} The relevant facts are undisputed. Petitioner's predecessor-in-interest, hereinafter also referred to as Petitioner, drilled an oil well on the McNeill Ranch in 1951. Petitioner constructed an open, earthen "reserve pit" to dispose of waste from the well, which is known as "produced water" and is composed of petroleum, hydrocarbons, salt water, and other contaminants. The well ceased production in 1986 and Petitioner closed the pit in 1992.

{4} Respondents contend that the manner in which Petitioner closed the pit was contrary to industry standards and resulted in subsurface contamination of their property. They filed suit on June 1, 1999, alleging negligence and trespass. They subsequently filed two amended complaints, the second of which added a claim for private nuisance.

II. LEGAL BACKGROUND AND PROCEEDINGS BELOW

{5} Central to the ensuing litigation was the proper measure of damages to Respondents' land. Recognizing that Amoco Production Co. v. Carter Farms Co. occupies the field of the proper measure of damages to a surface estate by a mineral lessee in New Mexico, both Respondents and Petitioner rely heavily on it. See id., 103 N.M. 117, 703 P.2d 894 (1985).

{6} In Carter Farms, a surface estate owner sued its mineral lessee for the lessee's refusal to restore a drilling site to its pre-drilling condition. Id. at 118, 703 P.2d at 895. While drilling and according to industry standards, the lessee had constructed a reserve pit to catch and hold the produced water resultant from the drilling. Id. at 118-19, 703 P.2d at 895-96. However, because there was water just below the surface area, the lessee had built the reserve pit partially above the surface of the ground with the assistance of caliche dikes. Id. at 118, 703 P.2d at 895. At the close of the drilling operation, the lessee began to level the pit area. Id. at 118-19, 703 P.2d at 895-96. Although the court found that it was customary to level the reserve pit and spread the organic waste about the ground in the manner attempted by the lessee, because of the lessee's use of the caliche dikes, its waste would have covered a greater amount of surface area than the typical operation. Id. at 119, 703 P.2d at 896.

{7} The surface rights owner brought suit against the lessee when the lessee refused to remove all of its debris from the site. Id. Although the trial court found that the lessee's clean-up method was reasonable and the jury found that the land used by the lessee was reasonably required, the jury still awarded the surface rights owner the cost of complete restoration of the reserve pit area. Id. at 118-19, 703 P.2d at 895-96. However, the trial court issued a judgment notwithstanding the verdict on the cost of restoration, refusing to award the cost of repair where the lessee's use had been reasonable. Id. at 118, 703 P.2d at 895. The Court of Appeals reversed the trial court and held that, even where the use of the surface is reasonable, the lessee must either restore the surface estate to its original condition or pay the costs to do so. Id. at 118, 120, 703 P.2d at 895, 897. This Court reversed the Court of Appeals and affirmed the trial court's judgment notwithstanding the verdict. Id. at 118, 703 P.2d at 895.

{8} While declining to imply a duty of restoration in Carter Farms, we adopted a framework for measuring the damages to a surface estate by a mineral lessee. Id. at 120-21, 703 P.2d at 897-98. We held that, where the damage was permanent, the proper measure of the surface owner's damages was the diminution in value, defined as the "difference between the fair market value of the land prior to the injury and the fair market value of the land after the full extent of the injury has been determined." Id. On the other hand, where the damage to the surface estate was merely temporary and could be repaired, we held that the proper measure of damages was the cost of repair or restoration, provided that the cost of repair did not exceed the value of the property. Id. at 121, 703 P.2d at 898. It is this framework that we revisit today.

{9} In the instant case, Petitioner argued before the trial court that the alleged damages to Respondents' land were permanent and that, under Carter Farms, the damages should be measured solely in terms of the diminution in value of the affected property. See id. at 120-21, 703 P.2d at 897-98. Respondents, though somewhat inconsistently, likewise maintained that the damage to their property was permanent. Nevertheless, they sought to introduce evidence of the cost of repairing the damage as a proxy for measuring the diminution in value. However, because Respondents had not alleged that the damage to their land was temporary, Petitioner moved, on the basis of Carter Farms, to exclude Respondents' proffered expert testimony on the cost to repair the damage to the land. See id. at 121, 703 P.2d at 898. The court granted Petitioner's motion and determined that, per Carter Farms, the proper measure of damages was the diminution in value of the land and that any evidence or reference to other measures of damages, viz. the cost to repair, was inadmissible. See id. at 120-21, 703 P.2d at 897-98. The trial proceeded with Respondents precluded from presenting any evidence of the cost to repair, evidence comparing the cost to repair to the diminution in value, or evidence of what accommodation a reasonable purchaser would request when learning of the damage to the property.

{10} At the close of the jury trial, Respondents were awarded $135,000 on the theories of negligence and trespass, though they had requested damages up to $1.4 million. The private nuisance claim was disposed of by a directed verdict. Respondents appealed, contending that the district court erred in ruling that, as a matter of law, the damage to the property was permanent and that Carter Farms barred the admission of all cost of repair evidence. See id. Rather, Respondents argued, whether the injury was permanent or temporary was a question of fact for the jury to decide. Respondents also argued on appeal that the court erred in directing a verdict for Petitioner on the private nuisance claim. Petitioner cross-appealed, arguing that the claims were waived by deed or, alternatively, were barred by the statute of limitations and that the Black Trust, alone among Respondents, had no standing.

{11} The Court of Appeals upheld the trial court on the private nuisance claim, declined to address whether the claims were waived by deed, concluded that there was substantial evidence to support the jury's finding that the claims were timely, and held that the Black Trust had standing. McNeill v. Burlington Res. Oil & Gas Co., 2007-NMCA-024, ¶¶ 11, 15, 17, 40, 141 N.M. 212, 153 P.3d 46. As to the damages issue, it held that Carter Farms provided the proper framework to measure such damages and that the issue of whether damage to a surface estate was permanent or temporary was an issue of fact for the jury to determine. Id. ¶¶ 25, 29 Thus, the Court of Appeals would have the jury determine whether an injury was permanent or temporary and then, once that finding had been made, Carter Farms would be dispositive as to the proper measure: diminution in value or the cost to repair. Id. The Court of Appeals also held that the cost of repair could be relevant and thus admissible in analyzing the diminution in value for permanent damage to a surface estate. Id. ¶¶ 29, 30. Lastly, it held that the value of the entire property, rather than solely the affected portion, should be considered in awarding damages for diminution in value. Id. ¶ 36.

{12} We granted the petition for writ...