>Daily Development for Thursday, August 7, 2008
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Husch Blackwell Sanders
>Kansas City, Missouri
>
>
>MINES AND MINERALS; CONTAMINATION; DAMAGES: New Mexico Supreme Court modernizes and summarizes the law on (1) the liability of a mineral lessee to the surface owner for environmental contamination resulting from the mineral lessee’s operations, (2) the measure of damages for that liability, (3) the general liabilities of the owners of mineral interests to surface owners, and (4) the standing to sue of a surface owner who acquires an interest in the land long after the contamination occurred, but before it was discovered.

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> 2008-NMSC-022, 143 N.M. 740, 182 P.3d 121 (2008)
>
>Surface Owners owned the surface rights of the McNeill Ranch.  Mineral Lessee was the former oil, gas, and mineral lessee under a portion of Surface Owners’ property.  Mineral Lessee’s predecessor-in-interest drilled an oil well on the McNeill Ranch in 1951.  The oil well ceased production in 1986, and in 1992 Mineral Lessee closed a “reserve pit,” used to dispose of waste from the well.  Surface Owners alleged that the manner in which Mineral Lessee closed the pit was contrary to industry standards and resulted in subsurface contamination of their property.  They filed a lawsuit against Mineral Lessee alleging negligence and trespass, and later amended their complaints to include a claim for private nuisance.  The only issues before the Supreme Court related to the negligence claim and the standing of one of the plaintiffs.

>
>In reaching its decision the Supreme Court affirmed in part and reversed in part the decision of the New Mexico Court of Appeals, reported in an ABA Quarterly Report (cited below), which had done the same thing with the decision of the trial court.  See also McNeill v. Burlington Res. Oil & Gas Co., 2007-NMCA-024, 141 N.M. 212, 153 P.3d 46 (published in ABA Real Estate Quarterly Report, Spring, 2007).

>
>Central to the litigation was the proper measure of damages to Surface Owners’ land.  The Court of Appeals analyzed this issue and concluded that the proper measure of damages for injury to real property depends on whether the injury is permanent or temporary.  The Court of Appeals also held that the cost of repair could be relevant and, therefore, admissible in analyzing the diminution in value for permanent damage to a surface estate.  Finally, the Court of Appeals held that the value of the entire property, not just the affected portion, should be considered in awarding damages for diminution in value.

>
>The Supreme Court revisited the permanent/temporary dichotomy and concluded that such a distinction is no longer useful in analyzing damages to a surface estate by a mineral lessee.  Instead, the jury should determine the most reasonable means of making a surface estate owner whole.  The Supreme Court did, however, agree with the Court of Appeals that the cost of repair may be relevant in analyzing the diminution in value of real property in a negligence claim against a mineral lessee.  But the Court ruled that damages under a cost-of-repair theory could not exceed the diminution in value of the property. In the instant case, the trial court’s exclusion of Surface Owners’ evidence of the cost to repair prejudiced Surface Owners and amounted to reversible error.  The Supreme Court also agreed with the Court of Appeals that the proper vehicle for comparison of the pre- and post- negligent injury values is the property as a whole, rather than just the affected portion of the propert

y. 
>
>The Supreme Court also held that in order to prevail on a negligence claim against a mineral lessee, damages must result from the mineral lessee’s unreasonable, excessive or negligent use of a surface estate.  The reason for this holding is that in New Mexico the surface estate is subservient to the mineral estate.  Because the mineral lessee is entitled to use as much of the surface area as is reasonably necessary for extraction, the mineral lessee is not liable for damages resulting from the reasonable use.  In addition, the owner of the mineral estate has no duty to restore the surface to its pre-drilling state, absent negligence or a contract otherwise.

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>New Mexico has adopted the “discovery rule” for the accrual of a cause of action and for the start-date of the statute of limitations for negligent injury to property.  The “discovery rule” states that a cause of action arises when the plaintiff discovers or with reasonable diligence should have discovered that a claim exists.  Because the property owner was found to have acquired the property before the cause of action was discovered, it had standing to bring this action.

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>Comment 1:  The reporters, Amanda Sanchez and Jack Burton of the New Mexico bar, view this case as very significant in New Mexico and likely influential in other jurisdictions as well.  The editor has seen question of whether damages are “permanent” arise in a number of cases evaluating environmental damages in various circumstances.  The concept has been relevant particularly in evaluating whether the statute of limitations has run, as it would have once an injury has become “permanent.”  It’s uncertain, of course, whether the court’s decision to abandon the distinction in computing damages would affect statute of limitations considerations.

>Comment 2:  The notion that a mineral lessee has an “estate” in form of a dominant interest (likely an easement) is reasonably well established, but kudos to the court here for taking that concept to its logical conclusion and identifying the reasonable extraction activities as to measure of the mineral owner’s rights to invade the surface owner.  This seems appropriate, and avoids any absolute rule protecting the surface owner from any residual effect or completely protecting the lessee, even when the lessee is unreasonable.  Of course, “reasonableness” can be measured by the parties’ actual or probable intent, and the language of the agreement and the circumstances surrounding it, as well as custom and practice within which the parties were operating at the time of the agreement seem relevant. 

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>Comment 3:  Note the standing issue tagging along at the end.  If the cause of action had been discovered before the conveyance, one would have assumed that the parties took it into account in setting the price for the conveyance and the cause of action would have remained with the transferor, unless it was assigned as part of the conveyance.   Parties acquiring property with environmental injury shouldn’t lose sight of this important distinction.  It’s a lot easier to get the assignment of rights as part of the conveyance rather than later, when it becomes clear that that the potential claim has value and that there is a solvent defendant. 

>
>Compare:  Corbello v. Iowa Production, 850 So.2d 686 (La. 2003) (Where tenant contractually agreed to "reasonably restore the premises as nearly as possible to their present condition," in a lease for an oil and gas terminal, jury may properly award $33 million in damages for cost of restoration even when property, as restored, will be worth $106,000 and even when landlord has no duty to use the damages proceeds actually to restore the property.)

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