W.L. Lindemann Operating Company, Inc. v. Joyce Strange, Individually and as Trustee for the Joyce Strange Marital Trust ( 2008 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 2-06-433-CV
W.L. LINDEMANN OPERATING APPELLANT
COMPANY, INC.
V.
JOYCE STRANGE, INDIVIDUALLY
AND AS TRUSTEE FOR THE JOYCE
STRANGE MARITAL TRUST APPELLEE
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FROM THE 97TH DISTRICT COURT OF ARCHER COUNTY
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OPINION
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This is an appeal from a jury verdict in favor of appellee Joyce Strange,
individually and as Trustee for the Joyce Strange Marital Trust, in a case
involving production from an oil lease in Archer County, Texas. In five issues,
appellant W.L. Lindemann Operating Company, Inc. contends generally that the
evidence is legally and factually insufficient to support the jury’s findings on
willful commingling, fraud, and damages. We affirm in part and reverse and
render in part.
Background Facts
Appellee was married to Doug Strange for over twenty years. Strange
developed and operated oil leases; appellee worked for him as a bookkeeper.
Strange did business through Brock & Strange Oil Company, a partnership
between him and Joe Wayne Brock. Beginning in the 1960s, Brock & Strange
developed leases and drilled oil wells with W.L. “Rusty” Lindemann. Although
their businesses were separate, according to appellee, her “husband would drill
a well and Rusty would take an interest” in it.
Rusty and Strange verbally agreed that Rusty would drill and operate a
well in Archer County on one of Strange’s leases known as the D.D. Strange.
Strange gave Rusty a fifty percent working interest in the lease.1 Rusty drilled
the first of two wells on the D.D. Strange in 1991; Strange passed away in
1992. Upon Strange’s death, appellee acquired his working interest and a
1
… He also gave a 1/16th working interest to Brock. Appellee’s counsel
clarified with appellee that when the parties referred to a “working interest,”
“that means you pay part of the expenses and you get part of the proceeds.”
And when they referred to a royalty interest, “that means you own the minerals
under the land and you’ve leased those minerals and you get a part of the
proceeds but you don’t have to pay the day-to-day working expenses like
insurance and overhead and electricity and fuel and repair parts.”
2
royalty interest in the wells, individually and as a beneficiary of the Joyce
Strange Marital Trust, through inheritance from her husband’s estate. Appellee
also took over his interest in Brock & Strange. Rusty continued to operate the
D.D. Strange, through appellant,2 after appellee acquired these interests.
After Rusty drilled the first well on the D.D. Strange, he also began to
develop and operate the Powell lease located to the north of the D.D. Strange.
Rusty and his family members own 7/8ths of the working interests in the
Powell.3 Around the same time, Rusty’s son Doug Lindemann began to develop
the Hoff lease, located to the east of the D.D. Strange. Rusty’s sons William,
Robert, and other family members own all the working interests in the Hoff. To
the south of the Hoff is the O’Keefe “B” lease, which Rusty also operated and
in which he owned an approximately one-half working interest. 4 Brock &
Strange also owns interests in the O’Keefe.
Appellee testified that she did not have any contact with Rusty about the
D.D. Strange wells between 1991 and 2000. Brock, who acted as
2
… Rusty testified at trial that he formed appellant in 1994 and that
appellant took over operations of his leases.
3
… Appellee and Brock each own a 1/16th working interest in the Powell.
4
… Rusty also operated the Kinsey lease west of the D.D. Strange and the
Mullis lease north of the Powell. A map showing the location of the various
leases is appended to this opinion as Attachment “A”.
3
superintendent on the Brock & Strange leases, informed her about matters
related to the D.D. Strange. According to appellee, Brock “takes care of all the
leases. He goes out and checks them and makes sure they’re all pumping
properly and just takes care of all the field superintendent work.” Conoco
purchased production on the D.D. Strange while it was producing.
In 2000, appellee and Brock became concerned about the D.D. Strange
because, according to appellee, “[i]t quit producing oil.” Appellee said she
found out about this because she stopped “getting an oil run[5 ] out from the oil
companies.” Brock checked both wells on the D.D. Strange; 6 they looked as
if they had been shut in for some time. 7 Brock and appellee talked about the
5
… Appellee explained that “no oil was being run out from under [her]
lease.”
6
… Brock testified that he checked the O’Keefe first and that the
irregularities he found there made him suspicious about the D.D. Strange. For
instance, he found new tong dyes (equipment used on the oil wells) in one of
the O’Keefe well casingheads that should not have been there. In addition, the
O’Keefe was producing oil, but Brock & Strange had not been getting any
money from production. When he confronted Rusty about this, Rusty told him
the oil had been “misplaced” and that it had been run on a different lease Rusty
owned; Rusty paid Brock & Strange for the “misplaced” oil. Brock & Strange
took over operating the O’Keefe in the latter part of 2001.
7
… There is conflicting evidence as to whether the wells were “shut in,”
that is, not producing in paying quantities, or whether they were simply pumped
only long enough to produce the minimum amount of paying quantity per
month. Nevertheless, it is clear that production from the D.D. Strange
decreased significantly between 1998 and the early part of 2001.
4
problem and then went to the lease together to investigate. When Brock and
appellee opened one of the valves on the well, according to appellee, “oil just
gushed out . . . like gangbusters.” Additionally, the screw that held the lever
properly on the saltwater separator, 8 or saltwater knock-out,9 was not there.
Appellee then contacted counsel to “get [her] lease back.” Appellee’s
attorney was able to negotiate a deal with W illowbend Investments—a
company owned by Lee Murchison and Rusty’s son William, to whom Rusty
had transferred his interest in the D.D. Strange effective March 1, 2001.
Willowbend let Brock & Strange take over operation of the D.D. Strange, and
Willowbend transferred at least some of its interest in the D.D. Strange to
appellee. 10
Before Brock & Strange took over the lease, it was producing “about
nothing.” After they took over operation of the lease, according to appellee,
“Brock went down and flipped a switch[,] and it started gushing like it should
have to begin with.” Additionally, about a month later, Brock acidized the well,
8
… A separator is a device that separates the oil and water pumped from
a well.
9
… These terms are used interchangeably in the record.
10
… Appellee testified that she purchased Murchison’s interest but then
assigned him half of what he had conveyed to her. It is unclear who owned all
the working interests in the D.D. Strange, and in what amount, after the
transfer.
5
and “production has been going up ever since.” The evidence at trial confirmed
that production on the D.D. Strange increased significantly after Brock &
Strange took over operating the lease.
Appellee filed suit against appellant in 2001, claiming, in appellee’s
words, that Rusty and appellant “shut down [her] lease[,] . . . pumped all the
leases around [her,] and just took the oil out from under [her] lease.” A jury
trial began October 11, 2005, upon appellee’s fourth amended petition, in
which she specifically alleged that appellant either drained oil from beneath the
D.D. Strange, failed to properly produce the D.D. Strange and O’Keefe leases,
or both. She also alleged causes of action for fraud, conspiracy, negligent
misrepresentation, conversion, civil theft under section 134.001 of the civil
practice and remedies code, unjust enrichment, breach of contract, fraudulent
concealment, and wrongful commingling. She requested actual damages, the
imposition of a constructive trust, exemplary damages, and attorneys’ fees.
On October 17, 2005, after appellee had rested her case, appellant filed
a motion for instructed verdict as to all of appellee’s claims. The trial court
granted the motion as to appellee’s conspiracy, civil theft, and unjust
enrichment claims and her contention that appellant improperly reported the
quantity of oil produced from the D.D. Strange and O’Keefe leases to the Texas
Railroad Commission. But the trial court denied the motion as to all other
6
claims. Appellant also filed a motion for instructed verdict on appellee’s fraud,
conversion, and willful commingling claims after the close of its evidence,
which the trial court denied as to all claims.
The jury found that substantial drainage had occurred from the D.D.
Strange lease and that appellant had failed to act as a reasonably prudent
operator by failing to prevent substantial drainage from the D.D. Strange. It
awarded appellee past damages of $66,093.00 as to her royalty interest in the
lease and $642,959 in past damages as to her working interest. 11 The jury also
found that no substantial drainage had occurred from the O’Keefe lease. The
jury additionally found that appellant had willfully commingled the oil production
from the D.D. Strange, Powell, and Hoff leases, causing damages to appellee
of $1,627,300. Although the jury found that Rusty individually did not commit
fraud against appellee, it did find that appellant committed fraud; the jury
awarded appellee compensatory damages of $233,300 and exemplary damages
of $200,000. Finally, the jury found that appellee was entitled to reasonable
attorneys’ fees of $160,000 for trial, $10,000 for an appeal to the court of
appeals, and $10,000 for an appeal to the Supreme Court of Texas.
11
… These damages are the total amount calculated by appellee’s expert
from May 1991 through February 2001.
7
Appellee moved for judgment on the jury’s verdict, and appellant moved
to require appellee to elect a remedy as to either her fraud or drainage claims
because both claims were based on the facts underlying appellee’s drainage
claim. Appellant also moved to disregard the jury’s findings of substantial
drainage and damages for that cause of action, willful commingling and
damages for that cause of action, and fraud and the actual and exemplary
damages for that cause of action; appellant moved to disregard the jury’s
findings on attorneys’ fees as well.
The trial court entered a final take-nothing judgment in Rusty’s favor and
severed it from the pending suit.12 It also entered an order recognizing that
appellee had elected to proceed on her fraud claim as opposed to her drainage
claim; thus, the trial court disregarded the jury’s findings as to wrongful
drainage. 13 The trial court additionally granted appellant’s motion to disregard
12
… Appellee has not appealed the judgment in Rusty’s favor.
13
… The jury awarded appellee the entire amount of damages that her
expert attributed to wrongful drainage during the time period from May 1991
through February 2001; however, because the jury also found that only
appellant, not Rusty individually, had substantially drained the D.D. Strange,
appellee was entitled to recover damages only from July 1, 1994 through
February 2001. After the damages attributable to the time period before
appellant operated the D.D. Strange are subtracted, appellee’s recovery on the
drainage claims would be only $282,463.93.
8
the jury’s findings as to attorneys’ fees; however, it denied the motion as to all
of appellee’s other claims.
On August 28, 2006, the trial court entered a “Judgment on the Verdict.”
In it, the court ordered that appellee recover $1,860,600 from appellant in
actual damages and $200,000 in exemplary damages. It also awarded
prejudgment and postjudgment interest at the rate of 8.25% and assessed
costs against appellant. Appellant filed a timely notice of appeal.
Issues Presented
In five issues, appellant contends that the evidence is legally and factually
insufficient to support the following jury findings: (1) that appellant willfully
commingled oil from the D.D. Strange lease with oil from the Powell and Hoff
leases, (2) that appellant committed fraud, (3) that appellee was damaged in
the amount of $1,627,300 for the willful commingling, (4) that appellee
sustained damages in the amount of $233,300 for the fraud, and (5) that
appellee is entitled to exemplary damages of $200,000.14 We will first address
14
… Appellant also brings two contingent issues, challenging the jury’s
findings on wrongful drainage and attorney’s fees in the event appellee
attempts to challenge the trial court’s ruling as to those findings. Appellee
responds to the contingent issues, contending that the jury’s findings as to
wrongful drainage and attorneys’ fees were proper. However, we do not
address these issues because appellee did not file a separate notice of appeal
challenging the trial court’s decision to disregard these findings. See T EX. R.
A PP. P. 25.1(c); Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732, 737 (Tex.
9
appellant’s second issue related to the jury’s fraud findings because the fraud
evidence is also relevant to appellee’s wrongful commingling claim.
Legal and Factual Sufficiency Standards of Review
Legal Sufficiency
We may sustain a legal sufficiency challenge only when (1) the record
discloses a complete absence of evidence of a vital fact; (2) the court is barred
by rules of law or of evidence from giving weight to the only evidence offered
to prove a vital fact; (3) the evidence offered to prove a vital fact is no more
than a mere scintilla; or (4) the evidence establishes conclusively the opposite
of a vital fact. Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 334
(Tex. 1998), cert. denied, 526 U.S. 1040 (1999); Robert W . Calvert, "No
Evidence" and "Insufficient Evidence" Points of Error, 38 T EX. L. R EV. 361,
362–63 (1960). In determining whether there is legally sufficient evidence to
support the finding under review, we must consider evidence favorable to the
finding if a reasonable fact-finder could and disregard evidence contrary to the
finding unless a reasonable fact-finder could not. City of Keller v. Wilson, 168
S.W.3d 802, 807, 827 (Tex. 2005).
2001); Pettus v. Pettus, 237 S.W.3d 405, 421-22 (Tex. App.—Fort Worth
2007, pet. denied).
10
Anything more than a scintilla of evidence is legally sufficient to support
the finding. Cont’l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 450 (Tex.
1996); Leitch v. Hornsby, 935 S.W.2d 114, 118 (Tex. 1996). When the
evidence offered to prove a vital fact is so weak as to do no more than create
a mere surmise or suspicion of its existence, the evidence is no more than a
scintilla and, in legal effect, is no evidence. Kindred v. Con/Chem, Inc., 650
S.W.2d 61, 63 (Tex. 1983). More than a scintilla of evidence exists if the
evidence furnishes some reasonable basis for differing conclusions by
reasonable minds about the existence of a vital fact. Rocor Int’l, Inc. v. Nat’l
Union Fire Ins. Co., 77 S.W.3d 253, 262 (Tex. 2002).
Any ultimate fact may be proved by circumstantial evidence. Russell v.
Russell, 865 S.W.2d 929, 933 (Tex. 1993). A fact is established by
circumstantial evidence when the fact may be fairly and reasonably inferred
from other facts proved in the case. Id. However, to withstand a legal
sufficiency challenge, circumstantial evidence still must consist of more than
a scintilla. Blount v. Bordens, Inc., 910 S.W.2d 931, 933 (Tex. 1995).
Factual Sufficiency
An assertion that the evidence is factually insufficient to support a fact
finding means that the evidence supporting the finding is so weak or the
evidence to the contrary is so overwhelming that the answer should be set
11
aside and a new trial ordered. Garza v. Alviar, 395 S.W.2d 821, 823 (Tex.
1965). We are required to consider all of the evidence in the case in making
this determination, not just the evidence that supports the finding. Mar.
Overseas Corp. v. Ellis, 971 S.W.2d 402, 406-07 (Tex.), cert. denied, 525 U.S.
1017 (1998).
Exemplary Damages Standard of Review
To be entitled to an award of punitive damages, appellee had to prove by
clear and convincing evidence that the harm with respect to which she seeks
recovery of exemplary damages resulted from fraud or malice committed by
appellant. See T EX. C IV. P RAC. & R EM. C ODE A NN. § 41.003 (Vernon Supp.
2007). Clear and convincing evidence is that measure or degree of proof that
will produce in the mind of the trier of fact a firm belief or conviction as to the
truth of the allegations sought to be established. T EX. C IV. P RAC. & R EM. C ODE
A NN § 41.001(2) (Vernon Supp. 2007); Transp. Ins. Co. v. Moriel, 879 S.W.2d
10, 31 (Tex. 1994). This intermediate standard falls between the
preponderance standard of civil proceedings and the reasonable doubt standard
of criminal proceedings. In re G.M., 596 S.W.2d 846, 847 (Tex. 1980); State
v. Addington, 588 S.W.2d 569, 570 (Tex. 1979). While the proof must weigh
heavier than merely the greater weight of the credible evidence, there is no
12
requirement that the evidence be unequivocal or undisputed. Addington, 588
S.W.2d at 570.
In reviewing the evidence for legal sufficiency, we must determine
whether the evidence is such that a fact-finder could reasonably form a firm
belief or conviction that its finding was true. Diamond Shamrock Ref. Co. v.
Hall, 168 S.W.3d 164, 170 (Tex. 2005); Sw. Bell Tel. Co. v. Garza, 164
S.W.3d 607, 627 (Tex. 2004). We must review all the evidence in the light
most favorable to the finding. Hall, 168 S.W.3d at 170; Garza, 164 S.W.3d
at 627. This means that we must assume that the fact-finder resolved any
disputed facts in favor of its finding if a reasonable fact-finder could have done
so. Hall, 168 S.W.3d at 170; Garza, 164 S.W .3d at 627. We must also
disregard all evidence that a reasonable fact-finder could have disbelieved. Hall,
168 S.W.3d at 170; Garza, 164 S.W.3d at 627. We must consider, however,
undisputed evidence even if it is contrary to the finding. City of Keller v.
Wilson, 168 S.W.3d 802, 817 (Tex. 2005); Hall, 168 S.W.3d at 170. That is,
we must consider evidence favorable to the finding if a reasonable fact-finder
could and disregard evidence contrary to the finding unless a reasonable fact-
finder could not. Wilson, 168 S.W.3d at 827.
13
Jury Charge
Absent an objection to the jury charge, the sufficiency of the evidence is
reviewed in light of the charge submitted. Wal-Mart Stores, Inc. v. Sturges, 52
S.W.3d 711, 715 (Tex. 2001); City of Fort Worth v. Zimlich, 29 S.W.3d 62,
71 (Tex. 2000). However, when a party properly objects to a jury question, we
review the sufficiency of the evidence in light of the charge the trial court
should have submitted. St. Joseph Hosp. v. Wolff, 94 S.W.3d 513, 530 (Tex.
2003); Allen v. Am. Gen. Fin., Inc., No. 04-06-00273-CV, 2007 WL 4180145,
at *8 (Tex. App.—San Antonio Nov. 28, 2007, pet. filed).
Fraud
In its second issue, appellant contends that the evidence is legally and
factually insufficient to support the jury’s findings that appellant committed
fraud against appellee and that appellee proved by clear and convincing
evidence that the fraud caused her harm. Generally, appellant contends that
the evidence shows only that it engaged in good faith business practices typical
of the oil and gas business in Archer County. Specifically, appellant claims that
the evidence is insufficient to support the required mental state for fraud and
the element of reliance by appellee; it also challenges evidence of discrete acts,
standing alone, as supporting the fraud claim. For example, appellant contends
14
that the following evidence is insufficient to support a fraud finding: (1)
evidence that Brock found a bypass hose on the D.D. Strange No. 1 well that
allowed oil produced from the No. 2 well to go back down into the ground
through the No. 1 well, (2) evidence of appellant’s use of electricity from
appellee’s wells to operate another well without appellee’s consent or
knowledge, (3) evidence that appellant continued to bill appellee for operating
costs on the D.D. Strange even during the period when it was pumping the well
only once per month, and (4) evidence that Rusty told Brock that he was
waiting on the success of a water injection before beginning to pump the D.D.
Strange wells again.
Applicable Law
A party commits fraud by (1) making a false, material misrepresentation
(2) that the party either knows to be false or asserts recklessly without
knowledge of its truth (3) with the intent that the misrepresentation be acted
upon, (4) and the person to whom the misrepresentation is made acts in
reliance upon it (5) and is injured as a result. Formosa Plastics Corp. USA v.
Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 47–48 (Tex. 1998) (op.
on reh’g); Reynolds v. Murphy, 188 S.W.3d 252, 270 (Tex. App.—Fort Worth
2006, pet. denied) (op. on reh’g), cert. denied, 127 S. Ct. 1839 (2007). Thus,
a statement is not fraudulent unless the maker knew it was false when he made
15
it or made it recklessly without knowledge of the truth. DeSantis v. Wackenhut
Corp., 793 S.W.2d 670, 688 (Tex. 1990), cert. denied, 498 U.S. 1048 (1991).
A misrepresentation may also consist of the concealment or nondisclosure
of a material fact when there is a duty to disclose. Custom Leasing, Inc. v.
Tex. Bank & Trust Co., 516 S.W.2d 138, 142 (Tex. 1974); Reynolds, 188
S.W.3d at 270. The duty to disclose arises when one party knows that the
other party is ignorant of the true facts and does not have an equal opportunity
to discover the truth. Reynolds, 188 S.W.3d at 270. Whether a duty to
disclose exists is a question of law. Bradford v. Vento, 48 S.W.3d 749, 755
(Tex. 2001); Reynolds, 188 S.W.3d at 270.
Fraud is usually not discernible by direct evidence and is usually so covert
or attendant with such attempts at concealment as to be incapable of proof
other than by circumstantial evidence. Cotten v. Weatherford Bancshares, Inc.,
187 S.W.3d 687, 707 (Tex. App.—Fort Worth 2006, pet. denied); see Spoljaric
v. Percival Tours, Inc., 708 S.W.2d 432, 435 (Tex. 1986); Weinberger v.
Longer, 222 S.W.3d 557, 562 (Tex. App.—Houston [14th Dist.] 2007, pet.
denied). Motive, past conduct, and related wrongful acts are thus factors to
be considered. Cotten, 187 S.W.3d at 707.
16
Applicable Facts
Appellee’s theory at trial was that appellant committed fraud by
misrepresenting why the D.D. Strange wells were not producing, by failing to
tell appellee that it was not producing the wells, and by concealing a bypass
hose and a separator malfunction 15 on the wells. Appellee contended that all
of these contributed to oil in the underlying formation being diverted—or
drained—from under the D.D. Strange so that it could be produced from the
Powell, the Hoff, or both—leases in which Rusty or his children had the majority
interests.
The evidence showed that in 1993, the D.D. Strange wells produced
3,629 barrels of oil, and in 1994, they produced 1,162 barrels. In 1995, the
production dropped to 573 barrels and kept steadily declining so that in 1999,
they produced 77 barrels, and in 2000, they produced only 48. But in 2001,
the year Brock & Strange took over operation of the D.D. Strange, the wells
produced 979 barrels: 962 in June through December when Brock & Strange
operated the lease,16 15 between March and May, when Willowbend operated
15
… The evidence regarding the bypass hose and separator is discussed
at length in the following discussion of appellee’s first issue regarding willful
commingling.
16
… The lease produced 30 barrels the first month Brock & Strange took
over operations.
17
the lease, and 2 barrels in January and February of that year when appellant
operated the lease. The next year Brock & Strange produced 1,746 barrels.
The parties introduced conflicting evidence for the decline and subsequent
increase in production from the D.D. Strange.
Rusty testified that he owned a one-half working interest in the D.D.
Strange when he operated it.17 He also testified that his sons owned the
majority of the working interests in the Hoff. According to Rusty, some of the
wells in the area produced better than others, and the D.D. Strange wells were
not good producers after 1995. Rusty testified that when he first started
decreasing production on the D.D. Strange, he pumped the wells once a week
at first, then once a month when the price for a barrel went down to $9. 18 He
wanted to continue holding the lease, that is, producing it in paying quantities,
but he did not want to expend more money in producing it than it would make
in revenue.
17
… The operator controls production on and makes day-to-day decisions
regarding the lease.
18
… The evidence shows that oil prices were around $9-$11 a barrel from
December 1998 through January 1999. Appellant introduced into evidence a
letter from Brock & Strange written around this time stating that due to the
decline in oil prices, Brock & Strange were going to pump another of its leases,
the Strange Fee “B” lease, only once per week.
18
Although Rusty testified initially that he started cutting back production
on the D.D. Strange around the time oil prices were $9 a barrel—which the
evidence shows was in December 1998 and January 1999—he later testified
that the production in 1998, 1999, and most of 2000 was the natural
production on the D.D. Strange and that that was all it was capable of
producing. He then testified that he started cutting back production in October
2000 because of the decrease in oil prices.
Rusty admitted that he did not decrease production from the Powell
during this time, nor did his son Doug decrease production from the Hoff. In
addition, contrary to Rusty’s testimony, the evidence shows that after the
December 1998-January 1999 low, oil prices began steadily increasing, and by
October and November 2000 they were higher than they had been since at
least May 1991 (the earliest date in the record).
According to Rusty, appellee and Brock had complained about the
operating expenses for the wells. But Rusty also testified that he made the
decision to decrease production himself; he never consulted Brock. He agreed
that even though the D.D. Strange was the only lease in the area losing money,
he kept billing appellee for the operating expenses, and he never attempted to
19
acidize the wells.19 He did acidize the Powell around the same time, however.
Rusty at first said that Brock did not want to acidize the well because of the
expense but later testified that he never asked Brock because of the expense.
Brock testified that he did not have any conversations with Rusty about
expenses on the D.D. Strange before its wells were shut in and that the only
conversation they later had about expenses was about Brock & Strange being
charged for operating expenses while the wells were not being produced.
Rusty admitted that instead of telling Brock or appellee that he had decreased
production on the D.D. Strange due to expenses, he told Brock that he was
“waiting on the water to hit” from one of the wells on the Hoff.20 Brock
understood this to mean that Rusty was waiting for the zone to be
repressurized by the water being put into one of the Hoff wells, which he hoped
19
… Acidizing is a technique to increase oil production. It consists of
pumping acid into the well, which cleans out the well and the underlying
formation.
20
… There is some confusion in the record as to whether the well on the
Hoff was an injection well or merely a disposal well. Rusty testified that an
injection well puts more water into the underlying formation than it takes out,
but a disposal well simply disposes of the same amount of water that the wells
produce along with any oil. The purpose of an injection well is to increase
production from a formation once it has already produced all the oil that it will
produce naturally; it is a secondary recovery technique, in the same vein as
acidization.
20
would cause the other wells to produce more oil. However, Rusty also testified
that he did not operate an injection well in the area and that he never had.
When Brock told Rusty in October 2000 that he had been to the D.D.
Strange and oil had flowed out of the casingheads of one of the wells, Rusty
told Brock he did not know what he was talking about. Rusty said that in
response to Brock’s telling him this, he went to the lease, and a little gas came
out of the well, so he started producing it. However, Rusty also testified that
the well would not produce more than one barrel per day and that if Brock had
been telling the truth about oil coming out of the top of the casing, there would
have been forty barrels of oil in the casing.
After Brock told Rusty that appellee wanted to produce the lease, Rusty
sold his interest to Willowbend. Rusty did not keep any records; however, he
claims he gave them all to Murchison, who owned Willowbend with Rusty’s son
William.
Rusty admitted that he had used electricity from the deep wells on the
O’Keefe 21 without permission to power one of his shallow wells; however,
during this time, he also continued to bill the deep well owners for all the
21
… There were two levels of mineral interests on the O’Keefe: interests
in the shallow formation and interests in the deeper part of the formation.
Rusty owned the shallow interests and part of the deep interests, along with
Brock & Strange, among others.
21
electricity. According to Rusty, even though he did not talk to the lease
owners and obtain their permission to use the electricity at their expense, he
also did not charge them for disposing of water on his shallow lease. He
explained, “We just kind of worked together on them things.” Brock testified
that he discovered this “misuse of electricity” shortly after Brock & Strange
took over operations on the O’Keefe. According to Rusty’s son Robert,
however, the electricity usage was temporary in 1996 or 1997 and lasted only
for about a month or less.
Appellee introduced expert testimony that the sands in the formation
underlying the wells in the D.D. Strange, Powell, Hoff, and O’Keefe areas
communicated; that is, that oil could move from one well to another if some
wells were produced more than others. She also introduced expert testimony
that appellant did not produce the D.D. Strange to its productive capacity, that
the Hoff produced more than its share of the original oil in place, and that the
D.D. Strange had a much lower recovery than some of the other leases in the
same reservoir. 22
22
… Appellee’s expert Keith Masters calculated the original oil in place
under the reservoir and how much of that was attributable to each lease, then
calculated how much of the original oil in place was produced from each lease.
He then determined how much each lease actually produced. For example,
while he determined that the Hoff had 16.4% of the original oil in place in the
reservoir, it actually produced 88.4% of the oil, or 56.9% of the reservoir,
22
Analysis - Falsity of Statement and Mental State
Appellant contends that there is no evidence or insufficient evidence that
Rusty’s statement that he was waiting on the water to hit was false—or that
Rusty intentionally or recklessly misrepresented to Brock or appellee why he
was not producing the D.D. Strange—because there is no or insufficient
evidence that Rusty did not really believe that a water injection would increase
production. Appellant points to the following evidence as showing that Rusty
could have believed that an injection would increase production on the D.D.
Strange: “undisputed” evidence that one of the wells on the O’Keefe was
being operated as an injection well; Masters’s testimony that the D.D. Strange
had exhausted its primary productive capacity in 1996; Rusty’s and Robert’s
testimony that they unsuccessfully tried to produce the D.D. Strange when
Brock told Rusty that there was oil coming out of the casinghead on the No. 2
well; and other evidence that the D.D. Strange was capable of producing only
one barrel a day during this time.
while the D.D. Strange, which had 8.5% of the original oil in place, produced
7.3% of the original oil in place or only 2.4% of the reservoir. Masters testified
that the Hoff could not have produced that much of the original oil in place in
the reservoir absent a drainage. He also attributed the increase in production
of the D.D. Strange when Brock & Strange took over to its being continuously
produced.
23
Appellant contends that there is undisputed evidence that one of the
wells on the O’Keefe was being used as an injection well. There is indeed
evidence that one of the O’Keefe wells was permitted as an injection well, and
Masters testified that the O’Keefe No. 3 well was injected beginning in January
1996, according to Texas Railroad Commission records. But Rusty testified
that he had never operated a waterflood, or injection well; according to Rusty,
the O’Keefe well merely disposed of water produced from a different lease, the
Stallcup, and not any additional water for the purpose of promoting secondary
recovery.23 An inference can be made from Masters’s testimony that the
O’Keefe No. 3 was injected until October 2001; he testified that when Brock
& Strange took over and moved injection to the No. 4 well—in accordance with
the permit—production in the reservoir decreased rather than holding steady as
it had been doing. Thus, there is conflicting evidence as to whether there were
any injections on the O’Keefe around the time Brock said Rusty told him he was
waiting on the water to hit. More importantly, both Brock and Rusty testified
that Rusty’s statement referred to injection of one of the Hoff wells. The Hoff
well was not injected until August 2001.
23
… Rusty had testified earlier that he had planned to do a waterflood
someday.
24
Additionally, although Masters did testify that the D.D. Strange had
reached its primary production limit in 1996, he also attributed the dramatic
increase in production after Brock & Strange took over to the fact that it was
again being continuously pumped. Masters further testified that while any
injection on the O’Keefe benefitted the Hoff and Powell leases, it did not benefit
the D.D. Strange. In other words, while the rest of the reservoir had benefitted
from the O’Keefe injection, the D.D. Strange did not because it was not being
pumped. 24
Finally, Rusty’s own testimony regarding his reasons for decreasing
production is at odds with appellant’s theory that Rusty genuinely believed that
an injection would increase production on the D.D. Strange. Although the D.D.
Strange produced only 7 barrels in December 1998 and 6 barrels in January
1999—when prices were hovering around $9 a barrel—between October 2000
and February 2001, when it was producing only one barrel each month, oil
prices were higher than they had been since at least 1991. And Rusty admitted
that appellant and Doug did not cut back production on the Powell and Hoff
24
… Appellant attempts to attribute the dramatic increase in production
on the D.D. Strange after Brock & Strange took over solely to the acidization
performed in July 2001. But in May 2001, Willowbend pumped 13 barrels, and
in June 2001, the first month Brock & Strange operated the lease, it produced
30 barrels.
25
during the same time. Finally, Rusty said that after Brock told him in October
2000 that oil was coming out of the well casingheads on the D.D. Strange, he
produced the wells, but they would pump only one barrel per day. The
evidence of the D.D. Strange’s actual production contradicts this, however; it
shows that between October 2000 and February 2001, the last months
appellant operated the lease, it produced only 1 barrel per month. Thus, all of
appellant’s attempted explanations for the lack of production on the D.D.
Strange are, at best, inconsistent, and the jury was entitled to disbelieve them.
See Wilson, 168 S.W.3d at 827.
Moreover, the surrounding circumstances also support an inference that
Rusty knew the statement was false, or was at least reckless in making it.
When Brock started investigating what was going on, Rusty sold his interest in
the D.D. Strange to a third party, Willowbend, in which his son William was a
partner. Rusty did not keep any records regarding the D.D. Strange. In
addition, evidence of other irregularities on the leases operated by
appellant—for example, the use of electricity from the O’Keefe deep well
owners and the use of the O’Keefe No. 3 well as the injection well even though
the No. 4 was listed on the permit—combined with the fact that appellant is
operated by family members of the surrounding lease owners (and by persons
who also own interests in the surrounding leases), supports the conclusion that
26
Rusty’s statement to Brock that he was waiting on the water to hit was
intentionally or recklessly false.
We conclude and hold that there is both legally and factually sufficient
evidence to prove that Rusty’s statement to Brock was false and that it was
made intentionally or with reckless disregard for the truth.
Analysis - Reliance
Appellant also contends that the evidence is legally and factually
insufficient to prove reliance because Rusty made his statement to Brock, not
appellee. In addition, appellant contends that appellee could not have relied on
Rusty’s misrepresentation to her detriment because Brock continued to
investigate the reason for low production on the leases.
Texas does not require privity to establish fraud. Ernst & Young, L.L.P.
v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 578, 580 (Tex. 2001) (“Our fraud
jurisprudence has traditionally focused not on whether a misrepresentation is
directly transmitted to a known person alleged to be in privity with the
fraudfeasor, but on whether the misrepresentation was intended to reach a third
person and induce reliance.”). To prove that an alleged fraudfeasor had reason
to expect reliance,
[t]he maker of the misrepresentation must have information that
would lead a reasonable man to conclude that there is an especial
likelihood that it will reach those persons and will influence their
27
conduct. There must be something in the situation known to the
maker that would lead a reasonable man to govern his conduct on
the assumption that this will occur. If he has the information, the
maker is subject to liability under the rule stated here.
Id. at 581 (quoting R ESTATEMENT (S ECOND) OF T ORTS § 531 cmt. d (1977)).
Here, the parties had been doing business together for thirty to forty
years. Appellant operated numerous wells in a small area in which appellee,
Brock, and Rusty all held working interests. Brock and Rusty were friends, and
Rusty and appellee’s husband had worked on twenty to twenty-five wells
together. After Strange passed away, Rusty had some business dealings with
appellee regarding the leases. He dealt regularly with Brock regarding
operational details of the leases. Moreover, when asked at trial why he shut
in the D.D. Strange, Rusty testified, “that’s all I could do because they was
complaining about the costs.” [Emphasis added.] Thus, the evidence shows
that Rusty would have known that the information he told Brock would reach
appellee for the purpose of influencing her conduct.
As to whether appellee relied on Rusty’s misrepresentation to her
detriment, Brock testified that he had a conversation with Rusty about why the
D.D. Strange wells were shut in; he did not say when that conversation
occurred. Brock did not start investigating the D.D. Strange until after he began
investigating the O’Keefe in 2000. Brock also testified that when he had
28
questioned Rusty about the expenses being charged for operating the D.D.
Strange while it was shut in, he just accepted Rusty’s answer. Brock had
trusted Rusty.
Appellant contends that the evidence shows that Brock continued
investigating the D.D. Strange issues after Rusty told him he was waiting on
the water to hit; thus, there is no evidence that appellee could have relied on
Rusty’s statement to her detriment. But it is a reasonable inference from
Brock’s testimony that he and Rusty had the conversation about the water
before Brock started investigating the D.D. Strange and that Brock and appellee
relied on Rusty’s statement for at least some time. Brock testified that he did
not even begin investigating the D.D. Strange until after he had found
irregularities on the O’Keefe. Thus, we conclude and hold that the evidence is
legally and factually sufficient to prove appellee’s reliance on Rusty’s material
misrepresentation.
For the same reasons, we also conclude and hold that the evidence is
legally and factually sufficient under the clear and convincing standard of
review to prove that appellee was harmed by appellant’s fraud. See Hall, 168
S.W.3d at 170.
29
Willful Commingling
In its first issue, appellant contends that the evidence is legally and
factually insufficient to support the jury’s finding that it willfully commingled oil
that was produced from the D.D. Strange with oil from the Powell and Hoff.
As part of this issue, appellant contends that Texas Railroad Commission
reports purportedly relied on by appellee are not evidence of commingling, that
there is insufficient evidence of any commingling between the D.D. Strange and
the Powell, that there is insufficient evidence that if any commingling occurred,
it happened while appellant operated the D.D. Strange, that there is insufficient
evidence to identify oil that appeared in the Hoff saltwater disposal tank after
Willowbend took over operation of the D.D. Strange as actually coming from
the D.D. Strange, that there is insufficient evidence of willfulness, and that the
evidence shows, at most, only an accidental malfunction of the separator float,
the means by which appellee claims the oil from the D.D. Strange was
commingled with oil from the Powell and Hoff.
Applicable Law
Commingling is also referred to as confusion of goods; “[a]s a general
rule, the confusion of goods theory attaches only when the commingled goods
of different parties are so confused that the property of each cannot be
distinguished.” Humble Oil & Ref. Co. v. West, 508 S.W.2d 812, 818 (Tex.
30
1974); see also 12 T EX. J UR. 3 D Confusion of Goods 902, 903 (2004). “One
who wrongfully permits the property of another to become so intermingled and
confused with his own property as to render it impossible to identify the goods
of each is under the burden of disclosing such facts as will insure a fair division,
and if he fails or refuses to do so, the combined property or its value will be
awarded to the injured party.” 12 T EX. J UR. 3 D Confusion of Goods 902, 905-
06 (2004) (citing Humble Oil, 508 S.W.2d at 818); see Farrow v. Farrow, 238
S.W.2d 255, 257 (Tex. Civ. App.—Austin 1951, no writ). In applying the
commingling rule, we hold one who willfully commingles to a strict burden;
however, the application of such a burden is not appropriate until “the facts
establish that there has been a commingling.” Mooers v. Richardson Petroleum
Co., 146 Tex. 174, 204 S.W.2d 606, 608 (Tex. 1947); Cole v. Wadsworth,
326 S.W.2d 928, 931 (Tex. Civ. App.—Eastland 1959, writ ref’d n.r.e.); see
also Dorchester Gas Producing Co. v. Harlow Corp., 743 S.W.2d 243, 256
(Tex. App.—Amarillo 1987, writ dism’d).
Applicable Facts
Appellee alleged two theories of commingling by appellant: first, that
appellant had misreported production from the D.D. Strange to the Texas
Railroad Commission; and second, that appellant intentionally mis-set or altered
the setting of the float in the oil and water separator from the No. 2 well so
31
that oil and water produced from that well crossed lease lines and commingled
with oil produced from the Powell and Hoff. As damages, appellee pled for her
“pro rata share of all oil produced from” the Powell and Hoff. The trial court
granted appellant’s directed verdict as to the misreporting to the Railroad
Commission, and appellee does not challenge that decision on appeal. Thus,
we will review whether the evidence is sufficient to support a finding of willful
commingling based on the separator setting.
Appellee testified that when she first went to inspect the D.D. Strange
with Brock, she noticed that the screw that would have held the separator
“lever” properly was not there. According to appellee, this inspection occurred
sometime between March and May 2001 when Willowbend was operating the
lease. She could not say whether the screw had been there when appellant
was operating the lease.
According to Rusty, his son Doug, who owned a working interest in the
Hoff, agreed in 1998 or 1999 to dispose of water pumped out of the D.D.
Strange and Powell in the No. 1 well on the Hoff. Rusty also testified about the
operation of a separator. According to Rusty, there is a float inside that floats
in oil but not water. He agreed that the float is set on the line where the oil and
water meet (the oil will float on the water because it is lighter). The separator
also has a dump valve at the bottom; when the fluid gets to a certain level, the
32
“float will go down and will dump out your saltwater out of the bottom.” But
if the float was sitting on the bottom of the separator, both oil and water would
flow out. Rusty agreed that there was a similar separator on the Powell and
that there would be no legitimate reason to set the float so that it would sit at
the bottom of the D.D. Strange or Powell separators. Rusty agreed that his
son, Robert, who oversaw daily operations on the D.D. Strange, would know
how to set the float.25
Rusty testified that until 1999, appellant trucked the disposed water off
of the D.D. Strange. After Doug started disposing of the D.D. Strange’s water
on the Hoff, Rusty was not sure whether the water line from the D.D. Strange
went to the Powell water tank first and then to the Hoff or whether the lines
just “tied in together.” At some point, oil was found in the water tank on the
Hoff; Rusty said it was probably from the Powell because of the decreased
production on the D.D. Strange.
Brock testified that after appellant decreased production on the D.D.
Strange, he began to “suspect[] things . . . weren’t right on all the leases.”
One of the things he noticed was that the separator was malfunctioning
because “the float wasn’t set on it. The setscrew wasn’t set on the float, and,
25
… Robert owns working interests in the Powell and Hoff but not the
D.D. Strange.
33
therefore, it was on the bottom.” The effect of the setting was that if any fluid
came through—oil, water, or both—it would all go down into the waterline.
According to Brock, the waterline from the D.D. Strange went to either the Hoff
injection well or the Hoff water tank. Although Brock said that it was “possible
they could separate [the water from the D.D. Strange] again over there on the
Hoff lease,” he also said that he had never told anyone that oil from the D.D.
Strange separator was going to the Hoff water tank. Brock estimated that the
separator was repaired within about a week after Willowbend took over the
D.D. Strange operations, which was March 1, 2001.
Brock testified that there was no pin missing from the separator but that
the setscrew was “all the way out.” When asked whether he was aware of
any evidence that the separator was not working perfectly when appellant was
operating the D.D. Strange, Brock answered, “Not that I know of, no.”
Brock testified that sometime before Brock & Strange started pumping the
No. 2 well, he could hear fluid going through the flow line that went from the
well tubing through the separator to the tank battery, but there “wasn’t any gas
or fluid or anything going into the tank battery or even the separator.”
According to Brock, he discovered a bypass buried underground that was
causing fluid from the No. 2 well to go down the flow line for the No. 1 well
instead of to the separator. Because the separator was set at sixty pounds of
34
pressure, the fluid couldn’t overcome that pressure and instead it was forced
down the flow line and through the bypass back into the casing for the No. 1
well. Brock agreed on cross-examination that he could not have run fluid into
the storage tanks unless the separator was working and that if the separator
was not working, it would be impossible to flow oil from the D.D. Strange into
the tanks.
Although Brock seemed confused during much of his testimony about the
exact date that the bypass and separator were discovered,26 he did testify
clearly that the two problems were discovered about two or three days apart.27
He also never wavered from his testimony that the problem with the separator
was discovered by Willowbend after it took over operating the D.D. Strange in
March 2001 and that Willowbend was the one who showed him the separator
problem.
26
… Brock admitted that he had guessed at “a lot of dates.”
27
… Brock’s testimony is quite conflicting as to when the bypass and
separator were discovered. Although he testified several times that he found
the bypass after Brock & Strange took over operations, he also testified that he
found the separator malfunction after finding the bypass and was adamant that
the separator malfunction was discovered by Willowbend while it was operating
the lease. However, at one point Brock also testified that he found the bypass
with Brock & Strange’s pumper, Kinsey, before Brock & Strange took over
operation of the lease; this testimony could have been relied upon by the jury
to resolve the conflict with his other testimony. See Wilson, 168 S.W .3d at
827.
35
Rusty’s son Doug testified by deposition. Doug operates the Hoff. Doug
testified that before 2000, the water from the Strange was hauled off by tanker
trucks. But in 2000, Doug agreed that water from the D.D. Strange, Powell,
Mullis, and maybe the Kinsey could be pumped to the Hoff saltwater disposal
tank, where he then disposed of the water in one of the Hoff wells. Doug
admitted that at one time, his son had found “a couple or three feet” of oil in
the Hoff saltwater disposal tank. He could not remember when this oil was
discovered, but he said, “There shouldn’t be oil down there.” According to
Doug, the oil was from Murchison’s lease, either the Powell, Mullis, or Kinsey;28
he did not know if “the D.D. Strange was going in there then or not.” When
the oil was discovered, Doug told Murchison, “Hey, you-all got a problem over
there. You’re sending a trickle stream of oil down to our tank with your water.”
He further testified that the oil was struck by lightning and burnt “about two
months ago.” 29
28
… There is no evidence of the exact date of this discovery, but it must
have been after March 2001 when Willowbend took over operations on
appellant’s former leases.
29
… There is no date for the deposition in the record, but because there
is no indication that there was any presuit discovery, see T EX. R. C IV. P. 202,
we presume that the deposition was taken after suit was filed.
36
Robert, Rusty’s son and production supervisor for appellant’s operations,
also testified at length about the operation of a separator. According to Robert,
when the fluid enters the separator, the water falls to the bottom and the oil
rises to the top. A float is inside, which will float on the water, but sink in the
oil; thus, the float should always be on the water line. If there is no water in
the separator, the float will always stay on the bottom. When the water rises
to a certain level, a handle on the float that is outside the separator activates
a flip valve, which opens a valve that allows the water to come out. As the
water level lowers, the float lowers and the valve shuts off. This way, the
separator is able to continuously release water from the separator as it comes
in. There is another valve in the separator that works strictly off of pressure.
When oil builds up in the separator and the water has not reached the level
where it will be released, pressure builds up, which in turn opens a different
valve. The pressure valve is spring-loaded and “lets pressure escape by a
predetermined amount by the tension you put on the spring.” Oil is released
from that valve and goes on to the tanks for storage.
According to Robert, pressure would not affect the separation of the oil
and water except that there has to be enough pressure to dispose of the water.
The longer the distance the water needs to travel, the higher the pressure needs
to be in the separator.
37
Robert testified that he was the person in charge of making sure the
separator on the D.D. Strange worked properly. According to Robert, the
separator was functioning properly while appellant was operating the D.D.
Strange. He also testified that initially, water from the lease went into a tank
and was hauled off by truck. He said that the haulers never discovered oil in
the water they collected, that they do not want oil in the water they collect,
and that they “would know right away” if the disposal water had oil in it.
Robert testified that “[i]n . . . 2000 or somewhere” appellant stopped
hauling water from the D.D. Strange and began disposing of it on the Hoff. The
water from the D.D. Strange, the Powell, the Kinsey, and the Mullis leases was
disposed of in one of the Hoff wells. All of the water lines from the leases met,
in Robert’s words,
[u]p at the Powell tank battery, which is where the water tank was
when we were trucking the water. We sat the water tank at the
Powell because the other leases are down in a creek bottom. To
make sure we could always get a truck in there to haul them, we
set it at the Powell. And when we plumbed it in to go to the Hoff
lease, everything was already – all the wells were already coming
to that point, so we just disconnected the tank and tied them all
together and laid the line from there to the Hoff injection well.
In other words, before 2000 or so, all the water from the Powell, Kinsey, and
D.D. Strange went into the Powell water tank; the Mullis lease had another tank
at its location. On cross-examination, Robert testified that “[t]he water from
38
the D. D. Strange went up to the oil-saltwater on the Powell and then went to
the Hoff in 2000.” [Emphasis added.] Thus, Robert agreed that from 2000 on,
anything dumped out of the separator on the D.D. Strange would go to the
Powell and then over to the Hoff. Robert further testified that if oil got into the
water line, you would not be able to tell which lease it came from; you would
have to check each lease’s separator.
Robert testified on cross-examination that it was possible to set the float
in such a way that the dump valve would always be open, then “water, oil,
pressure, everything” would go out the dump valve and “straight into the water
line,” as if there were a hole in the separator.
Keith Masters, appellee’s expert, testified that his calculation of
commingling damages was based on above-ground mixing of the oil from the
Powell, Hoff, and D.D. Strange. In other words, his damage calculation was
based on the theory that oil actually produced from the D.D. Strange mixed
with oil that was actually produced from both the Powell and the Hoff so that
one could no longer tell which percentage of oil was produced from which
lease.
Peyton Carnes, appellant’s expert, also testified about the operation of a
separator. There is a dump valve where the water goes out and a line where
the oil goes out to the tank. The float has a rod attached to it, and the rod is
39
attached to the dump valve on the bottom of the separator. The float should
be set so that it floats on the line where the oil and water meet. As the water
level rises, the float rises, the rod lowers, and the dump valve opens. As the
water level lowers, the float lowers, and the dump valve closes. So if the rod
is properly affixed to the float and dump valve, when the float is at the bottom
of the separator, the dump valve is closed rather than open.
On cross-examination, Carnes agreed with appellee’s counsel that if the
separator is working correctly, “it is virtually impossible to send oil down the
water valve.” To the question, “[I]f somebody is out there monkeying with this
thing and has set it incorrectly, then you would have a situation where your
water and your oil were going out the bottom of it, correct?”, Carnes answered,
“That’s possible.”
In closing argument, appellee’s counsel urged the jury that the evidence
of commingling came from the following: the separator setting and “the oil and
the water from the Strange going to the Powell and the Hoff. . . . Doug
Lindemann admits that there was a stream of oil coming from the Strange to
the Powell and the Hoff.” The jury charge asked, “Did the operator of the
Strange Lease willfully commingle the oil production from the D.D. Strange,
Powell, and Hoff?” to which the jury answered, “Yes.” On appeal, appellee’s
support for its commingling claim is the evidence of overproduction of the
40
Hoff—as discussed in detail, supra, in our discussion of appellant’s second
issue on fraud—the separator setting, and the presence of oil in the Hoff
saltwater tank.
Analysis
Appellee’s evidence of overproduction of the Hoff, standing alone, is not
sufficient to prove commingling. In light of appellee’s evidence of underground
drainage, which supports its fraud claim, overproduction of the Hoff could have
been caused solely by the improper drainage. Thus, we must consider whether
the overproduction evidence, taken together with the evidence regarding the
separator setting, establishes willful commingling.
Appellee contends that the presence of oil in the Hoff saltwater tank
shows commingling. But there is no evidence that the tank to which the D.D.
Strange water (and oil, assuming the separator was mis-set) was pumped was
a separator in which oil produced from the Hoff mingled with oil and water from
the D.D. Strange and Powell; instead, all the evidence is that after 2000, the
water from the D.D. Strange and Powell went to the Hoff water disposal tank,
which then went back into the Hoff injection well. Because the waterlines from
the D.D. Strange and Powell “tied in together” and then went to the Hoff, any
fluid from the D.D. Strange and Powell, while perhaps mixed together in the
connected waterline, would ultimately end up in the Hoff injection well. There
41
is no evidence that any of this fluid was actually “produced” and diverted to the
Hoff storage tanks. Indeed, the conclusion that the water tank on the Hoff was
a disposal tank only and not a separator is supported by Doug’s testimony that
there should not have been oil in that tank. One would expect oil to be in a
separator but not a water disposal tank.
Thus, we are left with the evidence regarding the setting of the separator.
There is evidence that before 2000, any fluid coming down the waterline from
the D.D. Strange went, in Robert’s words, to the “oil-saltwater” on the Powell.
It is a reasonable inference from this testimony that fluid traveling down the
waterline from the D.D. Strange, whether oil, water, or both, did not go merely
to a disposal tank but to a separator, and that if any oil was in the D.D. Strange
waterline, it was produced, and thus commingled, with the oil produced from
the Powell. But Willowbend, Brock, and appellee discovered the separator mis-
setting in spring 2001, after water was already being sent to the Hoff. There
is no evidence as to how long the separator had been mis-set, whether the mis-
setting was intentional, as appellee contends, or accidental, as appellant
contends.30
30
… The evidence of the separator mis-setting is also consistent with the
lease having been shut in completely for several months; Brock testified that
when he first went to the D.D. Strange, it looked as if no one had been out
there for awhile.
42
If the jury believed Brock’s testimony that the bypass was discovered
before the separator and that when the bypass was discovered, no oil could
have even made it to the separator because it was all going back into the No.
1 well, then the fact that the separator was set so that its dump valve was
continuously open would not matter because fluid would never reach the
separator in the first place. To interpret Brock’s testimony otherwise, that is,
interpret it to mean that the separator mis-setting was discovered first, then the
jury would have had to disbelieve his testimony about the bypass (because,
again, even if the separator mis-setting was discovered first, if the bypass was
functional as Brock said, no oil would have even made it to the separator).
Additionally, everyone agreed that if the float had been set so that the
dump valve was continuously open, all oil would have gone down the waterline
and none would have made it to the D.D. Strange tank battery for storage.
Thus, the jury would have had to believe that either the production records for
the D.D. Strange had been falsified (and the trial court’s directed verdict on that
issue has not been challenged) or that appellant hooked up the separator
properly to pump one barrel per month into the D.D. Strange tank battery (or,
for several years before October 2000, approximately one barrel per week),
then intentionally mis-set the separator after pumping so that it could pump
additional fluid through the separator and over to the Powell. This conclusion
43
would require too much speculation on the jury’s part; there is no evidence that
such continual alteration of the separator setting occurred.
Accordingly, we conclude and hold that the evidence is legally insufficient
to sustain the jury’s finding of wrongful commingling. We sustain appellant’s
first issue. In addition, because appellant also challenged the damages awarded
as to commingling, we sustain its third issue challenging the damages awarded
by the jury for wrongful commingling.
Damages
In its fourth and fifth issues, appellant challenges the legal and factual
sufficiency of the actual and exemplary damages awarded to appellee on her
fraud claims.
Appellant challenges the damages not only on the ground that the jury’s
fraud finding was not supported by the evidence; it also challenges the
evidence supporting the amount of damages awarded by the jury on the
grounds that the expert who calculated the damage model did not testify that
any fraud had occurred and that there is no evidence that Rusty’s statement
caused any particular harm to appellee.
Although, as appellant points out, Masters—appellee’s expert who
calculated damages based on the improper drainage of the D.D. Strange oil—did
not testify that his damage calculations were based on a determination that
44
fraud had occurred, there is other evidence in the record supporting the
conclusion that appellant committed fraud. And appellee’s theory at trial was
that Rusty made his false statement about the decrease in D.D. Strange
production to facilitate the continued improper drainage; i.e., he did not want
appellee and Brock to investigate further so that appellant (and his sons) could
continue draining the reservoir without interference. Thus, the fact that
Masters himself did not calculate the damages based on a conclusion of fraud
is immaterial.
The jury has the discretion to award damages within the range of
evidence presented at trial, so long as a rational basis exists for the jury’s
calculation. Duggan v. Marshall, 7 S.W.3d 888, 893 (Tex. App.—Houston [1st
Dist.] 1999, no pet.); Mayberry v. Tex. Dep’t of Agric., 948 S.W.2d 312, 317
(Tex. App.—Austin 1997, writ denied). Here, the jury’s award of $233,300
corresponds closely with Masters’s damage calculations for drainage of the
D.D. Strange oil from 1995 through February 2001. Although the evidence
regarding the well being “shut in,” i.e., not being productively pumped, tends
to show that the shutting in did not occur until 1998 at the earliest, there is
also evidence, via Rusty’s deposition testimony, with which he was impeached,
that appellant actually began cutting back on production in 1995. And as we
have already determined, there is legally and factually sufficient evidence that
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appellee’s reliance on Rusty’s statement on waiting for the water to hit
facilitated appellant’s drainage of the oil under the D.D. Strange. Accordingly,
we conclude and hold that the jury’s damage award is supported by sufficient
evidence. We overrule appellant’s fourth issue.
Appellant challenged the $200,000 exemplary damages awarded by the
jury solely on the ground that there is no clear and convincing evidence that
appellee was harmed by the fraud. We have already determined that the
evidence supports such a conclusion; thus, we overrule appellant’s fifth issue.
Conclusion
Having overruled appellant’s second, fourth, and fifth issues, we affirm
the trial court’s judgment as to the jury’s findings on fraud and the actual and
exemplary damages related to that claim. But having sustained appellant’s first
and third issues, we reverse the part of the judgment awarding appellee
damages for willful commingling and render a take-nothing judgment as to that
claim only.
TERRIE LIVINGSTON
JUSTICE
PANEL A: CAYCE, C.J.; LIVINGSTON and MCCOY, JJ.
DELIVERED: May 29, 2008
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