The Eastland Court of Appeals has held that a saltwater disposal agreement between a disposal company and a landowner conveyed an ownership interest sufficient to allow the company to bring an action to quiet title and a suit for an accounting.
Darkhorse Water, LP v. Birch Operations, Inc. and Birch Watermania, LLC (No. 11-22-00124-CV; delivered December 21, 2023) arose from a saltwater “reclamation, treatment, water purchase, and [] disposal” agreement between Darkhorse and a landowner for the landowner’s undivided twenty percent interest in a tract of land in Martin County. This agreement was recorded shortly after its execution in August 2019. Three weeks prior to executing the Darkhorse agreement, however, landowner and others executed a surface lease agreement with Birch for the same tract. This agreement was not recorded until March 2021. Discovering the Birch agreement, Darkhorse filed suit in July 2021, asserting claims to quiet title and for an accounting of Birch’s activities on the property. Both parties filed traditional summary judgment motions. The trial court granted denied Darkhorse’s motion and granted Birch’s. Darkhorse appealed.
The court of appeals reversed. The issue before the court was “whether the Darkhorse agreement is similar to an oil and gas lease whereby [landowner] conveyed an ownership interest to Darkhorse such that Darkhorse can bring a suit to quiet title, or whether it is akin to a ‘regular’ lease of real property where no title is passed.” Birch asserted that a saltwater disposal agreement can never convey an ownership interest, but the court of appeals agreed with Darkhorse that is agreement “conveys an ownership interest in another attribute of the property [i.e., other than the minerals in place]—the subsurface reservoir storage space or the ‘subsurface matrix’” (citations omitted). Noting that “[r]eservoir storage is an attribute of the surface estate,” the court observed that “Texas courts have recognized that the owner of the surface estate can convey a determinable fee interest in the minerals that are considered to be a part of the surface estate” (citations omitted). The saltwater disposal agreement executed here granted Darkhorse a similar exclusive right “to drill for, produce, treat, reclaim, and transport water from the property for commercial sale to third parties,” as well as “to utilize the property for disposal of salt water and other waste produced from oil and gas leases operated by Darkhorse or other third parties.” It also gave Darkhorse the exclusive right to drill water and disposal wells, use and operate facilities to reclaim or treat wastewater, construct pipelines and flowlines, and build roads, electric lines, and communication lines across the property. In return for these rights, Darkhorse agreed to the payment of royalties to landowner “based upon a percentage of amounts received by Darkhorse for the sale of produced water, the disposal of waste water into the reservoir storage space, and the sale of oil/skim from the property.” The agreement also contained a habendum clause similar to that included in oil and gas leases.
Based on these facts, the court concluded that the agreement conveyed a fee simple determinable, just as similar agreements conveying minerals in place, coal and lignite, or san and gravel (citing applicable precedents). The court remanded to the trial court to determine Darkhorse’s suit to quiet title based on its claim that it was a bona fide purchaser for value without notice. Similarly, the court remanded Darkhorse’s suit for accounting, as it hinges on a determination of its bona fide purchaser claim.
