CHAPTER 8 TAKINGS LITIGATION COMPENSABLE REGULATORY TAKINGS IN TEXAS

• Jurisdiction: United States

Development Issues and Conflicts in Modern Gas and Oil Plays
(Nov 2004)
CHAPTER 8
TAKINGS LITIGATION COMPENSABLE REGULATORY TAKINGS IN TEXAS
Dwight Shupe
Hughes & Luce, LLP
Dallas, Texas

Dwight (Ike) Shupe is a partner in the Real Estate Section of the Dallas office of Hughes & Luce, LLP. The primary focus of his practice is land use and property rights.

He received his B.S. from Ball State University in 1968, his M.S. from M.I.T. in 1970, and his law degree from S.M.U. in 1981. He is a former high school science teacher and Air Force officer.

1. INTRODUCTION

The purpose of this paper and the attached PowerPoint presentation is to summarize the view of one lawyer ¹ regarding the case to be made that municipal zoning regulations that prohibit (or effectively prohibit) oil and gas development constitute a "compensable regulatory taking" or inverse condemnation of the mineral estate under Article I, Section 17 of the Texas Constitution that provides, in relevant part, that no person's property shall be taken, damaged or destroyed for or applied to public use without adequate compensation being made. This view is based on recent experience in the north Texas area representing clients involved in Barnett Shale gas well development. This presentation is not intended to be a comprehensive treatise on regulatory takings generally, but rather a brief and focused look at current Texas law; a starting point, so to speak, for those whose oil and gas operations are or may be coming into conflict with municipal zoning regulations. Neither is this presentation intended to address constitutional challenges to zoning regulations based on "due process" or "equal protection" claims. I leave to others more qualified, such as Professor Bruce Kramer (Maddox Professor of Law, Texas Tech University School of Law), the job of providing a broad and comprehensive look at local governmental zoning regulations and all of the constitutional challenges thereto. ²

This paper and presentation will address the police power of cities to regulate and prohibit oil and gas development; the "ripeness doctrine" as a jurisdictional pre-requisite to any claim of a taking; the legal standard for a compensable regulatory taking (including "investment backed expectations" and "loss of all economically viable use"); the applicability of the "accommodation doctrine"; the compensation exception for "harmful and noxious uses"; claims for illegal exactions; and conclusions and recommendations.

2. JURISDICTIONAL CONTROL

The Texas Railroad Commission has jurisdiction over all oil and gas wells in Texas and over all persons owning or engaged in drilling or operating such oil or gas wells. ³ The jurisdiction of the Railroad Commission, however, does not prevent a municipality from exercising its police power to regulate and control drilling.

In Klepak v. Humble Oil & Refining, ⁴ the City of Tomball adopted an ordinance that gave the city exclusive authority under its police power to regulate and control the drilling of oil and gas wells within the city, that divided the city into "drilling blocks," that restricted drilling to one well per block, and that required a city-issued permit. Two years later Henry Klepak obtained a permit from the Railroad Commission to drill within the city on lots that were not within any of the drilling blocks designated by the ordinance. Klepak challenged the ordinance on the grounds, among others, that the Railroad Commission was the sole source of any authority to drill. The trial court dismissed the suit and the court of appeals affirmed, holding "there is no dispute - nor could there properly be under the settled law - that the Railroad Commission of Texas has authority under the statute conferring that duty upon it to regulate the production of oil and gas within this state, and to issue its permits accordingly." ⁵ The court continued, "the Legislature -- in so delegating ... authority to the Railroad Commission - did not thereby intend to nor accomplish the repeal of the fundamental law thereof, as well as subsequently, existing, that municipalities in Texas have, under the police power, authority to regulate the drilling for and production of oil and gas within their corporate limits, when acting for the protection of their citizens and the property within their limits, looking to the preservation of good government, peace, and order therein." ⁶

In Unger v. State of Texas, ⁷ the City of Burkburnett, a home-rule city, adopted Ordinance No. 309 that required a drilling permit within the city limits. Unger drilled an oil well without obtaining a permit and was convicted and fined for violating the ordinance. Unger appealed the conviction on the grounds, among others, that the Texas legislature authorized the Railroad Commission to regulate the oil and gas business and, therefore, that the city had no police power to prohibit it. The court of appeals upheld Unger's conviction and held that the city had the full authority, under its police power, to regulate the drilling of oil wells within the city ⁸ and that the ordinance was a valid exercise of such police power. ⁹

In both Klepak and Unger, the courts upheld the authority of the cities to regulate oil and gas development within their city limits; and in Unger, the court frequently referred to the city's status as "home-rule." These decisions raise two questions: first, does a city have the authority to regulate outside its city limits; and second, is there any distinction between the authority of a "home-rule" and "general-law" city?

The authority of a city (whether home-rule or general-law) to regulate beyond its corporate limits is open to question. If oil and gas development is regulated as part of a city's comprehensive zoning ordinance pursuant to the authority granted by Chapter 211 of the Texas Local Government Code (Municipal Zoning Authority), then such powers are limited to the corporate limits of the city. If, however, oil and gas development is regulated as part of a city's subdivision ordinance pursuant to the authority of Chapter 212 of the Texas Local Government Code (Municipal Regulations of Subdivisions and Property Development), then Section 212.003 allows such regulations to be extended, by ordinance, into the extraterritorial jurisdiction ("ETJ") ¹⁰ of the city. Consequently, the mere label given to oil and gas regulations by a city can define the area in which the city will enforce such regulations. The trend in north Texas is to include some degree of oil and gas development regulations as part of subdivision ordinances with the hope that they can be justified as merely regulating the subdivision of land. And at least one north Texas city has extended its gas regulations into its ETJ upon the authority of Section 401.002 of the Texas Local Government Code which provides, in relevant part, that a home-rule municipality may provide for the protection of and may police watersheds within its boundaries and its ETJ (the theory of the city being that gas well development represents an environmental risk to watersheds). ¹¹

There are two types of cities in Texas, "home-rule" and "general-law." Home-rule cities must have a population of 5,000 or more and a city charter that has been approved by the voters. ¹² Home-rule cities have full authority of local self-government, ¹³ limited only by their charter, state law, and the Texas Constitution. General-law cities, however, have only the authority expressly granted to them by the legislature (and those necessarily implied). Both types of cities, however, have broad authority under the Texas Local Government Code to adopt ordinances. ¹⁴ Despite the apparent emphasis of the Unger court on the fact that the City of Burkburnett was a home-rule city, there does not appear to be any reason to doubt the authority of both general-law and home-rule cities to regulate oil and gas development within their corporate limits.

3. MUNICIPAL POLICE POWER

I believe it is well settled that Texas cities have the authority, under their police power, not only to regulate oil and gas development but to totally prohibit such development. The two cases most often cited (particularly by attorneys representing cities) for this proposition are Unger v. State ¹⁵ and Helton v. City of Burkburnett. ¹⁶ Neither of these cased, however, address whether the ordinances complained of in Unger and Helton constitute a taking.

In Helton v. City of Burkburnett, Robert Helton wanted to drill an oil well within a relatively undeveloped portion of the City. He refused, however, to obtain a permit as required by City Ordinance No. 375 (which also charged a fee of $250.00, required a surety bond and insurance, and prohibited wells within 50 feet, and tank batteries within 100 feet, of a residence or commercial structure unless approved by the owner). Helton asserted that the ordinance was unconstitutional on its face and as applied to his drilling operations because it gave the city the power to totally prohibit drilling. The ordinance provided, in relevant part, that the City Commissioners had the authority to refuse any permit to drill a well "where by reason of such particular location and the character and value of the permanent improvements already erected on or adjacent to the particular location in question, for school, hospital, park, civic purposes, health reasons, safety reasons, or any of them where the drilling of such wells on such particular location might be injurious or be a disadvantage to the city or its inhabitants as a whole or to a substantial number of its inhabitants or would not promote orderly growth and development to the city." ¹⁷ The court rejected Helton's argument finding that the ordinance "neither prohibits the drilling of oil and gas wells nor their maintenance and operation." ¹⁸ The court concluded that "the ordinance merely provided rules facilitating the orderly and harmonious development of...