City held to be acting both in a proprietary capacity and a governmental capacity involving lease for mineral interests says Dallas Court of Appeals

The City of Dallas v. Trinity East Energy, LLC, 05-16-00349-CV(Tex.App— Dallas, February 7, 2017)

This is an interlocutory appeal from the granting-in-part and denial-in-part of a plea to the jurisdiction involving an inverse condemnation claim for mineral interests. The Dallas Court of Appeals affirmed-in-part, reversed-in-part, and remanded.

The City was suffering a budgetary shortfall and decided to seek an additional source of revenue by leasing the minerals on City-owned property to a private party for developing the oil and gas. Trinity asserted, if it bid, it would need surface access to two City sites.  Trinity and the City entered into two leases for mineral interests. Afterwards, Trinity began the long process of preparing to drill, including geological and engineering tests, designing drill sites, roads, and pipelines, and multiple City meetings. Trinity sought permits to drill on the designated sites. However, in the spring of 2013 the Planning Commission voted to deny the applications. Trinity appealed to the City Council. But because the Planning Commission had denied the applications, the Council was required to override that denial by a vote of three-fourths of its members; the vote to approve received only a majority of the votes of the Council members. Consequently, the applications were denied. Later, the City passed new ordinances changing setback requirements and making the sites impossible for Trinity to use for drilling. The leases then expired.  Trinity sued. The City filed pleas to the jurisdiction in which it asserted it was immune from suit with regard to Trinity’s claims for breach of contract, tort, and declaratory relief, and that Trinity had not alleged a viable claim for inverse condemnation. Trinity responded that the City’s actions were proprietary for which immunity did not apply. The trial court granted parts and denied parts. Both parties appealed.

Citing the Texas Supreme Court’s expansion in Wasson Interests, Ltd. v. City of Jacksonville, 489 S.W.3d 427 (Tex. 2016) of the proprietary-governmental dichotomy to contracts the Dallas Court of Appeals held the City was acting in its proprietary capacity. Mineral leases, even if on park or flood plains, are proprietary as to the ownership use or lease. Further, since immunity does not already exist, Chapter 271 of the Texas Local Government Code (waiving immunity for goods or services) does not apply.  The City was acting as a property owner as to the lease, however, the City was also acting as a regulatory agency as to the permits. Thus, the denial of the permit can also act as an inverse condemnation of a property interest.  Given the change in ordinances making drilling impossible, Trinity presented evidence the City denied all economically viable use of the mineral leases. As a result, the trial court erred in granting the plea as to Trinity’s claims for breach of contract, tort, and declaratory relief but properly denied it as to the takings claim.

If you would like to read this opinion click here. The Panel Includes Justice Lang-Miers, Justice Myers, and Retired Justice O’ Neil. Justice Lang-Miers delivered the opinion of the court. If you would like to see the representatives for The City of Dallas and Trinity East Energy, LLC click here.