In the recent decision of In re MTE Holdings, LLC, et al., Case No. 19-12269 (CSS) (Del. Bankr. June 8, 2020), the Delaware Bankruptcy Court determined whether a landowner that leases mineral rights to a debtor is entitled to an administrative claim against the debtor for accessing its land and installing a tank battery. According to this decision, under the circumstances present in this case, the answer is “no”.
By way of background, debtor MDC Energy, LLC (“MDC”) leases the mineral rights, including those for oil and gas interests, beneath the surface of land owned by claimant Peter Shah. In accordance with its rights as lessee, MDC advised Mr. Shah that it would require access to Mr. Shah’s property to, among other things, build a tank battery in support of its oil and gas drilling activities.
Mr. Shah disputed that the debtors had the right to access his property, which is located in Reeves County, Texas. On February 25, 2020, Mr. Shah filed the Motion for an administrative claim of $50,000 (the “Claim”) for post-petition surface entries, surface damages, certain construction and other such activities performed by MDC.
MDC is the mineral lessee to the property owned by Mr. Shah. Judge Sontchi noted that in Texas, the right to minerals in place carries with it the rights to enter and extract them and all other incidents thereto as are necessary to the enjoyment of those rights. Further, under Texas state law, “only when the conduct of the lessee destroys or substantially impairs the surface owner’s use of the surface does the question arise as to whether that conduct is
reasonably necessary.” Slip op. at 5 (citing Davis v. Devon Energy Prod. Co., L.P., 136 S.W.3d 419, 424 (Tex. App. 2004)).
In denying the Motion, the Court found that while Mr. Shah complained that the debtors accessed his land, he provided no other information regarding damage to his property, unreasonableness of the Debtor’s actions, or any evidence or argument regarding the Debtor’s actions or destruction of Mr. Shah’s property.
“Sadly for the surface owner, Texas law, which governs in the present case, implies that a mineral lease gives a large measure of deference to the lessee’s view of reasonableness.” Slip op. at 6 (citing Vest v. Exxon Corp., 752 F.2d 959, 960–61 (5th Cir. 1985)).
Having failed to provide any evidence that MDC “substantially interfered with” or “precluded” Mr. Shah’s rights by constructing a tank battery, the Court denied the motion.
This decision demonstrates the difficulty in asserting an administrative claim against a debtor that is a lessee to mineral rights under the claimant’s land. Landowners who seek such relief should ensure their claim meets the requisite showing of proof under the state law governing the mineral lease.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Wilmington, Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.