United States District Court, C.D. Illinois, Springfield Division
June 24, 2004.
TEST DRILLING SERVICE CO., Plaintiff,
THE HANOR COMPANY, et al., Defendants.
The opinion of the court was delivered by: JEANNE SCOTT, District Judge
This matter comes before the Court on five separate Motions for
Partial Summary Judgment filed by the various Defendants.
Plaintiff alleges claims for negligence against each Defendant.
This action was removed to this Court from the Circuit Court of
the Seventh Judicial Circuit, Greene County, Illinois. Removal
was appropriate because of diversity of citizenship of the
parties. See May 28, 2003 Order, (d/e 17). The Motions for
Partial Summary Judgment are filed by: (1) The Hanor Company,
Inc. (Hanor) (d/e 109), which Motion is joined by Terracon
Consultants, Inc. (Terracon) and GSE Lining Technology, Inc. (GSE
Lining); (2) Pig Improvement Co., Inc. (PIC) (d/e 113); (3)
Agri-waste Technology, Inc. (Agri-waste) (d/e 114); (4)
Envirotech Engineering & Consulting, Inc. (Envirotech) (d/e 118);
and (5) Hog Slat Inc. (Hog Slat) (d/e 110), which Motion is also
joined by GSE Lining. For the reasons stated below, each one of
the Motions for Partial Summary Judgment is allowed in part and denied in part.
It is undisputed that in 1994, Plaintiff Test Drilling Service
Co. (TDSCO) entered into three separate oil and gas leases
covering property located in Greene County, Illinois. Each lease
contained the following provision:
1. Lessor, for and in consideration of Ten Dollars
($10.00), in hand paid, the receipt of which is
hereby acknowledged, and of the covenants and
agreements hereinafter contained on the part of
Lessee, has granted, demised, leased and let and by
these presents does grant, demise, lease and let,
exclusively unto Lessee for the purpose of exploring
by geophysical and other methods, drilling and
operating for and producing oil, liquid hydrocarbons,
all gases, and their constituent products, injecting
gas, waters, other fluids and air into subsurface
strata, including the further right to inject water
from other wells on adjoining lands and within the
field of development, laying pipelines, storing oil,
building tanks, electric transmission lines, ponds,
powers, roads and structures thereon to produce,
save, take care of, treat, process, store and
transport said oil, liquid hydrocarbons, gases, and
their constituent products, together with the right
of ingress and egress thereto on to other land under
lease to Lessee, the following described land in
Greene County, State of Illinois, to wit:
[description of property]. It is intended hereby to
include herein all lands and interest therein
contiguous to or pertinent to the above described
land and owned or claimed by Lessor. For the purpose
of making any payment based on acreage, said land and
its constituent parcels shall be deemed to contain
the acreage above stated whether they actually
contain more or less. This lease shall cover all the
interest in said land now owned by or hereafter
vested in Lessor, even though greater than the
undivided interest (if any) described above.
Agri-Waste Motion for Partial Summary Judgment, Ex. A. ¶ 1.
Each lease also provided that:
Subject to the other provisions herein contained,
this lease shall remain in force for a term of Two
(2) years from this date (called "primary term"), and
as long thereafter as oil, liquid hydrocarbons, gas
or their respective constituent products, or any of them is
produced from said land or land with which said land
is pooled. . . .
Id., ¶ 2.
If operations for drilling are not commenced on said
land or on land pooled therewith on or before one (1)
year from this date, this lease shall terminate as to
both parties, unless on or before one (1) year from
this date lessee shall pay or tender to the lessor a
rental of One Hundred Eighty Dollars Dollars [sic]
($180) which shall cover the privilege of deferring
commencement of such operations for a period of
twelve (12) months. In like manner and upon like
payments or tenders, annually the commencement of
said operations may be further deferred for
successive periods of the same number of months, each
during the primary term. . . .
Id., ¶ 4.
Apparently the leases were still in effect in September/October
2000. TDSCO alleges that prior to October 2000, there was
absolutely no evidence of contamination in any of the oil samples
obtained from the property subject to the agreements. TDSCO began
to remove oil in September 2000. In October 2000, TDSCO
discovered that the oil was contaminated by bacteria and microbes
of the kind found in animal and livestock waste products. The
discovery of contaminants "rendered the entire quantity of oil
extracted and existing in-situ and subject to the oil and gas
mineral rights agreements unsaleable, unusable and absolutely
worthless." First Amended Compl., (Compl.) ¶ 15. The
contaminant has rendered the oil subject to the oil and gas
agreements unsaleable and ruined the entire oil deposits in the
area. Id. ¶ 17. The contaminant in the oil also caused TDSCO's
pumping and storage equipment to become damaged and unusable. Id. ¶ 16.
Each of the Defendants was or is involved in the design,
construction, maintenance, and/or operation of hog confinement
facilities adjacent to the land subject to TDSCO's oil and gas
agreements. TDSCO claims that each Defendant "allowed leachate
and animal waste to escape the confines of the commercial hog
confinement facility and flow into plaintiff's mineral rights."
Id. ¶¶ 73, 102, 132, 162, 192, 222, 252, 282, 312. TDSCO
alleges that Defendants' failure to control leachate and animal
waste caused it to sustain loss and permanent damage to property,
including its mineral rights, and damage to its operation and
TDSCO's Complaint consisted of two counts against each
Defendant. The first count alleged negligence, and the second
count alleged negligence per se. TDSCO sought the following
damages: (a) costs incurred for the repair and restoration of
TDSCO's property to restore it to its original condition; (b) a
sum of money that represents the diminution in the market value;
(c) a sum of money in compensation for the lost mineral rights of
TDSCO's property; and (d) a sum of money for the loss of
commercial use of TDSCO's property. On November 25, 2003, this
Court dismissed each of the negligence per se claims against each
Defendant See November 25, 2003 Order, (d/e 89).
Defendants now move for partial summary judgment on the
remaining negligence counts. They claim that any damages to the oil or to
TDSCO's commercial expectations are barred by the economic loss
doctrine set forth in Moorman Manufacturing Company v. National
Tank Company, 91 Ill.2d 69, 435 N.E.2d 443 (Ill. 1982).
SUMMARY JUDGMENT STANDARD
Summary judgment shall be entered if the pleadings,
depositions, answers to interrogatories and admissions on file,
together with affidavits, show that there is no genuine issue as
to any material fact and that the moving party is entitled to
judgment as a matter of law. Fed.R. Civ. P. 56(c). At summary
judgment, Defendants must present evidence which demonstrates the
absence of a genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 323-24 (1986). The Court must consider
the evidence presented in the light most favorable to TDSCO. Any
doubt as to the existence of a triable issue of fact must be
resolved against Defendants. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 255 (1986). Once Defendants have produced evidence
showing that they are entitled to summary judgment, TDSCO must
present evidence to show that issues of fact remain. Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 576
(1986). Illinois substantive law applies to TDSCO's remaining
negligence claims, since the alleged tortious acts occurred in
Illinois, and the real estate subject to the oil and gas leases
is located in Illinois.
A. Moorman Economic Loss Rule Under Illinois law, economic damages are not recoverable in a
tort action. Moorman, 91 Ill.2d at 69, 435 N.E.2d at 443. Under
this doctrine, economic loss is defined as "damages for
inadequate value, costs of repair and replacement of the
defective product, or consequent loss of profits without any
claim of personal injury or damage to other property. . . ." In
re Chicago Flood Litigation, 176 Ill.2d 179, 680 N.E.2d 265, 274
(Ill. 1997), quoting Moorman, 91 Ill.2d at 82 (emphasis added
in In re Chicago Flood Litigation opinion).
However, one exception to the economic loss rule is when the
plaintiff sustained damage, such as "personal injury or property
damage resulting from a sudden or dangerous occurrence." Id. at
275. Thus, the economic loss rule barring recovery in tort
"applies even to plaintiffs who have incurred physical damage to
their property if the damage is caused by disappointed commercial
expectation, gradual deterioration, internal breakage, or other
nonaccidental causes, rather than a dangerous event." Id. Even
if there were a sudden, dangerous, or calamitous occurrence, the
plaintiff must allege personal injury or property damage
resulting from it to avoid a bar to recovery by the economic loss
rule. Id. "To recover in negligence there must be a showing of
harm above and beyond disappointed expectations." Id. at 276,
quoting Redarowicz v. Ohlendorf, 92 Ill.2d 171, 177,
441 N.E.2d 324 (Ill. 1982).
Defendants have previously moved to dismiss the negligence
counts as barred by the Moorman economic loss doctrine. In
denying the motions to dismiss, this Court stated the following: TDSCO alleges that it suffered damage to its
property, including its pumping equipment as well as
to its mineral rights. . . . It is ambiguous from the
language of the Complaint whether TDSCO possesses an
ownership interest in the oil and mineral rights, or
whether it possesses a contractual interest to drill
for oil on the property. The Court must view all
ambiguities in a light most favorable to TDSCO, and
thus assumes TDSCO had an ownership interest in the
oil and mineral rights, and that property right was
injured. If in fact TDSCO only possessed a
contractual right to drill for oil on the property,
without any property interest in the mineral rights,
then any recovery would be limited to damage to
TDSCO's equipment. Recovery for any lost profits
arising from damage to the oil caused by the alleged
contamination would be barred under Moorman and In
re Chicago Flood Litigation.
November 25, 2003 Order, p. 9. Therefore, the issue currently
before the Court is, in light of the oil and gas agreements in
evidence, whether TDSCO had a property interest which was injured
by a sudden or dangerous act for which Defendants are
B. TDSCO's Property Interest Pursuant to Illinois Oil and Gas
TDSCO had a property interest in the mineral rights at issue
here. "Oil and gas leases granting the right to search for and
take oil and gas are freehold estates in the land" Jilek v.
Chicago, Wilmington & Franklin Coal. Co., 382 Ill. 241, 246,
47 N.E.2d 96, 98 (Ill. 1943). "An oil and gas lease, in effect,
transfers the mineral estate to the lessee by conveying to the
lessee the right to enter the land for exploration purposes and
reduce to possession any oil or gas located beneath the land
When this right is granted for an indefinite term, the working
interest in an oil and gas lease constitutes a freehold estate in
real property." Matter of Fullop, 6 F.3d 422, 427 (7th Cir.
1993) citing Fry v. Farm Bureau Oil Co., 3 Ill.2d 94,
119 N.E.2d 749, 750 (Ill. 1954).
In this case, the leases authorized TDSCO to come onto the
property to produce and explore for oil. The leases were in
effect for two years, "and as long thereafter as oil, liquid
hydrocarbons, [or] gas . . . is produced from said land . . ."
Agri-Waste Motion for Partial Summary Judgment, Ex. A., ¶ 2.
Accordingly, the language used indicates the leases were of an
unlimited duration and conveyed to TDSCO a freehold interest in
the property. See Greer v. Carter Oil Inc., 373 Ill. 168,
174, 25 N.E.2d 805, 808 (Ill. 1940) (oil and gas lease with term
of three years, or as long as oil and gas is produced, granted a
freehold estate), Poe v. Ulrey, 233 Ill. 56, 84 N.E. 46 (Ill.
1908) (lease for term of five years, or as long as oil or gas is
found in paying quantities, was a lease of unlimited duration).
Thus, TDSCO's freehold estate in the mineral rights was a
cognizable interest in real property. Fullop, 6 F.3d at 427.
Under Illinois law and under the terms of the oil and gas leases,
TDSCO did have a property interest in the mineral estate.
TDSCO's allegations support the inference that TDSCO's property
interest had a greater value prior to the contamination than it
had after the contamination occurred. Any such reduction in value
of TDSCO's freehold estate in the mineral rights is property
damage allegedly caused by a dangerous occurrence. Such damage to
the freehold estate itself is property damage above and beyond
disappointed commercial expectations and is not barred by the
economic loss rule set forth in Moorman and In re Chicago Flood Litigation.*fn2 TDSCO's damages are
measured by the reduction in value of TDSCO's real property
interest conveyed by the leases, or the cost of repair to the
mineral estate, whichever is less. Matich v. Gerdes,
193 Ill. App.3d 859, 865, 550 N.E.2d 622, 625 (Ill.App.Ct. 4th
Dist. 1990) citing Williams-Bowman Rubber Co. v. Industrial
Maintenance, Welding and Machining Co., 677 F. Supp. 539 (N.D.Ill.
1987) (proper measure of damages "is the diminution in market
value of the real estate, except when the damages are only
partial and repairs are reasonably priced"). Damages measured by
the lost value of the oil produced, and any lost profits
associated with the anticipated sale of that oil, are not per
se recoverable (see below). However, the lost value of that
produced oil may be relevant to a determination of the loss of
value in TDSCO's freehold estate in the mineral rights (or the
cost of repair).
This position is supported by Redarowicz. In Redarowicz, a
homeowner sued the builder of his home because of the faulty
construction of the home. The chimney and adjoining brick wall
began to pull away from the house. The court applied Moorman
and found that the cost and repair of the chimney, wall and patio
were economic losses unrecoverable in tort. Redarowicz, 92
Ill.2d at 178. The court noted that, "This is not a case where
defective construction created a hazard that resulted in a member of the plaintiff's family being struck by a falling
brick from the chimney. The adjoining wall has not collapsed on
and destroyed the plaintiff's living room furniture." Id. Such
damages would be recoverable in tort.
The damage to TDSCO's real property interest is analogous to
the damage to the living room furniture caused by a falling wall
and recoverable in tort. Plaintiff's claims are that Defendants
negligently constructed the hog waste product containment
facility in such a way that a hazard was created allowing hog
waste product to escape and flow into and damage TDSCO's freehold
estate in the mineral rights as well as TDSCO's drilling
equipment. These claims are not barred by Moorman because they
constitute damage to property (real and personal).
C. Moorman bars recovery for damage to the oil existing in the
ground, and any lost profits from the anticipated sale of that
TDSCO can only recover for the damage to its freehold estate.
TDSCO cannot recover for the damage to the oil in and of itself
because it had no property interest in the oil in the ground. The
party holding a freehold interest in the mineral rights does not
have title to the oil in the ground; title passes when the oil is
produced. Under Illinois law:
A lease of land to enter and prospect for oil or gas
is a grant of a privilege to enter and prospect, but
does not give a title to the oil or gas until such
products are found. In the eye of the law oil and
natural gas are treated as minerals, but they possess
certain peculiar attributes not common to other
minerals which have a fixed and permanent situs.
Owing to their liability to escape, these minerals
are not capable of distinct ownership in place. Oil
and gas, while in the earth, unlike solid minerals,
cannot be the subject of a distinct ownership from
the soil. A grant to the oil and gas passes nothing which can be
the subject of an ejectment or other real action. It
is a grant, not of the oil that is in the ground, but
to such part thereof as the grantee may find.
Watford Oil & Gas Co. v. Shipman, 233 Ill. 9, 12-13,
84 N.E. 53, 54 (Ill. 1908), see also Triger v. Carter Oil Co.,
372 Ill. 182, 185, 23 N.E.2d 55, 56 (Ill. 1939). Oil and gas belong
to the "owner of the land only so long as they remain under the
land, and if the owner makes a grant of them to another, it is a
grant only of the oil and gas that the grantee takes from the
land" Pawnee Oil & Gas, Inc. v. County of Wayne,
323 Ill. App.3d 426, 428, 751 N.E.2d 1268
, 1269 (5th Dist. 2001)
citing Triger, 372 Ill. at 185. "Oil and gas are incapable of
ownership until actually found and produced." Id.
Since TDSCO did not yet own the oil itself that was in the
earth (because it had not been produced), the diminished value of
that oil once produced would only be economic loss. That damage
is in the form of disappointed commercial expectations. Such
damages are barred by the economic loss rule set forth in
Moorman. Damages in the form of profits TDSCO expected to make
from the sale of the oil are also barred by Moorman. These
economic damages are barred even though TDSCO also alleges
property damage, such as damage to its equipment and to its
mineral estate. TDSCO is not allowed to bootstrap a tort claim
for economic damages simply because it has also suffered other
separate property damage. See Vacuum Indus. Pollution, Inc. v.
Union Oil Co. of California, 764 F. Supp. 507 (N.D.Ill. 1991).
THEREFORE, for the above stated reasons, each Defendant's
Motion for Partial Summary Judgment (d/e 109, 110, 113, 114, and
118) is ALLOWED, IN PART. TDSCO is barred from recovering damages for any lost
profits associated with the anticipated sale of oil. However, the
economic loss rule does not bar TDSCO from recovering for the
diminution in value of its freehold estate in the mineral rights.
The projected lost profits from the oil production may be
relevant to the determination of the diminution in value of the
mineral estate, but those profits are not recoverable separately
as an independent element of damages. TDSCO may also seek an
award for damage to its equipment.
IT IS THEREFORE SO ORDERED.