Devon Energy Production Company, L.P. and PennzEnergy Exploration and Production, L.L.C. v. Hockley County Appraisal District

NO. 07-04-0005-CV

IN THE COURT OF APPEALS

FOR THE SEVENTH DISTRICT OF TEXAS

AT AMARILLO

PANEL D

NOVEMBER 3, 2005
______________________________

DEVON ENERGY PRODUCTION, L.P., and
PENNZENERGY EXPLORATION and PRODUCTION, L.L.C.

Appellants

v.

HOCKLEY COUNTY APPRAISAL DISTRICT,

Appellee
_________________________________

FROM THE 286TH DISTRICT COURT OF HOCKLEY COUNTY;

NO. 00-01-17,897; HON. HAROLD PHELAN, PRESIDING
_______________________________

OPINION
_______________________________

Before QUINN, C.J., and REAVIS and CAMPBELL, JJ.

Devon Energy Production Company, L.P. and PennzEnergy Exploration and

Production, L.L.C. (collectively referred to as Devon) appeal from a judgment denying them

relief against the Hockley County Appraisal District (Hockley District).1 Devon sued the

Hockley District contending that the latter’s appraisal of the former’s working interest in an

oil and gas reservoir was excessive and that it included within its appraisal property outside

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De von’s predec ess or-in-interes t was Pen nzEnerg y.
county boundaries. Because of these purported errors, the Hockley District’s appraisals

over the years were void or otherwise unenforceable, Devon concluded. Trial was had,

and judgment was entered denying Devon relief. The two issues before us concern the

valuation of minerals by the Hockley District for ad valorem taxation and the trial court’s

refusal to award Devon attorney’s fees. We reverse the judgment of the trial court.

Background

Devon owned a working interest in an oil and gas lease, the M. G. Gordon, covering

approximately 731 surface acres of land. Approximately 84% of the surface acreage (or

612.7 acres) lay in Hockley County, while 16% (or 118.3 acres) lay in Terry County.

Furthermore, minerals were being produced from a reservoir encompassed by the lease

and known as the Clearfork formation. The latter also crossed the Terry and Hockley

County lines.

As previously mentioned, the dispute before us arose when the Hockley District

attempted to value the minerals for purposes of ad valorem taxation. It did so by first

valuing the entire Clearfork reserve included in the M.G. Gordon lease, irrespective of the

county in which it lay. Next, it calculated the percentage of surface acres in the lease

which were located within the boundaries of Hockley County. That percentage (84%) was

then multiplied by the entire value of the Clearfork reserve previously derived, and the

resulting sum purported to form the fair market value of the property upon which Devon’s

ad valorem tax liability was based.

Devon questioned the manner of appraisal for, among other reasons, the calculation

allegedly encompassed property outside county borders. That is, the evidence revealed

that the boundaries of the Clearfork formation were not co-terminous with those of the M.G.

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Gordon lease. The former covered a smaller area than did the latter. More importantly,

about 50% of the reserve actually was located in both Hockley and Terry Counties. Given

this, the Hockley District could assess only 50% of the reservoir for tax purposes, so Devon

argued.

The record further disclosed that the Terry County Appraisal District (Terry District)

also valued the Clearfork reservoir for ad valorem taxation. It too calculated the fair market

value of the entire Clearfork mineral interest in dispute. But, because only 50% of the

formation lay within the boundaries of Terry County, it only assessed 50% of the whole for

tax purposes.

So too does the record illustrate that upon combining the assessments derived by

the Hockley District with that of the Terry District, the mineral formation at issue was

effectively valued (for tax purposes) at 134% of its fair market value. Indeed, the Hockley

District so stipulated.2 And, according to Devon, such an excessive valuation was

prohibited by the Texas Constitution.

Issue One – Validity of Assessment

Devon initially challenges the assessment of the Hockley District by arguing that it

fails to pass constitutional muster and because it included property outside Hockley

County. We sustain the latter argument, and since it is dispositive of the appeal, we need

not consider the former.

2
The stipulation read: “The different appraisal methodologies used by Hockley County Appraisal
District and the Terry County A ppraisal Dis trict result in the appraisal of P laintiff’s pro perty at approxim ate ly
one hun dred thirty-four percent (134% ) of its m arket value.”

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 Applicable Law

The Texas Constitution provides:

No property of any kind in this State shall ever be assessed for ad valorem
taxes at a greater value than its fair cash market value nor shall the Board
of Equalization of any governmental or political subdivision or taxing district
within this State fix the value of any property for tax purposes at more than
its fair cash market value . . . .

TEX . CONST . art. VIII, §20. Article VIII, § 11 of the same document further specifies that

“[a]ll property, whether owned by persons or corporations shall be assessed for taxation,

and the taxes paid in the county where situated . . . .” Id. art. VIII, § 11.

Next, to perform the duties of assessing property for ad valorem taxation, the

legislature created appraisal districts. Each county has one, TEX . TAX CODE ANN . §6.01(a)

(Vernon 2001), and its boundaries generally are co-terminous with those of the county.3

Id. §6.02(a). So too is each district statutorily charged with the responsibility of “appraising

property in the district for ad valorem tax purposes of each taxing unit that imposes ad

valorem taxes on property in the district.” Id. §6.01(b). Statute further dictates that “[r]eal

property is taxable by a taxing unit if located in the unit on January 1 . . .,” id. §21.01, and

the burden lies with the unit to prove situs. Oake v. Collin County, 692 S.W.2d 454, 455

(Tex. 1985) (holding that “a taxing authority must prove its entitlement to collect taxes by

showing that the property it seeks to assess has a taxable situs within the limits of its

boundaries”).

From the aforementioned statutes, one encounters a truism applicable to this case.

It pertains to the situs of the property undergoing assessment and holds that the appraisal

3
To the extent that exceptions to this rule exist, no one argues that such exceptions were in play here.

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district may assess for taxation only that property within its district. Indeed, if 1) a district’s

boundaries are co-terminous with those of the county and 2) a district is responsible for

assessing property within the district, then one must logically conclude that its assessment

cannot include property outside the county. 4

Application of Law

The property undergoing appraisal here by the Hockley District consists of minerals

beneath a particular tract of land. Yet, the borders of the zone wherein the minerals lay

are not co-terminous with those of the surface acres comprising the M.G. Gordon lease.

Much like the chocolate in a marble cake, the minerals lay in specific areas within the

whole. So too does the formation in which they are found traverse county lines. Given

this, the Hockley District was prohibited from including within its assessment property

laying outside Hockley County borders. Yet, the appraisal methodology utilized to

determine the fair market value of the Clearfork reservoir within Hockley County did not

comport with this restriction.

Instead of using the geographic borders of the Clearfork reservoir as determinative,

it adopted the surface acreage encompassed in the Gordon lease and within Hockley

County as the relevant yardstick. Yet, no one disputes that the surface acreage and the

sub-surface acreage containing the minerals were not the same here. Nor does anyone

deny that 84% of the surface acreage had a situs in Hockley County while only 50% of the

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W e acknowledge that the boun daries of o ne a ppra isal district m ay extend into those of another if a
taxing unit covered by the district itself has b oun daries laying in tw o or m ore c oun ties. T EX . T AX C ODE A N N .
§ 6.02(b) (Vernon 2001). Yet, again, no one a rgue s that the facts o f record p erm it applica tion of §6.02(b).

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Clearfork reservoir lay within that county. So, as can be readily seen, the size of one was

not the true measure of the other. And, when the greater was used as the measure of the

smaller, than the difference had to come from somewhere. Logic permits us only to

conclude that here, the difference came from that portion of the reservoir located within

Terry County. Simply put, the Hockley District effectively incorporated 34% of the

formation located in Terry County into its assessment.

In sum, if only 50% of the mineral formation being taxed lay within Hockley County,

then the taxing units for whom the Hockley District valued the property could only tax 50%

of the formation. And, because they could only tax 50% of the formation, the Hockley

District could only assess 50% of the formation for tax purposes. Any creative appraisal

methodology that ignored this limitation was and remains unacceptable. To paraphrase

the words of Pink Floyd in its song “Money,” appraisal districts assessing property crossing

county lines are entitled to “share it fairly but don't take a slice of [the other’s] pie.”

Moreover, that it may be difficult to accurately determine the actual size and location of the

underground property is no reason to ignore restrictions imposed by law. After all, the

taxing unit seeking to tax the property has the burden to establish that the realty lay within

the unit’s border. Oake v. Collin County, supra. If it cannot, then it cannot lawfully tax the

realty. And, if it cannot lawfully tax the realty, then the appraisal district has no authority

to incorporate the realty into its assessment.5 Thus, we sustain the issue.

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No one argues that the property rights accompanying the use of the surface (e.g. right to enter the
land and explore) were included in the valuation of the property at issue. Indeed, while the language used by
the appraisers to describe what the y were valuing differed, all began by determining a value for the remaining
recoverable reserves calculated through a discounted cash flow analysis. C onsequently, ou r ho lding is
restricted to the facts before us. Finally, the mode of valuing properties such as those involved at bar may
be a m atter ripe for legislative attention.

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 Issue Two – Attorney’s Fees

Through its remaining issue, Devon contends that the trial court erred in failing to

award it attorney’s fees. The trial court did not consider awarding Devon attorney’s fees

because it was not a prevailing party. This is no longer true, given our opinion in this

cause. Therefore, we also remand this topic for reconsideration by the trial court. See

Tex-Air Helicopters, Inc. v. Appraisal Review Board of Galveston County, 940 S.W.2d 299,

304 (Tex. App.–Houston [14th Dist.] 1997), aff’d, 970 S.W.2d 530 (Tex. 1998) (refusing to

award attorney’s fees under the Tax Code because the trial court mistakenly held that the

claimant was not a prevailing party and had yet to have the opportunity to reconsider the

issue once it was determined that the claimant was actually a prevailing party).

The Hockley District having assessed the value of the realty at issue in violation of

the law, we reverse the judgment of the trial court and remand the cause.

Brian Quinn
Chief Justice

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