Sometime in the near future, the Supreme Court of Texas will make an important decision regarding whether a party can recover stigma damages to their property, even when the physical damage to their property was not permanent. The opportunity to rule on this issue came before the Court through consecutive appeals where a property owner alleged that his land was contaminated due to the negligence of a neighboring Metal Processing company. The landowner in this matter is Mel Acres Ranch and the Metal Company is Houston Unlimited, Inc. Metal Processing (HUI).
HUI and Mel Acres Ranch are located in Washington County, Texas. The Mel Acres property is undeveloped ranchland located across Highway 290 from HUI's facility. A culvert flows downhill from HUI's facility, under the highway, and into a stock tank “a large pond” on the Mel Acres property. Mel Acres also contains two background ponds, which are not hydraulically connected to HUI's property and are not affected by HUI's activities.
In late 2007, the Mel Acres lessee complained that a number of their calves had died or experienced various defects. Additionally, HUI had been observed dumping the contents of a large drum into the culvert. In response to these problematic actions of HUI, Mel Acres retained an environmental consultant to test water samples on the property. These tests revealed arsenic, chromium, copper, nickel, and zinc exceeding state action levels in the culvert and copper exceeding state action levels in the large pond.
After receiving the water test results, Mel Acres sued HUI for trespass, nuisance, and negligence. Mel Acres alleged that it suffered permanent damage, measured by loss in market value of the property. The trial court jury found that HUI did not create a permanent nuisance on the property or commit trespass. However, the jury did find that HUI's negligence proximately caused the occurrence or injury in question. On July 15, 2010, the trial court signed a final judgment awarding Mel Acres $349,312.50 in actual damages. HUI appealed the trial court’s judgment which found that Mel Acres was entitled to the recovery of stigma damages.
In 2012, the Houston Court of Appeals affirmed the trial courts judgment in favor of Mel Acres Ranch. The issues on appeal were slightly different than the issue before the trial court. On appeal, the issue of negligence and causation were not contested by HUI. However, HUI contested the type of damage caused by their negligence. HUI argued that their negligent dumping of hazardous materials caused “temporary” rather than “permanent” damage to the Mel Acres Ranch. HUI additionally argued that “constituents on the plaintiff’s property must exceed state action levels” and cause permanent injury to the property in order for a plaintiff to successfully recover damages for environmental contamination. The Texas Court of Appeals disagreed, and held that Mel Acres successfully proved the permanent damage of diminished market value. This lost market value was caused by the “temporary” contamination of the Mel Acres property which in turn resulted in a “permanent” stigma.The Texas Court of Appeals additionally held that proof of physical property damage is not required to support a ruling for permanent property damage. Therefore, a plaintiff is entitled to the recovery of lost market value that results from a permanent stigma upon the land. This holding is the first of its kind in Texas and one of the main focus points for the Texas Supreme Court as they review this case.
One of the first things considered by the Texas Supreme Court on review of this matter is the reasoning of the Texas Court of Appeals. The Texas Court of Appeals decided that a plaintiff could recover lost market value of a property that was temporarily damaged by the defendant but permanently stigmatized due to the damage. The Texas Court of Appeals made this ruling by observing other jurisdictions’ appoach to the same question. Utah and Pennyslvania courts have both addressed this same question. The general holding by these two courts is that a plaintiff can recover stigma damages when:
(1) The defendant caused temporary physical injury to plaintiff’s land and;
(2) Repair of this damage cannot return the value of the property to its prior level due to a lingering negative perception.
The Texas Supreme Court may also have to rule on other issues pertinent to this case. Since the ruling of the Texas Court of Appeals was in favor of Mel Acres, the issues presented by HUI, the petitioner, are a good starting point for the analysis of what is being discussed behind the Texas Supreme Court doors.
The arguments set forth to the Texas Supreme Court by HUI can be divided into four categories. The first argument deals with causation of permanent damages. The second argument addresses the validity of Mel Acre’s real estate expert’s testimony. The third requests that the Supreme Court adopt the Taco Cabana doctrine. Lastly, the fourth argument claims that there is no evidence of permanent injury.
HUI first argues that in any claim based on a negligence theory, causation must be proven in order for a plaintiff to recover damages. HUI contends that Mel Acres cited no evidence where HUI, or even its expert, admitted that HUI’s negligence caused permanent injury to Mel Acres. HUI also argues that they submitted extensive evidence (including admissions produced from the Mel Acres experts) disproving that HUI caused permanent injury to the property and that Mel Acres made no attempt to analyze this evidence. Rather, according to HUI, Mel Acres is urging the Supreme Court to ignore its past decisions, and rely on a portion of the Pattern Jury Charge, to support the argument that Mel Acres did not need to prove that HUI’s negligence caused permanent injury. Lastly, HUI argues that Mel Acres failed to provide any credible support for the conclusion that HUI did not controvert that its negligence caused permanent injury and they contend that this failure calls for a reversal from the Supreme Court of Texas.
The second argument presented by HUI claims that Mel Acre’s real-estate expert’s testimony is insufficient to support the Court of Appeal’s affirmation of judgment in favor of Mel Acres. HUI argues that Mel Acres makes no effort to defend what its real estate expert claimed to be comparable properties with a reduction in market value due to contamination. Justice Boyce of the Court of Appeals based his dissent along the same lines, stating that the properties selected by the Mel Acres expert bear small, insignificant similarities to the Mel Acres property. Mel Acres complains that HUI did not preserve its objection to the comparables upon which the real estate expert relied. In response to the Mel Acres complaint, HUI states that they did object to the comparables in a pre-trial motion to strike this very expert. Additionally, given the extensive record regarding the “comparables,” it is clear that neither Mel Acres nor their expert could supply any additional support for the use of these two “comparables,” according to HUI. HUI also points out that Mel Acres does not dispute that the property has contamination above the TCEQ state levels that cannot be linked to HUI in the “background ponds.” HUI claims that the Mel Acres real-estate expert made no attempt to separate what HUI might have caused from what HUI clearly did not cause and therefore this expert testimony cannot support a judgment under Texas law.
HUI’s third argument for the Texas Supreme Court requests the adoption of the Taco Cabana Doctrine. In Taco Cabana, the court held that a gas-station lessee was not liable to lessor for contamination of property in unreasonable levels because the State provided a closure letter stating that any constituents caused by a leak in lessee's storage tank had been corrected below actionable levels. Taco Cabana was a negligence case, where the levels at the property in question were temporarily over the state action levels. Taco Cabana’s holding means that once the levels are back down below the state action levels, any common law duties are displaced. HUI asserts that both Mel Acres and the Court of Appeals tried to avoid admitting that the decision of the Court of Appeals conflicts with the holding in Taco Cabana. Because of this avoidance, HUI claims that as a matter of sound jurisprudence and good public policy, the Supreme Court of Texas Court should affirm the holding in Taco Cabana and apply it to this matter. If so, the Supreme Court would likely reverse and render the court of appeals previous ruling in favor of HUI.
HUI’s final argument is that the damage done the Mel Acres property was temporary rather than permanent. This contention is based on the fact that Mel Acres did not dispute that its environmental experts had no opinion as to what the concentration of alleged contamination would have been on the day of trial, or on any day after trial. HUI states that when any future impact would be so highly speculative, the Supreme Court of Texas has said that the injury must be temporary. HUI urges the Court to reverse and render judgment in their favor due to the lack of certainty that future damages to the Mel Acres property would be permanent. Regarding this issue, the Supreme Court will be tasked with the duty to decide whether or not Mel Acres can recover for a permanent stigma resulting from a temporary physical contamination.
Anytime a dispute reaches the Supreme Court of Texas, its resolution has the potential to greatly affect the interests of the citizens of the State of Texas. This dispute between HUI and Mel Acres is important because its resolution will undoubtedly have a substantial effect on environmental law and damage recovery in Texas. Let’s assume that the Supreme Court of Texas rules in favor of HUI, meaning that any individual or company who temporarily contaminates another person’s property will not be responsible for permanent stigma damages so long as they clean the property after. How does this apply in the real world? Is it realistic to expect potential property buyers to disregard contamination and pay full market value for what was once contaminated property?
A great illustration of the perception of contamination comes from an episode of Seinfeld. One day, George and Jerry went to the bookstore. As Jerry searched for a book, George desperately needed to use the restroom. George loved to read on the toilet so he grabbed a book displayed on the shelves. Upon finishing his business and returning to Jerry, George was approached by a bookstore employee. The worker explained to George that the book he previously used in the bathroom was now flagged as a “bathroom book” and George had to purchase it. George refused to pay for the book, yelling that he had no use for it anymore. The worker calmly explained to George that the bookstore has a policy; if any books are used in the restroom, they will be flagged in the company’s database and not sold to anyone other than the person that contaminated it. Why do they have this policy? The book is no different than the one it is placed next to on the shelf?
This Seinfeld scenario can be applied with any property, including Mel Acres Ranch. Once a piece of land, an article of clothing, or even a book become dirtied, or contaminated in some way, people simply don’t want to use them or pay as much for them. There is a reason you can buy a certain item for significantly less than another item that are made of the same material. Stigmas attach to property and affect the way buyers perceive them, which in turn, affect their value. These stigmas can be either positive or negative, but they are not temporary. Take guitars for example. Someone interested in buying a guitar could find a guitar priced for $1500 at the store. However, an identical guitar priced at $25,000 is also in the store. How is this possible? It turns out that the $1500 guitar is a regular guitar that’s sold to the store on a daily basis. The $25,000 guitar was played by world renowned artist Jimi Hendrix, thus explaining the huge disparity of price between the two guitars. This large disparity is representative of a positive and permanent stigma attached to the perception of a famous guitar.
Stigmas attach to perception, which may or may not have an actual and real effect on the sale of an asset. The Supreme Court will have to answer the question whether or not a negative stigma is an element of damage calculations, and if so, allowing a jury to decide whether or not a potential stigma has an actual and real effect in any given case.
Oil and Gas Law Blog
Brandon M. Barchus