Fracking, HB 40, and Concerns about Liability

This column first appeared in the San Antonio Express-News and on MySA.com on July 21, 2015.

2015-07-21Dear Mr. Premack: I own land in north Texas, in an area where a local ordinance had put a stop to fracking the city’s extraterritorial jurisdiction. My land was in a pool that would have been developed, and I was not greatly bothered by the ordinance since fracking seems to cause so much environmental damage. Now that Governor Abbott has signed HB 40, I think that fracking may again start in the area. But the reality of the environmental damage concerns me. Might I be sued someday for making a profit from the fracking, when the fracking pollutes the local water supply or some other foreseeable (or unforeseeable) damage to the community? If so, is there a way to limit my exposure? – W.J.

In late 2014 the citizens of Denton voted to ban fracking in the city and its extraterritorial jurisdiction. The proponents felt that fracking was a dangerous and polluting practice that does not belong in their community. Many other cities in the nation have passed similar ordinances. The State of Texas immediately sued Denton to overturn the ban, and the legislature took up a bill (HB 40) to forbid local communities from controlling fracking operations.

HB 40 passed both in the Texas House and Texas Senate, with a clause declaring that would take effect immediately when signed by the Governor. He signed the bill on May 18, 2015. The state’s lawsuit continues, and under the new law is expected to force Denton to allow fracking inside its jurisdictional limits. The bill was supported by the Oil & Gas industry, and opposed by environmentalists. One side frames the issue as favoring jobs and economic development, the other as favoring a clean and safe environment. The EPA has recognized issues with fracking and water quality, but its study was not broad enough to draw final conclusions.

You are a landowner in the area who is straddling both side of the fence. You support a clean environment, but are tempted by the potential income from the fracking. As such, you worry that going along with the fracking and profiting from it may expose you to liability if the fracking does, in fact, cause environmental damage.

There are many in the South Texas region who are in the same boat, albeit there was no ban on fracking in this area like there was in Denton, so HB 40 was of less concern in the Eagle Ford Shale area.

What can you do to protect your assets from potential lawsuit liability? One strategy is to compartmentalize. Already, you own certain items that are safe even from a court judgement against you, like your homestead and your retirement accounts. But your regular savings, your non-homestead real estate, and all of your non-retirement investments could be lost in a lawsuit. Compartmentalize by separating the exposed assets from your mineral rights using a Limited Liability Company (LLC).

Visit with an attorney who works with both estate planning and business entity issues, and visit with your CPA, about formation of the LLC. When it is properly established, transfer title to your oil holdings into the LLC. You can even allow the LLC to be owned by a Trust so that management can be further segregated from your general assets. Once the LLC owns the mineral rights, any lawsuit over environmental issues would be against the LLC, not against you personally. If a judgement is entered because the fracking causes environmental damage, the liability is limited to the LLC and to the assets which it possesses. Your regular savings, other real estate, and non-retirement investments will be protected by the LLC.

Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via www.TexasEstateandProbate.com or www.Premack.com.

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