Articles

Created by: Martha Mills at 4/30/2015 1:12:23 PM | 0 comments. | 1106 views.

LOUISIANA LEGAL UPDATE

By Andrea Knouse Tettleton

Mayhall Fondren Blaise

 

Midstates Petroleum, LLC v State Mineral and Energy Board of the State of Louisiana, et al,

No. 14-1168, Unrecorded (La. App. 3rd Cir. ______)

 

The first step in determining ownership of the surface and minerals of a tract of land is whether the tract of land was properly severed from the United State of America or the State of Louisiana. As title examiners, we come across various transfers of title by the State of Louisiana, but most commonly we examine patents and lieu warrants issued by the State of Louisiana. Act 104 of 1888 grants the State of Louisiana the authority to issue lieu warrants. Act 104 of 1888 allows the State to keep money from the sale of property it did not own and in its place issue a land or lieu warrant. Upon application for a patent at some future date, the holder of the lieu warrant would be issued title to suitable land to satisfy the previous erroneous sale.

Title examiners should be particularly cautious of patents issued by the State of Louisiana after 1921. Prior to 1921, the minerals in and to any tract of land sold by the State were transferred in said act of sale. However, Louisiana passed the 1921 Constitution which in Section 2, Article 4 contained a prohibition against the sale of mineral rights by the State, providing in pertinent part: In all cases the mineral rights on any and all property sold by the State shall be reserved, except where the owner or other person having the right to redeem may buy or redeem property sold or adjudicated to the State for taxes. Thus, any land sold by the State of Louisiana subsequent to the passage of the 1921 Constitution would be subject to the constitutionally imposed mineral reservation.

While the issue of mineral ownership upon severance pre-1921 and post-1921 appears to be straight forward, Midstates Petroleum, LLC v State Mineral and Energy Board of the State of Louisiana, et al addresses the issue of whether the minerals underlying a tract of land are transferred when a lieu warrant was issued prior to 1921 but the application for a patent to satisfy the rights acquired under the lieu warrant is executed after 1921.

Facts

In 1858, the State of Louisiana sold a tract of land to John Laidlaw; however, the State later determined that it did not own the tract of land, as the federal government had previously sold said tract. Pursuant to Act 104 of 1888, the State of Louisiana issued Warrant No. 188 on August 28, 1919 to John Laidlaw. The heirs of John Laidlaw sold their rights under Warrant No. 188 to Alvin R. Albritton. In 1943, Albritton applied for a patent to satisfy the rights acquired under the 1919 lieu warrant. The lieu warrant was issued prior to the passage of the 1921 prohibition against the State’s sale of minerals, but the patent application was not requested until after the passage of the 1921 Constitution.

In 2011, the ancestors in title to Alvin Albritton granted a mineral lease burdening the property acquired in Warrant No. 1888 to MidStates Petroleum Company. In August of 2012, the State Mineral and Energy Board of the State of Louisiana entered into an operating agreement with MidStates on the same tract of land. MidStates drilled a well which began producing and then filed a concursus proceeding to determine the ownership of the proceeds. The State filed a Motion for Summary Judgment asserting it should be declared owner of the minerals in and to the disputed property. The Albrittons filed a cross Motion for Summary Judgment contending they should be declared the owners of the mineral in and to the disputed property. The trial court denied the State’s Motion and granted the Albritton’s motion. The State appealed to the Third Circuit arguing that the trial court erred in granting the Albritton’s motion for summary judgment.

Discussion

The Third Circuit Court of Appeal held that law, equity and jurisprudence supported the trial court’s finding that the issuance of a lieu warrant created a constitutionally protected contractual right to some land with minerals that cannot be impaired either by statute or subsequent constitutional amendment by the State.

The Third Circuit found that the Albritton’s reference to the United States Supreme Court case of McGee v Mathis, 71 U.S. 143 (1866) particularly instructive. In McGee, the Arkansas legislature passed an act that provided if a private person drained and leveed certain swamp lands, he could take as compensation either the land he improved or a scrip he could present at a later date for similar quantity of land, and said lands would be exempt from taxation for 10 years. In 1853, the plaintiff drained land and obtained a scrip for his compensation. In 1855, before the plaintiff could exchange his scrip for land, the legislature repealed the tax exemption. Plaintiff selected his land in 1857, and Arkansas demanded he pay taxes on said land. The U.S. Supreme Court held that the legislature’s attempt to collect taxes on land selected pursuant to scrips executed prior to the 1855 Act which repealed the tax exemption constitute an impairment of existing contractual rights. The Third Circuit held that in accordance with McGee, once Warrant No. 188 was issued, the State could not change the terms of the contract by changing the stipulated character of the land, i.e. the removal of the rights to the underlying minerals, any more than it could revoke its contract to issue a patent in compensation for the previously issued erroneous title.

The Third Circuit also relied upon the Louisiana Supreme Court decisions in State ex rel. Hyams’ Heirs v Grace, 197 La. 428, 1 So.2d 683 (La. 1941) (referred to as Hyams II) and State ex rel. Hyams’ Hiers v Grace, 173 La. 215, 136 So.569 (La. 1931) (referred to as Hyams I). In 1863, Henry Hyams purchased land from the State which the State did not have title to. Pursuant to Act 104 of 1888, the Hyams estate filed an application for a lieu warrant. The application was lost, but after some time, the warrant application was found and Warrant No. 168 was issued to the Hyams heirs on December 28, 1917. To satisfy the 400 acre warrant, the Hyams heirs made three separate patent applocations in 1917, 1918 and 1919. The applications were rejected by the State leading the Hyams heirs to file a petition of mandamus to compel the issuance of a patent. The Louisiana Supreme Court in Hyams I granted the relief of mandamus and held that the Hyams’ estate’s compliance with Act 104, in conjunction with the State misplacing the application for the lieu warrant, created an equitable contract right as of the date of the original lieu warrant application in 1888. The Hyams’ heirs were granted patens for the 120 acres of land applied for in the 1917, 1918, and 1919 applications.

In 1938, the Hyams heirs made a written application for a patent for the remaining 280 acres left under Warrant No. 168, and the State refused the application. The Hyams heirs filed a petition of mandamus to compel the issuance of the patent. The State contended that the 1921 Constitution prohibited the sale of minerals by the State. In Hyams II, the Louisiana Supreme Court concluded the 1921 Constitution’s prohibition against the sale of minerals did not apply to this transfer. The Hyams’ heirs were granted a patent on the 280 acres.

The Third Circuit held that the facts in Hyams II were identical to the issues presented in the instant case. Hyams II involved whether the State could invoke Section 2, Article 4 of the 1921 Constitution to prohibit the conveyance of minerals in a patent applied for and issued after 1921 to satisfy a lieu warrant applied for and issued under Act 104 prior to 1921. The court in Hyams II held that there was no language used to indicate that the constitutional provision was to apply to transfer of property under lieu warrants previously issued under Act 1034 of 1888. Lieu warrants are contracts between the State and the holder of the warrant, creating a contractual right in the holder of the warrant for land of like class and character. The Third Circuit agreed with the decision of the trial court to base its ruling on the holding in Hyams II that a lieu warrant issued prior to 1921 is a contractual obligation owed by the State to convey land with minerals, and the passage of the 1921 Constitution cannot alter or impair that obligation. The Third Circuit was not persuaded by any of the State’s arguments that the trial court erred in finding the holding in Hyams II was controlling in the instant case.

The Third Circuit then discussed the State’s reliance on the Justiss Oil Co. v. Louisiana State Mineral Bd. 42, 212 (La. App. 2 Cir. 4/14/20), 34 So.2d 507, writ denied, 10-1066 (La. 9/17/10) in support of its position. The Third Circuit’s discussion of Justiss is particularly compelling, because the Third Circuit’s decision that the ruling in Justiss was incorrect creates a split amongst the Louisiana Appellate Courts. In Justiss, the State sold land it did not own to Frank Pierson. In 1919, Pierson had the erroneous 1896 certificate cancelled and obtained Warrant No. 187. In 1935, the heir in title to Pierson presented the warrant to the land office, and the State issued Patent No. 101068. Justiss Oil acquired the tract through sheriff’s sale. Justiss Oil and State of Louisiana both subsequently granted mineral leases on the disputed tract. The State made the same argument that it made in Midstates, which is that the minerals were not transferred in 1935, but were reserved by the State under the 1921 Constitution. Justiss Oil argued that because the patent was issued pursuant to a pre-1921 lieu warrant, the constitutional prohibition did not apply. The Second Circuit held that “property rights [including mineral rights] vest only when the lieu warrant is presented to obtain a patent for a specifically identified parcel of land”; therefore, the minerals were reserved by the State in the 1935 patent.

The Third Circuit refused to follow the holding of Justiss, stating that it would instead follow the holding of the U.S. Supreme Court in McGee v Mathis in addition to the holding of the Louisiana Supreme Court in Hyams II.  The Third Circuit determined that it was the Justiss court’s incorrect interpretation of the facts of Hyams II which led to its failure to ultimately follow the clear holding of that case.

Holding

The Third Circuit found that the issuance of a lieu warrant prior to 1921 created a constitutionally protected contractual right to some land with minerals that cannot be impaired either by statute or subsequent constitutional amendment.

Accordingly, MidStates clearly holds that if the lieu warrant was issued prior to the 1921 Constitution and the patent was issued after the 1921 Constitution, the minerals ARE transferred. The Third Circuit’s decision in MidStates clearly contradicts the Second Circuit’s holding in Justiss.

 

 

Andrea K. Tettleton is a partner in the Baton Rouge, Louisiana office of Mayhall Fondren Blaize. Her practice focuses on oil and gas law in Louisiana, including drill site and division order title examination and contract negotiation. She graduated magna cum laude from Texas Christian University with a Bachelor of Science in Psychology. She earned her Juris Doctorate cum laude from the Paul M. Hebert Law Center at Louisiana State University in 2009. Mrs. Tettleton is a member of the Louisiana State Bar Association, Baton Rouge Bar Association, and Louisiana Oil & Gas Association. She is currently serving on the Board of Directors and the Executive Committee for the Baton Rouge Association of Professional Landmen and on the Board of Directors for Women’s Energy Network.

Created by: Martha Mills at 4/14/2015 6:47:49 PM | 0 comments. | 1017 views.

The 2015 Louisiana State Legislature


The Louisiana State Legislature will convene its 2015 Regular Session on Monday April 13, 2015. This legislative session will last for 60 days adjourning on Thursday June 11, 2015 at 6:00 p.m.

This will be a very active session as of date there have been 271 Senate Bills pre-filed and 774 House Bills pre-filed. It will also be a very interesting and volatile session as the State has a $1.6 Billion budget short fall, the Legislators will be trying to fill the hole with many different types of fees, restrictions and sunset provisions for many tax credits. Everything is at risk from TOPS, property taxes, inventory taxes, sales taxes, tax deductions, with Hospitals and Higher Ed being in most danger as they are not protected.

House Bill 55-Rep. Ritchie and Senate Bill 15-Sen. Nevers – Propose a tax on the use of hydrocarbon processing facilities. Meaning that as hydrocarbons (Oil & Gas) are processed by Louisiana Refineries they will be taxed before moving out of state through pipelines or other means.

House Bill 101- Rep. Ritchie – Reduces the severance tax “exemption” for production of Oil and Natural Gas from horizontally drilled wells and horizontally drilled recompletion wells from 100% to 75%.

House Bill 116 – Rep. Gisclair – Provides for the protection of coastal residential property through the use of bulkheads and buffer zones for water bottom leases.

House Bill 120 – Rep. Shadoin - Repeals the sunset provision which terminates the commissions of provisional notaries existing on Aug. 1, 2016.

House Bill 228 – Rep. Reynolds - Dedicates $300,000 from the state's mineral income from activity on certain water bottoms of Lake Bistineau to weevil production for control of giant salvinia in the lake.

House Bill 341 – Rep. Garofalo - Provides additional penalties for the illegal taking of oysters from leased acreage.

House Bill 372 – Rep. Garofalo - Requires the secretary of state to post certain information on its website regarding the passage rate of the uniform notarial examination, and subjects notaries to suspension or revocation of their commissions for failure to fully complete the required annual report.

House Bill 388 – Rep. Leger - Levies an additional 4¢ per gallon tax on gasoline, diesel fuel, and special fuels from July 1, 2015, through June 30, 2018, increasing the tax from 20¢ per gallon to 24¢ per gallon for dedication to projects in the Transportation Infrastructure Model for Economic Development Program.

House Bill 400 – Rep. Schexnayder – Authorizes the Commissioner of conservation to regulate liquefied natural gas facilities in the state.

House Bill 429 – Rep. Jackson - Changes the tax credit for ad valorem taxes paid on vessels in Outer Continental Shelf Lands Act Waters from a refundable credit to a credit in which amounts of the credit above the tax liability may be carried forward and applied against subsequent tax liability for up to five years.

House Bill 432 – Rep. Jackson - Changes the tax credit for ad valorem taxes paid on certain natural gas from a refundable credit to a credit in which amounts of the credit above the tax liability may be carried forward and applied against subsequent tax liability for up to five years.

House Bill 483 – Rep. Jay Morris – Limits the severance tax “exemption on horizontally drilled wells and horizontally drilled recompletion wells from 24 months to 12 months or until payout of well cost is achieved, whichever occurs first.

House Bill 504 – Rep. Jay Morris - Prohibits the contradiction, under certain circumstances, of a donation inter vivos made in authentic form.

House Bill 522 – Rep. Stokes - Exempts natural gas held, used, or consumed in providing natural gas storage services or operating natural gas storage facilities from ad valorem property tax.

House Bill 525 – Rep. Lambert - Deposits excess mineral revenue into the Transportation Trust Fund when the Budget Stabilization Fund has reached its constitutional capacity.

House Bill 579 – Rep. Garofalo – Increases the rental rates for oyster leases and the severance tax on the harvest of oysters.

House Bill 590 – Rep. Cox - Requires certain facilities to implement a fence-line air monitoring system.

House Bill 597 – Rep. S. Bishop - Allows for a privilege for a voluntarily conducted environmental audit and information attached to that audit.


House Bill 631 – Rep. Harris - Changes the severance tax "exemption" for production of oil and natural gas from horizontally drilled wells and horizontally drilled recompletion wells by changing the duration from 2 to 4 years and by changing the amount of the exemption from 100% to a certain amount based on the price of oil and natural gas.

House Bill 680 – Rep. Leopold - Provides relative to certain aspects of private oyster leases located on privately-held water bottoms.

Senate Bill 41 – Sen. Allain – Changes the restoration cost limitation on site restoration from $250,000 to $50,000.

Senate Bill 79 – Sen. Allain - Proposed law provides that within 60 days after the end of stay required in present law, the parties must meet and confer to assess the dispute, narrow the issues, and reach agreements useful or convenient for the litigation of the action.

Senate Bill 88 – Sen. Allain – Changes the definition of “drilling unit” from a “maximum area which may be efficiently and economically drained by one well” to a “maximum area which may be efficiently and economically drained by any well or wells designated to serve the drilling unit as the unit well, substitute unit well, or alternate unit well”.

Senate Bill 89 – Sen. Adley - Removes the refundable tax credit for ad valorem property taxes paid on natural gas held, used, or consumed in providing natural gas storage services or operating natural gas storage facilities.

Senate Bill 122 – Sen. Adley – Provides for an increase in the base amount of mineral revenues state receives prior to annual deposit into the Budget Stabilization Fund.

Senate Bill 148 – Sen. Gallot - Constitutional amendment to provide that private purchasers of lands belonging to the state, school board, or levee district shall gain the ability to acquire mineral interests upon prescription resulting from nonuse without interruption.

Senate Bill 265 – Sen. Broome - Requires the recordation of certain instruments regarding real property rights and provides for the allocation of fees and penalties concerning the recordation requirement.

Senate Bill 271 – Sen. White - Provides for equivalency of the special fuels tax with the gasoline tax on motor vehicles that operate on the highways using liquefied natural gas, liquefied petroleum gas, or compressed natural gas.



For you hunters:

House Bill 161 – Rep. Burford - Allows night taking of feral hogs on private property year-round.

House Bill 306 – Rep. Jackson - Provides that hunting licenses are not required for the taking of outlaw quadrupeds, nutria, or beaver.

For Students or Parents with Students:

House Bill 181 – Rep. Terry Brown - Restricts awards under the Taylor Opportunity Program for Students (TOPS) to U.S. citizens and children of non-U.S. citizens who either are serving in or were honorably discharged from any branch of the U.S. armed forces

House Bill 462 – Rep. Cox - Aligns the high school curriculum requirements for eligibility for a TOPS-Tech award and requirements for a career diploma. Provides relative to certain testing requirements to receive a TOPS-Tech Early Start Award.

Also, as most of you know by now this is a BIG election year with many municipal elections being held in May and the larger fall election held in October where we will elect a new Governor, so please go VOTE! It is your privilege to elect our future leaders.

Remember many laws and issues will be up for grabs this session and anything can happen once a bill goes to committee or hits the House or Senate floor. Call or email me if you need more information on any of the legislation that you might feel affects you or your company.


Thanks

Richard Hines, CPL

337-234-1125

rhines@ilandman.com


Created by: Martha Mills at 4/14/2015 5:25:10 PM | 0 comments. | 956 views.

Our apologies to our friends at Angelle and Donohue for printing the incorrect date for their Safety Meeting at Tsunami.

We hope to see you there on Thursday, May 14!

Thanks again Angelle and Donohue!

Created by: Martha Mills at 4/14/2015 2:47:36 PM | 0 comments. | 1140 views.


Timely Payment of Royalty. . . because Penalties on Mailbox Money are not funny

by Kate B. Labue


Kate Labue is an attorney with Randazzo Giglio & Bailey LLC. Mrs. Labue’s practice encompasses all areas of oil and gas law, including property title examination, litigation, and regulatory matters with the Louisiana Office of Conservation and the Louisiana Office of Mineral Resources. She regularly speaks at seminars on oil and gas related topics and has authored several articles on such oil and gas topics.



Withholding of royalty, after the passage of the mineral code in 1975, has been considered a passive breach of a lessee’s obligations. Thus, the nonpayment of such royalty, alone, is not sufficient to spur cancellation of a mineral lease. However, if sufficient notice requesting payment of past due royalties is sent to a Lessee and further payment is unreasonably withheld, Lessors may seek monetary penalties and even, cancellation of their mineral lease against their Lessee.

 

What constitutes a “timely payment” of royalty is undefined under the current version of La. R.S. 31:137; thus, the issue has spurned litigation in all of the Louisiana state and federal courts, with different time periods being held as timely, with response, under the circumstances. See Fawvor v. U.S. Oil of La., Inc. 162 So.2d 602 (La.App. 3rd Cir. 1964)(finding payment of royalty after 9 months was timely under the circumstances); See Canik v. Texas International Petroleum Corp., 308 So.2d 453 (La.App. 3 Cir. 1975), writ denied, 310 So.2d 850 (La.1975)(holding four (4) months was timely where there was no willful intent by the defendant in waiting for the necessary title work to be completed before paying royalties); See Hilliard v. Amoco Production Co. 1177-1178, 95-1366 (La.App. 3 Cir. 10/9/96); 688 So.2d 1176 (finding payments made 9 months from the completion of the well and formation of unit, due to title complications was timely).

In 2013, certain members of the Louisiana Legislature sought to amend La. R.S. 31:137, and enact hard deadlines for the payment of royalty by a lessee. Representative Henry Burns proposed House Bill 223 (“HB 223”) in the 2013, which sought to define “timely payment”, subject to the delays provided by R.S. 31:212.32 and contrary provisions in a mineral lease, as being:  (1) Sixty (60) days after the calendar month in which oil production is sold; or (2) Ninety (90) days after the calendar month in which gas production is sold.   These time periods appear to align with the Operator’s obligation to file Monthly Oil & Gas Production Reports to the Louisiana Office of Conservation. HB 223 did not pass out of the House. Representative Burns then filed House Concurrent Resolution No. 73, which requested the Louisiana Mineral Law Institute study and report its findings on the issue on or before January 1, 2014; however, no findings were reported and no new bills have been filed, as of yet, for the 2015 legislative session, and as a result, timeliness of payment is still unclear.


If a Lessor believes their payment is “untimely”, and sends notice that royalties are due, then pursuant to La. R.S. 31:138, the lessee has thirty (30) days after receipt of the notice to either (a) pay the royalties due or (b) respond stating a reasonable cause for nonpayment. If the Lessee fails to do either, Lessors may then seek damages from their Lessees.


It is uncertain what a court would view as justifiable circumstances for a delay in payment of royalties, or a reasonable length of non-payment. As a result, courts have to examine these two questions on a case-by-case basis. The Louisiana First Circuit, in Bayou Bouillon Corp. v. Atlantic Richfield Co., 385 So. 2d 834, 839 (La. App. 1st Cir. 1980) laid out several factors to be considered when determining whether such non-payment is reasonable, including: 1. the length of time royalties were not paid; 2. the amount; 3. circumstances outside the control of the lessee; 4. lessee's motive; 5. when the lessor sought payment; and 6. whether the footing was unequal (i.e. whether Lessee held the superior position to resolve any impediments to payment).


Reasonableness has been recognized in situations where royalties were not paid due to (a) honest mistake, corrected when the error is discovered (See Hebert v. Sun Oil Company, 223 So. 2d 897 (La. App. 3d Cir. 1969)(holding that deletion of property from a revised unit, where royalties were not paid for 8 months until error was discovered was an inadvertent clerical error);  (b) customs of the oil and gas industry (see Canik v. Texas International Petroleum Corp, 308 So.2d 453 (La.App. 3 Cir. 1975) (finding that it was customary to not pay royalties for four months following the creation of a new unit, while  engaged in the administrative work necessary for all owners in the new unit); (c) special circumstances outside the lessee’s control (See Fawvor v. United States Oil of Louisiana, Inc. (La.App.3d Cir. 1964), 162 So.2d 602) (finding that an error in a  survey plat, subsequently discovered, causing the lessee to be unable to determine the amount of the lessor's land included within the unit and pay for 8 months, was reasonable).


The Louisiana Second Circuit Court of Appeal recently issued an opinion regarding the issues of sufficient notice and reasonableness of nonpayment of royalties under La R.S. 31:137, et seq., and upheld harsh penalties against an operator for failing to meet their obligations to pay royalties.


In Samson Contour Energy E & P, L.L.C. v. Smith, 49,494 (La.App. 2 Cir. 12/29/14); 2014 WL 7404070, Effie Connell (“Mother”), and her children, Billy Smith (“Mr. Smith”) and Betty Robinson (“Ms. Robinson”) executed a mineral lease (the “Connell Lease”) covering their property, including property in Section 8. Thereafter, in 1996, Mother donated to her son, Billy Smith (“Mr. Smith”) her one-half (1/2) interest in Section 8, reserving a usufruct in certain wells (the “1996 Donation”). The Lessee of the Connell Lease received notice of the 1996 Donation and began paying Mr. Smith the donated interest. In January, 2001, Mother died, survived by Mr. Smith and Ms. Robinson. Her succession was opened, and during the pendency of her Succession, Ms. Robinson filed a petition to annul the 1996 Donation to Mr. Smith.


Lessee assigned interests in the Connell Lease to Samson Contour Energy E&P, LLC (“Samson”) in 2003. In April 2004, Samson was informed of the annulment proceeding for the 1996 Donation and suspended royalty payments for the existing wells in Section 8; however, Samson drilled new wells in Section 8, and using outdated information, began paying Mr. Smith, and his assignees, the interest from the 1996 Donation in those wells. In January 2005, the district court rendered judgment annulling the 1996 Donation and ordering the transfer of the interests covered thereby in Section 8 to the Estate of Effie Smith Connell (“the Estate”). The Estate administrator forwarded a copy of the Judgment annulling the 1996 Donation to Samson.


Samson, failing to update its paydeck, continued to pay out the production from the new wells, as if the 1996 Donation was still valid, to Mr. Smith.  The Estate again contacted Samson, forwarding a second copy of the Judgment. Samson thereafter credited the Estate with an interest in the new wells; however, the Estate promptly notified Samson that their calculations of royalties due to the Estate were incorrect. Moreover, when the Estate received a check from Samson, in the incorrect amount, Lessors returned the check, by hand delivery, with an accompanying letter notifying Samson of the royalty underpayment to the Succession.


In response, Samson initiated a concursus proceeding, naming the Estate, and all of the heirs of Effie Connell, as parties and began placing new production from the wells into the court. Samson did not, however, deposit in the registry the amount for royalties claimed by the Estate for past production. The Estate filed a joint motion for partial summary judgment. The court rendered partial summary judgment for the Estate, ordering that the funds deposited in the registry be disbursed to the Estate and closed the registry.


The Estate, thereafter, filed an action alleging Samson’s failure to pay royalties and seeking cancellation of the mineral leases. The matter proceeded to a bench trial, and the court held for the Estate, finding Samson’s failure to make payments was unreasonable, and awarded double the amount of royalty, as damages and interest as well as attorney fees.


On appeal, Samson argued the district court erred in finding that the Estate’s notice to Samson was sufficient. More particularly, Samson argued the notices from the Estate were deficient because they failed (a) to “demand” payment; and (b) to provide information so that proper payment could be made. Moreover, Samson argued that it was protected under the public records doctrine, since the judgment annulling the 1996 Donation was never recorded. Finally, Samson argued that the same heir who received excess royalties (Mr. Smith, heir of the Estate) initiated the claim as co-administrator of the Estate, and thus, had “unclean hands”.


The Second Circuit disagreed. The court found that Lessors did not have to make a demand for specific performance in their letters (i.e. demand the payment of royalties) but rather, only put the Lessee on notice that monies are due, before seeking judicial remedies. The Second Circuit Court of Appeal found the Lessors had given sufficient notice by (a) having the Estate administrator provide letters of administration in June 2006; (b) requesting royalties be paid to the administrators at their listed address (c) disputing accounting for the wells in Section 8; (d) providing judicial documents supporting their right to payment via facsimile; (e) providing email documentation disputing the interest reflected in the Estate; and (f) providing a hand written letter and return check informing Samson as to the insufficient payment rendered and requesting payment of full royalties.  The court found the foregoing, even in the absence of the words “demand for payment,” provided sufficient notice to Samson under Article 137.


The court also determined Samson’s actions did not meet reasonable industry practices, as Samson failed to accurately adjust the percentages on its paydeck when it was informed of an error, and further failed to investigate its records and pay the proper owner(s) after it received notice.


Moreover, the court discussed the invocation of the concursus proceeding as a response to the Lessor’s notice of nonpayment.   Much like the earlier decision of Cimarex Energy Co., et al v. Katherine D. Mauboules 2009-1170 (La. 9/25/2009); 18 So.3d 97, the Second Circuit Court examined whether the use of concursus proceeding was proper, where there was no identifiable third party claims validly outstanding that had to be settled before the payment of royalty monies. Here, the Second Circuit court remarked that at the time of the filing, Samson was aware that the Estate was claiming past due royalty paid by Samson to the other heirs, and Samson failed to file third party claims against Mr. Smith, and his assignees, with regard to their overpayment of royalties for 8 months.  The court thus concluded that since there were no competing claims for the payment of royalties that existed, it was not prudent for Samson to file a concursus proceeding and deposit royalties from the new production into the court registry after the nullity of the 1996 Donation.


The Second Circuit court affirmed the ruling of the district court, upholding the award of damages in accordance with LSA–R.S. 31:139.


The author understands that during the drafting of this article, a Motion for rehearing was granted, and thus, the foregoing judgment by the Second Circuit in Samson, 2014 WL 7404070, is subject to review; however, regardless of the results of the rehearing, issues of timeliness of payment of royalties, and reasonable withholding of same need to be considered and monitored by each Lessee. In conclusion, Lessees should ensure that when questions regarding royalty payments arise, they are diligent in taking appropriate action to correct any errors, if possible. Moreover, Lessees and operators should invoke a concursus proceeding when the appropriate circumstances arise.







Created by: Martha Mills at 3/24/2015 12:21:24 PM | 0 comments. | 980 views.

Oil Crisis: Horseshoes and Hand Grenades

 

With the downturn in commodity prices comes a reduction in drilling activity and capital expenditures. E&P Companies will be looking at their balance sheets to maximize value on what they already have in inventory. That will include PDP (Proved Developed Producing) as well as PUD (Proved Undeveloped). 

 

Prior to shale, a typical E&P would have 80% of their asset value in PDP and 20% in PUD. As late as 2010 this reversed to 20% in PDP and 80% in PUD. These PUD’s were valued on a per net mineral acre value. Therefore the vast majority of the value of the company was in their undrilled acreage. While this has been changing with drilling activity, even today it is common to see a company value its PUD at 50% of its total assets. With reduced drilling budgets these valuations will be with us for several more years.

 

Recently this was apparent when facilitating the acreage reconciliation of a sale where there was little producing acreage and the price was $6,000 per net mineral acre (the total sale was in excess of $150 million). With the commoditization of acreage within the shale plays being valued at dollar per net mineral acre on a formation by formation basis, valuation of the company not only becomes more complex, but more important than ever. This is especially relevant where the PDP and PUD overlap at different depths on the same acreage.

 

Somewhere along the way, the question was asked, “Are we the owner of the net mineral acres at all depths?” More and more the answer will be, “No, not at all formations.” In every shale play there are multiple formations with potential value. Just as companies sell or farmout their leased acreage based on formation severance, so too have the mineral owners began to insert both vertical as well as horizontal depth limitations and expirations by area and depth. These clauses, commonly known as “pugh clauses,” will greatly affect the company’s value over time. The next round of leasing will see even more of this.

 

If you look at any E&P company’s valuations you will see more focus on value of net mineral acres on a formation by formation basis. How many net mineral acres they own in the geographic area, like the field, county, shale play and more, is almost irrelevant. What is crucial now is how many net mineral acres they own, at each depth, within a specific geographic area. With “sweet spots” being identified in each active shale play, the net acres in these spots are valued higher than the surrounding acreage.

 

This, of course, means more and more responsibility will be placed on land departments for accurate acreage counts by formation. These E&P’s will become more reliant on either brokers or their own lease analysts to give them accurate net acre counts. With acreage trading anywhere from $6,000 to $15,000 per acre, per formation, unlike horseshoes and hand grenades, “close enough” will no longer be an adequate response.

 

Tim Supple is the President of iLandMan and has been in the oil and gas industry for nearly 40 years working as a landman, broker, and E+P operator, before entering the land software business in 2005.

 

About iLandMan: iLandMan has offices in Lafayette, Houston and Oklahoma City, and is an online, real-time, tract-based software tool for landmen to use every day.


Created by: Martha Mills at 3/24/2015 12:18:59 PM | 0 comments. | 1187 views.

LAPL Legal Update

March 2015

By:  John Kolwe and Brett Venn

Jones Walker LLP

 

The Southeast Louisiana Flood Protection Authority – East Lawsuit Dismissed

 

On February 13, 2015, Judge Nannette Jolivette Brown of the United States District Court for the Eastern District of Louisiana dismissed the lawsuit filed by the Southeast Louisiana Flood Protection Authority—East that charged nearly 100 oil and gas companies with causing erosion in Louisiana’s coastal wetlands. The authority is one of two regional boards set up by the state after Hurricane Katrina to better protect the New Orleans area from flooding.

 

In the complaint, which was originally filed in state court and then removed to federal court, the levee authority alleged that the oil and gas companies have caused coastal land loss by dredging and failing to maintain a network of canals used to access oil and gas wells and to transport products. The authority also identified ten other activities as purportedly contributing to coastal erosion: road dumps, ring levees, drilling activities, fluid withdrawal, seismic surveys, marsh buggies, spoil disposal/dispersal, watercraft navigation, impoundments, and propwashing/maintenance dredging.

 

In dismissing the lawsuit, Judge Brown determined that federal and state laws did not provide any avenue by which the levee authority could successfully bring suit. For reasons detailed below, Judge Brown rejected arguments by the authority that it had claims for damages and injunctive relief against the oil and gas companies for negligence, strict liability, public and private nuisance, and natural servitude of drain. She ruled that the levees were too far from, or too indirectly affected by, the alleged damage. Judge Brown also said the authority cannot succeed on a claim that it is an intended third party beneficiary of permits issued by the state or the U.S. Army Corps of Engineers that allowed the companies’ energy exploration or transportation activities in the first place.

 

Negligence and strict liability. Judge Brown determined that the oil and gas companies do not have a duty under Louisiana law to protect members of the public from the results of coastal erosion that were allegedly caused by the companies. She likewise rejected the levee authority’s argument that several federal statutes – the Rivers and Harbors Act, the Clean Water, and the Coastal Zone Management Act – imposed a duty on the companies to protect the authority from coastal erosion.

 

The Rivers and Harbors Act makes it illegal for any person to damage or impair a public work built by the United States to prevent floods. 33 U.S.C. § 408. The levee authority argued that a levee operator is a member of the class for whose benefit the Act was enacted, thereby imposing a duty upon the oil and gas companies for the protection of the authority. Judge Brown found that there was no support for the authority’s argument.

 

The Clean Water prohibits, among other things, the discharge of any pollutant into navigable waters unless authorized by a permit. 33 U.S.C. §§ 1311, 1344. Under Section 404 of the Act, the U.S. Army Corps of Engineers has authority to issue permits – called 404 permits – for the discharge of dredged or fill materials into navigable waters. The levee authority contended that the Corps’ permits impose a duty upon the oil and gas companies to 1) maintain canals and other physical alterations as originally proposed, 2) restore dredged or otherwise modified areas to their natural state upon completion of their use or their abandonment, and 3) make all reasonable efforts to minimize the impact of the companies’ activities. These duties, the levee authority alleged, imposed a standard of care upon the companies for the benefit of the authority. Judge Brown once again concluded that there was no support for the authority’s position.

 

The purpose of the Coastal Zone Management Act is to encourage and assist the states in preparing and implementing management programs to preserve, protect, develop, and (whenever possible) restore the resources of the coastal zones of the United States. 16 U.S.C. § 1451, et seq. The levee authority alleged that the Act imposed a duty upon the oil and gas companies for the benefit of the levee authority. But the authority did not identify a specific provision of the Act wherein specific duties or obligations are imposed upon the companies for the authority’s benefit. Judge Brown once again concluded there was no authority for the rule advanced by the authority.

 

Having concluded that neither Louisiana law nor the three federal statutes cited by the levee authority created any sort of duty owed by the oil and gas companies to the authority or its predecessor, Judge Brown dismissed the levee authority’s negligence and strict liability claims under Louisiana law.

 

Natural Servitude of Drain. In Louisiana a natural servitude of drain is a type of predial servitude, which is a charge on a servient estate for the benefit of the dominant estate, and requires that two estates must belong to different owners. Louisiana Civil Code article 655 provides that an estate situated below is bound to receive the surface waters that flow naturally from an estate situated above unless an act of man has created the flow. Article 656 states that the owner of the servient estate may not do anything to prevent the flow of the water, and the owner of the dominant estate may not do anything to render the servitude more burdensome. 

 

Judge Brown found that the levee authority “essentially urges this Court to expand Louisiana law by finding that a natural servitude of drain may exist between non-adjacent estates with respect to coastal storm surge.” In particular, the authority did not allege that it owned property adjacent to property owned by any of the oil and gas companies. Judge Brown declined to expand the law, noting that such an undertaking must come from the legislature or Louisiana Supreme Court, not from a federal district court. She accordingly dismissed the levee authority’s claim for natural servitude of drain.

 

Public and private nuisance.  The levee authority’s claims for public and private nuisance were rejected by Judge Brown because the authority is not a “neighbor” to the property of the oil and gas companies. The authority argued that neither adjacency or ownership of property is necessary to establish a cause of action for public or private nuisance under Louisiana law. The court disagreed, noting that Louisiana courts and the U.S. Fifth Circuit Court of Appeals appear to agree that a plaintiff must have some interest in an immovable “near” the defendant’s immovable.

 

Breach of contract – third party beneficiary claim. Finally, the levee authority asserted a claim for breach of contract, alleging that the oil and gas companies had violated permits issued by the U.S. Army Corps of Engineers and that the authority was entitled to enforce the permits as a third party beneficiary. Judge Brown did not decide whether Corps-issued permits are contracts. Rather, she dismissed the authority’s claim because it is not an intended third party beneficiary under the terms of the permits. As a result, the authority cannot enforce the permits. Judge Brown determined that any benefit that may flow to the authority pursuant to the permits was merely incidental, and the law does not permit mere incidental beneficiaries to enforce contracts. For these reasons, the authority’s claim was dismissed.

 

The levee authority has filed a notice of intent to appeal Judge Brown’s ruling to the U.S. Fifth Circuit Court of Appeals.

 

John Kolwe is a partner in Jones Walker LLP's Business & Commercial Litigation Practice Group and a member of the Energy Industry Team. Mr. Kolwe is directly involved in complex oil and gas and commercial litigation matters pertaining to exploration and development operations on land and in the Gulf of Mexico. He assists clients in transactions involving the purchase, sale, and financing of oil and gas properties. Mr. Kolwe has extensive experience in connection with the representation of exploration and production companies in the negotiation and preparation of leases, farmouts, participation agreements, seismic permit and lease option agreements, joint operating agreements, and various other contracts routinely used in the oil and gas industry. He also represents those clients in connection with title review activities, including preliminary drill site title opinions and division order title opinions.

 

Brett Venn is a partner in the Jones Walker LLP’s Business & Commercial Litigation Practice Group and practices from the firm's New Orleans office. His practice focuses on a variety of business and commercial disputes, including energy, general contract, and shareholder derivative litigation. He has recently represented companies in disputes under the Louisiana Oil Well Lien Act, in construction lien and contract disputes, and in litigation arising out of the Bayou Corne sinkhole in Assumption Parish, Louisiana. He also has experience in investigations involving allegations of commercial kickbacks and conflicts of interest.

 

 

Created by: Martha Mills at 1/29/2015 9:50:22 AM | 0 comments. | 1195 views.

LOUISIANA LEGAL UPDATE

 

By Joshua G. McDiarmid

Dupuis & Polozola, L.L.C.

Another Taste of Champagne:

Term Servitudes Revisited in Moffett v. Barnes

 

In Moffett v. Barnes, 49,280 (La. App. 2 Cir. 10/1/14) 149 So. 3d 475, the court was tasked with interpreting a mineral reservation contained within an act of credit sale.  The sellers, Clyde and Marla Barnes, conveyed two tracts of land to Dewey and Jeanne Moffett on February 28, 2000, reserving the minerals.  The act of sale stated, “Vendor retains all oil, gas and other mineral rights in the land herein conveyed for ten (10) years.”  In 2002, the Barneses executed a mineral lease affecting one of the tracts; during the term of the lease, the lessee drilled, obtaining production in August 2007.  In 2009, the Barneses executed a separate mineral lease affecting the other tract; during the term of this lease, the lessee drilled, obtaining production in March 2010. 

 

The issue revolved around an interpretation of Louisiana Mineral Code article 74, which provides that “parties may either fix the term of a servitude or shorten the applicable period of prescription of nonuse or both.”  The district court identified the issue as whether the reservation created a fixed, ten-year term, or whether it was merely a reaffirmation of the parties’ adoption of the regular ten-year prescriptive period, which is subject to interruption.  The lower court ruled in favor of the Barneses, finding that without an affirmative intention or statement that the servitude would not be subject to prescription, it was subject to prescription by default.

 

By their first assignment of error, the Moffetts argued that the language used in the mineral reservation created a term, and was not a mere restatement of the law of prescription of nonuse.  The Barneses responded that the lower court’s ruling was factually and legally correct, relying upon the decision of the Third Circuit Court of Appeals in St. Mary Operating Company v. Champagne, 2006-984 (La. App. 3 Cir. 12/06/06), 945 So. 846.  The following is a brief recapitulation of the court’s decision in Champagne, which we believe is instructive to this discussion.

 

In Champagne, at issue was the validity of a mineral servitude created on June 22, 1993, which was created by the following language: “Vendors reserve unto themselves all of the minerals underlying or which may be produced from the above described tracts for a period of ten (10) years…” (emphasis added).  In Champagne, St. Mary began drilling operations on the servitude premises on or about March 3, 2003.  The landowners contended that the servitude terminated on June 22, 1993, irrespective of the fact that sufficient operations and production occurred which could have interrupted prescription of nonuse, because the servitude was for a fixed term.  The mineral servitude owners argued that the servitude was subject to the rules of prescription, because unless an instrument creating a mineral servitude clearly provides a statement to the contrary, it is subject to the rules of prescription. 

 

While the court in Champagne acknowledged that the June 22, 1993 deed did not mention prescription, the instrument also did not state in clear terms that the ten-year period would be a term servitude, and not subject to the rules of prescription of nonuse.  In addition to relying on Mineral Code article 74, discussed above, the court referred to the comments thereof, specifically, the statement that the parties are “free to specify that the stated number of years is the term of the interest and not a prescriptive period.”  Accordingly, the court in Champagne held that the phrase “for a period of ten (10) years” was not sufficient to create a fixed term mineral servitude.  Instead, it was a mere restatement of the default prescriptive period that is the default rule in all mineral servitudes.  Thus, the court found that the mineral activities that took place beginning in March 2003 were sufficient to interrupt prescription of nonuse running against the servitude.

 

Returning to our discussion of Moffett, the appellate court found that the lower court correctly analyzed the mineral reservation and the law applicable to mineral servitudes and prescription of nonuse, approving the lower court’s reliance on Champagne.  As a counter argument, the Moffetts posited that the phrasing of the reservation somehow converted it to a fixed term servitude instead of a servitude subject to the normal rules of prescription.  In particular, they believed that the fact that it applied “for ten (10) years,” instead of “for a period of ten years,” removed it from the purview of Champagne.  The court disagreed with this position, holding that the reservation merely confirms the normal ten-year initial period for a mineral servitude, and does not renounce or reject the normal operation of nonuse and interruption provided by law.

 

By their second assignment of error, the Moffetts urged that the lower court should have allowed testimony as to the intent of the parties, relying upon dicta from St. Mary Operating Co. v. Guidry, 2006-1495 (La. App. 3 Cir. 4/4/07), 945 So. 2d 397, writ denied, 2007-0962 (La. 6/29/07), 959 So. 2d 500.  In Guidry, the Third Circuit was again confronted with a similar issue.  In this case, members of the Guidry family executed an instrument which contained the following paragraph: “All of the parties hereto agree that this exchange of minerals, which creates a mineral servitude, will last a period of seven (7) years …”  Yet again, the question presented to the court was whether the mineral servitude was subject to a fixed term of seven years, or whether the parties were simply shortening the ten year prescriptive period provided by law.

 

Mark and Mathew Guidry, the land owners, took the position that the servitude was for a fixed term and not subject to interruption.  They also believed that the language in the instrument was clear and unambiguous, and no parole evidence should be admitted to alter the agreement.  The district court disagreed, finding that since there was no indication in the instrument whether the default laws relating to mineral servitudes were to be avoided, it was necessary to determine the intent of the parties through parole, or extrinsic, evidence.  The pertinent instrument was executed by Mark and Mathew Guidry, as well as their other siblings, and after review of the testimony, the district court was convinced that no agreement existed among the parties as to the question presented to the court.  Many of the Guidry family members never read the instrument and had little or no knowledge of mineral law at the time.  The lower court ruled against Mark and Matthew, reasoning that since there was no express agreement relating to the interruption issue, the parties did not have the intent to alter the law relating to mineral servitudes.  On appeal, Mark and Matthew Guidry claimed it was in error for the trial court to look beyond the four corners of the document in order to ascertain the intent of the parties.  The court of appeals upheld the ruling of the trial court, finding the agreement among the Guidry family ambiguous, and, therefore, it allowed extrinsic evidence to be considered

 

Based upon their reading of Guidry, the Moffetts contended that since the reservation was unclear, the court should have considered the extrinsic evidence submitted by the parties.  Specifically, they urged that the lower court’s judgment should be reversed for the admission of their testimony.  Although the Moffetts urged that the reservation created something other than a mineral servitude subject to the statutory rules of prescription, the district court found the reservation was clear and unambiguous.  When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent.  See also, La. C.C. art. 2046.  In light of the plain reading of the instrument, and the law applicable to the admission of extrinsic evidence, the court of appeals found no error in excluding the Moffetts’ testimony as to their understanding of this reservation.

 

So where are we now?  Well, it looks like we have simply had another glass of Champagne.  The refusal to consider extrinsic evidence signals a reluctance to stray away from Champagne, and a rejection of the lower court’s approach Guidry—at least when the instrument creates what might appear to be a term servitude.  The lesson to learn is that if you intend to create a mineral servitude with a fixed term, you must be explicit and you must show the requisite intent within the four corners of the document.

 

Joshua G. McDiarmid is an associate with the law firm Dupuis & Polozola, L.L.C.  His practice focuses on oil, gas and mineral law in Louisiana and Texas, and centers on oil and gas property title examination.  Mr. McDiarmid graduated from Rhodes College with a B.A. in 2010 and from the Louisiana State University Paul M. Hebert Law Center, cum laude, in 2013.  In preparing this article, the author would like to thank James H. Dupuis, Jr., for his ever invaluable assistance.

 

 

 

 

 

 

 

 

 

 

 

 

 

Created by: Martha Mills at 1/27/2015 4:50:20 PM | 0 comments. | 1137 views.

Oil Crisis: Danger or Opportunity?

By Tim Supple

 

The Chinese symbol for crisis is composed of two sino-characters that can represent “danger” and “opportunity”. So which applies to the present state of the oil business? The answer is both.

 

The good thing about getting older is that nothing surprises you anymore. While the drop in oil prices may have taken everyone by surprise, it is of no surprise... that we were surprised. We have been here before. And while almost everyone has an opinion on when or if it will it recover, I do not. I can honestly say I have no idea what is going to happen.

 

Here is what I do know; this may be the best opportunity to enter the oil and gas business that I’ve seen in my career (my very, very long career). Sounds nuts right? Well let me explain.

 

BUY LOW. SELL HIGH. Any acquisition of oil and gas assets at this time will be based on the “current” price, not some price we wish it to be. If you look at crude futures you see March 2023 deliver at $68.26/barrel (+/-). Lenders will use the lesser of futures prices or even lower to fund exploration and production, but effective yield rates will be the same. Whatever the future brings, investing now at $50/barrel is much less riskier than investing at $100/barrel.

 

DEBT WILL CREATE A “BUYER’S” MARKET. From WSJ Aug 4, 2014: “The E&P sector in 2007 was carrying $28.84 of net debt per barrel of oil equivalent produced, according to data from IHS, roughly equal to operating cash flow. By last year, net debt per barrel had jumped 36 percent to more than $39, while cash flow was essentially flat.”

 

Even before the drop in oil prices, E&P debt was at an all-time high and has not decreased, but the drop in price has decreased the companies’ ability to pay debt. They will be forced to sell. Many of their leases have multiple pay horizons not yet exploited, and at current prices, little value. This creates the opportunity for future value, when and if prices come back.

 

HERE’S THE GOOD NEWS. There will be a lot of new capital coming into the oil and gas business to take advantage of this “buying” opportunity. New companies that no one has heard of, with capital from new sources, will enter the market with low debt/barrel ratios and therefore they will be more stable than their predecessors.

 

These companies will be shedding old methods and looking for new technology to create efficiencies and lower administration costs. Some will even begin using the “virtual” model, meaning there will be no “corporate” office in the traditional sense. They can now lean on a network of skilled and professional oil and gas personnel operating in the cloud. Technology will open up opportunities to hire the best and brightest, wherever they live. The company President can be located in New York, Geophysics, Geology and Engineering in Houston, Operations in Tulsa, Land in Dallas, and Land Service Companies all over the map.

 

Is there danger? Yes, but opportunities for new E&P’s are boundless. Our focus is on supporting those companies willing to take on the challenge and embrace these exciting opportunities.

 

Tim Supple is the President of iLandMan and has been in the oil and gas industry for nearly 40 years working as a landman, broker, and E+P operator, before entering the land software About iLandMan: iLandMan has offices in Lafayette, Houston and Oklahoma City, and is an online, real-time, tract-based software tool for landmen to use every day.

 

 

Created by: Martha Mills at 1/26/2015 11:54:21 PM | 0 comments. | 1116 views.

Former First Lady Laura Bush: Now is the time to reinvest in the surface


(EDITOR’S NOTE:  In case any of our readers have not yet read Laura Bush’s recent letter to the AAPL’s Director of Publishing, the LAPL has decided to print it in this issue of our newsletter.)


To: Le’Ann P. Callihan

American Association of Professional Landmen

Senior Director of Publishing,

Marketing & Media Relations

4100 Fossil Creek Blvd.

Fort Worth, Texas 76137


Dear Ms. Callihan,


I enjoyed reading “Native Seeds for Right-of-Way Restoration: What Every Landman Should Know” by Colleen Schreiber in the July/August 2013 issue of Landman. Schreiber highlights the importance of conserving wildlife habitat in the Eagle Ford Shale region of Texas.


My childhood in Midland taught me to appreciate both the oil and gas industry and the beauty of the natural world. The Eagle Ford Shale’s location in South Texas, along migratory bird routes and its huge expanse of contiguous habitat, is unparalleled in Texas in its species richness. And while we prosper from the development of the underground resources, we must work together to reinvest in the surface that sustains and enriches our quality of life.


To many people, grass is grass and dirt is dirt. That’s why the nonprofit I founded with friends, Taking Care of Texas, is working with a collaborative group of oil and gas companies, landowners and wildlife experts to educate people to take care of land and wildlife in the Eagle Ford. We want to make sure that more landowners and oil and gas companies have the information they need to conserve land and wildlife. Conservation practices are already being implemented on many sites, and we are committed to expanding on these successes.


In June, I visited an active drilling rig on a ranch where the landowner and the lessee were conserving topsoil with the goal of successfully reclaiming the native habitat. I look forward to visiting again in the spring to see what new grasses and flowers have sprung up in the shadow of a brand new pumpjack. Many key partners joined us on that tour and are working with us, including The South Texas Energy and Economic Roundtable, South Texas Natives, Texas Parks and Wildlife Department and Texas Wildlife Association. Through collaboration, we can make Texas a leader in meeting the nation’s energy needs while conserving critical soil and habitat.


When George and I bought our ranch in Central Texas, we began to restore the wild prairie that once flourished there, and to date, we’ve restored over 120 acres. Seeing the land and wildlife blossom even during extended drought proves that public efforts for conservation must be complemented by private endeavor — that means corporations, organizations and people like you and me, who are willing to take responsibility for our land.


During this time of prosperity, we have the opportunity and obligation to reinvest in Texas’ land, wildlife and people. I hope the Landman magazine and all landmen will join me in taking care of Texas.


Sincerely,

Laura W. Bush

Honorary Chair Taking Care of Texas

 

 

 

For native seed supplier and technical assistance, see information below.

DOUGLASS W. KING SEED COMPANY

San Antonio, TX • 210-661-4191

www.dkseeds.com

POGUE AGRI PARTNERS

Kenedy, TX • 830-583-3456

www.pogueagri.com

NATIVE AMERICAN SEED

Junction, TX • (325) 446-3600

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TURNER SEED COMPANY

Breckenridge, TX • 1-800-722-8616

www.turnerseed.com

BAMERT SEED COMPANY

Muleshoe, TX •1-800-262-9892

www.bamertseed.com

Photo by Grant Miller

Technical Assistance:

• USDA NRCS Plant Materials Centers in Kingsville 361.595.1313 and Knox City, Texas - 940-658-3922

• USDA NRCS Field Offices

• Regional/District Texas Parks and Wildlife Department Biologists

• South Texas Natives/Texas Native Seeds Projects of Caesar Kleberg Wildlife Research Institute


Created by: Martha Mills at 1/4/2015 4:15:21 PM | 0 comments. | 1189 views.

 

LOUISIANA LEGAL UPDATE

By Jeffrey D. Lieberman

Liskow & Lewis APLC

 

MINERAL LEASES FROM INDEPENDENT EXECUTORS AND INDEPENDENT ADMINISTRATORS

 

Landmen are frequently tasked with obtaining mineral leases from heirs or legatees of a deceased mineral owner.  Where a succession proceeding has been opened and an independent executor or independent administrator has been appointed, it is commonly understood that the independent executor or independent administrator is fully authorized to execute a mineral lease on property included in the succession without court approval or consent by the heirs or legatees.  That common understanding was affirmed by Davis v. Prescott, 47,799 (La. App. 2 Cir. 02/27/13); 110 So. 3d 625, writ granted by 2013-0669 (La. 05/17/13); 118 So. 3d 374, writ recalled and denied by 2013-0669 (La. 11/05/13); 130 So. 3d 849.

 

In that case, Prescott, the duly appointed independent executor of the succession at issue,  granted a mineral lease burdening property included in the succession for a three year primary term in favor of AIX Energy without first seeking court approval and without seeking the consent of the legatees.  Shortly thereafter, Davis, a legatee, entered into an agreement to sell his undivided interest in the property unaware that it had been leased.  Davis learned of the AIX lease after the sale and filed suit, alleging that Prescott breached his fiduciary duty as independent executor by granting the AIX lease without his consent. Davis contended that he would have been able to sell his undivided interest for a much higher price had he known of the lease and the valuable mineral deposits underlying the property.

 

Davis based his argument on Louisiana Code of Civil Procedure article 3226, which states:

 

When it appears to the best interest of the succession, the court may authorize a succession representative to grant a lease upon succession property after compliance with Article 3229. No lease may be granted for more than one year, except with the consent of the heirs and interested legatees.

 

The court may also authorize the granting of mineral leases on succession property after compliance with Article 3229. The leases may be for a period greater than one year as may appear reasonable to the court. A copy of the proposed lease contract shall be attached to the application for the granting of a mineral lease, and the court may require alterations as it deems proper.

 

The order of the court shall state the minimum bonus, if any, to be received by the executor or administrator of the estate under the lease and the minimum royalty to be reserved to the estate, which in no event shall be less than one-eighth royalty on the oil and such other terms as the court may embody in its order.

 

Davis argued that the first paragraph of Article 3226 required the legatees to consent to the execution of a lease with a term greater than one year, even though Prescott, as an independent executor, was relieved of the requirement to petition the court for approval in accordance with Article 3229.  The trial court agreed.

 

On appeal, the Second Circuit correctly found that the first paragraph only applied to surface leases.  The second paragraph, specific to mineral leases, governed the requirements for a succession representative to grant a lease on succession property.  Because Prescott was an independent executor relieved of the requirement to petition the court for approval of the lease in accordance with Article 3229, he was free to grant the AIX lease for a term greater than one year without the surface-lease-specific requirement of obtaining the consent of the legatees.

 

This case thus affirms the common practice of obtaining mineral leases with terms exceeding one year from an independent executor or independent administrator without petitioning the court for approval and without the consent of the heirs or legatees.


The subsequent history of this case, however, raises a note of caution for landmen taking such leases and the independent executors and independent administrators who execute them on behalf of a succession.  After the Second Circuit rendered its opinion, the Louisiana Supreme Court granted a writ to review the decision.  This writ was ultimately recalled and denied, but Justice Knoll dissented noting that a succession representative may still breach his fiduciary duty by concealing the existence a mineral lease burdening succession property from the heirs or legatees even though there is no requirement that the heirs or legatees consent to the lease, stating:

 

Despite Article 3396.15's significant relaxation of the procedural rules for administering estates, an independent executor is, above all else, "a fiduciary and  is responsible for his actions." La. Code Civ. Proc. art. 3396.15, Official Revision Comments (b). Although the Court of Appeal correctly concluded Prescott did not breach any fiduciary duty by failing to obtain Davis's approval for the AIX lease, its analysis failed to consider that Prescott may have breached a broader fiduciary obligation by failing to make good faith, managerial disclosures to the legatees, specifically Davis. Prescott  breached this broader obligation when he neglected to notify Davis of the AIX Energy lease prior to Davis's sale of his 1/5 interest in the succession property…


Louisiana courts, as well as courts in other jurisdictions, have recognized this duty of good faith disclosure extends specifically to independent executors. The Second Circuit, for instance, has recognized that while Louisiana's independent-administration-of-estates law allows an independent executor to act without court authorization, the executor's fiduciary obligations still require "good faith dealings and managerial disclosure with the heirs and legatees for whom he represents." Succession of Davis, 43,096 at pp. 9-10, 978 So.2d at 611. This general obligation of good faith disclosure exists so as to  avoid disputes between the executor and the legatees and to fulfill the executor's fiduciary obligations. Id. Likewise, the Texas Supreme Court has recognized an independent executor owes "a fiduciary duty of full disclosure of all material facts" known to him that might affect the beneficiary's interests in the succession. Montgomery v. Kennedy, 669 S.W.2d 309, 313 (Tex. 1984). Specifically, the Texas Supreme Court found the executor's failure to disclose the existence of a mineral lease on succession property concealed a material asset of the estate from the beneficiary. Id.

 

In light of this jurisprudence and the general obligation of disclosure owed by all who serve in a fiduciary capacity, Prescott, at the very least, had a duty to inform Davis of the AIX lease. This lease produced substantial returns, making its existence a fact which would materially affect Davis's 1/5 interest in the Claiborne Parish property. As evidenced by this litigation, Davis's ignorance of the AIX lease lead him to accept a much lower price than his interest was worth in the sale to SOTJ, L.L.C. Prescott, therefore, violated the fiduciary's special relationship of confidence and trust by failing "to render  a full and fair disclosure to the beneficiary of all facts which materially affect his [Davis's] rights and interests."  130 So. 3d 849 (J. Knoll Dissent).

 

The lesson to be gleaned from this dissent is that, even though an independent succession representative may execute a mineral lease burdening succession property without the consent of the heirs or legatees, the succession representative remains a fiduciary and he may be personally liable if the heirs or legatees can show that the existence of the lease was concealed from them.  Further, if the heirs or legatees are unhappy with the terms of the concealed lease, they may attempt to challenge the validity of the lease itself.  Although a challenge to the validity of the lease solely on the basis that its existence was concealed from the heirs or legatees may not be successful, landmen taking leases from independent succession representatives should consider encouraging those representatives to disclose the existence and terms of any leases taken on succession property to the heirs and legatees whose interests are subject to those leases.

 

Further information concerning the above-mentioned case may be obtained from Jeffrey D. Lieberman at jdlieberman@liskow.com or by phone at (337) 232-7424.

 

Mr. Lieberman practices in the oil and gas section of the firm's the Lafayette office.  His practice focuses on oil and gas non-litigation matters, including title examination, unitization and other regulatory matters before the Louisiana Office of Conservation and the State Mineral Board, contract negotiation, and acquisition and divestiture of oil and gas properties.

 

 

 

 

 

 

 

 

 

 

 

Created by: Martha Mills at 12/8/2014 6:31:57 PM | 0 comments. | 1277 views.

LOUISIANA LEGAL UPDATE

By Tom McKowen

Dennis, Bates & Bullen

 

 

 

Hayes Fund v. Kerr-McGee, No. 13-1374 (3d Cir. 10-1-14, rehearing denied 11-12-14)

 

 

In the instant proceeding, plaintiffs contend that Kerr-McGee Rocky Mountain, LLC, and other defendants, failed to follow the proper, customary, and industry-wide accepted protocol for drilling two oil and gas wells. Such actions allegedly resulted in valuable hydrocarbons being unrecoverable resulting in substantial pecuniary damages to the plaintiffs.

 

The trial consumed twenty-five days over a ten-month period. It was a battle of experts as to whether Kerr-McGee properly drilled the wells. The trial judge dismissed all of the plaintiffs’ claims with prejudice. He went with the defendant’s experts. The Court of Appeal unanimously reversed. Plaintiffs asserted that the trial judge’s determination of six different issues of fact were each manifestly erroneous. The Court of Appeal agreed in every instance, apparently finding numerous instances of negligence on behalf of the defendants, including cementing stuck pipe and thereby not providing effective zonal isolation, simultaneous use of multiple permanent packers in a depletion drive well, and failure to use sand control resulting in the well sanding up.

 

The Court of Appeal accepted the testimony of the plaintiffs’ expert on damages. He had prepared a spreadsheet outlining the actual income generated from production versus the income that would have been generated had the well been prudently operated. He found such difference on one well to be $6,963,898 and on the other to be $6,473,998. Damages were awarded in such amount.

 

The instant decision also addressed two legal issues. In determining the quantum of damages, the boundaries of the reservoir were at issue. Plaintiffs asserted that the area of the reservoir was established by the unit order establishing a drilling and production unit for the Hackberry Zone, Reservoir A, one of the wells at issue being the unit well. Defendants presented evidence that the actual reservoir was smaller and that there were no damages to the remaining hydrocarbons that could be produced by a replacement to such well. The trial judge found that presenting such evidence was not a collateral attack on the Order of the Commissioner of Conservation. The Court of Appeal reversed, finding that despite this order being geographic and not geologic, its determination of reservoir boundaries were not subject to collateral attack.

 

Plaintiffs also asserted that they did not have to prove that defendants’ actions were imprudent, but only had to prove causation and damages. Such position was based upon the deletion of the words “to timber and growing crops of Lessor” in Paragraph 8 of the Oil, Gas and Mineral Lease, which originally provided in pertinent part: “The Lessee shall be responsible for all damages to timber and growing crops of Lessor caused by Lessee’s operations.” The trial judge held that such change in language did not result in strict and/or absolute liability. The Court of Appeal reversed. It quoted such provision and additional language in an exhibit to the lease providing that the Lessee is responsible for all damages caused by Lessee’s operations “including, but not limited to damages to the surface of the land, timber, crops, pastures, . . . water wells and improvements.” It ruled as follows:

 

Based on our review of the jurisprudence, lease, and trial record, we find that Kerr-McGee was absolutely liable when it knowingly agreed that “Lessee shall be responsible for all damages caused by Lessee’s operations.” This absolute liability was initially limited to damages to Hayes Fund’s timber and growing crops. Those limitations, however, were struck from the lease. By adding Exhibit A, which includes paragraph EE, Kerr-McGee’s responsibilities were expounded upon rather than limited. Since the words of the lease are clear and explicit and lead to no absurd consequences, “no further interpretation may be made into the parties’ intent.” Id. [Corbello-Iowa Prod., 850 So. 2d 686, 693 (La. 2003)].

 

It is quite common to strike such language from a mineral lease. That doing so results in absolute liability to the Lessee would certainly be surprising to most oil companies. From a reading of the opinion, which is difficult to follow in many places, it would appear that this ruling is dicta. The main part of the opinion finds negligence in almost all instances. The defendant’s liability would appear to be the same, whether pursuant to negligence or pursuant to absolute or strict liability.

 

This case is not final. The delays for filing a writ application in the Louisiana Supreme Court have not expired.

 

THOMAS C. McKOWEN, IV, born in Baton Rouge, September 13, 1953; admitted to bar, 1977, Louisiana; U.S. District Court, Middle, Eastern and Western Districts of Louisiana; U.S. Court of Federal Claims; U.S. Supreme Court.  Education: Louisiana State University and A. and M. College (B.S. 1974; J.D. 1977).  Phi Alpha Delta; Order of the Coif; Phi Kappa Phi.  Law Clerk to the Honorable C. Lenton Sartain, Court of Appeal First Circuit, 1977-1978.  Member: Baton Rouge, Feliciana (President, 1983-1984), Louisiana State (Member, Sections of Trust Estates, Probate, Immovable Property Law; Civil Law; and Mineral Law) Bar Associations.  Mineral Law, Probate, Estate Planning, and Real Estate Law.

 

 

 

Created by: Martha Mills at 11/11/2014 7:25:02 PM | 0 comments. | 2340 views.

iLandMan Job Openings

 

https://www.ilandman.com/about/careers/

 

Land Data Analyst

iLandMan is in need of Land/Lease Data Analyst’s for an ongoing client project. Ideal candidate has 3+ years experience in Land related work, i.e. leasing, title, due diligence and/or curative. This candidate should have iLandMan experience and has taken the web-based training course or has used iLandMan for verifiable client. Knowledge of lease terms and clauses as well as title verification is a must. This is a temporary contract lasting 2-3 months.

Web Developer/Data Analyst

 

Design, develop, and implement customized web applications, web services, and enterprise solutions for clients using SQL Server, C#, .NET, MVC and JQuery. Interface with customers to identify, develop, and implement transitioning of data from product to product. Work closely with other developers to design and develop public-facing web sites for the management, manipulation, and visualization of spatial data. Assist with application development estimating, planning, and progress tracking.

 

Project Manager

 

This position will report to the Operations Manager. Ideal candidates will work with iLandMan clients to get projects done efficiently and effectively. Candidates must be proficient in iLandMan have a strong background in various aspects of land work. Ideal candidates must have a take charge personality and be available for local and traveling projects.

 

GIS Technician

 

This position will report to the GIS Program Development Manager. Ideal candidates must be proficient in ArcGIS Server and/or ArcMap. Skills in AutoCad are a plus. Ideal candidates must have ability to work independently and within work groups.

 

Training/Marketing Assistant

 

Design, develop, and implement customized training manuals, brochures, online help guide instructions with a strong literary and design background. Interface with Training and Marketing managers to identify, develop, and implement transformative training and helpful data concerning product knowledge retention for everyday use. Work closely with software developers to design and develop public-facing user guides, training manuals and brochures.

 This position could be part-time or full-time in our Lafayette, LA office.

 

Please contact Richard Hines @ 337-234-1125 or send resume to careers@ilandman.com.

Created by: Martha Mills at 11/9/2014 1:18:04 PM | 0 comments. | 1391 views.

LOUISIANA LEGAL

UPDATE

By David J. Rogers

Gordon Arata


 Louisiana Title Examiners,
Take Note of Recent Change in the Mineral Code on Prescription

A recent change in the Mineral Code should be noted by all title examiners and title researchers in Louisiana.  Subsection (I) was added to Article 149 of the Louisiana Mineral Code (Louisiana Revised Statute 31:149) effective August 1, 2014.  Subsection I provides as follows:

When land is acquired from any person by an acquiring authority or other person, through act of sale, exchange, donation, or other contract, as part of an economic development project pursuant to a cooperative endeavor agreement between the acquiring authority and the state through the Department of Economic Development, as evidenced in a certification by the secretary of the Department of Economic Development attached to the instrument by which the land is acquired, and a mineral right subject to the prescription of nonuse is reserved in the instrument by which the land is acquired, the prescription of nonuse shall be for a period of twenty years from the date of acquisition whether the title to the land remains in the acquiring authority or is subsequently transferred to a third person, public or private.[1]

An analysis of Article 149 suggests that the newly added Subsection I is a narrowly tailored variation of the previously existing Subsection B of Article 149, which provides as follows:

When land is acquired from any person by an acquiring authority through act of sale, exchange, donation, or other contract, or by condemnation or expropriation, and a mineral right subject to the prescription of nonuse is reserved in the instrument or judgment by which the land is acquired, prescription of the mineral right is interrupted as long as title to the land remains with the acquiring authority, or any successor that is also an acquiring authority.  The instrument or judgment shall reflect the intent to reserve or exclude the mineral rights from the acquisition and their imprescriptibility as authorized under the provisions of this Section and shall be recorded in the conveyance records of the parish in which the land is located.[2]

While similar, Subsections B and I provide certain differences that could create title ambiguities in certain circumstances.  Below is an analysis of these differences:

Acquiring Authority:

Under Subsection I, the transfer may be between any person and an acquiring authority or other person.  This differs from Subsection B, which applies only when land is being acquired from any person by an acquiring authority.

 

Type of Transfer:

Subsection I pertains only to a narrow set of transfers, namely, those that are part of an economic development project pursuant to a cooperative endeavor agreement between the acquiring authority and the state through the Department of Economic Development.  By contrast, Subsection B is much broader in nature and includes acts of sale, exchanges, donations, or other contracts, or transfers by condemnation or expropriation between a person and any qualifying acquiring authority.  An exception to the type of transfers applicable to Subsection B includes tax sales or other types of transfers resulting from the enforcement of obligations.[3]

Certificate Required:

The form requirements under Subsection I include the attachment of a certificate issued by the secretary of the Department of Economic Development attached to the instrument by which the land was acquired.  The certificate must evidence that the transfer is part of a cooperative endeavor agreement.  Title examiners, in particular, should be aware of this requirement and confirm that these certificates are attached to such conveyances.  This may be the only hint in the conveyance records that a transfer falling under Subsection I has occurred.  No such requirement exists under Subsection B.

Reservation Language:

The reservation language required for a valid mineral reservation in the instrument of conveyance is also different under Subsections B and I.  Under Subsection I, it appears that as long as “a mineral right subject to the prescription of nonuse is reserved in the instrument,” then a valid reservation under Subsection I has occurred.

By contrast, the language required for a valid mineral reservation is much more onerous under Subsection B.  The requisite language under Subsection B must “reflect the intent to reserve or exclude the mineral rights from the acquisition and their imprescriptibility as authorized under the provisions of this Section and shall be recorded in the conveyance records of the parish in which the land is located.”

Prescriptive Period:

The commencement of the tolling of the period of prescription of nonuse differs between Subsections I and B.  Also, the term of the prescription of nonuse is different under Subsections I and B. Under Subsection I, the prescriptive period begins to run from the date of the acquisition whether or not the acquiring authority or other person transfers the property to a third person who may be public or private.  The period of nonuse under Subsection I is for twenty (20) years.  By contrast, under Subsection B, the mineral rights are held in perpetuity and the ten (10) year prescriptive period of nonuse does not begin to run until such time as the public body transfers the land back into the private domain.

The difference in the period of prescription of nonuse under Subsections I and B could create ambiguity in a situation where an acquiring authority acquires property and the mineral rights have been reserved pursuant to the requirements under Subsection I, whereby a mineral servitude was created by the transfer with a valid reservation, and all the requirements of Subsection B have also been met.  The question arises whether the prescription of nonuse on the transferor’s servitude would begin to run upon the date of the transfer with a 20-year prescriptive period, as stated under Subsection I or instead whether the prescriptive period would be interrupted for as long as title to the land remains with the acquiring authority, or any successor in title that is also an acquiring authority as applicable under Subsection B.  Although the answer is not clear, any transferor in the above factual scenario should make certain that the mineral reservation in the instrument of conveyance is stated as being made under Subsection B in order to ensure that the intention to reserve the minerals for the period of nonuse allowed under Subsection B is clear.

Reversionary Interests:

Generally, under Louisiana mineral law, the expectancy of a landowner in the extinction of an outstanding mineral servitude cannot be conveyed or reserved directly or indirectly.[4]  But Subsection D to Article 149 is an exception to this general rule.  Subsection D provides that “if a mineral right subject to prescription has already been established over land at the time it is acquired by an acquiring authority, the mineral right shall continue to be subject to the prescription of nonuse to the same extent as if the acquiring authority had not acquired the land.  Upon the prescription or other extinction of such mineral right, the transferor of the land shall without further action or agreement become vested with a mineral right identical to that extinguished, if (1) the instrument or judgment by which the land was acquired expressly reserves or purports to reserve the mineral right to the transferor, whether or not the transferor then actually owns the mineral right that is reserved, and (2) the land is still owned by an acquiring authority at the time of extinguishment.”[5]

Based on the language of Subsection D, it is unclear as to what the result would be where an acquiring authority acquires land under Subsection I and the mineral reservation made by the transferor in the instrument making the transfer is one of a reversionary interest.  The outcome of such a reservation upon the extinguishment of the prior reservation is not clear under the newly revised Article 149.  As above, a transferor should express the intent to be bound by Subsection B with regard to the prescriptive period in the mineral reservation language in the instrument of transfer.

In short, the change to the Mineral Code with the addition of Subsection I to Article 149 needs clarification.  Why the legislature felt the need to stray from a ten year prescriptive period to a twenty year period is unclear.  We can only hope that this is not the beginning of a trend of creating multiple prescriptive periods for different scenarios in Louisiana.  Over time some clarity on the changes to Article 149 should emerge.  In the meantime, all title examiners and researchers should keep an eye out for scenarios where Article 149 is applicable and act accordingly to protect their client’s interests.



[1] La. R.S. 31:149(I).

 

[2] La. R.S. 31:149(B).

[3] Id. See Comments.

[4] La. R.S. 31:76.

 

[5] La. R.S. 31:149(D).

Created by: Martha Mills at 10/10/2014 10:33:24 AM | 0 comments. | 1568 views.

LOUISIANA LEGAL UPDATE

 

By Stuart Simoneaud

Ottinger & Hebert

Divisibility of Mineral Lease Revisited

 

Questar Exploration and Production Co. v. Woodard Villa, Inc., 48,401 (La.App. 2nd Cir. 8/7/13); 123 So.3d 734, writ denied, 13-2467 (La. 2/21/14); 133 So.3d 682.

 

A mineral lease is innately indivisible.[1] However, parties are free to contract as to those instances in which the lease may be made divisible,[2] and a determination of whether there has been a division of the mineral lease (either verti­cally/geographically or horizontally/depth) is essential to a lease maintenance analysis.[3] Arguably, a division of the lease shall not be effectuated unless the contract of lease clearly provides for such. However, it seems that Louisiana courts have gone to great lengths to find an intent to divide a mineral lease in some instances. In his January 2012 Legal Update, Jamie Rhymes discussed lease di­visibility and highlighted two recent decisions addressing whether the so-called “di­vision of rental clause” reflects an intent to divide the mineral lease in the event of a partial assignment thereof as to a particular depth or horizon. In this article, the author proposes to revisit the issue of lease divisibility in light of the recent decision of Questar Exploration and Production Co. v. Woodard Villa, Inc., supra.

 

At issue in Questar Exploration and Production Co. was not a partial assignment of a mineral lease, but whether a “Pugh clause” operated to divide the mineral lease into separate leases. The mineral lease in that case covered roughly 1,480 acres situated in five governmental sections in Bienville Parish, Louisiana, all of which had been included within individual units created by the Louisiana Office of Conservation for the Cotton Valley Formation and which units conformed to such governmental sections. The mineral lease was executed on a fairly standard lease form but there was attached thereto a rider, Paragraphs 6 and 11 of which contained a horizontal “Pugh clause” and a vertical “Pugh clause” which read, as follows:

 

¶6:  This lease shall cover and affect the land described herein from the surface of the earth down to one hundred feet (100’) below the stratigraphic equivalent of the deep­est depth to which the deepest well shall be drilled on the leased premises or on a unit(s) embracing some part of the leased premises during the primary term, plus one (1) year. Provided, however, that if a productive formation is discovered and the same is producing when the depth limitation takes effect, this lease shall extend to the base of such formation so as to include all of such formation under the lease plus one hundred feet, though no well shall have been drilled to the depth of said base or lower limit of such formation.

 

¶11:  Notwithstanding anything to the contrary contained herein, the commencement of operations for drilling . . . from any well situated on lands included within a unit or units embracing a portion of the leased premises and other lands not covered hereby shall only serve to main­tain the lease in force beyond the primary [term] as to that portion of the leased premises embraced in such unit or units. This lease may be maintained as to acreage not included in such unit or units in any other manner pro­vided for herein, including continuous development as provided for in paragraph 6 of the body of the lease form.

 

As of the expiration of the primary term of the lease, production from the Cotton Valley Formation had been established for each of the aforementioned five units. By then, no wells had been drilled to a depth deeper than the Cotton Valley Forma­tion. However, prior to the operative date of the horizontal “Pugh clause” (¶6) [i.e., within 1 year of expiration of the primary term], QEP commenced the drilling of the Jimmy Woodard 34 H No. 1 Well (the “JW #1 Well”) to test the Haynesville Shale Formation. That well was ultimately completed in the Haynesville Shale Formation as the unit well for the HA RA SUVV, which unit included a portion of the leased premises. While it was drilled from a surface location outside of the unit and off of the leased premises, the drilling of the JW #1 Well was deemed to be a unit operation which had commenced prior to the operative date of the horizontal “Pugh clause.”

 

Despite such, Woodard subsequently notified QEP that the mineral lease had ter­minated as to all depths below the Cotton Valley Formation and demanded a re­lease of the “deep rights.” In its demand for release, Woodard relied on the lan­guage of the vertical “Pugh clause” and horizontal “Pugh clause.” QEP responded by tendering a partial release of the mineral lease as to all depths below 12,556’, being 100’ feet below the total depth drilled in the JW #1 Well. It then instituted the present action seeking a declaration that the mineral lease remained in effect down to a depth of 12,556’ as to the entirety of the leased premises and which in­cluded the Haynesville Shale Formation. Judgment was granted by the trial court in favor of QEP to that effect.

 

On appeal to the Second Circuit, Woodard made several arguments in support of termination of the lease as to the “deep rights.” One of such arguments was that the vertical “Pugh clause” (¶11) effectuated a “division” of the lease into five sepa­rate leases -- one for each of the Cotton Valley Units which were producing as of the expiration of the primary term -- and, thus, the horizontal “Pugh clause” (¶6) oper­ated to terminate the lease as to all depths below the deepest depth drilled in each unit. In support of the proposition that a “Pugh clause” has the effect of dividing the lease, Woodard relied on Roseberry v. Louisiana Land & Exploration Co. and Peironnet v. Matador Resources Co.

 

After considering arguments from both sides, the Second Circuit affirmed the deci­sion of the trial court, holding that a division of the lease had not occurred and the mineral lease remained in effect down to a depth of 12,556’ as to the entirety of the leased premises. In doing so, the court noted that, under Article 114 of the Louisi­ana Mineral Code, operations on any portion of the leased premises, or on land unitized therewith, will maintain the lease as to the entirety of the land burdened thereby.[4] It also noted that such general principle can be altered contractually by the inclusion in the lease of a “Pugh clause,” but explained that the main purpose of such a clause is to protect the lessor from the anomaly of having the entire property held under lease by production from a very small portion.[5] In other words, a “Pugh clause” does not, in and of itself, operate to divide the lease but, rather, modifies the default rule of Article 114 that unit operations or production serve to maintain the lease as to the entirety of the leased premises. Of course, as noted by the court, not all “Pugh clauses” are alike, and the provisions of each must be reviewed to deter­mine its effect.

 

Additionally, addressing Woodard’s reliance on Peironnet and Roseberry for the general proposition that a “Pugh clause” effectuates a division of the lease, the court said:[6]

 

Woodard correctly shows that in Peironnet [], the Pugh clause expressly stated that each unit “shall be treated as constituting a separate lease,” and that in Roseberry [], certain language was “clearly intended to negate the gen­eral rule” of [Article 114 of the Louisiana Mineral Code]. On close examination, however, we find no such similar intent in the instant Pugh clause. Woodard has not cited any provision of the lease, and our own reading of it has uncovered none, referring to separate leases or a division of the lease. The Pugh clause states that operations from any well situated on lands included within a unit or units embracing a portion of the lease premises will maintain the lease only “as to that portion of the leased premises embraced in such unit or units,” but further states:

 

“This lease may be maintained as to acreage not included in such unit or units in any other manner provided for herein, including continuous development as provided for in paragraph 6 of the body of the lease form.”

 

Finally, and perhaps most significant, the Second Circuit stated that “a mineral lease is fundamentally indivisible” and “a division of the lease will be recognized when the lease agreement clearly provides for it.”[7]  Since the mineral lease in this case did not reflect a clear intent to divide the lease, the court found that no division had occurred.

 

This decision is important because it provides further guidance with respect to the issue of lease divisibility. More precisely, it serves as an affirmation by the Second Circuit (and, by reason of the denial of writs, perhaps by the Louisiana Supreme Court) of the proposition that a division of the lease shall only occur when the contract of lease clearly provides for such.

 



[1]           See e.g. Articles 114 and 130, Louisiana Mineral Code, and the comments thereto.

[2]           See Article 3, Louisiana Mineral Code.

[3]           Lease “division” has reference to creating, in a proper case, two or more separate leases where but one existed before.

[4]           Questar Exploration and Production Co., 123 So.3d 734, 738.

[5]           Id. at 738.

[6]           Id. at 738-739.

[7]           Id. at 741.

Created by: Martha Mills at 9/3/2014 11:31:02 AM | 0 comments. | 1389 views.

LOUISIANA LEGAL

UPDATE

By Jasmine B. Bertand

Onebane Law Firm

 

Top Lease Discussed in

Barham v. St. Mary Land & Exploration Co.

 

Louisiana Civil Code Article 1881 defines how an objective novation takes place, providing that “[a] novation takes place when, by agreement of the parties, a new performance is substituted for that previously owed, or a new cause is substituted for that of the original obligation. If any substantial part of the original performance is still owed, there is no novation. Novation takes place also when the parties expressly declare their intention to novate an obligation.” Article 1881 further elaborates that “a mere modification of an obligation, made without intention to extinguish it, does not effect a novation.”  The article gives the execution of a new writing as an example of such a modification.

 

The existence, or nonexistence, of a novation was the central issue in the Second Circuit’s decision in Barham v. St. Mary Land & Exploration Co., 129 So.3d 705 (La.App. 2 Cir. 11/20/2013). In Barham, plaintiff and defendant executed a mineral lease over an 80-acre tract in Bienville Parish (referred to as the “1966 lease”) with the standard one-eighth (1/8th) royalty. Once the well was drilled, plaintiffs continuously received either royalties or shut-in payments. However, in 1990, a landman researched the 1966 lease and discovered there was a gap in production from July 1986, through January 1987. Fearful that the 1966 lease may have terminated due to this gap in production, defendant presented a new lease to the plaintiffs (the “1990 lease”). The 1990 lease covered the same 80-acre tract as the 1966 lease, but contained a typewritten addendum changing the lessor’s royalty from one-eighth (1/8th) to one-fifth (1/5th), and an attachment adding a Pugh clause and a surface damage clause, none of which were present in the 1966 lease. At trial, plaintiff testified that she insisted on these new provisions.

 

Plaintiff filed suit in September 2006, demanding declaration that the 1966 lease was invalid for nonpayment of royalties; an award of all unpaid royalties; in the alternative, an award of one-fifth (1/5th) royalties under the 1990 lease; and damages, penalties and attorney fees provided by the Mineral Code. It was the plaintiff’s position that the 1990 lease was a novation of the 1966 lease. Defendants countered, claiming that they never intended to cancel the 1966 lease, that the company continued to pay either the one-eighth (1/8th) royalty or shut-in payments to the plaintiff, and that the 1990 lease was not a novation of the 1966 lease but rather a “protection top lease” put in place as a precaution until the status of the 1966 lease could be clarified. Once defendants uncovered receipts showing quarterly shut-in payments in August and November 1986, the defendant deemed the 1966 lease still in effect, continued paying the plaintiff one-eighth (1/8th) royalty, and treated the 1990 lease as a “protection lease” that never took effect.  At trial, the district court found that the evidence did not show that the 1990 lease was a novation of the 1966 lease and rejected plaintiff’s claim.

 

Under the Louisiana Civil Code, a novation is the extinguishment of an existing obligation by the substitution of a new one. La.C.C. art. 1879. The intention to extinguish the original obligation must be clear and unequivocal; novation may not be presumed. La.C.C. art. 1880. Both parties conceded that the 1990 lease made no mention of the 1966 lease, thus the court found no clear statement of intent to extinguish the prior obligation, as required by La.C.C. art. 1880. However, the Louisiana jurisprudence recognizes that the intent to novate may be inferred by the circumstances and need not be made expressly in writing. 

 

The Second Circuit then discussed the law with respect to top leases, noting that it had previously recognized the practice of granting a top lease on property already subject to a mineral lease, to become effective if and when the existing lease expired or terminated. The court also noted that in some circumstances, the same lessee or his successor in title may secure a second lease from the same lessor covering all or part of the same interest before the first lease has expired, in order to preserve its leasehold rights where there are perhaps questions regarding the validity of the underlying lease.  The court pointed to commentary which stated that “the mere execution of a top lease, silent as to its effect on the existing lease, should not result in the extinction of the original lease by novation,” and that “the language of the instrument and the facts surrounding its execution are crucial factors in finding either the ‘common purpose’ of protection—a top lease—or an intent to novate.”

 

In arguing that an intent to novate could be found from the circumstances at hand, plaintiff relied on Placid Oil Co. v. Taylor, 325 So.2d 313 (La.App. 3 Cir. 1975), writ denied, 329 So.2d 455 (1976), a case which held that a top lease subject to twice the lessor’s royalty payment as the underlying leases effected a novation.  Similar to the facts in Barham, the top lease in Placid Oil made no reference to the underlying leases.  In countering that there was no such intent to novate, the defendants relied upon the earlier opinion of Stacy v. Midstates Oil Corp., 214 La. 173, 36 So.2d 714 (1947), where  the Louisiana Supreme Court found there was no novation, despite the fact that the top lease expressly superseded the underlying lease. 

 

In Placid Oil, the Third Circuit held that a top lease can act as a novation of the underlying leases even if the top lease makes no reference to those underlying leases. The facts of Placid Oil were as follows: in 1964, persons owning an undivided mineral interest in two tracts of land executed oil, gas and mineral leases subject to a one-eighth (1/8th) lessor’s royalty and then by mesne conveyances conveyed their interests, subject to the leases, to a third party, who acquired additional mineral interests in the tract.  In 1965, the third party executed an oil, gas and mineral lease to the original lessee of the 1964 lease.  The 1965 lease provided for a one-fourth (1/4th) royalty and contained no reference to the 1964 leases. Placid's principal argument, based on the cited articles of the Civil Code, was that the terms of the 1965 lease did not make it clear that the parties intended to extinguish the old leases and substitute the new one in their place, that novation cannot be presumed, and that the evidence thus failed to support a holding that the 1965 lease effected a novation of the previously existing leases. The court in Placid Oil held that the determining factor in deciding whether a novation had been effected was the intention of the parties. The intention to novate may be shown by the character of the transaction, and by the facts and circumstances surrounding it, as well as by the terms of the agreement itself.

 

After considering the character of the transaction involved in the suit, the facts and circumstances surrounding it, and the terms of the agreement itself, the Placid Oil court concluded the parties intended to extinguish the existing 1964 leases and substitute in their place the 1965 lease. An important circumstance which prompted the Placid Oil court to arrive at this conclusion was that the 1965 lease was silent as to the prior existing leases. It was inconceivable, the court noted, that the parties would omit a reference to the 1964 leases, if they actually intended that the lessee was to pay only a one-eighth (1/8th) royalty on the production of mineral interests instead of the one-fourth (1/4th) royalty provided in the 1965 lease covering the same interests. The court also pointed out that a separate letter between the two parties accompanied the 1965 lease. The court found it apparent that the letter agreement specifically referred to the 1965 lease, it described the property covered by the lease, it provided that one-fourth (1/4th) royalties were to be paid, and no exception was made in that letter as to the production obtained or to be obtained from the 1964 lease. Thus, the court in Placid Oil decided to rely more on the character of the transaction and the facts and circumstances surrounding it than on the terms of the agreement itself.

 

In Stacy v. Midstates Oil Corp., 214 La. 173, 36 So.2d 714 (1947), cited by defendant, the Louisiana Supreme Court found that it is a matter of common knowledge that lessees often take top leases when they are doubtful about the validity of former lease, without intending to impeach the title of a former lessor, or to surrender their rights under any former lease which may turn out to be valid. The plaintiffs in Stacy contended that the defendant therein surrendered or abandoned the original lease to a 200-acre tract, by years later taking top leases from all the land owners and owners of mineral rights as to that tract. The top leases were attached to a stipulation of facts in connection with an exception of non-joinder of parties defendant filed by the defendants. The Supreme Court in Stacy did not find this recital in the top leases sufficient, of itself, to support a finding that the defendant intended to abandon, or did in fact abandon, the original lease insofar as it affected the 200-acre tract. Nor did the Court consider the taking of the top leases as being entirely inconsistent with the continued existence of the original lease.

 

In Barham, the Second Circuit pointed out that Placid Oil failed to cite the earlier Supreme Court decision of Stacy in its opinion, even though the Stacy opinion contradicted the holding reached in Placid Oil. Further, the Second Circuit distinguished the facts in Barham from the facts in Placid Oil. In Placid Oil, the top lease was taken eleven (11) months after the term of the underlying leases began, and the court therein did not cite any evidence that anyone thought the underlying leases might be invalid. By contrast, testimony from the defendants in Barham showed that there was a legitimate concern that the defendant’s predecessor in title may have allowed the 1966 lease to lapse, and it was the defendant’s intent to protect its status with the top lease while he attempted to sort out whether the 1966 lease was invalid or not.

 

Further, the Second Circuit highlighted defendant’s twenty-four (24) years of compliance with the 1966 lease by continuously paying one-eighth (1/8th) royalty or shut-in payments, unlike the parties in Placid Oil who acknowledged the new lease’s royalties in a separate letter.

 

Other facts that the Second Circuit discussed with regard to the intent to novate included the plaintiff’s testimony that she understood that the landman’s explanation that her lease was “lost” meant that it had been mislaid; and that although the lessee’s records did not refer to the 1990 lease as a top lease or protection lease, there was testimony showing that the landman who took the 1990 lease did not tell the plaintiffs that the lessee intended to cancel the 1990 lease.  Additionally, the court looked at the events that precipitated the 1990 lease, being the gap in production and the uncertainty as to the validity of the 1966 lease, as supporting a finding that the lessee “was ‘doubtful about the validity of a former lease,’ a fact normally giving rise to a protective top lease.”  The court also noted that the lessee and its successors in title referenced the 1966 lease in assignments as opposed to the 1990 lease.  The plaintiffs had also been informed by defendants in 2005 that the 1990 lease had been taken “in error.”  And, as noted above, the defendants continued to pay the one-eighth (1/8th) royalty stated in the 1966 lease.  Taken together, the Second Circuit found that these facts supported the finding that the parties had no intent to extinguish the 1966 lease. 

 

In summary, Barham v. St. Mary Land & Exploration helped clarify what surrounding circumstances warrant a finding of a novation. In the absence of a clear and unambiguous statement displaying intent to extinguish a prior obligation, the circumstances surrounding a particular transaction are often indicative of the parties’ intent to put an end to an obligation and substitute a new one in its place. An adjacent letter acknowledging the new lease can show the intent of the parties to enact a novation, such was the case in Placid Oil. However, where the new lease as taken as a “protective top lease” as in Barham, a novation does not occur.  Further, continuously paying the royalties from the original lease also helps show a party’s intent to honor the original lease and may provide evidence that there is no intent to enact a novation.

 

Jasmine B. Bertrand is a shareholder of the Onebane Law Firm in Lafayette, Louisiana, where she focuses primarily on oil and gas property title examination and immovable property/oil and gas property advice. Special thanks to Stuart Theriot for his assistance in drafting this article.

 

 

 

 

 

 

 

 

 

 

 

Created by: Martha Mills at 7/28/2014 6:27:49 PM | 0 comments. | 1826 views.

Court Rejects Estimate of Value of Minerals when Determining

“Fair Market Value”

in Action to Rescind for Lesion

 

The Third Circuit in Harruff v. King, No. 13-940 (La. App. 3 Cir. 5/14/14), 2014 WL 1911008, held that the rescission of a sale of immovable property on the basis of lesion beyond moiety was improper where the appraisal value of the property was based on the speculative value of unproduced minerals. 

 

Sisters Tammy Harruff and Amy Bilodeau sold their undivided interests in two tracts of immovable property located above the Haynesville Shale in Natchitoches and Red River Parishes, respectfully, to Richard King, Renee King and Kyle King (the “Kings”).  The parties executed a cash deed wherein the Kings paid $175,000 for the undivided interests.  Several months later the sisters sold the same undivided interests to Edgar Cason, and shortly thereafter, Cason and the sisters filed suit to quiet the title to Cason and to have the first sale rescinded for lesion beyond moiety. 

 

The plaintiffs (Cason and the sisters) argued that the first conveyance of the property to the Kings should be rescinded because the purchase price was less than half its fair market value.  Their appraisal of the property included, among other things, the value of the undeveloped minerals underlying the tracts.  The plaintiffs alleged that because the Haynesville Shale underlies the tracts, such additional value was significant. 

 

The trial court ruled in favor of plaintiffs that the sale of the property constituted lesion, finding the fair market value of the property to be $862,061.08.  The court permitted rescission of the sale, but afforded the Kings an opportunity to supplement the purchase price by paying the sisters the difference in amount between the purchase price and fair market value. 

 

The Kings appealed the trial court’s decision on a number of grounds, including, among others, that the trial court committed legal error “by allowing the valuation of speculative, un-proven, non-producing, un-leased, un-unitized, and untested gaseous minerals,” and “by valuing the property as a mineral-producing property . . . .”  Id. at *3–4.  The court of appeals agreed with the Kings on both grounds and reversed the decision of the trial court. 

 

The court of appeal relied primarily on Article 2589 of the Louisiana Civil Code which provides, in pertinent part, that “the sale of an immovable may be rescinded for lesion when the price is less than one half of the fair market value of the immovable.”  The court noted that a sale may only be rescinded for lesion if proved by “clear and exceedingly strong evidence.”  Id. at *7 (citing Pierce v. Roussel, 79 So.2d 567, 571 (La. 1955) (emphasis in original)).  It found that the evidence presented at trial did not rise to this level.  While the court noted that unsevered mineral rights should be included in the value of immovable property, it cautioned that the “speculative nature of mineral exploration” makes it difficult to value such rights with any degree of certainty.  Id. at *10.  This was especially true in light of Louisiana’s “Rule of Capture.”  Based on that rule, the sisters never owned the minerals themselves, merely the right to explore and develop any minerals which may underlie the property. 

 

The court also rejected the trial testimony of plaintiffs’ real estate appraiser and his “cash flow” method in valuing the property.  The appraiser’s methodology relied on a number of assumptions that the court found questionable.  For example, the appraiser assumed that (1) the property would be leased under an agreement promising a lease bonus and/or delay rent; (2) any well on the property would produce; (3) the probability of future production was high; and (4) the future value of any gas produced would remain constant.  The court concluded that this speculative appraisal should not have been relied upon by the trial court when determining the fair market value of the property.  As such, rescission of the sale was unwarranted because plaintiffs had not satisfied their burden of proving lesion beyond moiety by clear and exceedingly strong evidence.      

 

Court Determines Meaning of Property Description in Cash Sale Deed

 

The Louisiana Supreme Court in Mason v. Exco Operating Co., LP, No. 2014-C-426 (La. 5/23/14) (per curiam), 2014 WL 2139145, resolved the ownership of a 3/880 interest in a certain tract of immovable property by interpreting language in a cash sale deed.    

 

Virgil Mason inherited a 1/125 interest and a 1/880 interest in a tract of immovable property from his father, Willis Mason.  When Virgil’s sister died later, Virgil inherited an addition 3/880 interest in the same property.  Virgil thereafter sold “all of [his] undivided interest in and to the . . . property” to the Leonards.  Id. at *1.  The document of sale noted that the property being conveyed “is the separate property of Virgil Mason inherited from Willis Mason’s Estate.”  Id.  The Leonards later sold their interest in the property to the Jeanes.   

 

The family of Virgil Mason instituted a concursus proceeding in which the Masons and Jeanes disputed who rightfully owned the 3/880 interest in the property that Virgil inherited from his sister.  The Jeanes argued that they were the rightful owners because the deed conveyed “all of Virgil Mason’s undivided interest,” but the Mason’s maintained that Virgil did not sell the 3/880 interest, because of the limiting language.  Id.  The trial court ruled in favor of the Masons, finding that the sale deed was “neither unclear nor unambiguous” and that Virgil only conveyed the 1/125 and 1/880 interests that he had inherited from his father.  Id.  He did not convey the 3/880 interest because he inherited that portion from his sister. 

 

The court of appeal reversed.  It found that the limiting language was intended only to clarify that the property was separate property and community property.  The court ruled that the cash sale deed conveyed all of Virgil’s interest in the property, including the interest he inherited from his sister. 

 

The Louisiana Supreme Court granted certiorari, reversed the appellate decision, and reinstated the ruling of the trial court.  The court’s analysis was quite brief.  The court began by reciting several rules regarding the interpretation of contracts.  Id. at *2 (citing La. Civ. Code arts. 2046, 47, 50).  The court found that the limiting phrase of the cash sale deed “clearly clarifies that the property being sold is Virgil Mason’s undivided interest in the property he inherited from his father, Willis Mason,” and it concluded that “[t]he language ‘inherited from Willis Mason’s Estate’ must be given meaning.”  Id. at *2.    

 

Justice Hughes dissented from the decision of the court.  He believed that the majority opinion ignored industry practice and that the limiting language was “provided only to assist the title examiner in ascertaining the nature and source of the property conveyed.”  Id. at *2.  The dissent reasoned that “[l]ack of precision in the acquisition information does not evidence a positive intent on the part of the vendor to reserve a portion of all the property conveyed.”  Id. at *3.  Rather, reservations are usually cast in terms such as “less and except” or “this sale does not included.”  Id.

 

Court Affirms that Chesapeake Operating is Entitled to Deduct Costs from

Amounts Due Unleased Mineral Owner

 

In Adams v. Chesapeake Operating, Inc., No. 13-30342, 2014 WL 1303394 (5th Cir. Apr. 2, 2014), the United States Court of Appeals for the Fifth Circuit affirmed a summary judgment in favor of defendant, Chesapeake Operating, Inc. (“Chesapeake”), finding that defendant did not forfeit its right to contribution for well costs from plaintiff, Tyler Adams (“Adams”). 

 

Adams owned an undivided one-third interest in a tract of immovable property in north Louisiana.  The property was unleased but located within a drilling and production unit.   Chesapeake drilled a well on property within the unitized lands.  As an unleased owner of the property, Adams was entitled to receive a share of the proceeds of the well, but Chesapeake was entitled to deduct the expenses of drilling and completing the well before making a distribution.

 

On February 12, 2011, Adams sent a certified letter to Chesapeake notifying it that he was an unleased mineral owner and that he would like an itemized statement of the costs of the well as permitted by La. Rev. Stat. § 30:103.1.  Adams sent a follow-up letter to Chesapeake on April 11, 2011, wherein he notified Chesapeake that, pursuant to La. Rev. Stat. § 30:103.2, it had forfeited its right to deducts costs because Chesapeake failed to timely respond to Adams’s request.  Chesapeake did not respond or provide an itemized statement of costs until April 29, 2011. 

 

Adams argued that Section 30:103.1 imposed an affirmative duty upon Chesapeake to provide a report of costs even absent a request for a written report.  The Fifth Circuit disagreed with Adams’s interpretation of the statutory language and analyzed the issue as follows:

 

An operator or producer’s duty under Section 30:103.1 is not triggered until a written request is sent by certified mail.  While Subsection A states that an operator or producer “shall issue” an initial report to unleased mineral interest owners, Subsection C limits that duty to situations where the unleased mineral interest owner has sent a written request.  Therefore, Adams’s February 10, 2011 letter only triggered Chesapeake’s duty to send him the well cost report.  Before the penalty in Section 103.2 can be imposed, however, Adams had to send Chesapeake another “written notice by certified mail . . . calling attention to [Chesapeake’s] failure to comply with the provisions of R.S. 30:103.1.” 

 

Id. at *3 (brackets in original).  The court concluded that because Chesapeake provided a written report of costs within thirty days of Adams’s follow-up letter, the forfeiture provision did not apply and that Chesapeake was entitled to judgment as a matter of law. 

 

Jacob is an associate attorney with Slattery, Marino & Roberts in New Orleans and is licensed to practice in Louisiana and Texas.  He practices primarily in the area of commercial litigation with a particular focus on oil and gas.  Prior to joining the firm, Mr. Gower clerked for Magistrate Judge Kathleen Kay in the Western District of Louisiana, Lake Charles Division. Jacob is a native of Lafayette and graduated from Lafayette High School in 2004. He earned his J.D. from Louisiana State University where he graduated magna cum laude. 

 

 

Created by: Martha Mills at 6/3/2014 1:47:42 AM | 0 comments. | 1949 views.

LOUISIANA LEGAL UPDATE

By Andrea K. Tettleton

Mayhall Fondren Blaize

 

Chesapeake Operating, Inc. v City of Shreveport, 132 So.3d 537 (La App. 2 Cir. 1/29/14)

As abstractors and title examiners, we are typically faced with road issues involving public versus private ownership of roadbeds and transfers of fee title ownership versus servitudes of use. Chesapeake Operating, Inc. v City of Shreveport, 132 So.3d 537 (La. App. 2 Cir. 1/29/14) highlights the fact that we must also be aware of conflicting ownership issues which can arise between the state, its political subdivisions or municipalities.

The issue presented in Chesapeake is whether the City of Shreveport’s annexation of land, which included dedicated public roads, transferred ownership of the public roads to the city of Shreveport; and therefore, Shreveport, not the Parish of Caddo, was entitled to the proceeds of mineral production attributable to the acreage under the roads.

Facts

Chesapeake instituted legal proceedings by filing four concursus proceedings naming Shreveport and the Caddo Parish Commission as defendants in order to determine which party is entitled to receive royalties from mineral production from gas wells which it operated in Sections 6, 7, 8 and 17 all in Township 16 North, Range 14 West. Both Shreveport and the Caddo Parish Commission executed leases covering the disputed public roads. On August 12, 2009, the State Mineral Board granted a lease in favor of Merit Energy Services on behalf of the Caddo Parish Commission covering approximately 154 acres. On October 14, 2009, the State Mineral Board granted a lease in favor of Cypress Energy Corporation on behalf of Shreveport covering approximately 479 acres. The Caddo Parish Commission and Shreveport both claimed they were entitled to the royalties attributable to all acreage underlying the public roads, streets and highways by virtue of the two above leases.

The conflicting claims by the Caddo Parish Commission and Shreveport arose from the city’s annexation of parish property.  Annexation is the procedure in which a municipality extends is corporate limits. Shreveport contended annexation transfers full ownership which would include all mineral rights. Caddo Parish Commission asserted that the property was dedicated to public use prior to Shreveport’s annexation; therefore, ownership, and thus mineral rights, were not transferred to Shreveport.

EXCO Operating Company, assignee of Cypress Energy’s lease, intervened in the concursus proceeding, and filed a motion for summary judgment to have the trial court declare Shreveport the owner of the acreage under the roadbeds. Chesapeake then filed a partial summary judgment requesting that the Court declare that annexation by Shreveport did not transfer ownership of the roadbeds, as well as raising various other legal issues which are not pertinent to this summary.

The trial court granted Chesapeake’s motion for partial summary judgment. The trial court held that because the Caddo Parish Commission did not convey ownership of the public roads when it agreed to permit annexation of territory encompassing the public roadbeds at issue, the parish and not the city was entitled to receive the proceeds of mineral production attributable to the acreage under the roadbeds. Shreveport filed a motion for a new trial and second motion for summary judgment arguing, among other things, that the trial court’s decision was contrary to law under the trial court’s recent ruling in Webb v Franks Investment Co., 105 So.3d 764 (La. App. 2 Cir. 10/29/12). Trial court denied both of Shreveport’s motions. Shreveport appealed to the Second Circuit.

Discussion

Under Louisiana Civil Code Article 456, public roads are subject to public use, and the public may own the land on which the road is built or merely have the right to use the land. The roads in dispute were dedicated for public use by formal dedication and statutory dedication. Statutory dedication grants full ownership; however, a subdivider may reserve ownership and grant only servitudes of use. Formal dedications also transfer ownership of the property to the public unless ownership is expressly or impliedly reserved, and then only a servitude of use is created. In Webb, the Second Circuit held that formal dedications executed in 1913, 1914, 1924 and 1928 on specific forms by the Caddo Parish Police Jury which state that the property was dedicated to the public for a public road created a servitude of use and did not transfer fee title ownership. In deciding Webb, the Second Circuit held that the parties treated the property as a servitude, no compensation was given, the dedications lacked language granting fee title to the parish and the property was dedicated for a limited time.  The court also relied upon a 1983 resolution by Caddo Parish waiving fee title and mineral rights in property dedicated for public road purposes.

The Second Circuit held that the dispute in this case was unlike Webb, as the issue of whether any specific dedication conveyed fee title of land to the parish was not before the trial court. The Court held that the issue in the present case is the effect of Shreveport’s annexation of public roadbeds owned by the parish.

Annexation can occur by petition and election or through an ordinance. The effect of an annexation is that the land shall be included and constitute part of the corporate limits of the city or town and subject to the jurisdiction, control and authority of the municipal authorities of the city or town as fully, and to all intents and purposes as if, the same had been originally included in the corporate limits thereof (La. R.S. 33:160(A)).

The parties both recognized that there is no jurisprudence directly addressing annexation of public roads, but the Second Circuit relied upon Louisiana’s Revised Statutes, Civil Code Articles and three attorney general opinions to determine the ownership issue. The Second Circuit held that La R.S. 33:224 was pertinent to the case at hand, which provides that whenever any municipality annexes territory by any methods provided in this Chapter it shall also annex and maintain any parish road which is within the territory proposed to be annexed, but only insofar as the road is within the municipality. Where the road is adjacent to but not within the annexed territory, the municipality and the parish shall share equally the maintenance of the road. The appellate court held that while La. R.S. 33:224 does not expressly refer to ownership transfer, it does require parish roads to be included in annexation and places the burden of maintaining those roads on the municipality. Thus, the municipality then becomes responsible for the road in its corporate limits. The court then discussed Louisiana Civil Code Article 477(A) which provides that ownership confers direct, exclusive, and immediate authority over a thing and allows the owner to use, enjoy and disposes of it. Louisiana Code Article 450 and its comments provide that public things, such as streets and roads, are owned by the state or political subdivision in their capacity as public persons, and public things are out of commerce and dedicated to public use, with the public authorities acting as “trustees” for the benefit of the public.

The first attorney general opinion addressed a dispute between Pointe Coupee Parish and the City of New Roads. There was a statutory dedication of public roads in a subdivision for public use in Pointe Coupee. The City of New Roads then annexed the subdivision and sought to obtain proceeds of mineral production from the roads, as the roads were located within a producing unit.  The attorney general determined the annexation did transfer ownership to the city. The attorney general likened the ownership interest vested by statutory dedication to that of a trust with the public authority acting as a trustee exercising control of the property for the public. Because the municipality assumes control and responsibility over the annexed roads to the exclusion of the parish and that it is the municipality’s assumption of responsibility for the public use of the annexed that effects of transfer in ownership. The attorney general determined that because the municipality assumes control and responsibility of the roads to the exclusion of the parish in an annexation, the annexation vests ownership in the City of New Roads. However, in a two subsequent opinions by the attorney general, the attorney general did not equate jurisdiction, control and authority over annexed land to a transfer of ownership.

The court recognized that while attorney general opinions are not binding, the opinions are persuasive authorities and treated them as such. Even though the attorney general twice determined that annexation does not transfer ownership, the Second Circuit held that it was persuaded by the attorney general’s reasoning in its initial opinion, and that annexation does convey ownership.

The parish and Chesapeake relied upon several cases to argue that annexation does not transfer ownership. The Second Circuit held that neither of the cases cited by the parish and Chesapeake related to annexations of public roads. The parish cited a case related to ownership of a building, and the court roundly dismissed the case by holding that the only discussion of road ownership pursuant to annexation was dicta and thus not controlling on the court. The second case was the most closely related to the issue at hand, and it dealt with whether a city could annex a state owned river bottom. The Second Circuit held that the river bottom case does not definitely establish that annexation does not transfer ownership of public property, but at most, makes clear that ownership of a river bottom, specifically, cannot be transferred by annexation.

Holding

The Second Circuit reversed the decision of the trial court and held that annexation of public property, namely roads and roadbeds owned by the parish, transferred ownership to the city. Upon annexation, the city obtained full authority, control and jurisdiction over such roads and roadbeds, which authority includes the mineral rights attributable to such acreage.

Chesapeake v City of Shreveport emphasizes the importance of determining the method in which a road is created in order to ascertain the proper owners of the roadbed.

ANDREA K. TETTLETON is an attorney with Mayhall Fondren Blaize, LLC. Her practice consists of title examination, division order work, and litigation. Ms. Tettleton joined Mayhall Fondren Blaize in 2009 after graduating cum laude from the Paul M. Hebert Law Center at Louisiana State University. While in law school, Ms. Tettleton was named to the Chancellor’s List five times and received the CALI Award twice for earning the highest grade in Tax Policy and Taxation of Capital Gains. Ms. Tettleton graduated magna cum laude from Texas Christian University with a Bachelor of Science degree in Psychology.

 

 

Created by: Bill Justice at 5/23/2014 9:42:46 AM | 0 comments. | 2240 views.

HPS OIL & GAS PROPERTIES, INC. is now hiring experienced landmen and abstractors.  Please submit resume to Jay Bivins (jbivins@hps-og.com).

Created by: Martha Mills at 4/23/2014 10:56:08 PM | 0 comments. | 1823 views.

Joshua Barnhill

Randazzo Gigli0 & Bailey LLC

 

In the matter of Black Water Marsh, LLC v. Roger C. Ferriss Properties, Inc., 2013-447 (la. App. 3 Cir. 1/8/14); 130 So.3d 968, (rehearing denied 2/26/04), the Louisiana Third Circuit Court of Appeal applied Louisiana’s Public Record Doctrine finding that the instrument at issue improperly identified the parties (and was therefore improperly indexed) and, consequently, was not effective against a subsequent  purchaser of the property at issue.

 

The dispute arose out of a marsh lease agreement (the “marsh lease”) dated March 13, 2006, by Janice Ferriss on behalf of Roger C. Ferris Properties, Inc., lessor, and Gary M. Lavoi on behalf of Black Water Marshes, Inc., lessee.  Under the marsh lease Roger C. Ferriss Properties, Inc. granted hunting and fishing privileges over 350 acres of immovable property located in Calcasieu Parish and Jefferson Davis Parish (the “leased property”) to Black Water Marshes, Inc.  Included in the marsh lease was a right of first refusal granted to Black Water Marshes, Inc. if Roger C. Ferriss Properties, Inc. chose to sell the leased property.  The marsh lease was subsequently recorded in both Calcasieu Parish and Jefferson Davis Parish. 

 

On August 2, 2011, Timothy Litel purchased the property from Roger C. Ferris Properties, Inc.  A title search in both Calcasieu Parish and Jefferson Davis Parish was conducted by Mr. Litel; however, the marsh lease was not discovered.

 

On October 11, 2011, Black Water Marsh, LLC filed suit against Timothy Litel, Roger Ferriss Properties and Janice Ferriss seeking: (1) injunctive relief against Timothy Litel, whom denied it access to the property during hunting season; (2) dissolution of the sale between Timothy Litel and Roger Ferriss Properties; or (3) in the alternative, a money judgment against defendants for losses suffered as a result of being denied the right of first refusal due under the marsh lease.  In response, defendants asserted the dilatory exceptions of no right and no cause of action claiming that because Black Water Marsh, Inc. executed the lease, Black Water Marsh, LLC could not exercise any rights Black Water Inc. may have under the marsh lease.  The trial court granted the exceptions of no right and no cause of action as to Mr. Litel. In response to the Court’s ruling Black Water Marsh, LLC amended its petition naming Gary Lavoi d/b/a Black Water Marshes, Inc. as an additional party to the suit.

 

Subsequent to the amending of its petition, plaintiffs appealed, asserting that the trial court erred in granting Mr. Litel’s exceptions of no right and no cause of action, arguing that errors in the indexing process which led to difficulty in discovering the existence of the marsh lease were not sufficient to protect Mr. Litel under the Public Records Doctrine.

 

On appeal the Third Circuit reviewed the trial court’s application of the Public Records Doctrine, which is codified in Louisiana Civil Code article 3338, et seq.  Article 3338 states:

 

The rights and obligations established or created by the following written instruments are without effect as to a third person unless the instrument is registered by recording it in the appropriate mortgage or conveyance records pursuant to the provisions of this Title:

 

(1)           An instrument that transfers an immovable or establishes a real right in or over an immovable.

 

(2)           The lease of an immovable.

 

(3)           An option or right of first refusal, or a contract to buy, sell, or lease an immovable or to establish a real right in or over an immovable.

 

(4)          An instrument that modifies, terminates, or transfers the rights created or evidenced by the instruments described in Subparagraphs (1) through (3) of this Article.

 

Louisiana Civil Code article 3343 defines a “third person” as “a person who is not a party to or is personally bound by an instrument.”

 

In its analysis, the Court identified several issues with the recorded lease.  First, the Court noted issues with both the identification (or naming) of the lessee and the lessor, finding that the lessee, Black Water Marshes, Inc., did not exist as a legal entity at the time the marsh lease was executed and that the named lessor was identified in three different ways throughout the lease: Roger Ferris Properties; Janice Ferris of Roger Ferriss Properties; and Roger Ferriss Properties.  Next the Court noted that although the marsh lease was recorded in the appropriate conveyance offices, the recordation process in both Calcasieu and Jefferson Davis Parishes resulted in indexing errors which made locating the marsh lease in the public records difficult.  Specifically, in Calcasieu Parish, “Roger Ferris Properties” was lessor, instead of Roger C. Ferriss Properties, Inc.  And, in Jefferson Davis Parish, “Janice Ferriss” was lessor.  Neither parish correctly indexed Roger C. Ferriss Properties, Inc., the owner of the property, as the lessor.  Additionally, both parishes indexed Black Water Marshes, Inc., which was a non-existent corporation, as lessee.  “Thus, when the lease was recorded in the conveyance records of Calcasieu Parish, neither indexed party to the lease agreement existed as a legal entity; and when the lease was recorded in the conveyance records of Jefferson Davis Parish, one of the indexed parties did not exist as a legal entity, and the other could at best be described as ‘Janice Ferriss d/b/a Roger Ferriss Properties.’”

 

Black Water Marsh, LLC argued that at the time of the sale, Mr. Litel knew of the marsh lease and should have insisted on seeing a copy of the lease before the closing of the sale or, at the very least, should have found the lease through examination of the public records.  The Court found no merit in Black Water Marsh LLC’s argument stating that under the Public Records Doctrine, “Mr. Litel was not required to take notice of anything outside of the public records.”  The Court further held that “appellants’ attempts at recordation of the marsh lease were [not] effective as against Mr. Litel.”  Citing to Louisiana Civil Code article 3353:

 

“[a] recorded instrument is effective with respect to a third person if the name of a party is not so indefinite, incomplete, or erroneous as to be misleading and the instrument as a whole reasonably alerts a person examining the records that the instrument may be that of the party;”

 

the Court found that “the inappropriateness of recordation, i.e., the recordation in names which would not appear on a search of the title under the record owner, rendered the recording to be so indefinite, incomplete, and erroneous that it did not reasonably alert a person examining the title of any claim by those parties.”  Based on its analysis of Article 3353, the Court found no error in the trial court’s ruling that the recordation of the marsh lease was not effective against third persons and thus Mr. Litel was protected under the Public Records Doctrine.

 

This decision of the Third Circuit is important because it confirms the long-standing rule of the Public Records Doctrine that actual notice is not relevant and also provides guidance that even the slightest deviation in the name of a record owner of immovable property may be sufficient to cause a recorded instrument to be ineffective as to a third person under the Public Records Doctrine.  Thus one should be vigilant when executing and recording leases of immovable property that all parties are correctly identified in the lease document as well as correctly recorded in the conveyance office of the parish in which the immovable property is located.

 

JOSHUA S. BARNHILL is an associate attorney with Randazzo Giglio & Bailey LLC. His practice focuses on oil and gas transactional and litigation matters, including oil and gas title examination and “legacy” oil field site litigation.

 

Created by: Martha Mills at 4/23/2014 10:43:08 PM | 0 comments. | 1551 views.