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Created by: Martha Mills at 1/29/2015 9:50:22 AM | 0 comments. | 1433 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. | 1335 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. | 1352 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

www.seedsource.com

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. | 1488 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. | 1545 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. | 2553 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. | 1647 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. | 1903 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. | 1629 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. | 2190 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. | 2251 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. | 2450 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. | 2088 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.

 

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LOUISIANA LEGAL UPDATE

By Megan Donohue Breaux

Jones Walker, LLP

 

 

Does an Assignment of ORRI Convey an interest in Real Property under Louisiana Law?

 

In re: ATP Oil & Gas Corp., No. 12-36187, 2014 WL 61408 (Bkrtcy. S.D. Tex. Jan. 6, 2014).

 

On several occasions within the last year Judge Marvin Isgur, Bankruptcy Judge for the United States Bankruptcy Court for the Southern District of Texas, Houston Division, has considered the issue of whether certain prepetition transactions between a debtor and another party were real property conveyances (as they are characterized in the respective documents) or were actually debt instruments pursuant to Louisiana law. The importance of this issue is that if the conveyances constituted outright transfers of ownership of property, the conveyed interests are not property of the debtor’s estate.

Judge Isgur’s latest opinion on the issue involved ATP Oil & Gas Corporation (“ATP”), the debtor in the bankruptcy, which entered into at least 16 agreements that were characterized as ORRI conveyances. The interests at issue relate to outer-continental shelf lands leased by ATP from the United States. ATP now argues that although the transactions were labeled as ORRI conveyances, they are actually “disguised financing” transactions.

One of the parties to some of the transactions at issue in the bankruptcy is NGP Capital Resources Company (“NGP”). In a motion for summary judgment, NGP moved, in part, for a declaration by the Court that the Term ORRI are property of NGP and not property of the Debtor’s estate. In its opposition to NGP’s motion, ATP argued that although characterized in the relevant documents as ORRIs, the economic substance of the transactions is that of a financing agreement. Conversely, NGP argued that the characteristics contained in the relevant documents accurately describe the nature of these transactions – conveyances of real property interests (in the form of ORRIs) under applicable law. The Court ultimately denied the motion for summary judgment, finding that genuine issues of material fact exist concerning what type of transaction the agreements were.

Generally, an ORRI is “[a]n interest in oil and gas produced at the surface, free of the expense of production, and in addition to the usual landowner’s royalty reserved to the lessor in an oil and gas lease.” In re: ATP Oil & Gas Corp., No. 12-36187, 2014 WL 61408, *2 (Bkrtcy. S.D. Tex. Jan. 6, 2014), citing 8 Patrick H. Martin & Bruce M. Kramer, Williams & Meyers Oil and Gas Law 757 (2012). The Bankruptcy Code defines a term overriding royalty to be “an interest in liquid or gaseous hydrocarbons in place or to be produced from particular real property that entitles the owner thereof to a share of production, or the value thereof, for a term limited by time, quantity, or value realized.” Id. at *2, citing 11 U.S.C. § 101(56A).

The Court rejected NGP’s argument that the Court could not look beyond the four corners of the transaction where the stated intent as to the form and label of the contract is unambiguous. The Court also determined that the parties’ intent as to the legal effects of their contract has no bearing on whether those legal effects are in fact created, citing Howard Trucking Co., Inc. v. Stassi, 474 So.2d 955, 959 (La. Ct. App. 1985), writ granted, 478 So.2d 1229 (La. 1985), and aff’d, 485 So.2d 915 (La. 1986).

Moreover, the Court held that at the summary judgment stage, ATP only needs to show that there is a genuine issue of material fact as to whether the transaction is inconsistent with a term ORRI or that the transaction is consistent with a loan under Louisiana law. But if NGP could establish that the NGP transaction is consistent with the meaning of a Term ORRI under Louisiana case law and that there is at least one inconsistency with the definition of a loan under Louisiana law, then partial summary judgment would be granted to NGP and ATP’s recharacterization theory fails. That would necessarily show that the transaction is better characterized as a real property interest than as a debt instrument.

The Court also reasoned that if, on the other hand, the transaction is wholly consistent with both a loan and a term ORRI, inconsistent with both, or inconsistent with a Term ORRI, then NGP’s motion for summary judgment would be denied. Failure to show that the transaction is wholly consistent with a Term ORRI and that there is at least one inconsistency with a debt instrument under Louisiana law will require a fact intensive analysis beyond the summary judgment stage to determine the transaction’s character.

Ultimately, the Court held that there is a genuine issue of material facts as to whether the NGP-ATP transaction is consistent with a “Term ORRI” under Louisiana law. First, In the conveyance NGP agreed to subordinate its interests to the Diamond Offshore NPI, meaning that NGP would not be entitled to receive payments from any hydrocarbon production from the applicable wells until Diamond’s interest was fully satisfied and discharged. Because NGP failed to cite any cases that either explicitly or implicitly recognizes a “subordinated interest” provision, the Court held that there is a genuine issue of material fact as to whether this provision is consistent with a Term ORRI under Louisiana law. Second, there was a genuine issue of material fact concerning whether the interest rate based formula used to define the ORRI’s terminating condition is consistent with a Term ORRI under Louisiana law.

Furthermore, the Court held that there was a genuine issue of material fact as to whether the NGP transaction is consistent with the economic substance of a debt instrument under Louisiana law. The Court also noted that the transaction at issue appears to fall within the meaning of a loan under several accounting standards, including GAAP, and that the NGP transaction is the economic equivalent of a loan.

On January 21, 2014, NGP filed a motion for leave to appeal the Court’s denial of its motion for summary judgment. That motion is currently pending.

In other opinions in the case on motions for summary judgment, the Court also analyzed certain transfers between ATP and TM and Diamond, including the issue of whether certain transactions constitute real property transfers or should be characterized as debt instruments. See In re: ATP Oil & Gas Corp., No. 12-36187, 497 B.R. 238 (Bkrtcy. S.D. Tex. July 24, 2013). The Court ultimately also denied those motions for summary judgment. TM and Diamond requested leave to appeal the order, which was initially granted. But the Court later vacated its decision to grant leave to appeal, denied the parties leave to appeal, and dismissed the interlocutory appeal.

A copy of the cases discussed above, or any other cases referenced above, may be obtained upon request from Megan Donohue Breaux by fax (337-593-7601). 

 

Megan Donohue Breaux is an associate in Jones Walker’s Business & Commercial Litigation Practice Group and practices from the firm’s Lafayette office.  Ms. Breaux’s practice includes a wide range of business and commercial litigation cases as well as environmental/legacy litigation.  She has represented clients in the oil, insurance, and telecommunications industries. Ms. Breaux has been involved in many aspects of litigation, including traditional discovery and complex e-discovery, drafting substantive pleadings, taking and defending depositions, oral argument, and trial. Her experience also extends to various types of complex litigation, including multi-district litigation.

 

For Ms. Breaux’s full biography, please visit Jones Walker’s website: http://www.joneswalker.com/professionals-366.html. 

 

 

Created by: Martha Mills at 4/8/2014 7:33:25 AM | 0 comments. | 2747 views.

By Kyle P. Polozola and Joshua G. McDiarmid

Dupuis & Polozola L.L.C.

 

Royalty Acres:  Why Be Clear When You Can Be Confusing?

Instruments that grant or reserve “royalty acres” typically cause problems and confusion due to the lack of precise meaning of the terminology used to create the interest.  Despite the inherent ambiguity of the term they are still frequently used, and often lead to litigation and unintended consequences.  The lack of uniformity among commentators and courts and the lack of jurisprudence in Louisiana on the issue all point to the conclusion that royalty acres should be avoided in drafting royalty deeds.  In fact, the only consensus among most commentators is that the use of “royalty acres” should be avoided.  The purpose of this article is to show how the term “royalty acre” has been interpreted, and the potential pitfalls and consequences of using the term in drafting.

In general terms, a royalty acre is the full lease royalty on one acre of land, and is frequently understood to refer to a one-eighth cost-free interest.  Stated differently, the term “royalty acres” represents the undivided interest in royalty accruing from production computed on an acre basis.  Thus, the owner of 50 royalty acres in 100-acre tract is entitled to 1/2 of royalty, or 1/16 royalty where the lease provides for a 1/8 royalty.

Give these baseline definitions, how can a royalty acre case play out when the royalty reserved is not 1/8, but a higher fraction?  The court discussed this issue in Thibodeaux v. American Land & Exploration, 450 So. 2d 990 (La. App. 1 Cir. 1984).  In this case, plaintiff, Thibodeaux owned an undivided one-half interest in three tracts of land totaling 29.5 acres.  He executed a mineral lease covering these lands to Stone Oil, reserving a one-fifth royalty.  Shortly thereafter he executed a deed to American Land selling one-half of the royalties he owned.  The deed contained the following proviso: “this sale is for ONE-HALF (1/2) of all the royalties owned, now or formerly [by plaintiff], but in no event shall the royalties conveyed herein equal less than 11.8 royalties acres.”  Two days later, Thibodeaux signed an agreement with another company transferring one-half of his royalty interests in the same three tracts for a much larger sum of money.  Thibodeaux claimed that he had intended to convey only one-fourth of his total interest in the three tracts, and that American Land had defrauded him by the reference in the deed to one-half of his royalties.  Thibodeaux claimed that the tracts consisted of 29.5 acres which would yield 47.2 royalty acres (calculated at a one-eighth royalty) when under lease at a one-fifth royalty rate: one-fourth of 47.2 royalty acres would be 11.8 royalty acres.  In contrast, American Land asserted that the agreement clearly indicated that Thibodeaux intended to transfer one-half of the one-fifth royalty on Thibodeaux interest.  The trial court ruled in favor of Thibodeaux, annulling the royalty deed on the basis that Thibodeaux could not read and did not understand the transfer provisions of the contract.  On appeal, the court of appeal reversed, finding that Thibodeaux had dealt with “royalty” acres in other transaction and that the trial court was clearly wrong in finding that he failed to understand the terms of the deed.  As such, while Thibodeaux gave the court a well-reasoned scenario for calculating the royalty conveyance based upon royalty acres, he did not persuade the court due to the ambiguity involved.

Professors Pat Martin and Bruce Kramer, who are the current editors of the Williams & Meyers Oil and Gas Law treatise, advocate adopting the most widespread definition of royalty acre, which is defined as the full lease royalty on one acre of land.  Similar to the transfer of a royalty interest, the transferee of a royalty acre typically does not receive a share in bonus, rental, or executive right.  Thus, the owner of 50 royalty acres in a 100-acre tract of land subject to a 1/8 lease royalty receives a 1/16 royalty interest (1/8 of 50/100).  In the same vein, if the lease royalty was 1/5 instead of 1/8, the royalty interest would be 1/10 (1/5 of 50/100).

Other commentators argue that a royalty acre is a full 1/8 royalty on one acre of land.  This characterization serves to fix the lease royalty at 1/8 regardless of whether the actual lease provided for a greater or lesser amount.  The owner of 50 royalty acres in a 100-acre tract of land subject to a 1/5 lease royalty would own a 1/16 royalty interest (1/8 of 50/100).  No consideration would be given to the fact that the lease is subject to a higher royalty.  This interpretation was adopted by the Alabama Supreme Court in Dudley v. Fridge, 443 So. 2d 1207, 1208 (Al. 1983), which defined a royalty acre “as a 1/8 royalty in the full mineral interest in one acre of land.”  See also Payne v. Campbell, 250 Miss. 227 (1964).

In addition, there is disagreement among commentators regarding whether a grant of royalty acres is distinguishable from a grant of acres of royalty.  One commentator believes that a grant of an undivided 50 acres of royalty in a 100 acre tract of land subject to a standard 1/8 lease would yield a 1/128 royalty interest (1/16 of 1/8 of 50/100).  In contrast, a grant of an undivided 50 royalty acres in a 100 acre tract of land subject to a standard 1/8 lease would yield a 1/16 royalty interest (1/8 of 50/100).  This distinction is premised on the difference between 1/16 of royalty (being 1/16 of 1/8) and 1/16 royalty (1/16, free of costs).

Descriptions using royalty acres also suffer from the same drawbacks as mineral acres when the acreage of the land conveyed differs from the description used by the parties.  Many instruments are drafted in which both the fractional and the royalty acre designations are used.  The presence of both forms of designation in the instruments creates a very difficult problem of construction if the acreage in the tract varies from the assumed acreage or if the grantor does not hold title to the entire area purportedly covered.  In a case from the Oklahoma Supreme Court, Wade v. Roberts, 346 P.2d 727 (Okla. 1959), the land was described as containing 32 acres and the grantor reserved “an undivided 5/32 interest amounting to an undivided five (5) acre interest.”  At the time of the dispute, an undivided 5/32 interest amounted to 7.385 mineral acres.  The court found that the instrument was not ambiguous and treated the phrase “amounting to an undivided five (5) acre interest” as qualifying the former fraction.  The court based its conclusion upon the general rule of construing an instrument against the grantor, which means that the same court might reach a contrary result in the instance of a grant rather than a reservation.  Although involving mineral acres, in Light v. Crowson Well Service, Inc., 313 So. 2d 803 (La. 1975), the Louisiana Supreme Court was tasked with interpreting a document that conveyed 1/16 of 8/8 of the oil, gas and minerals underlying a 366 acre tract of land, when that instrument also stated that the vendor was conveying 61 mineral acres (1/6 mineral interest).  The Supreme Court concluded that an ambiguity was created which would permit the use of parol evidence to show the intention of the parties, and if the intention was not clarified by the parol evidence, it should be construed against the preparer.

Given the extent of disagreement among learned commentators, and the ambiguity posed by the term “royalty acres,” it is best to avoid using the term altogether, due to the risk that a court, as opposed to the parties, may be called upon to decide the issue.  Couching a description in fractional interests avoids the ambiguities caused by royalty acres, and more clearly illustrates the interest being conveyed.  Louisiana courts have not adopted a unified definition of the term royalty acres, and the definition may depend on the caprice of the court rendering the decision.  Many title attorneys call for the execution of division orders when royalty acres are involved, and others may call for corrective instruments.  To avoid the confusion, delay, and unnecessary expense that come with resolving such questions, avoid using the term “royalty acres” – you will be glad you did.   

 

Kyle P. Polozola is the managing partner of the Louisiana office of Dupuis & Polozola, LLC, which also has an office in The Woodlands, Texas.  His practice focuses on oil and gas law in Louisiana and Texas, including mineral title examination, due diligence, contract negotiation and drafting, and providing counsel to industry members in all phases of onshore exploration and production.  He has 16 years of litigation experience involving oil, gas and property matters.  He graduated from Louisiana State University with a B.S. in Business in 1992, and from Loyola University School of Law, cum laude, in 1996. He is licensed to practice law in Louisiana, Texas, and Kansas. 

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 centers on oil and gas property title examination.  His admission to the State Bar of Texas is pending.  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.

 

Created by: Martha Mills at 4/8/2014 7:28:08 AM | 0 comments. | 2266 views.

By Richard Revels

Liskow & Lewis

Cross Unit Horizontal Laterals IN LOUISIANA

 

A. Background.  As you know, the Haynesville Shale play in Northwest Louisiana was extremely active for several years beginning about 2008.  The Commissioner of Conservation has created over 2000 drilling units for the Haynesville Zone.  Most of these units encompass a governmental section of approximately 640 acres.  As prices for natural gas began to fall, some operators in the Haynesville Shale play were of the opinion that longer laterals might improve the economics of the play.  In a regular-sized unit of 640 acres with a 330 foot setback requirement from unit lines, an operator is generally limited to drilling a North/South lateral no longer than about 4,500 feet.  Because many of the units were already producing, the Office of Conservation was not receptive to reforming existing units to accommodate longer laterals which would have the effect of changing equities of the owners in existing production.  Hoping to realize comparable benefits resulting from drilling such laterals in other jurisdictions such as Arkansas for the Fayetteville Shale, operators requested the Commissioner of Conservation to allow the drilling of cross unit laterals. 

 

B.  New Memo.  For purposes of this discussion, a cross unit horizontal lateral is a well drilled horizontally and completed under multiple units.  The Office of Conservation first permitted cross unit horizontal laterals to be drilled and completed in Order No. 990-D-72, effective March 22, 2011.  This was done for the Haynesville Zone in Woodardville Field after notice and hearing and based in part upon written affirmative approval from all owners in the affected units.  Several more orders were subsequently issued, also based upon 100% approval of owners.  It is obviously very difficult to get all owners to approve in writing, thus application of the concept was likely to be quite limited without liberalizing the consent requirement.  The Commissioner of Conservation by memorandum dated November 2, 2012 set forth procedures whereby cross unit horizontal laterals could be requested with affirmative written approval of at least 50% of the working interest owners (unleased mineral owners count for such purposes as working interest owners) plus the unit operators of the affected units.  Having such approval does not ensure that the request will be granted, but is more in the nature of a filing threshold.  Production is allocated to each unit served by the cross unit horizontal lateral on a surface acre basis in the same proportion as the perforated lateral length in the individual unit bears to the total perforated lateral length as determined by an “as drilled” survey after the well is completed.  Production from the cross unit lateral must be separated and metered individually.  Because production is allocated only to the units under which it is completed, the cross unit horizontal lateral may not be perforated less than 330 feet from the boundaries of an offset unit which will not share in production.  The procedures outlined in the memo relate only to shale formations, tight gas sands and unconventional reservoirs, and not to conventional reservoirs or vertical wells.  Should you want a copy of the memo, please email the writer at rwrevels@liskow.com or download a copy from the Commissioner’s website.

 

C.  Current Practice and Applications.  The writer offers one practice note for landmen preparing mineral histories.  It will be important to recognize that production from cross unit laterals is being allocated to multiple units.  Look for HC in the well name.  The Office of Conservation uses the unit nomenclature from the unit in which the well is first completed in the well name, but adds the section numbers and HC also.  To date, the writer is not aware of a cross unit lateral being completed under more than two units, but this will certainly be possible given the advances in drilling and completing technology.  To date, cross unit horizontal laterals have been approved for numerous Haynesville units and also for some units for the various Wilcox and Cotton Valley intervals.  At present, Wildhorse Resources is actively drilling cross unit laterals in several fields in Lincoln Parish, particularly for the various Cotton Valley intervals.  Cross unit laterals will likely not be as commonly requested in new resource plays in Louisiana such as the Lower Smackover (“Brown Dense”) and Tuscaloosa Marine Shale because the initial units are much larger than the Haynesville units (960 acre to 1280 acre units are fairly typical).  However, in an existing pattern of producing units, regardless of size, the operator may conclude that a cross unit lateral offers needed flexibility in developing acreage that might otherwise be stranded due to faulting or topographic conditions (for example, drilling under wetlands or residential/commercial developments from a distant surface location in another unit).  We applaud the Commissioner of Conservation’s efforts to update his procedures and policies to accommodate advances in drilling and completion technology to the mutual benefit of operators and royalty owners.

 

 

Created by: Martha Mills at 4/8/2014 6:14:14 AM | 0 comments. | 1470 views.

LOUISIANA LEGAL UPDATE

 

By Lauren Gardner

Dennis, Bates & Bullen, L.L.P.

It’s All in the Details: What to Include in Your Reports under La. R.S. 30:103.1.

 

XXI Oil & Gas, LLC v. Hilcorp Energy Co., 13-1410 (La. App. 3 Cir. 10/9/2013), 2013 WL 5539200.

 

At issue in XXI Oil & Gas, LLC v. Hilcorp Energy Co., 13-1410 (La. App. 3 Cir. 10/9/2013), 2013 WL 5539200, was whether or not the defendant, Hilcorp Energy Co. (“Hilcorp”) failed to comply with the requirements of La. R.S. 30:103.1, resulting in it being penalized pursuant to La. R.S. 30:103.2.  The Third Circuit found that Hilcorp did not comply with the requirements of La. R.S. 30:103.1.  Based on the language from the court, it is clear that at least in the Third Circuit, the specific requirements of La. R.S. 30:103.1 must be strictly complied with in order to avoid any penalty.

 

La. R.S. 30:103.1 provides, in pertinent part:

 

A. Whenever there is included within a drilling unit, as authorized by the costs of drilling, completing, and equipping the unit well.

 

 (1)                          Within ninety calendar days from completion of the well, an initial report which shall contain the ccommissioner of conservation, lands producing oil or gas, or both, upon which the operator or producer has no valid oil, gas, or mineral lease, said operator or producer shall issue the following reports to the owners of said interests by a sworn, detailed, itemized statement:

 

 

(2)                          After establishment of production from the unit well, quarterly reports which shall contain the following:

 

(a)           The total amount of oil, gas, or other hydrocarbons produced from the lands during the previous quarter.

 

                                (b)          The price received from any purchaser of unit production.

 

                                (c)           Quarterly operating costs and expenses.

 

                                (d)          Any additional funds expended to enhance or restore the production of the unit well.

 


The related penalty statute, La. R.S. 30:103.2, provides as follows:

 

 

Whenever the operator or producer permits ninety calendar days to elapse from completion of the well and thirty additional calendar days to elapse from date of receipt of written notice by certified mail from the owner or owners of unleased oil and gas interests calling attention to failure to comply with the provisions of La. R.S. 30:103.1, such operator or producer shall forfeit his right to demand contribution from the owner or owners of the unleased oil and gas interests for the costs of the drilling operations of the well.

 

In this case, on January 11, 2011, Hilcorp recompleted the well in the drilling unit at issue and began producing.  In February 2011, XXI Oil and Gas, LLC (“XXI”) acquired a number of mineral leases within the unit.  On April 21, 2011, XXI sent a letter by certified mail, return receipt requested, to Hilcorp, requesting that Hilcorp provide: “...an initial report containing the costs of recompleting said unit well, or quarterly reports containing the total amount of oil, gas, or other hydrocarbons produced from the lands covered by XXI’s mineral rights during the previous quarter, the price received from any purchase of unit production, quarter operating costs and expenses or any additional funds expended to enhance or restore the production of said well, ...an initial report containing the costs of recompleting the unit well with detailed supporting invoices, ...the total amount of oil, gas, or other hydrocarbons produced from the unit, the price received from any purchaser of unit production, the operating costs and expenses, and any additional funds expended to enhance or restore the production of the unit well.”

 

On the same day, and before receiving XXI’s letter, Hilcorp sent a letter to XXI, attaching an authority for expenditure (“AFE”) report, which included cost estimations and an invoice for $40,737.33 described as “cash advance on actuals through 2/2011.”  This letter explained that the unit well had been “shut in” since March 28, 2011, and would be returned to production shortly.  The AFE, dated January 26, 2011, contained itemized costs to recomplete the well and stated that the well had casing damage and would not flow.  It included no other revenue information or amounts.  The statement did include specific estimations of costs of transportation, miscellaneous, contingencies, perforating, supervision/consultation, well control insurance, and road and location costs, totaling $616,025 of intangible completion costs.  The AFE was signed by XXI on May 20, 2011, under a line reading “Participant Approval.”  The statement was also signed by two representatives of Hilcorp. 

               

On May 20, 2011, XXI notified Hilcorp of its election to participate in the recompleted unit well.  On June 13, 2011, XXI sent Hilcorp a second letter stating that because Hilcorp failed to provide XXI with a “sworn, detailed statement of revenues and expenses attributable to the above referenced well within 90 days of its completion and within 30 days of receipt of my April 21, 2011 letter,” Hilcorp could not deduct the costs of completing or operating the well from XXI’s share of the revenue. 

 

On September 9, 2011, XXI filed suit against Hilcorp, asserting claims under La. R.S. 30:103.1 and La. R.S. 30:103.2.  Pursuant to a partial Motion for Summary Judgment, the trial court ruled in favor of XXI, reasoning that Hilcorp did not comply with the statute because the statement of costs it submitted to XXI was neither sworn nor detailed and therefore, it ruled that XXI will receive its share of the revenue from the well without deduction of costs of drilling operations.  On appeal, the Third Circuit upheld the trial court’s ruling on the basis that the statement submitted to XXI was not sworn and therefore did not comply with the statute.  Although it did not rule on whether or not the statement was “detailed” in accordance with the statute, the court provided some guidance on this issue.

 

On the issue of whether or not the statement was detailed in accordance with the statute, Hilcorp admitted on appeal that it did not comply with the “technical requirements” of the statute, but that its statement of costs in the AFE sent to XXI complied with the intent and purpose of the statute.  The court disagreed.  The court found that the statute was clear and unambiguous and therefore should be applied as written without further interpretation.  Because of this, the court held that it must apply strict construction to determine if Hilcorp’s AFE complied with the statute.  Citing a United States Fifth Circuit Court of Appeals case, Brannon Props, LLC v. Chesapeake Operating, Inc., No. 12-30306, 2013 WL 657781 (5th Cir. 2/21/2013), the Third Circuit noted that the term “detailed” in the statute is unambiguous, and therefore the “detailed” requirement must mean that the report has to relate the cost to the benefit, telling the unleased mineral owner what it is getting for its money.  While not ruling on this issue, the Third Circuit did note that the list of cost estimations in the AFE provided by Hilcorp was in large part lacking detail. 

 

Accordingly, while the court’s ruling hinged on the fact that the AFE submitted by Hilcorp was not sworn, and therefore non-compliant, its opinion is telling and offers some guidance as to what the Third Circuit would consider “detailed” to comply with the statute.  We know that the AFE submitted by Hilcorp would most likely not be considered “detailed” to comply with the statute.  This case is a good reminder that we should always try to strictly comply with the oil and gas statutes out there–especially when significant penalties can be imposed.  When prompted to comply with La. R.S. 30:103.1, you should make sure your initial report submitted complies with these requirements and is as detailed as possible in order to avoid the penalty contained in La. R.S. 30:103.2.