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Created by: Martha Mills at 10/10/2014 10:33:24 AM | 0 comments. | 1783 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. | 1553 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. | 2080 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. | 2165 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. | 2391 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. | 1995 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. | 2579 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. | 2161 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. | 1399 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.

 

 

 

 

Created by: Martha Mills at 4/8/2014 6:08:26 AM | 0 comments. | 1438 views.

LOUISIANA LEGAL UPDATE

 

By Julie Deshotels Jardell and Kelly D. Perrier

Gordon Arata

Total E&P USA, Inc. v. Kerr-McGee Oil and Gas Corp. No. 11-30038, 719 F.3d 424 (June 20, 2013)

 

The Fifth Circuit Court of Appeals of the United States recently overruled the district court’s interpretation of an overriding royalty assignment’s “calculate and pay” clause.  The case involved a contractual dispute over whether overriding royalties were owed by the lessees during the period when no royalties were owed to the landowner.  The district court granted the lessees’ motion for summary judgment, holding that the “calculate and pay” clause in the assignment at issue clearly and explicitly requires that the payment of the overriding royalties be suspended during the suspension of the landowner royalty.  Therefore, the landowner and the overriding royalty interest (“ORRI”) owners would be paid royalties on parallel tracks that began with the same trigger: here, once production reached 87.5 million barrels of oil equivalent pursuant to the Outer Continental Shelf Deep Water Royalty Relief Act (“DWRRA”).  The ORRI owners appealed.  

 

In 1998, pursuant to the Outer Continental Shelf Lands Act, the United States issued a mineral lease covering certain lands.  In 1999 and 2001, various ORRI were carved out of the lessees’ working interests and assigned to seven individuals.  In particular, the instruments creating the over­riding royalties contained a clause stating that the overriding royalties “shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner’s royalty under the Lease.”  This clause is often referred to as a “calculate and pay” clause. 

 

The district court interpreted the language of the above “calculate and pay” clause to require that the ORRI owners be paid at the same time as the landowner, i.e. not until production reached 87.5 million barrels of oil equivalent, in addition to calculating the royalties owed to the ORRI owners in the same manner as the royalties owed to the landowner.  The United States Fifth Circuit Court of Appeals considered affidavits and parole evidence submitted by the ORRI owners and held that the intents of the parties regarding the possible suspension of royalty payments was not clear based upon the language of the “calculate and pay” clause; therefore, summary judgment was not warranted.

 

In rendering its decision, the Fifth Circuit relied upon the Louisiana rules of contract interpretation because Louisiana is the state adjacent to the portion of the outer continental shelf where the oilfield at issue is located.  Louisiana Civil Code art. 2046 articulates the most fundamental rule in interpreting contracts – simply, no further interpretation is necessary when the words of the contract are clear and explicit and do not lead to absurd consequences.  The Fifth Circuit held that the “calculate and pay” clause did not clearly establish parties’ intents that the royalty payments to the ORRI owners would be suspended under any circumstance.  The Fifth Circuit then held that a reasonable interpretation of the “same manner and subject to the same terms and conditions” language could be that the method of payment would be same but not the timing of the payment.

 

In support of its position, the majority recognized that ORRI and a lessor’s royalty interest possess many distinctions; therefore, there should be no presumption that the royalties should be treated the same under a “calculate and pay” clause.  The Fifth Circuit also considered the syntax of the clause.  And the Fifth Circuit dismissed the lessees’ interpretation of a footnote in the lease that referenced the potential application of the DWRRA due to the absence of the verb “shall.” 

 

After assessing the language from various viewpoints, the majority concluded that multiple reasonable interpretations of the “calculate and pay” clause existed, and the ambiguity presented a genuine issue of material fact.  Because “royalty suspension was not clearly and explicitly made a term or condition of the lease that was binding on the lease parties or third parties,” the district court’s decision was reversed, and the suit was remanded.

 

The dissent, on the other hand, asserted that the language of the “calculate and pay” clause clearly established that payments to the ORRI owners would be paid under all of the same conditions as royalty payments to the landowner.  While the majority largely dismissed the lessees’ reliance on a footnote, the dissent found that “[t]he footnote clearly stipulates that the lease’s provisions for payment of royalties are superseded by the DWRRA if the lease is eligible for royalty suspension, thus qualifying the lessee’s contractual duty to make royalty payments to the United States.”  Moreover, even though there are many circumstances in which ORRI owners and lessors are treated differently, the clear directive of the “calculate and pay” clause before the court establishes that these parties should be treated the same for all royalty payment purposes.  In short, the dissent disagreed with each ground on which the majority relied to establish ambiguity, and the dissenting judge would have affirmed the district court’s grant of summary judgment in the lessees’ favor.

 

In conclusion, the interpretation of the “calculate and pay” clause will be a matter for the trial on the merits.

 

Julie Deshotels Jardell’s practice is concentrated on oil and gas transactions and general, commercial and oil and gas litigation. Although a significant portion of her practice is dedicated to examining abstracts and rendering drilling and division order title opinions, Julie is also experienced in drafting agreements and contractual provisions on behalf of both operating and non-operating working interest owners, including the drafting and negotiating of provisions for joint operating agreements, drilling contracts, mineral leases, right-of-ways and servitudes as well as surface and subsurface use agreements.

As a litigator, Julie has gained extensive experience participating in lawsuits and drafting briefs focused on oil and gas issues, and has argued these issues before Louisiana District and Appellate Courts.

 

During law school, Julie served as Chairman of the Moot Court Board and as a Moot Court teaching assistant. She was awarded the Law Excellence Award in Law and Poverty, and was a member of the Loyola Maritime Law Journal. Upon graduation, she was elected into the Order of Barristers. She received her J.D. from Loyola University in 2007 and her B.S. from Louisiana State University in 2001.

 

Kelly Perrier practices in the areas of commercial litigation and oil, gas and energy litigation.  Her practice also includes employment disputes and environmental claims largely focused on legacy litigation. 

Kelly interned for Chief Judge Burrell J. Carter of the Louisiana First Circuit Court of Appeals while earning her J.D. and Diploma of Civil Law Studies from LSU Law School. Prior to law school, she worked as a media/political consultant for a small firm handling local and statewide campaigns. She is a 2004 cum laude graduate of the University of Georgia’s Grady School of Journalism and Mass Communication.

 

 

 

 

Created by: Martha Mills at 4/8/2014 6:04:37 AM | 0 comments. | 1480 views.

By Pat S. Ottinger

Ottinger Hebert L.L.C.

 

Imprescriptible Minerals Resulting from Acquisition

by a Legal Entity Vested With Power of Expropriation

 

In his excellent Legal Update in April 2013, entitled “Expropriation in Louisiana After 2012 Legislative Session,” my friend Matt Randazzo was limited by space restrictions and could not address yet another amendment resulting from Act No. 702 of 2012.  In order to address this amendment, this Update might be considered a supplement to Matt’s work.

 

Before reviewing this new legislation, let’s put forth a hypothetical title issue with which you will be presented – stay with me here – in 2023.  (If you can’t wait to find out why I’ve moved you at warp speed a decade hence, you can cheat and take a peak at the very last paragraph herein.).

 

You are examining title to two sections of land and find that, on September 1, 2012, John Doe sells Section 1 to American Natural Gas Pipeline Company, a Louisiana corporation, in which deed it was stated that “Vendor does hereby reserve all oil, gas and other minerals under such land.”  On the same day, John Doe sells Section 2 to American Pie and Cookie Company, a Louisiana corporation, and this deed also stated “Vendor does hereby reserve all oil, gas and other minerals under such land.” 

 

In the year 2023, you encounter these deeds and determine, after reviewing SONRIS, that no use has been made of either servitude since that date (either on the burdened lands or lands pooled therewith).  Let’s hold that thought for a moment and now take a further look at Act No. 702 of 2012.

 

On first blush, this legislation would not seem to have much relevance to oil and gas in that it amends certain sections of Title 19, Expropriation, including Section 2 which identifies the types of juridical persons[1] enjoying the power of expropriation.  This Act made numerous procedural and other changes to the law of expropriation (including a change to the so-called “St. Julien Doctrine”),[2] but for our immediate purposes, we wish to highlight only one change made to the statute.

 

Signed by the Governor on June 11, 2012, Act No. 702 amended La. Rev. Stat. Ann. § 19:2 so as to expand the “created for” standard of eligibility for the right of a private legal entity to expropriate, to now include a legal entity which is “engaged in” certain specified activities.

 

We must digress.  Article 149 of the Louisiana Mineral Code deals with “imprescriptible minerals,” that is, a mineral servitude which is not subject to the prescription of non-use.  Basically, if land is acquired by an “acquiring authority,” either consensually or by expropriation, and the vendor reserves minerals in such transaction, the “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.” 

 

As defined in Article 149, an “acquiring authority” includes, in addition to the Federal and State governments (and certain political subdivisions thereof), “any legal entity with authority to expropriate or condemn, except an electric public utility acquiring land without expropriation.”  Hence, this definition points us to Title 19 of the Revised Statutes.

 

La. Rev. Stat. Ann. § 19:2 specifies the types of “legal entity with authority to expropriate or condemn,” and, thus, which non-governmental legal entities would constitute an “acquiring authority” for purposes of Article 149.

 

Prior to this legislation, those included certain entities which were “created for” certain purposes, e.g., the construction of railroads, toll roads, or navigation canals; the construction and operation of street railways, urban railways, or inter-urban railways; the construction or operation of waterworks, filtration and treating plants, or sewerage plants to supply the public with water and sewerage; the piping and marketing of natural gas for the purpose of supplying the public with natural gas; the purpose of transmitting intelligence by telegraph or telephone; the purpose of generating, transmitting and distributing or for transmitting or distributing electricity and steam for power, lighting, heating, or other such uses, and piping and marketing of coal or lignite in whatever form or mixture convenient for transportation within a pipeline.

 

In view of the foregoing, prior to the legislation under consideration, it was both necessary and sufficient to examine the organizational papers of a legal entity involved in such a transaction (a legal entity being a vendee in a sale of land wherein the vendor reserves a mineral servitude) in order to determine if the legal entity had been “created for” any of the purposes stated in La. Rev. Stat. Ann. § 19:2. 

 


As noted, Act No. 702 expanded the “created for” standard of eligibility for the right to expropriate, to now include a legal entity which is “engaged in” the specified activities.[3]

 

Thus, it now appears that, if a corporation (for example) was created “for any lawful activity,”[4] but is in fact “engaged in” certain specified activities, a reservation of a mineral servitude in a sale to such entity might be imprescriptible.

 

When, prior to the adoption of Act No. 702, the standard was simply “created for,” a title examiner had the ability to find the entity’s articles[5] and could rather easily make a determination as to whether the vendee was an “acquiring authority,” and, hence, to determine if the vendor’s mineral servitude was or was not subject to prescription.

 

Now that the touchstone has been extended to an entity which is “engaged in” those specified activities (even if not explicitly “created for” such purpose), this is a factual matter not reflected by the public records and would seemingly require an inquiry as to the activities in which the entity is or has been “engaged.”

 

And worse, the transaction in question might be for unrelated purposes, but if that entity is “engaged in” a prescribed activity in another parish or state (unrelated to the transaction at hand), is that sufficient to vest the entity with the power of expropriation?  Nothing in the new statutory formulation requires that the land purchase (with attendant reservation of a mineral servitude) actually be effectuated in connection with a qualifying activity in which the vendee is then “engaged.”

 

In other words, a corporation which is created for the generic purpose of engaging in “any lawful activity” might be “engaged in” a qualifying activity in Bossier Parish, and thereby might enjoy the power of expropriation in Terrebonne Parish, even though its activities in that latter parish are unrelated to the conduct of (or “engaged in”) the specified activity.  Thus, if you are reviewing or examining title to land in Terrebonne Parish and find that the entity purchased property wherein the vendor reserved minerals, is the mineral servitude prescriptible or not?  What inquiry must the land man or title examiner make to ascertain the status or character of the reserved mineral servitude?

 

Admittedly, the concern expressed herein might be assuaged somewhat by the requirement in Subparagraph B of Article 149 that 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.” 

 

If there is no reference in the deed to the minerals’ “imprescriptibility as authorized under the provisions of this Section,” the inquiry should end there.  This conclusion is reinforced by Subparagraph G(2) of Article 149 which states that the “provisions of this Chapter shall not apply to:  *  *  * [a] transfer in which the acquiring authority neither expressly reserves or excludes nor conveys to the transferor a mineral right otherwise subject to prescription.”

 

However, even with compliance with this requirement (by making express reference to the imprescriptibility of the mineral servitude), it is still necessary to inquire into the relevant facts to determine that the vendee is in fact an “acquiring authority” by reason of the circumstance that it has “engaged in” a prescribed activity.  Said differently, merely stating, in the deed or judgment, that the reserved minerals are “imprescriptib[le] as authorized under the provisions of” Article 149, does not make it so.[6]

 

Back to our hypothetical situation, way back in September of 2012.  The issue presented is whether the vendee is an “acquiring authority” within the meaning of Article 149 of the Mineral Code such that the mineral servitude is not subject to prescription.  You first examine the articles of incorporation of each vendee to see if either is “created for” a purpose which would give it the power of expropriation. 

 

You find that the articles of the Pipeline Company state that it is “created for” the purpose “to engage in any lawful activity for which corporations may be formed under the Business Corporation Law.”  So, the Pipeline Company was not “created for” the purpose of “the piping and marketing of natural gas for the purpose of supplying the public with natural gas”  To your chagrin, you also find that the articles of the Pie Company state that it is created for the explicitly stated purpose of “the piping and marketing of natural gas for the purpose of supplying the public with natural gas.”  You made a wrong assumption, didn’t you?! 

 

So, seemingly, at least prior to Act No. 702 of 2012,[7] the Pie Company has the power of expropriation (and, thus, the servitude is imprescriptible), but the Pipeline Company does not enjoy the power of expropriation (and, thus, the servitude is not imprescripti­ble).

 

But, thanks to your Legislature way back in 2012, your inquiry does not end there.  With regard to the Pipeline Company, you need to discern if it is (or has been) “engaged in” the laying of pipelines.  Remembering that there are 64 parishes in the state, good luck with that!

 

One final digression.  Why the analysis of this issue a decade away from today?  The amendment to Act No. 702 could not conceivably be applied retroactively, so we have to wait until a full ten-year period of time – with no “use” of the servitude having occurred -- to determine if the reservations were subject to prescription or not.

 



[1]               “A juridical person is an entity to which the law attributes personality, such as a corporation or a partnership.  The personality of a juridical person is distinct from that of its members.”  Article 24, Louisiana Revised Civil Code.  Essentially, these are corporations, partnerships, limited liability companies and the like.

[2]               Taking its name from the decision in St. Julien v. Morgan Louisiana & Texas Railroad Company, 35 La.Ann. 924 (1883), this doctrine stands for the proposition that a landowner who acquiesces in the installation of facilities on its property by a party having the power of expropriation, forfeits the right to demand the removal of the facilities and is relegated to a claim for money damages.  It is now codified in La. Rev. Stat. Ann. § 19:14.  (Factual tidbit – this case involved lands now on Ambassador Caffery in the Broussard area.).

[3]               Although, prior to Act No. 702, La. Rev. Stat. Ann. § 19:2(11) listed, as an entity having the right to expropriate, “any domestic or foreign limited liability company engaged in any of the activities otherwise provided for in this Section,” this Subsection, by its explicit terms, did not reach or apply to corporations or partnerships.  Act No. 702 did expand it to include corporations and any “other legal entity.”

[4]               As permitted by La. Rev. Stat. Ann. § 12:24B(2), Articles of Incorporation must state, “In general terms, the purpose or purposes for which the corporation is to be formed, or that its purpose is to engage in any lawful activity for which corporations may be formed under this Chapter.”

[5]               The articles would be available in the office of the Secretary of State, La. Rev. Stat. Ann. § 12:25A(1), as well as “the office of the recorder of mortgages of the parish in which the registered office of the corporation is located,” La. Rev. Stat. Ann. § 12:25D.

[6]               Indulge me by ignoring the fact that, in our hypothetical situation, the deeds did not “reflect the intent to reserve or exclude the mineral rights from the acquisition and their imprescriptibility” under Article 149.  Although this certainly makes a difference, your author wishes to focus on the issue of whether the nature of the legal entity acquiring the property could give rise to an imprescriptible mineral servitude.

[7]               This legislation became effective on August 1, 2012.

Created by: Martha Mills at 4/8/2014 6:01:03 AM | 0 comments. | 1242 views.

 

By Jasmine B. Bertrand

Onebane Law Firm

 

Louisiana Supreme Court Swims Through “Sea of Flags” to Uphold Contractual Negligence Defense to Claim of Unilateral Error

 

The Louisiana Supreme Court decision in Peironnet v. Matador Res. Co., 2012-2292 (La. 6/28/13) concerns whether a lease extension was limited to cover a certain 168.95 acres which was, at the time of the execution of said extension, unlikely to be productive by the end of the primary term of the lease, or whether the extension covered the deep rights for the entire 1805 acres initially leased.  Matador had successfully developed the Cotton Valley formation for all of the acreage covered by the lease, except for a certain 168.95 acre tract, by the end of the primary term.  However, the lease at issue included both horizontal and vertical Pugh clauses.  Therefore, at the end of the three year primary term of the lease, both the 168.95 acre tract as well as the deep rights for the productive acreage would potentially be unleased without an extension of same.  Although there was evidence at trial that payment for the lease extension may have been calculated by a price based on the undeveloped 168.95 acres, the language used in the lease extension that was eventually executed extended the primary term of the entire lease as to all acreage and depths, including the deep rights, covered by the original lease.  In early 2008, the discovery of the Haynesville Shale formation was announced.  Soon thereafter, Matador gave notice to the plaintiffs of its intent to create several units in order to drill to the Haynesville Shale.  The plaintiffs then filed suit in which they claimed error in the lease extension insofar as to the deep rights to the developed acreage. 

 

The law at issue in this case is Louisiana’s law with respect to error as a vice of consent to a contract.  Louisiana Civil Code article 1949 provides that “error vitiates consent only when it concerns a cause without which the obligation would not have been incurred and that cause was known or should have been known to the other party.”  In its discussion of error, the Louisiana Supreme Court noted that error can manifest itself either mutually or unilaterally.  Louisiana courts have granted relief to a party claiming unilateral error only where the other party knew or should have known that the matter affected by the error was the reason or principal cause why the party claiming unilateral error made the contract.  Whereas the court can either reform or rescind the contract in the case of mutual error, rescission is the only remedy for unilateral error.  However, the court can refuse to rescind the contract “when effective protection of the other party’s interest requires the contract be upheld,” or the court may partially rescind the contract when the totality of the parties’ intentions are considered.  In determining whether to grant rescission, the courts consider “whether the error was excusable or inexcusable,” which is determined according to the circumstances surrounding a particular case.  Personal circumstances, such as age, experience, and profession, are to be taken into account.  However, where unilateral error is the result of a party’s failure to read the contract, such an error is inexcusable.  In such a case, the jurisprudence has recognized a contractual negligence defense to a claim of unilateral error.

 

In the case at hand, the plaintiffs sought rescission of the contract for unilateral error and, in the alternative, reformation for mutual mistake.  In setting forth their claim of unilateral error, the plaintiffs claimed that their agent executing the lease extension on their behalf did not understand that it extended the entire lease, and that the defendants knew or should have known of his misunderstanding. 

 

In response, the defendants advanced the defense of contractual negligence as to the unilateral error claim, bringing forth evidence demonstrating that the plaintiffs could show no excuse for failing to read and understand the clear terms of the lease extension, which was written “in plain English, without technical language or terms of art.” The Court found that the plaintiffs’ agents were “self-proclaimed experts in dealing with oil and gas matters, including oil and gas leases,” and the original lease was executed in the agent’s own lease form and plainly covered all depths during the primary term.  The Louisiana Supreme Court therefore found that the error could have been detected and rectified by “a minimal amount of care, i.e., by simply reading the document and/or by requesting simple changes to the written offer before acceptance.”  The agents negotiating on behalf of the plaintiffs were petroleum landmen with the level of education and experience that made such an error “difficult to rationalize, accept or condone.”  Moreover, the Court noted that these landmen did not dispute that the lease extension explicitly extended to the entire lease as to all acreage and depths.  Although the extension of the lease to the deep rights was not discussed by the parties, the Court found that it was clear through the written offers given to the plaintiffs from the defendants that Matador sought to extend the entire lease.  Additionally, evidence at trial demonstrated that one of the co-owners of the tract at issue, who was not a party at trial, after being presented with the same extension agreement, requested that same be limited to the undeveloped 169.95 acres, which request was denied by Matador.  Other evidence introduced at trial was testimony from one of the plaintiffs’ agents that even if the mistake was noticed, “he suspected ‘no one thought it mattered at the time.’”  The Court’s opinion of such comment was that “it was undeniably” the agent’s responsibility “to question the document.” 

 

The Court then went through the “sea of flags” that “should have been raised by these experienced landmen” concerning the true extent of the extension agreement, by pointing to specific language in the agreement, including (i) language that it was the mutual desire of the parties to extend the primary term of the lease; (2) language that the lease shall remain unchanged and re-letting language that referenced the lands described in the lease; (3) language that the existing lease was extended; and (4) language that the primary term was extended.  The Court found the  plaintiffs’ failure to question the lease extension, to seek clarification of what it covered, or even to discuss coverage of the deep rights demonstrated an inexcusable lack of simple diligence precluding rescission of the agreement.

 

With respect to the plaintiffs’ claim of mutual error, the Court found that the lease extension clearly and unambiguously covered all acreage and all depths, based upon the language in the agreement, the testimony of all agents of the defendants at trial, and the initial letters to the plaintiffs from Matador.  In addressing a notation of “169.95 acs. (lease ext.)” on one of the plaintiffs checks, the Court found the jury’s decision on this issue in the defendants’ favor was supported by the defendants’ explanation that the notation reflected the formula employed to calculate the agreed upon consideration and was not indicative of the acreage extended.  Such an explanation was consistent with the defendants’ position on how consideration was calculated by the parties. 

 

In reversing the decision of the Second Circuit and finding in favor of the defendants, the take-away from the Louisiana Supreme Court decision in Peironnet is that the courts should not look favorably upon any party claiming unilateral error based on failure to read the document, especially when the parties are sophisticated such as the players at issue in the case.

 

Jasmine Bertrand is a shareholder in the Lafayette office of the Onebane Law Firm.  Originally from St. Martinville, Louisiana, Jasmine graduated from Catholic High School in New Iberia, Louisiana in 1995. She received her bachelor’s degree from the University of Louisiana at Lafayette in 1999, graduating as an honors student, summa cum laude. In 2005, she earned her Juris Doctor magna cum laude from Tulane Law School in New Orleans, Louisiana, where she was a managing editor of the Tulane Law Review, was elected Order of the Coif, and received the Dean Rufus C. Harris Civil Law Award, as well as various other awards.

Jasmine’s practice focuses primarily oil and gas property title examination and immovable property/oil and gas property advice.  Jasmine also maintains an elder and special needs law practice, advising clients on matters concerning advanced planning, capacity issues and interdictions, and Medicaid planning and advice. She is a member of the Lafayette Parish, Louisiana State and American Bar Associations, National Association of Elder Law Attorneys (NAELA), Lafayette Association of Petroleum Landmen (LAPL), American Association of Professional Landmen (AAPL), the Professional Landmen’s Association of New Orleans (PLANO), and the Ark-La-Tex Association of Petroleum Landmen (ALTAPL). She is the author of "Comment: What's Mine Is Mine Is Mine: The Inequitable Intersection of Louisiana's Choice-of-Law Provisions and the Movables of Migratory Spouses,” 79 Tul. L. Rev. 493 (Dec. 2004), as well as various articles on immovable property and oil and gas related topics, and elder law issues. She has presented at numerous seminars, including the Louisiana Mineral Law Institute, Gulf Coast Land Institute, and LAPL, BRAPL, and AAPL sponsored events, on such topics as imprescriptible mineral rights, divisions of interest, roadbed issues, capacity and authority issues, and various other subjects. Jasmine resides in Lafayette with her husband, Louis Vale, and their two children, Violet, age 5, and Finn, age 3.

 

 

 

 

 

 

 

 
Created by: Martha Mills at 4/8/2014 5:57:29 AM | 0 comments. | 1442 views.

LOUISIANA LEGAL UPDATE

 

By Colleen C. Jarrott

Slattery, Marino & Roberts, PLC

 

Three recent decisions affecting the oil and gas industry have been issued and are of note: the first case involves some careless drafting of a quitclaim deed that releases “all interests in property,” including mineral interests, the second involves a battle of the experts in a “legacy” lawsuit wherein a defendant oil and gas company was granted summary judgment by the Louisiana Court of Appeal for the Third Circuit, and the third involves ambiguity over the interpretation of “calculate and pay” language as it relates to individual override owners.  A brief discussion of each is provided below.

 

First Case: Louisiana Court of Appeal

for the Second Circuit

 

In Franklin v. Camterra Resources Partners, Inc., Mr. Franklin owned separate property from his then-wife in DeSoto Parish.  In 2000, as part of his divorce, Franklin transferred the property to a family-named educational trust, reserving his mineral rights.  In 2001, the Arbuckles offered to purchase the property and ultimately obtained it.  At the time of the sale, Franklin’s mineral servitude was not discussed.  

 

In 2008, Haynesville Shale was an attractive play.  The Arbuckles granted a mineral lease to Camterra Resource Partners, who later assigned it to Petrohawk.  A few months later, Franklin transferred his “reserved” mineral rights to his current (second) wife.  She later sought a declaratory judgment as to who owned the mineral rights.  Franklin intervened.  Defendants filed motions for summary judgment that the Arbuckle deed conveyed both the mineral and surface rights to the Arbuckles.  The trial court agreed. 

 

On appeal, the Louisiana Court of Appeal for the Second Circuit affirmed the trial court’s ruling and found that the deed was not ambiguous.  In the first part of the deed, Franklin and his ex-wife appeared together as trustees and transferred what the trust owned subject to any mineral reservation.  In the second part, however, Franklin appeared alone and quitclaimed “all interest” in the property.  The court further found that because Franklin had experience transferring mineral interests and he had his attorney review the transfer at issue, error could not absolve them from overlooking the “all interest” language.

 

Second Case: Louisiana Court of Appeal

for the Third Circuit

 

In Andrepont v. Chevron USA, Inc., et al., several plaintiffs filed an oilfield contamination (“legacy”) lawsuit against a number of defendant oil companies claiming that defendants’ ongoing operations polluted their property.  One defendant, Radke Oil & Gas, an independent oil and gas company, filed a motion for summary judgment on the basis that the wells it operated were not near the property and that it did not use earthen pits for storage.  Radke attached plaintiffs’ discovery responses and an affidavit from Lee Day, a senior geologist with Toxicological & Environmental Associates, Inc., to its motion. 

 

Mr. Day determined that Radke never operated any of the wells set forth in plaintiffs’ petitions and that Radke could not have caused any contamination because Radke did not use open pits and, given the natural drainage of the property, contamination could not have flowed from Radke’s wells onto plaintiffs’ property.  In opposition, plaintiffs filed an affidavit from Greg Miller with ICON.  Mr. Miller noted that defendants (including Radke) used open earthen pits to store oilfield waste and that flowlines used to transport oil across plaintiffs’ property “appeared” to have originated from Radke’s wells.  In a supplemental affidavit from Mr. Day, he showed that the use of open pits along the Gulf Coast was discontinued in the 1920’s and that by the 1940’s steel storage tanks were used to store oil.

 

The trial court ruled in favor of Radke.  Plaintiffs appealed.  The Louisiana Court of Appeal for the Third Circuit affirmed the trial court’s ruling and found that plaintiffs could not prove that Radke was liable for any contamination, based on Mr. Miller’s assertion that the flowlines “appeared” to originate from Radke’s wells.

 

Third Case: United States Court of Appeal

for the Fifth Circuit

 

 In 1995, the U.S. adopted the Deep Water Royalty Relief Act (“DWRRA”) to encourage drilling in deep waters on the outer continental shelf.  DWRRA authorized the Department of Interior to suspend collection of certain royalties for deep water production under federal offshore leases between 1996 and 2000.  The suspension would apply until a certain threshold amount of production was obtained. 

 

In 1998, the federal government issued an offshore lease to Mariner Energy and Westport Oil and Gas.  Westport assigned overriding royalty interests (“ORRIs”) to several persons.  The assignments contained a “calculate and pay” clause that stated: “The overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner’s royalty under the Lease.”  Westport and Mariner later assigned their interests to Chevron, Total E & P, and Statoil.

 

In 2009, the new owners established production.  Because their well qualified for a royalty suspension, the owners did not pay royalties to the federal government, but Chevron began making payments to the ORRI owners and continued to do so.  In contrast, Total and Statoil took the position that, for purposes of the “calculate and pay” clause, the royalty suspension was a “term and condition” of their obligation to make royalty payments to the “landowner.”  Accordingly, their obligation to make ORRI payments was also suspended.  The ORRI owners disagreed and litigation ensued.

 

The district court granted summary judgment for Statoil and Total, but the Fifth Circuit reversed, concluding that the “calculate and pay” clause is ambiguous.  The Fifth Circuit stated that the clause could be interpreted as incorporating the federal regulations that define how royalties are calculated, without interpreting the clause as also incorporating the DWRRA suspension of royalty payment obligations.  Because of the ambiguity, the Fifth Circuit remanded for further proceedings. 

 

Colleen C. Jarrott is an attorney with the law firm of Slattery, Marino & Roberts in New Orleans, Louisiana.  Ms. Jarrott practices oil and gas law, in particular defending oil and gas companies in “legacy” lawsuits.  Ms. Jarrott has lectured previously on mineral law developments.  Ms. Jarrott received her Juris Doctor in 2002 from the The Catholic University of America, Columbus School of Law in Washington, D.C.  While in law school, Ms. Jarrott was a staff member for the Catholic University Law Review and a member of moot court.  Following law school, Ms. Jarrott clerked for the Honorable Robert H. Hodges, Jr. at the U.S. Court of Federal Claims.  She is admitted to practice in all state and federal courts in Louisiana, as well as the U.S. Court of Federal Claims and the United States Supreme Court.  Ms. Jarrott is the past President and a founding member of the Women’s Energy Network – Southeast Louisiana chapter.  Ms. Jarrott may be contacted at cjarrott@smr-lawfirm.com or (504) 585-7800. 

 

 

Franklin v. Camterra Resources Partners, Inc., _______ So.3d _______, 2013 WL 2217324 (La. App. 2 Cir. 2013).

 

Andrepont v. Chevron USA, Inc., et al., 2012-1100 (La. App. 3 Cir. 4/3/13); 113 So.3d 421.

 

 

Total E&P USA, Inc. v. Kerr-McGee Oil&Gas, 711 F.3d 478 (5th Cir. Mar. 12, 2013); see alsoTotal E&P USA Inc. v. Kerr-McGee Oil&Gas Corp., --- F.3d ----, 2013 WL 3104943 (5th Cir. Jun. 20, 2013) (vacating and superseding prior decision; substance of opinion is same).

 

 

 

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                      

 

 

Created by: Martha Mills at 4/8/2014 5:54:52 AM | 0 comments. | 1289 views.

By Andrea Knouse

Mayhall Fondren Blaize

 

The Louisiana Court of Appeal for the Second Circuit recently decided Cason v Chesapeake Operating, Inc.,  47,084, 2012 WL 1192404 (La. App. 2 Cir. 4/11/12), In said case, the Court discussed what constitutes “engaged in operations for drilling” on a lease premises so as to continue the lease beyond its primary term as well as interpreted the “adjacent land clause” found in numerous oil, gas and mineral leases.

Plaintiffs, Edgar and Flora Cason, appealed a Judgment from the District Court granting Defendants, Empress Louisiana Properties, et al, a preliminary injunction prohibiting Plaintiffs from interfering with the construction of a pipeline on Plaintiffs’ leased property.

Plaintiffs executed an oil, gas and mineral lease on about 7,200 acres of land in favor of Pride Oil & Gas which, with exercised extensions, would terminate on May 31, 2010. Also included in said lease was a clause which stated that the lease would remain in existence as long as the lessee is “engaged in operations for drilling”, another allowing ingress and egress to the lease tract on “adjacent lands” to construct necessary roads and pipelines, and the right to assign the lease in whole or in part. Through various assignments, Chesapeake, parent company of Empress, acquired said lease.  Plaintiffs argue that Defendants failed to engage in activities that would maintain the lease beyond May 31, 2010, as no drilling permit was obtained from the Office of Conservation and, thus, executed an oil, gas and mineral lease in favor of Goodrich.  However, on May 28, 2010, Defendants entered the lease tract, on May 29 and 30, Defendants entered onto the tract to cut trees and stack lumber. The well was not spud until July 22, 2010. Plaintiffs alleged to the District Court that the minor work performed between May 29 and 30 did not constitute “operations for drilling” which would maintain the lease beyond its primary term and refused to allow Defendants to lay pipeline on an adjacent tract  owned by Plaintiffs.

During the trial at the District Court level, Defendants offered testimony from various witnesses relative to its operations and activities on the leased premises. A senior landman testified that while Defendants did not obtain a drilling permit during the primary term of the lease, they did complete surveys that were vital to drilling within the primary term. A corporate representative for Defendants testified that Defendants hired a surveying company on April 26, 2010, surveyors were on the ground May 4 through 7 tying off corners, and were staking the pad May 26 through 28. A manager of gas sales for Defendants testified that he started researching production issues on May 10, and the only feasible option was to run the gas through a tract of Plaintiffs’ land adjacent to the leased premises. The District Court gave the most weight to the testimony of an expert oil and gas attorney, Philip N. Asprodites. Mr. Asprodites reviewed all of the Defendants’ activities prior to May 31, 2010 and concluded while it was not “standard practice” to engage so many activities-putting surveyors on the ground, staking the well and cutting trees to lay the road-and not obtain a drilling permit until 45 days after the end of the primary term, Defendants nonetheless “commenced drilling operations.” He further testified that it did not matter that the drilling permit was not obtained during the primary term, stressing that the lease tract posed special difficulities requiring extensive preparatory work. We note that the Judgment of the Second Circuit does not elaborate as to what may be the “special difficulties” relating the leased premises.

The District Court determined that Defendants were engaged in good faith drilling operations prior to the end of the primary term and granted a preliminary injunction against Plaintiffs. Plaintiffs appealed alleging, among other claims, Defendants failed to make a prima facia case for maintaining the lease beyond the primary term.

Engaging in Operations

Plaintiffs allege that Defendants failed to apply for a drilling permit during the primary term, surveryors failed to complete drilling surveys, no equipment was moved onsite, and no pits were dug in connection with the drilling of a well. Moreover, Plaintiffs contend that no Louisiana case has ever maintained a lease on such minimal conduct of the lessee. Defendants counter that courts have held preliminary acts began in good faith constitute commencement of drilling operations under the “engaged in operations” clause.

The Court states that the crucial question is whether Defendants’ activities on the leased premises amount to “engaged in operations for drilling” and cite Allen v Continental Oil Co.

The general rule seems to be that actual drilling is unnecessary, but that the location of wells, hauling lumber on the premises, erection of derricks, providing a water supply, moving machinery on the premises and similar acts preliminary to the beginning of the actual work of drilling, when performed with the bona fide intention to proceed thereafter with diligence toward the completion of the well, constitute a commencement or beginning of a well or drilling operations within the meaning of this clause of the lease.

If the lessee has performed such preliminary acts within the time limit, and has thereafter actually proceeded with the drilling to completion of a well, the intent with which he did the preliminary acts [is] unquestionable, and the court may rule as a matter of law that the well was commenced within the time specified by the lease.

255 So.2d at 845, quoting 2 Summers Oil & Gas, § 349, pp. 459–465.

The Court further held that where the lease provides for commencement of operations, the courts will hold that operations preliminary to the actual drilling of the well are sufficient compliance with the terms of the lease, provided, however, that such preliminary operations are continued in good faith, without undue delay, and with due diligence and dispatch, and thereafter the well is begun and completed.

Applying the above principals, the Court determined that although Defendants failed to obtain a drilling permit within the primary term, they performed sufficient preliminary acts by surveyors tying off section corners and gathering topographic data, finishing the survey and staking the site and access road, and logging the site. The Court placed much weight on Mr. Asprodites’ testimony that because of the “special difficulties” of the tract, extensive prep work was necessary, and the acts of the Defendants constitute “commenced operations.” Additionally, the Court states that Defendants spent 8.5 million to bring the well into operation which shows that the preliminary actions were done for the purpose of completing the well. Thus, the lease was maintained.

Adjacent Land Clause

Plaintiffs also alleged that the preliminary injunction preventing Plaintiffs from interfering with pipeline installation was improper, as Defendants, assignees of the original lease, had no right to the land adjacent to the lease tract in Section 13. Plaintiffs contended that Defendants’ assignment was limited to the leased tract which covered lands located in Section 24.

The Court maintains that the original lease in favor of Pride Oil & Gas Properties expressly granted the lessee the right to conduct operations on adjacent or adjoining lands deemed necessary by the lessee to produce and transport oil, gas and other substances. While the partial assignment of the original lease to the Defendants may have been limited to Section 24 lands, the Court held that partial assignments do not divide a mineral lease under R.S. 31:310; therefore, the partial assignment did not sever the adjacent land clause contained in the original lease from the assignment.  The Court held that Defendants had to right to lay pipeline through the adjacent land in Section 13.

ANDREA M. KNOUSE is an attorney with Mayhall, Fondren & Blaize, LLC. Her practice consists of title examination, division order work, and litigation. Ms. Knouse 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. Knouse 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. Knouse graduated magna cum laude from Texas Christian University with a Bachelor of Science degree in Psychology.

 

 

 

 

 

 

Created by: Webmaster at 3/15/2014 10:43:00 AM | 0 comments. | 1568 views.

Exploration Land Services, LLC is currently seeking brokers with experience in title, abstracting, leasing, due diligence, and curative for jobs located in Louisiana and Texas.  If you or anyone you know who may be looking for work, please forward resumes to contact@explorationland.com and include at least 3 references. 

 

Natalie Holeman

Exploration Land Services, LLC

Office: 337.234.3500

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Email: nholeman@explorationland.com

Created by: Martha Mills at 4/10/2013 10:00:41 AM | 0 comments. | 7505 views.

LOUISIANA LEGAL UPDATE

 By Matt Randazzo[1]

Randazzo, Giglio & Bailey

 

EXPROPRIATION IN LOUISIANA AFTER 2012 LEGISLATIVE SESSION

 

With the boom for demand for more and more oil, natural gas, natural gas liquids, other petroleum products and various non-petroleum based products (i.e. hydrogen, CO2 and oxygen), both domestically and internationally, more and more pipelines are being proposed in Louisiana.  As other states have grappled with expropriation in areas that had never had pipelines and the controversy over the right of a private expropriating entity to exercise the right of eminent domain or condemnation (in Louisiana, the right of expropriation) the laws giving such right have been evolving and changing at a rapid pace. In the 2012 Louisiana Legislative Session, the legislature decided to review and amend the pertinent portions of the Louisiana Revised Statutes pertaining to the right of expropriation by a private expropriating entity, such as a utility or pipeline company. Some of the changes require additional action prior to the filing of an expropriation proceeding, which such action used to occur after the expropriation proceeding was filed.  Because the right of expropriation is solely dependent upon strict compliance with each and every pre-filing requirement specified in the Louisiana Constitution and the Revised Statutes, it is important for LAPL members to know what must now be done in order to make sure that an expropriation suit is not dismissed for failure to timely and properly comply with the laws of expropriation. 

 

Over the years the right to take property from a private landowner has expanded from the state to a plethora of state, parish and municipal entities and agencies and, in more recent times, to non-governmental entities such as, but not limited to, utility, telephone, cable, fiber optic and pipeline companies who can meet the stringent requirements set forth in the Louisiana Constitution and the Revised Statutes.

 

Pursuant to Article 1, Section 4, of the Louisiana Constitution:

 

Property shall not be taken or damaged by any private entity authorized by law to expropriate, except for a public and necessary purpose and with just compensation paid to the owner; in such proceedings, whether the purpose is public and necessary shall be a judicial question.

 

Accordingly, a private expropriating entity seeking to avail itself of the right to expropriate is subject to the particular requirements and standards that are germane and which must each be satisfied as a prerequisite to the commencement of an expropriation proceeding in Louisiana. (See Dixie Pipeline Co. v. Barry, App. 3 Cir.1969, 227 So.2d 1, writ refused, 255 La. 145, 229 So.2d 731, Texas Pipe Line Co. v. Stein, App. 4 Cir.1966, 190 So.2d 244, writ issued 249 La. 841, 191 So.2d 641, reversed on other grounds 250 La. 1104, 202 So.2d 266, and Interstate Natural Gas Co. v. Louisiana Public Service Commission, E.D.La.1940, 34 F. Supp. 980, all of which discuss common carrier status generally).

 

Act 702 of the 2012 Louisiana Regular Legislative Session[2] (“Act 702”) amends Louisiana Revised Statutes Sections 19:1, et seq. (“Louisiana Expropriation Statutes”). Act 702, which became effective as of August 1, 2012,[3] places additional pre-suit requirements on private expropriating authorities (excluding the state and/or its political subdivisions).

 

Most significant are the revisions to Section 19:2 of the Louisiana Expropriation Statutes, which now require private expropriating authorities to obtain an appraisal/evaluation before “exercising the rights of expropriation,” and  provide the landowner with:  (a) the name, address, and qualifications of the person or persons preparing the appraisal or evaluation; (b) the amount of compensation estimated in the appraisal or evaluation; and (c) a description of the methodology used in the appraisal or evaluation.  Prior to Act 702, only the state and its political corporations or subdivisions were required to do this.

 

In addition, Act 702 also requires private expropriating authorities (but not the state and/or its political subdivisions) to send a certified letter (return receipt requested) thirty (30) days before filing suit setting forth in detail or attaching the following: (1) the basis on which the expropriating authority exercises its power; (2) the purpose, terms, and conditions of the proposed acquisition; (3) the compensation to be paid for the rights sought to be acquired; (4) a complete copy of all appraisals of, or including, the subject property previously obtained by the expropriating authority; (5) a plat of survey signed by a Louisiana licensed surveyor illustrating the proposed location and boundary of the proposed acquisition, and any temporary servitudes or work spaces; (6) a description and proposed location of any proposed above-ground facilities to be located on the property; and (7) a statement by the entity of considerations for the proposed route or area to be acquired.

 

Prior to Act 702, the Louisiana Expropriation Statutes only required the “state or its political corporations or subdivisions” to obtain an “appraisal or evaluation” of the amount of compensation due and to provide the information contained in the appraisal/evaluation report to a landowner before “exercising the rights of expropriation.”  This requirement was codified in Section 19:2.2 of the Louisiana Expropriation Statutes.  Under Act 702, all Private Expropriating Authorities who are entitled to expropriation must comply with La. R.S. 19:2.2.

 

It is paramount to remember that an expropriation suit may be dismissed as being premature if the expropriating authority has not first negotiated with and been refused by the landowner to enter into a conventional agreement in the form of such agreements offered to and accepted by other landowners in the area.  See, LA. R.S. 19:2; Texas Gas Transmission Corporation v. Pierce, 192 So.2d 561 (La.App.3d Cir. 1966). The requirement of negotiation before suit is met, however, when the expropriating authority makes a ‘good faith’ attempt to acquire the property by conventional agreement prior to filing an expropriation suit. Evidence as to the amount which may have been offered to the landowner is material only insofar as it may have some bearing on the question of whether the expropriating authority was in good faith. There is no requirement that negotiations be conducted to a conclusion, or that the expropriating authority increase the initial offer which it made for the property. Forced arbitration in expropriation cases is not contemplated by our law, and, prior to the passage of Act 702, courts had held that it was not essential that a formal appraisal of the property or rights be made before suit was filed. The test to be applied in determining whether bona fide negotiations were conducted prior to suit is: “Did condemnor make a ‘good faith’ attempt to acquire the property or rights by conventional agreement before the expropriation suit was filed?”  See, Central Louisiana Electric Company v. Brooks, 201 So.2d 679 (La.App.3d Cir. 1967); Louisiana Power & Light Company v. Ristroph, 200 So.2d 14 (La.App.1st Cir. 1967).

 

In conclusion, only time will tell just how much Act 702 will impact expropriation proceedings in Louisiana.  Even under the amendments, expropriation cases are supposed to be given summary treatment – i.e. priority settings.  After reviewing Act 702, I have the following observations: (i) the new requirements imposed upon the entity seeking to expropriate will result in expropriation cases taking longer now than in the past to obtain a judgment allowing expropriation; (ii) certain costs will now be shifted to the entity seeking to expropriate and (iii) more fees will be incurred, prior to the filing of an expropriation proceeding, by the entity seeking to expropriate for attorneys, landmen and experts due to the additional steps in the pre-suit stage of the expropriation process.  LAPL members, who seek to obtain servitudes for clients who purport to have the right to expropriate, should pay close attention to the amended and new requirements imposed by Act 702 and consult and work closely with the client and its attorney, so as make sure that the negotiating timeline, the project timeline and the new expanded expropriation timeline are all considered and/or to avoid having an expropriation proceeding dismissed as being premature for failure to meet and satisfy each and every prerequisite to the filing of an expropriation proceeding.  Please email or call me with any questions.

 

Matthew (Matt) J. Randazzo, III is a founding Member of Randazzo Giglio & Bailey LLC and his practice includes all aspects of onshore and offshore oil and gas, environmental, pipeline operations, permitting and expropriation at the state and federal levels, commercial and litigation matters. Contact info: matt@rgb-llc.com, 900 East Saint Mary Blvd., Suite 200, Lafayette, LA 70503, 337-291-4900.



[1] ©2013 Matthew (Matt) J. Randazzo, III of Randazzo Giglio & Bailey LLC.  I would like to acknowledge and thank Shawn A. Carter, a member of Randazzo Giglio & Bailey LLC, for his contribution to the substance and assistance in the preparation of this update.

[2]       If you would like a copy of the Act 702 of 2012 showing the additions and deletions to the old law, please send me an email and I will reply with Act 702 attached.

[3]       Act 702 does not contain a statement as to its effective date. Pursuant to Louisiana Constitution Article III, Section 19, unless an earlier or later effective date is specified, all laws enacted during a regular session of the legislature “shall take effect on August first of the calendar year in which the regular session is held.”  Accordingly, the effective date of Act 702 was August 1, 2012.