The Energy Law Blog : Energy Lawyer & Attorney : Liskow & Lewis Law Firm : Gulf Coast, Offshore

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In CLK Company, L.L.C. v. CXY Energy, Inc., No. 07-834, 2007 WL 4409686 (La. App. 3d Cir. 12/19/07), the court addressed the payment of royalties and penalties under Mineral Code article 212.23(c) and concluded that plaintiff’s letters were insufficient to trigger the provisions of that article.  In CLK Company, the parties entered into a confidentiality agreement whereby the plaintiff agreed to provide services to the defendant.  In exchange, the defendant agreed to transfer an overriding royalty interest in the subject prospect to the plaintiff in the event defendant acquired an interest in the prospect.  When defendant refused to assign the overriding royalty interest to the plaintiff, plaintiff brought action, inter alia, for penalties under Article 212.23(c).  That article provides that a court may award as damages double the amount of royalties due together with attorney’s fees if the recipient of a demand letter fails to pay or otherwise fails to state a reasonable ground for non-payment in response to such notice.

In coming to its decision, the CLK Company court observed that a royalty owner must give a mineral lessee written notice of its failure to “’make timely or proper payment of royalties . . . as a prerequisite to a judicial demand for damages.’” Id. at *8 (citing La. R.S. 31:212.21).  Next, the court noted the dearth of reported cases involving Mineral Code articles 212.21-23 and considered jurisprudence under analogous Mineral Code article 137. Under Article 137, a demand for payment must be “’something more than the mere recitation of the lessee’s contractual and statutory duty to pay royalties’” and that the “’notice [must] be of a more specific nature, so as to reasonably alert the lessee and to allow for an appropriate investigation of the problem by the lessee.’”  Id. at *9 (citing Lewis v. Texaco Exploration & Prod. Co., Inc., 96-1458, pp. 11-12 (La. App. 1st Cir. 7/30/97), 698 So. 2d 1001, 1010).  Ultimately, the CLK Company court concluded that the trial court erred by instructing the jury to consider the plaintiff’s two letters as notice to make timely or proper payment of overriding royalties required by Article 212.23.  The court found that the letters merely requested an assignment of an overriding royalty, and neither made demand for royalties nor notified the defendant of deficiency of payment.  The court further reasoned that no royalties were due when the first letter was sent.  Accordingly, the court found that plaintiff’s claims for double damages had no merit.