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

by April Rolen-Ogden

This case involved a suit by an unleased landowner against an oil and gas unit operator seeking unpaid production proceeds. The landowner owned a portion of a small tract of property, which was included in an oil and gas production unit that was apparently being operated by the defendant, Cedyco. The trial court awarded Caldwell the unpaid production proceeds attributable to Caldwell’s production unit acreage. It is significant to note that the operator was  not represented by counsel at trial, which may explain the ultimate outcome in this case.

On appeal, Louisiana’s Third Circuit initially applied Louisiana Civil Code articles 487 and 488 to the landowner’s claims, which is not typically seen in mineral law cases because of the presence of Louisiana Revised Statute 30:10. The court had held it was legal error for the trial court to not require the landowner to reimburse Cedyco, the operator, for its expenses. The appellate court reversed the trial court’s decision and ruled that the operator was entitled to reimbursement from the landowner of its production expenses; however, the operator was still required to pay the landowner the remainder of the production proceeds.

Then, on rehearing, the appellate court issued a per curiam decision which resulted in a complete about-face on this issue. The court held that, based on article 487 of the Louisiana Civil Code, “only a good faith possessor is entitled to reimbursement of production expenses.” Since the record revealed no act transferring title in the operator’s favor, i.e., no lease from the landowner to the operator, the court reversed its prior decision and held instead that the landowner was not required to reimburse the operator for the operator’s production expenses. The court reasoned that without an act translating title to the operator, any minerals reduced to the operator’s possession are possessed by the operator in bad faith. Possessors in bad faith are not entitled to reimbursement of expenses under the Louisiana Civil Code. 

The result in this case is atypical because this issue is generally analyzed under Louisiana Revised Statutes 30:10, which is based on the theory of unjust enrichment. Even unleased landowners are required to pay their proportion of the production expenses under the Louisiana Mineral Code. Nevertheless, this case presents an additional concern for oil and gas operators who have unleased owners within their production units. 

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On July 12, 1996, the Jameses purchased immovable property from Gray Investments, a corporation owned by Leon Gray, Sr. and his wife, Mary Gray. The deed conveyed to the Jameses one-half of the royalties and mineral interests in the property and reserved the other one-half to Gray Investments. Division orders were prepared by Kelley Oil Corporation, a predecessor-in-interest to Samson, and the Jameses began receiving royalties. When Mr. Gray died, his heirs inherited certain property, including the right to receive royalties on the property purchased by the Jameses. The heirs discovered that the Jameses had been receiving one-half of the total royalties owned by and owed to Gray Investments rather than the one-half due them for royalties on the property they purchased. 

As a result, the heirs filed suit against the Jameses and Samson, as successor-in-interest, to Kelley Oil Corporation, for recovery of mineral proceeds, claiming that the Jameses were unjustly enriched by receiving royalty payments in excess of their ownership interest in the subject property. The trial court denied the exceptions of no right of action, no cause of action, and prescription. Thereafter, the Jameses’ application for supervisory writs was granted and the Second Circuit granted their no cause of action. The Jameses argued that the plaintiffs had no cause of action against them because there was no privity of contract between plaintiffs and them; instead, each party had a contract with Samson for the payment of royalties. Thus, the Jameses contended that the plaintiffs should have only filed suit against Samson for overpaying royalties to the wrong party.

Relying on Louisiana Civil Code article 2298, which provides that unjust enrichment is a remedy of last resort, available only when no other remedy is available, the court found that since the plaintiffs had a cause of action against Samson to recover for the underpayment of royalties to them and overpayment to the Jameses, the requirement that the plaintiffs have no other remedy at law was not satisfied. Accordingly, the court held that the plaintiffs had no cause of action against the Jameses, and thus reversed the trial court’s judgment denying the exception of no cause of action. Such a ruling rendered the exception of prescription moot.

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by Elisabeth Lorio

The United States Court of Appeals for the Fifth Circuit recently affirmed the United States District Court for the Eastern District of Louisiana’s decision to grant partial summary judgment in favor of the operator co-owner in a dispute over liability after a fellow co-owner’s assignment of lease interests governed by joint operating agreements (JOAs). Southeast acquired ownership of fractional working interests in two oil and gas leases in the Gulf of Mexico governed by two separate, yet nearly identical JOAs. After acquiring the interests in the leases, Southeast became a party to and assumed the rights and obligations under the JOAs. Hunt, a co-owner and operator of the leases, advanced 100% of the costs of operations and later billed the other co-owners for their virile portion. After a number of years, Southeast ceased paying Hunt for its share of the expenses. Subsequently, Southeast entered into a written assignment with South Pass Properties, South Pass assuming all of Southeast’s rights and obligations under the leases and JOAs.  South Pass, however, never paid the outstanding balance owed to Hunt.

Hunt filed suit against both Southeast and South Pass alleging that Southeast’s assignment did not release Southeast from its obligations under the JOAs. The district court agreed, finding Southeast solidary liable, as the language of the JOAs did not unambiguously effect a release of Southeast. The Fifth Circuit affirmed the decision of the district court, holding that an assignee and an assignor remain solidarily liable to the assignor’s obligations to a third party unless third party releases the assignor. The appellate court found that the record was devoid of any effective release of Southeast by Hunt. In its decision, the Court rejected Southeast’s argument that the language of the JOA served as a release of Southeast from its liability after it assigned its interests to South Pass. Since the JOAs did not contain a clear and unambiguous release of Southeast by Hunt, Southeast was found solidarily liable for the obligations under the leases and JOAs.

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Despite the current problems facing the national economy, Louisiana collected $3.5 million at its mineral lease sale in November, which State Mineral Board Director Marjorie McKeithan describes as “showing interest [that] leasing Louisiana mineral rights for energy production is still strong.” Bids on tracts in the Haynesville Shale area decreased from the peak sales in June, as companies are focusing on developing the tracts that were leased in the past few months. Despite the recent trend of falling prices for oil and gas, the Department of Natural Resouces reports that “leasing activity in areas outside the Haynesville Shale zone closely tracks typical lease sale history from recent years.” The Department of Natural Resources’ news release can be found at http://dnr.louisiana.gov/INDBDS/MINBOARD/MINLEASE/112008/newsrel.ssi

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