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

In Bowden v. Phillips Petroleum Co., No. 03-0824 (Feb. 15, 2008), the Texas Supreme Court again addressed the propriety of class actions for gas royalty claims.  The class affirmed the denial of two subclasses, but reversed the denial of a third subclass of royalty claimaints.  The Court followed its prior holding in Yzaguirre in concluding that an "implied duty to market claim" is not susceptible to class treatment in a class containing both "market-value" and "proceeds" type leases.  The Court also addressed the nature of the implied duties in oil and gas leases, whether the ambiguity of the underlying agreement precludes class treatment, and the extent to which class representatives may abandon individualized claims in order to preserve class treatment for common claims.

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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.

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      On November 21, 2007, the Louisiana Fourth Circuit Court of Appeal affirmed the trial court’s ruling in favor of Chevron U.S.A., Inc. (“Chevron”), the Plaquemines Parish Government (“PPG”), and others in a dispute with the State of Louisiana over the validity of a 1938 mineral lease granted by the Buras Levee District (“BLD”). The State of Louisiana had previously created the BLD and transferred to it all lands belonging to the State within its geographic borders, including the tract involved in the instant matter (Tract 1). In 1975, the BLD merged and consolidated with the PPG. The State of Louisiana asserted, among other arguments, that the merger and consolidation of the BLD with the PPG constituted an impermissible alienation of state minerals and that the State was entitled to the mineral revenues attributable to Tract 1 as an unleased owner. Faced with competing claims for royalty payments from the PPG and State of Louisiana, Chevron, as sublessee of the 1938 BLD lease, filed a petition for concursus and deposited royalty payments into the court registry.

            Ultimately, the Fourth Circuit affirmed the trial court’s finding that the State’s claims were barred by res judicata. Previously, in 1990, Chevron had filed a concursus to seek a resolution of competing claims made by the PPG and the State of Louisiana as to royalties applicable to a separate tract covered by the 1938 BLD Lease, Tract 87. In that prior litigation, the Louisiana Fourth Circuit affirmed a judgment in favor of PPG, finding that the 1938 BLD Lease was valid. 

            Here, the Fourth Circuit found that the instant case was barred by the doctrine of res judicata, since the present action concerning Tract 1 arose out of the same transaction or occurrence as the litigation concerning Tract 87. The court observed that the 1938 BLD Lease’s validity had been recognized by courts since 1943. Further, the real “cause of action” for res judicata purposes in both the Tract 87 litigation and the instant case was the immovable known as the 1938 BLD Lease, not any single tract of land contained therein. The court concluded that “[t]his is exactly the type of case to which res judicata applies” and “[t]o find otherwise would permit the State to file a series of separate actions challenging the ownership of mineral rights in each and every tract contained in the 1938 BLD Lease.”  Chevron U.S.A., Inc. v. State of Louisiana, et al., No. 2007-CA-0673, pp. 7-8 (La. App. 4th Cir. 11/21/07).    

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By Joe Giarrusso: 

In Louisiana, a lawsuit is generally deemed abandoned when the parties fail to take any step in its prosecution for three years.  This rule is operative without any formal order.  La. Code Civ. P. art 561.  However, Act 361 of 2007 extended the period for abandonment to five years where (1) the action was initiated prior to August 26, 2005, and was not previously declared abandoned under the general three year period, and (2) the party proves that the failure to take a step in the prosecution or defense of the suit was caused by or was a direct result of Hurricanes Katrina or Rita.  The revision became effective July 9, 2007.   Click here to read the Act.

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The Associated Press reported today that a federal jury found Kerr McGee liable for additional royalties on crude oil produced from federal properties and sold through Texon.  The case is noteworthy in that it was brought as a False Claims Act case by Bobby Maxwell, an auditor with the Mineral Management Service, who alleged that his superiors at the MMS refused to pursue his recommendation to demand additional royalties from Kerr McGee.  The underlying allegations were that Kerr McGee sold crude oil to Texon, and received marketing services and other non-cash considerations, on which royalty was not paid.  Kerr McGee had denied the allegations and claimed that no additional royalties were owed.

The MMS issued a press release maintaining its original position that Kerr McGee had properly paid its royalties on these transactions, and that federal auditors should not be able to bring False Claim Act cases because of the conflict of interest that arises in seeking personal recovery upon information that they are paid by the taxpayers to collect.  Kerr McGee has indicated that intends to appeal the verdict.

This is  one of several False Claim Act cases filed by former or current employees of the MMS, claiming that royalties were underpaid to the federal government on oil or gas production.

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