The Louisiana Supreme Court’s reversal of Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc., hands a victory to financiers of oil and gas operations and settles a long-running controversy over the amount of damages available for failure to pay mineral royalties.
The Gloria’s Ranch trial court held two mineral lessees and a mortgagee (Wells Fargo) solidarily liable for more than $20 million in damages resulting from failure to release a mineral lease in North Louisiana. The Second Circuit affirmed the finding of solidarity on the basis that Wells Fargo became an owner of the mineral lease because it “controlled the bundle of rights that make up ownership, i.e., the rights to use, enjoy, and dispose of the lease.” However, a vigorous dissent warned that the majority’s “control theory” to impose solidarity between a mortgagee and a mineral lessee could have “[d]evastating economic repercussions” for the lending industry, and “[s]erious and harmful impact on the oil and gas industry.”
A mortgagee with a security interest in a mineral lease can’t be held liable for breaches of the lease
In an opinion released June 27, 2018, the Louisiana Supreme Court reversed the finding that Wells Fargo was liable with the mineral lessees for the failure to release the mineral lease under Mineral Code articles 206 and 207. Those articles set forth the obligations of the “former owner” or “former lessee” to provide written evidence that mineral rights have been extinguished. The Court held, however, that Wells Fargo was merely a creditor with a security interest in a mineral lease, and not an “owner.”
The Court rejected the contention that Wells Fargo’s “rights of control” under its mortgage and credit agreement to direct aspects of mineral lease operations and to receive profits from the lease conferred ownership. Instead, the Court found these “provisions typical of security contracts, all designed to protect the collateral.” The Court also observed that “none of the provisions of the mortgage or credit agreement convey to Wells Fargo the right to explore for and produce minerals on the property—the primary right granted in a mineral lease and the stamp of ownership thereof.”
“Double” isn’t Treble
Gloria’s Ranch also brought a claim for unpaid royalties under Mineral Code article 140, which states in pertinent part:
If the lessee fails to pay royalties due or fails to inform the lessor of a reasonable cause for failure to pay in response to the required notice, the court may award as damages double the amount of royalties due[.]
The lower courts awarded Gloria’s Ranch $726,087.78 in damages: $242,029.26 in unpaid royalties, plus an additional double damages penalty of $484,058.52. This calculation interprets the “double damages” provision of article 140 to mean the amount of royalties due plus an additional penalty of two times the amount of royalties due—effectively awarding treble damages.
The double versus treble interpretation of article 140 has long been a source of dispute, with no clear appellate court guidance to date. The Supreme Court ended the uncertainty in its opinion, when the majority of the Court found the lower courts’ calculation to be wrong. Settling the interpretive dispute, the Court held that the language of article 140 is “a clear authorization by the legislature for courts to award a maximum of two times the amount of unpaid royalties, not three times the amount.” Because “damages” are compensation for a loss, they must necessarily include the amount owed. The Court reasoned:
Clearly, an award of the amount of royalties due is the compensation for the failure to perform that obligation. The use of the permissive word “may” gives the court the authority to double that amount if the court, in its discretion, finds the defendant’s conduct so warrants. A contrary reading that assumes the unpaid royalties are something separate from “damages” ignores the plain meaning of the word “damages.”
Justice Genovese dissented from this holding.
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