LA Case Strikes Down Class Action Relief for Royalty Underpayment

This recent case out of LA (and the 5th Cir. Case it relies upon) essentially prevents any class action under LA law from being filed for royalty underpayment.  

 

Jewel Williams v. Chesapeake Louisiana

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF LOUISIANA SHREVEPORT DIVISION


May 13, 2011

JEWEL WILLIAMS
v.
CHESAPEAKE LOUISIANA, INC., ET AL

The opinion of the court was delivered by: Judge Elizabeth Erny Foote

MAGISTRATE JUDGE HORNSBY

MEMORANDUM ORDER

After sending her individual notice pursuant to Louisiana Mineral Code Article 137 as a prerequisite to filing suit, Plaintiff Jewell Williams ("Plaintiff") filed a Complaint against Defendants Chesapeake Operating, Inc., Chesapeake Energy Corp., and Chesapeake Louisiana LP ("Defendants" or "Chesapeake"). She filed both individually and on behalf of a putative class of similarly situated plaintiffs seeking a declaration that Chesapeake Louisiana breached its obligations under the Mineral Lease(s), that Defendants violated their obligations under the Louisiana Mineral Code, and to recover for allegedly unpaid or underpaid royalties on natural gas. [Record Document 1]. Specifically, Plaintiff alleges Chesapeake Louisiana has engaged in a scheme to sell the gas produced from the leased premises to affiliated or associated entities at a price below market value in an effort to profit from substantially reduced royalty payments. Plaintiff provided written notice to Chesapeake Louisiana, Chesapeake Operating, "all their affiliate subsidiaries and assignees owning leasehold interests in the Haynesville Formation" of the alleged non-payment and underpayment of royalties. [Record Document 1, Exhibit B ("Notice Letter")]. The Notice Letter specifically references, and relates only to, the Mineral Lease executed by Plaintiff in favor of Chesapeake Louisiana. Id.

Defendants now seek to strike the class allegations from Plaintiff's Complaint placing squarely before the court the issue of whether Plaintiff's individual notice satisfies the notice prerequisite on behalf of the entire putative class. For the reasons outlined below, this Court holds: 1.) Under La. R.S. 31:137 pre-suit notice is a necessary prerequisite to file suit for unpaid/underpaid mineral royalties; and 2.) Plaintiff's individual notice does NOT satisfy the notice requirements on behalf of the putative class. Defendants' Motion to Strike Class Allegations [Record Document 6,¶ 51] is GRANTED.

Plaintiff has filed this action on her own behalf and on behalf of a putative class composed of:

All non-public juridical persons (including but not limited to, natural persons, corporations, partnerships, trusts, limited liability corporations, joint ventures, estates, guardians, tutors, etc.) who own or owned royalty interests in natural gas production in Louisiana from three years prior to filing herein, to date: whose natural gas was produced and marketed by Defendants or its wholly owned affiliates or entities; whose royalty payments for such natural gas production was calculated and/or made by Defendants and whose royalty payments were based upon prices below "market value."

Id. at ¶ 40.

Although Plaintiff submitted written notice to Defendants regarding the alleged royalty non-payments and underpayments, Plaintiff alleges in her Complaint that written notice is not required under Article 137 of the Louisiana Mineral Code because she is only seeking "unpaid royalties" rather than "damages." [Record Document 1 at n.1]. Alternatively, if notice is required pursuant to Article 137, Plaintiff alleges the Notice Letter submitted on her behalf with respect to her individual lease "is sufficiently detailed to provide formal notice for all similarly situated plaintiffs." Id. Chesapeake now moves to strike the class allegations from Plaintiff's Complaint on the ground that written notice is a prerequisite to a suit for failure to pay or underpayment of royalties and that such notice cannot be provided on a "class-wide" basis. [Record Documents 6, 8]. Plaintiff argues Chesapeake Louisiana's motion should be denied as premature because the record has not been sufficiently developed for the Court to determine whether the class action certification requirements of Rule 23 have been satisfied and because Article 137 does not require pre-suit notice for claims of "unpaid royalties" as opposed to "damages". [Record Document 15].

LAW AND ANALYSIS

A mineral lessor seeking proper payment of royalties is required to follow the procedure established by the Louisiana Mineral Code. See La. R.S. 31:137 et seq. Article 137 provides:

If a mineral lessor seeks relief for the failure of his lessee to make timely or proper payment of royalties, he must give his lessee written notice of such failure as a prerequisite to a judicial demand for damages or dissolution of the lease.

La. R.S. 31:137. Once the mineral lessor gives written notice of the failure to make timely or proper royalty payments, Article 138 allows the mineral lessee thirty (30) days to either pay the royalties due or provide a written response stating a reasonable cause for nonpayment.*fn1 If the mineral lessee pays the royalties due within thirty (30) days of receipt of the notice, Article 139 provides that the remedy of dissolution is no longer available to the mineral lessor unless it is proven that the mineral lessee fraudulently withheld payment.*fn2 If, however, the mineral lessee fails to pay the royalties due or fails to state a reasonable cause for nonpayment, Article 140 provides that the court may award as double damages the amount of royalties due and reasonable attorney's fees, and may also dissolve the lease in its discretion.*fn3 "It is the intent of Articles 137-141 to provide lessors with a meaningful remedy while simultaneously giving operators who have made substantial investments in producing properties the security of title which the nature and size of their investment deserves." La. R.S. 31:137, Official Comments. "The total effect of the articles is to provide an impetus to timely payment of royalties due, while giving lessees a reasonable way in which to avoid the harsh remedy of cancellation." Lewis v. Texaco Explor. & Prod. Co., 698 So.2d 1001, 1009 (La.App. 1 Cir. 1997). "It also affords the lessee an opportunity to evaluate a non-payment situation and to make a decision regarding whether the royalties allegedly due should be paid." Id.

It is well-established that the notice requirements set forth in Article 137 are an indispensable prerequisite to a judicial demand for damages or dissolution of the lease. Chevron USA, Inc. v. Vermillion Parish School Board, 128 F.Supp.2d 961, 965 (W.D.La. 2001), aff'd, 377 F.3d 459 (5th Cir. 2004); Lewis, 698 So.2d at 1009; Rivers v. Sun Explor. & Prod. Co., 559 So.2d 963, 969 (La.App. 2 Cir. 1990). Plaintiff argues that she is not seeking "damages" but is only seeking the return of any unpaid royalties, therefore written notice under Article 137 is not required to pursue the claims asserted in this matter. [Record document 15]. Nevertheless, Louisiana courts have consistently held that a mineral lessor does not have a right of action to complain of the mineral lessee's failure to make timely or proper royalty payments until he gives written notice as required by Article 137. Chevron, 128 F.Supp. at 965; Lewis, 698 So.2d at 1009; Rivers, 559 So.2d at 969. In fact, Article 137 has been interpreted to require written notice as a prerequisite to all royalty litigation. Wilson v. Palmer Petroleum, Inc., 706 So.2d 142, 146 (La.App. 1 Cir. 1997); see also, La. R.S. 31:137, Official Comments ("Article 137 contemplates that at any time there has been a nonpayment of royalties, the lessor must notify the lessee."); Chevron USA, Inc. v. Vermillion Parish School Board, 377 F.3d 459, 462 (5th Cir. 2004) ("Article 137 requires a mineral lessor to give his lessee written notice of his claim of failure to make timely or proper payment of royalties as a prerequisite to a judicial demand, i.e. filing suit seeking relief.").

There is no dispute that the Notice Letter submitted on Plaintiff's behalf satisfies the requirements of Article 137 with respect to her individual claims; rather, the issue before the Court is whether Plaintiff's Notice Letter satisfies the notice requirement as to the putative plaintiff class. Plaintiff alleges her Notice Letter "is sufficiently detailed to provide formal notice for all similarly situated plaintiffs," but her argument again fails to consider the binding jurisprudence which this Court is bound to follow. In Chevron, after examining the issue of whether written notice can be given on behalf of a putative class, the Fifth Circuit concluded "that the notice given of a lessee's failure to make timely or proper payment of royalties on behalf of a putative class does not satisfy the requirement of the Louisiana Mineral Code for the unnamed members of the class." Chevron, 377 F.3d at 461. The Fifth Circuit recognized that the notice and response system established by the Louisiana Mineral Code is incompatible with allowing notice to be given on a class basis, rather than by each individual lessor or royalty owner. Id. at 463. The Court reasoned that:

[p]ermitting the demand to be made on a class basis, especially in a case such as this,*fn4 would deprive the lessee of any real ability to respond with the relatively short time period allowed and upset the balance of rights between lessor and lessee carefully established by the Louisiana Legislature in Mineral Code Articles 137 to 141. * * * Allowing class notice increases the burden of responding to an Article 137 notice by the additional complexity necessarily related to multiple and unidentified lessors, multiple leases, multiple contracts between lessees and their purchasers of oil and gas, and expanded geographic area with no clear provision that the lessees would be protected in the event that they are unable to resolve the question raised in the notice within the thirty day period allowed for a response.

Id. at 463-64.

Consequently, based on the Fifth Circuit's decision in Chevron, the Court finds as a matter of law that Plaintiff's Notice Letter is insufficient to satisfy the notice requirement of Article 137 with respect to the putative plaintiff class members.

As a final matter, the Court notes that Plaintiff argues the motion to strike class allegations should be denied as premature and that the Court should reserve ruling until it has the opportunity to consider the class certification requirements of Rule 23.*fn5 While most cases necessitate a certain amount of discovery to properly address the issue of class certification, district courts have the power to dismiss class allegations where it is facially apparent from the Plaintiff's Complaint that a class action cannot be certified. See e.g., John v. Nat. Sec. Fire & Cas. Co., 501 F.3d 443, 445 (5th Cir. 2007); Aguilar v. Allstate Fire & Cas. Ins. Co., 2007 WL 734809, *2 (E.D.La. Mar. 6, 2007). Here, in the absence of the requisite written notice under Article 137, the putative class members do not have a substantive right of action to seek unpaid royalties in this matter. Any further motion practice or hearings to determine whether the Rule 23 requirements had been satisfied would be futile. See Chevron USA, Inc. v. Vermillion Parish School Board, 215 F.R.D. 511, 514-15 (W.D.La. 2003).

CONCLUSION

Accordingly, for the reasons stated herein,

IT IS ORDERED that Chesapeake's Motion to Strike Class Allegations [Record Document 6, ¶ 51] be and is hereby GRANTED, and that Plaintiff's class allegations be and are hereby STRICKEN from her Complaint, leaving Plaintiff to pursue only her individual claim for the amount of unpaid royalties.

IT IS FURTHER ORDERED that the Plaintiff's Motion for Class Certification [Record Document 21] be and is hereby DENIED as moot.

Tags: Chesapeake, class, royalty, underpayment

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Replies to This Discussion

Thanks Ben,

 

DrWAVeSport Cd1  8/17/2011

I am no lawyer, so here are my thoughts....  There is a big difference between a class action suits, and a bunch of similarly-situated plaintiffs who band together to sue.  I have seen lawsuits against companies, in which there were dozens of named plaintiffs, who had similar situations.  I would still think the opportunity is open for a number of plaintiffs to band together and litigate.  Stay with me here....

 

What if 100 people were to band together, engage an attorney, and litigate?  The attorney might be convinced to take the case on contingency, with his payment being the half of the double damages.  You can do the math, and see how many acres are required to make this profitable for an attorney.  It's not out of the realm of feasiblility, is it?  Someone (certainly not me) could use this site, or take out an ad in the Shreveport Times to find enough people to band together to litigate.  It won't be easy, but it could be done.  Right?

That is permissible as long as all of the 100 people send adequate demands prior to litigation.
Wouldn't it be hard to say how everyone is getting ripped off equally by this company considering how lease terms vary so much between MO's without doing so case by case?

That is very true PG, the Williams case hinted at that and that's why it appears the best way you can combine these proper payment royalty cases after a 137 notice is by issues being almost identical, the more identical the issue, the better chance the court will find that it will not be prejudicial for the company to have to defend all at once.  But then even if you were dealing with an issue like CHK taking out deductions on owners with lease terms to the contrary, it would be hard to organize a group where there wasn't a variation on that specific term's wording (Skip and others have discussed that type of clause and its variations in another post)

 

Another issue is that If you combine (as Henry posted above) on the same issue and make proper 137 notice, the company can or should then respond w/30days per the code.  Then the issue can turn on the type of response and whether it was adequate, so you could combine on an identical issue (say CHK price), but then still end up with a group of plaintiffs that each received different types of responses/reasons from the company and then the court will have to address their rights going forward based on each individual response.  Basically you made notice based on an identical issue, but the responses still turn into a patchwork of different situations.  Article 137 et seq benefits both sides to a point but seems to be set up with an individual situation/owner in mind.  IMHO. 

Those are also good points HBP.  It is not impossible, but it can be done and would be tricky.  I think the better solution is filing 100 individual actions.  The attorney's contingency would be the same, and the costs would not be much more, if at all. 
It could be done.  I think you would mainly want the group to be in the same field at least.  They would not have to have the same lease terms, because typically the method through which the underpayment is occurring is the same regardless of terms, as the lessee will usually sell all gas in a field under same or similar contracts.  The differing lease terms would make things more tricky primarily with respect to formulating a damage model for each individual.  Same lease terms would be preferable of course.
HBP & Ben,  I have a client that is one of a number of ownership interests in multiple mineral servitudes.  As they are all leased under the same terms and all have the same proportional interest in each mineral tract, would you expect a group such as this to meet the class action requirements?

Skip, that type of group would have the best chance, however, each one would still need to send individual 137 notice letters prior to filing suit.  I  think in that instance, the lessee would be forced to gie the same response to each notice letter, otherwise, it looks even worse.

So the class would roughly be defined as all owners having an interest in a __________, known as the __________________servitude, being created by _________________, and being leased by _____________, dated__________. 

 

Maybe.  But of course, you have to get all the 137 notices uniform and to the operator in a way where they would hopefully form letter response the same to each.  All things being equal after the response, I would think you have a few options at that point.

 

I guess a good question would be whether a "class action" that is limited to only those that make proper 137 demand is going to provide any more relief in LA than would a large combined case.  Both would show a systematic issue, but I would think you would still need some facts showing intentional purpose for the non-proper payment to get additional recovery beyond atty fees, interest and double recovery set out in the code.

 

Ben, do you know the status of that Coffey case that the Barnett Shale folks filed against CHK in Oklahoma?  Any movement on that?

Sorry just replying.  Been tied up.  No movement that I know of.  Just preliminary motion practice.
I would think the best chances at getting certified in a class would to be in the same unit.

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