MAGNOLIA POINT MINERALS VS CHK LA AND PXP LA - CIVIL ACTION NO. 11-00854 (Decision On No Cost Royalty Language)

CONCLUSION


The Court finds that the Lease language at issue is sufficiently clear and
unambiguous. The intent on the face of the document demonstrates that the production
payments are to be determined using the benchmark calculation of “market value at the
well.” The “no cost” provision in the Exhibit to the Lease does not alter the meaning of
this term of art but applies to any other costs incurred after calculating the “market value
at the well.” Therefore, Chesapeake may deduct post-production costs, including
transportation costs, as set out in determining the “market value at the well.”
Accordingly,
IT IS ORDERED that Chesapeake’s Cross Motion for Partial Summary Judgment
(Record Document 31) be and hereby is GRANTED.
IT IS FURTHER ORDERED that Magnolia’s Motion for Partial Summary
Judgment (Record Document 23) be and hereby is DENIED.
THUS DONE AND SIGNED, in chambers, Shreveport, Louisiana on this 30th

 

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Not sure what this may add to the discussion, but the possible implications of this ruling are already being felt amongst attorneys and landowners with which I have current dealings.

Opinions as to how to adequately address the implications of this ruling range from equipping lease riders with standard "supersede and control" declarations at the top of the lease form (which obviously was present in the Magnolia Point rider) AND language which expressly strikes paragraphs from the preprinted form and replaces said paragraph in its entirety with... and then replacing the whole of the paragraph, exactly as one would want to write it, OR going even so far as to just drafting the entire lease form, word for word, as the drafter would intend the lease to read.

As an independent landman, redrafting to a 100% custom lease form makes me cringe, largely because I work routinely with attorneys and landmen. The industry standard for many years has been to use a standard preprinted lease form, (which most purveyors of oil and gas lease transactions define as a "base form", which *everyone* knows what the content of such forms, advantages and disadvantages, are) and then craft a lease rider which subsequently modifies the base terms and provisions to what the "current deal is, or is supposed to be", and then go with that. This ruling unfortunately turns such conventional standards on their head, because in cases of incomplete conflict or ambiguity (which the judge cited as being the case here), the direction here is to have to make sense or blend the incompletely conflicting or ambiguous language together such that one may end up with some sort of "frankenclause" which may be completely at odds with the original intent of the provisions in the lease rider (which is exactly what happens here). Additionally, on the brink of the paranoid, one may recommend to subsequently strike through or black out all reference to the clause so modified, such that any further examiner of the document can no longer determine what the original preprinted text stated, lest it be interpreted within a comprehensive, all-inclusive "four corners" analysis.

I take the above to nearly the point of the absurd to further illustrate the negatives of the alternative, namely to create a "custom lease" for each and every variant of every mineral owner / lessee combination which may result in the slightest variation of terms. Such leases would likely be created to address the very specific concerns of each and every individual owner and his lessee, but could theoretically stretch the composition and analytical time involved in the lease negotiation to an untenable point. Remember, the field level landman, or even in-house personnel for a lease broker, possesses a very limited authority to grant variances in lease provisions, outside of so-called "per-approved" provisions. Everything else but be vetted by company landmen or in-house legal departments, which can be woefully unprepared for examination, analysis, and markup of a myriad "custom" leases. In short, this costs time. This does not even take into account "landowners" attorneys, which similarly must vet any and every permutation of these "company leases" which may be submitted on behalf of the Lessee. True, prominent attorneys and firms may craft "standard" forms of their own, which prospective Lessees may have to learn to live with, but for each and every "new" O&G player, a significant investment may have to be made in analyzing the "standard leases" of every new area in which they enter so as to determine what they can live with, what they can't, and then entering into a new round of clause-cobbling before they can obtain any amount of traction in a new area.

The most far-reaching implication that may come out of this ruling is the undoing of the "standard" lease and rider fabric to the extent that we end up right back where we were in 1950... Every lessor and lessee (and their legal counsel) having to read every word of every lease agreement that comes across the desk. That amount of reading takes time. Lots of time.

Dion,

You are absolutely right. This is a terrible decision. The Judge got off track in the beginning and never got his head in the game. He has since reversed himself and vacated his earlier Partial Summary Judgement in favor of CHK. The Judge seemed to think he had to find a way to reconcile the printed form language with the Addendum. They were MEANT to conflict from the beginning by the lessor and the leasee and they specifically put in the lease that it case of conflict, the Addendum would supersede and control. How hard is this for Judge Maury to get. 

W.R.,

Are you saying the Judge vacated the ruling and his opinion?  Or was that an earlier ruling he vacated, which led to this opinion?

 Dion expands on a good point. 

Are companies considering the long term effect on lease maintenance if we go toward thousands of homemade forms vs. understood clauses and principles.  I know CHK wants to get a win re: no-cost clauses here, but they do it at their (and all companies) future expense of their lease maintenance costs.  If attorneys cannot trust simple, well-trodden and understood provisions and how they work with base forms such as the N. La Bath form - then we have to get creative and the in-house folks hate lease maintenance on creative leases, not to mention the added time/expense at the acquisition level.  Every word will make a difference so the DO analysts and landmen will have to examine each custom lease and each custom clause in light of each unit and each situation - fyi, there are not enough hours in the day for that.

Thanks for the replies illustrating the potential problems with the ruling.  In addition to the specific concerns expressed, and with which I concur, I find this ruling to be a good example of a tendency of courts, particularly those above the state district level, to go to extraordinary lengths to hand down judgements favorable to the industry.

Yes, the ruling was vacated. Now goes to trial.

Order issued 9/19/12.

Wow. For those of us who aren't lawyers, can you explain how this happens? Does the judge just wake up one day and say, "Gee, I made a mistake?" Or is he nudged by someone? How does this happen?

Henry and Ben, here is the Order. Magnolia filed :

Motion for Reconsideration (Record Document 56) and

Motion for Leave to File Supplemental Motion for Reconsideration (Record Document 58). 

AND, Judge Hicks granted the Motions and then vacated his previous ruling. It ain't over until it is over.

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF LOUISIANA

SHREVEPORT DIVISION

MAGNOLIA POINT MINERALS, LLC CIVIL ACTION NO. 11-00854

VERSUS JUDGE S. MAURICE HICKS, JR.

CHESAPEAKE LOUISIANA, LP AND MAGISTRATE JUDGE HORNSBY

PXP LOUISIANA L.L.C.

ORDER

Before the Court is plaintiff’s Motion for Reconsideration (Record Document 56) and

Motion for Leave to File Supplemental Motion for Reconsideration (Record Document 58).

The plaintiff Magnolia’s motions and supplemental briefings have raised several issues that

deserve detailed consideration by this court.

Accordingly, as a matter of judicial efficiency, and in consideration of the law and

facts cited by Magnolia, Magnolia’s motion to reconsider this courts original ruling on the

lease and exhibit language (Record Document 56) and motion for leave to file supplemental

motion (Record Document 58) are hereby GRANTED in part and DENIED in part. The

motions are granted to the extent that the Memorandum Ruling (Record Document 52) and

Order (Record Document 53) are VACATED and WITHDRAWN. However, the motions

are denied as to plaintiff’s request to enter judgment in its favor. Due to the Court’s

decision to vacate and withdraw its prior ruling, the cross-motions for summary judgment

are now considered before the court as if no prior ruling had been issued. Therefore, the

summary judgment record in this case is hereby REOPENED, and the Court considers

arguments raised in the supplemental briefing to be part of such record.

Whether Chesapeake has taken positions in other courts inconsistent with its

Case 5:11-cv-00854-SMH-MLH Document 64 Filed 09/19/12 Page 1 of 2 PageID #: 561

position in this court raises questions that must now be addressed at this stage of the

proceedings. Additionally, the parties did not refer, either in initial briefing or at oral

argument, to a specific rule of Louisiana contract interpretation found in Kuhn v. Stan A.

Plauche Real Estate Co., 249 La. 85, 185, So.2d 210 (LA 1966), as recently applied in

Clovelly Oil Co., LLC v. Midstates Petroleum Co., LLC 2012 WL 2016225 (La.App. 3

Cir.,2012). Additional briefing and/or argument on the impact of these decisions on this

case needs to be evaluated and considered. Finally, the Court requires additional briefing

comparing or distinguishing Columbine II Ltd. Partnership v. Energen Resources Corp., 129

Fed. Appx. 119 (5th Cir. 2005) to the facts of this case.

Accordingly, in light of the above ruling, additional discovery on the cross-motions

may be appropriate. The Court hereby sets an in-person status conference for September

25, 2012, at 10:00 a.m. to discuss all issues raised in the instant order.

THUS DONE AND SIGNED, in chambers, Shreveport, Louisiana on this 19th day

of September, 2012.

Case 5:11-cv-00854-SMH-MLH Document 64 Filed 09/19/12 Page 2 of 2 PageID #: 562

Again, I am not a lawyer, and have little experience with how trials work...  Do I conclude this judge is a fair, open-minded fellow, who makes decisions based on thorough study of the facts as presented?  Or do I conclude this judge was lazy the first time around, and just didn't bother to dig in?  Does this kind of stuff happen often in trials?

Henry, I can't speak to this particular instance but I am familiar with others where rulings that are problematic for the legal process or do not fit well with existing case law are continuing topics of conversation both private and public.  The legal community particularly amongst those practicing mineral and contract law have been talking about the ramifications of Judge Hicks' ruling and I'm sure he must be aware of it.

I don't think Judge Hicks was lazy in his consideration of the case the first time around. As I wrote right after the first opinion came out, this is a tough case, and I would have a hard time coming to a conclusion were I a judge. I know I've changed my opinion on the matter since I first read the case, and if Judge Hicks has as well I don't think that's a negative. I would rather him take whatever steps necessary, consider the matter as closely as possible, and make a good decision. The outcome will almost certainly be appealed so it is imperative that his opinion be as on point as possible.

Very interesting.  Thanks W.R.

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