Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on August 9, 2012 at 14:47

Jo Ann, I think you are referring to PINNACLE OPERATING CO., INC.  There are several O&G related companies with Pinnacle in the name.  In your case Pinnacle Operating likely held an all depths lease and assigned their existing rights to the deeper depths to CHK.  There is nothing illegal or unethical with that transaction. If you signed a lease without a depth clause Pinnacle can do that.  It's all about due diligence in executing an O&G lease.  No one should expect the lessee to look out for their interests.

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Permalink Reply by Jo Ann Carter on August 9, 2012 at 14:57

You are exactly right. No one in this area realized or had any knowledge of what was to come. Companies had been leasing around here for years. Oh, well I did allow them to dig to China. That is so sad, had no idea. I guess I'll just get what they decide to give me and be thankful. I certainly will never sign anything else dealing with an O&G company. I do not really know what the well head means.

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Permalink Reply by Skip Peel - Mineral Consultant on August 9, 2012 at 15:03

Jo Ann, an O&G lease is a business transaction and as such should be reviewed by a professional.  If mineral owners don't lease, their minerals will not be developed and they will receive no benefit. 

Permalink Reply by Henry on August 9, 2012 at 14:26

Skip,

Can you explain why you think the ruling is wrong?

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Permalink Reply by Skip Peel - Mineral Consultant on August 9, 2012 at 14:32

I agree with HBP.  There is no other reason to place No Cost language in an Exhibit A.  IMO the Smithermans are experienced with O&G leasing and the legal implications of such.  Unlike lessors who simply accept what is offered with no professional review, they performed due diligence in executing their lease and did not anticipate any legal ambiguity.

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Permalink Reply by Skip Peel - Mineral Consultant on August 9, 2012 at 15:59

IMO district court judges are more prone to be equitable in suits between land/mineral owners and the O&G industry.  In general plaintiffs have a fair record of success in district courts.  And district court judges serve at the pleasure of their constituents.  The courts of appeal such as the Second Circuit tend to be the  focus of industry lobbying and campaign contributions.

The Second Circuit Court of Appeal in Shreveport, one of five circuit courts of appeal in Louisiana, consists of nine judges who are elected from three election districts in the 20 northernmost parishes of Louisiana. The Second Circuit Court of Appeal in Shreveport now consists of nine judges who are elected from three election districts in the 20 northernmost parishes of Louisiana. The most senior in service appellate jurist serves the court as chief judge.

Three judges are elected from each election district. Eight parishes are contained in Election District One: Ouachita, Morehouse, Richland, Franklin, East Carroll, West Carroll, Madison and Tensas.

Election District Two contains the nine parishes between Shreveport and Monroe: Bossier, Webster, Claiborne, Bienville, Union, Lincoln, Jackson, Caldwell and Winn.

The parishes of Caddo, DeSoto and Red River are in the Third Election District. Election Districts One and Three contain a sub-district.

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Permalink Reply by Skip Peel - Mineral Consultant on August 10, 2012 at 11:02

The Second Circuit Court consists of nine judges who are elected from three districts in the 20 northernmost parishes of Louisiana:

• Chief Judge Henry N. Brown Jr.(Bossier City - Division B, Second District)
• Judge Felicia Toney Williams(Tallulah - Division C, Section 1, First District)
• Judge James E. Stewart(Shreveport - Division A, Section 1, Third District)
• Judge Gay C. Gaskins(Shreveport - Division C, Section 2, Third District)
• Judge J. Jay Caraway(Bossier City - Division C, Second District)
• Judge Harmon Drew Jr.(Minden - Division A, Second District)
• Judge D. Milton Moore III(Monroe - Division B, Section 2, First District)
• Judge John Larry Lolley(Monroe - Division A, Section 2, First District)
•    VACANT - (Shreveport - Division B, Section 2, Third District)

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Permalink Reply by Andrew on August 9, 2012 at 18:39

This case is unfortunate for the mineral owners, but as I read it Judge Hicks may have gotten this one right as a matter of law. The conflict was whether Exhibit language that directly contradicts base lease language had the effect of striking out the base language. The opinion says that courts should try to reconcile the two provisions rather than nullifying them.

Much of the justification from this opinion comes from the Louisiana Civil Code articles on contract interpretation. The judge balanced a number of contract interpretation canons that he was obligated to follow by law. One of them is that provisions should not be rendered superfluous if it can be avoided by another reasonable interpretation. Another law the judge correctly followed is that the intent of the parties must be evidenced by the four corners of the document, not by extrinsic evidence. Here he admitted the difficulty in reconciling the "no cost language" based on this one.

I think the most important takeaway from this case is the application of another law  governing contract interpretation - "In case of doubt that cannot be otherwise resolved, a provision in a contract must be interpreted against the party who furnished its text." La Civ. Code art. 2056. 

In this case the Exhibit A was drafted by the Lessor, and the Lessor made several deletions and alterations to the base lease but declined to strike through the market at wellhead language. Considering the time and sophistication involved in drafting the exhibit, it is not unreasonable to conclude that the Lessor was capable of drafting a more precise cost-free royalty clause.

I know this topic has been a sensitive subject for many, particularly with CHK's cost-free royalty language (supplied by CHK I might point out) not being as "cost-free" as many expected. I feel for the Lessor in this case, because I have to guess they did not intend this result, but I also have to call these cases as I see them, and it appears to me that Judge Hicks applied the law of Louisiana correctly, and CHK happened to come out ahead...in this particular case.

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Permalink Reply by GoshDarn on August 9, 2012 at 18:47

Possibly, a fair assessment of the legalese, Andrew.

Here's a hypothetical for you.

What if a landman representing CHK can be proven to have knowingly lied to a lessor about the effectiveness of the Exhibit A cost-free addendum clause.  Do you think that would show "intent to fraud?"

If so, and if such occurred under the same parameters as above, what's your thoughts about what a possible legal judgment/ruling would be (say by the exact same judge), i.e., as best as you are able to understand the administration of the law as written to date?

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Permalink Reply by Andrew on August 9, 2012 at 19:24

It would depend on the nature of the lie, but let's say the landman told the Lessor that "none of CHK's Lessors with this provision have been charged any costs up to and including the point of sale," and that was a lie.

My view of the appropriate response would be:

The landman's false assertion was fraud. "Fraud is a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. " La Civ. Code art. 1953. 

 

"Consent may be vitiated by error, fraud, or duress." La Civ. Code art. 1948. If the lie about the cost-free royalty provision "concern[ed] a circumstance that has substantially influenced [Lessor's] consent," (La Civ. Code art. 1955) then the Lessor consent was vitiated, he would be entitled to recission of the contract. 

 

In addition to recission, "[t]he party against whom rescission is granted because of fraud is liable for damages and attorney fees." La Civ. Code art. 1958. The amount of damages and attorneys fees are issues of fact to be determined by a jury. 

 

At least, that's how I would rule if I was the judge. I've learned by now that guessing how a particular judge might rule on a hypothetical is fruitless. I can sympathize with an opinion that allows the drafter to make his own bed, but lying to a person to get them to enter into a contract is fraud and should dealt with harshly.

 

From a non-legal standpoint, I believe fraud and dishonesty by landman should not be tolerated as a matter of policy, either by the courts, the legislature, or professional organizations. Landmen do not have the ethical guidelines imposed by law that real estate agents or attorneys have, and that has unfortunately led to situations like the hypothetical described. What's even more unfortunate, is that most real  landmen I know are as honest and fair as one could hope for, but since any con man can call himself a landman, a few bad apples can cast a pall on the whole profession. This is one area where I think more regulation by the state of Louisiana is sorely needed, to protect both landowners and the whole profession.

 

Sorry to digress on a rant, I hold my current profession to a high standard and get sensitive!

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Permalink Reply by GoshDarn on August 9, 2012 at 19:59

Andrew:

Thanks for taking the time to clearly define the legal framework and to reference the appropriate statues.

Impressive.

FYI:  Not that many months back, at least one GHS member posted that a landman, who was employed to represent Chesapeake in a lease negotiation -- did, in fact, tell the lessor that the inserted "free-royalty" clause in the attached "Exhibit A" would work to benefit the landowner/mineral owner by requiring that no standard deductions would be subtracted from the payment of the royalty.

Ergo, if the landman knew that such was a lie . . . that, IMO, would indeed be fraud.

Yet the question arises to the issue of the said landman being in the "dark" (so to speak) as to the truth, i.e., it would be conceivably possible that the landman was also being lied to by CHK.

Of course, if put on the witness stand under oath to explain his intent, then the said landman, in order to clarify the circumstances leading up to this particular leasing . . . might also, by his testimony, shed some light on the truth and thus give the judge a mechanism to rule as to the judge's assessment of whom might be telling the truth (or might not telling the truth).

Note also that if CHK lied to the landman (in order to garner a contract advantage per such lying), then that still could be construed to be intent to fraud on CHK's part, albeit not on the landman's part.

Anyway, please feel free to "rant" anytime you are moved to do so, being as such vetting of the law is way important to so many Louisiana landowners.

Thanks, Andrew.

Take care.

GD

 

Permalink Reply by Ben Elmore on August 10, 2012 at 9:14

Andrew,

What I find frustrating about this case is the court says the law obligates him to give meaning to all terms.  He then says that if he were to rule for Magnolia, he would have to find the market value provision and no cost provision conflict.  He then says he is not going to do that and interprets the no cost clause as the Texas courts did in the cases CHK relied on.  By doing so, he ignores and fails to give meaning to the parties' language that in the event of conflict, the terms in the addendum control.  IMO, the correct result giving affect to all the provisions and the law, would be to find that the royalty was to be calculated on market value, which under LA law is determined on the reproduction (net-back-back) basis.  But, because the parties included Addendum A, and the no cost clause conflicts, the parties obviously intended that the post-production costs be added back in after market value is determined.  We all know that was the true intent of the parties.  IMO, that is one way to draft a cost free royalty clause .  Do not state that post-production costs shall not be charged against the royalty.  Instead state that any post-production costs factored into the determination of market value, shall be added back in before making payment of lessor's royalty, or something to that effect.  That makes it clear and gets around these issues.  Or you can simply tie the calculation of royalty to the gross proceeds received by lessee for the first arm's length downstream sale, if you can get away with it. 

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