Long-Awaited Victory on the Proper Deductibility of Post-Production Costs from Unleased Mineral Owners – The Western District of Louisiana Reverses Course in Johnson v. Chesapeake and Self v. BPX

By April Rolen-Ogden, Brittan J. Bush, Michael Ishee, Gus Laggner & Paul M. Adkins on March 31, 2022

For nearly three years, unit operators in Louisiana have waited to see whether the Western District of Louisiana would change course or double down on its March 2019 decision in Johnson v. Chesapeake. In the original Johnson decision, the district court sent shockwaves across the oil and gas industry in Louisiana by finding that post-production costs were not properly deductible against proceeds owed to unleased mineral owners. In the wake of that decision, at least two putative class actions were filed against the largest producers in the Haynesville Shale, and operators have been flooded with demands and suits from unleased owners who relied on Johnson to contest the validity of post-production cost decisions from unleased interests.

Today, on March 31, 2022, the Western District of Louisiana reversed that ruling and applied the same rationale to a pending motion for partial dismissal in one of the putative class actions, Self v. BPX Operating Co., et al. The primary impetus for the court’s reconsideration and reversal was the Louisiana Civil Code doctrine of negotiorum gestio (i.e., management of the affairs of another) which provides managers with reimbursement rights for all necessary and useful expenses.

This argument was not briefed prior to the original Johnson decision, but the authority provided along with the Motion for Reconsideration filed by Chesapeake and several amici groups, including industry groups like LOGA and LMOGA, and a group of similarly situated operators, explained that the unit operator is managing the unleased mineral owner’s affairs by selling his share of gas for him. Because post-production costs are expended to make that production marketable, the managing operator is entitled to be reimbursed for the unleased mineral owner’s share of post-production costs.

The district court recognized this was a res nova issue for which there was no authority directly on point. On reconsideration, the district court gave effect to the quasi-contractual relationship that exists between unit operators and unleased mineral owners by harmonizing the Civil Code regime of negotiorum gestio with Louisiana Revised Statutes 30:10. In the original Johnson decision, the district court ignored the Civil Code and instead found that the silence of Louisiana Revised Statutes 30:10 meant that post-production costs were not deductible. However, upon reconsideration, the district court found that silence in Louisiana Revised Statutes 30:10 is insufficient.

The court was particularly persuaded of this considering how the Louisiana Supreme Court has defined the relationship between unit operators and unleased mineral owners, as well as considering the prior ruling in J&L Family, LLC v. BHP Billiton where an unleased mineral owner was seeking to recover attorney’s fees, even though Louisiana Revised Statutes 30:10 had no provision for an award of attorney’s fees. In analyzing the potential right to fee recovery, the court in J&L looked to both Louisiana Revised Statutes 30:10 and the quasi-contractual provisions of the Civil Code. Neither contained any provision for attorney’s fees. Based on this rationale, the district court in Johnson found that it is proper to read both sources of law in pari materia and to harmonize them. In so doing, the court upheld the proper deductibility of post-production costs.

As with post-production costs, Louisiana Revised Statutes 30:10 contains no reference to the proper deductibility of severance taxes. Thus, on reconsideration, the district court concluded that there is no dispute that operators are authorized to withhold severance taxes from the payment of “proceeds” to unleased mineral owners. As such, “…the Court can find no plausible explanation why severance taxes can be deducted from ‘proceeds,’ but post-production costs cannot.” Ultimately, the district court recognized that preserving the express protections granted to unleased mineral owners could not override the reimbursement rights granted to those who manage the affairs of another.

The district court certified the rulings in Johnson and Self for interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b). Although not yet final, this reversal is long-awaited victory for unit operators in Louisiana.

Johnson Ruling Reversing Prior PPC Ruling

Self-Granting of 12b6 Motion to Dismiss

Earlier information about this case can be found here.

*In the interest of full disclosure, the authors of this article served as counsel of record on behalf of an amici group in Johnson, as counsel of record on behalf of the defendants in Self, and as counsel of record on behalf of various Louisiana operators in other lawsuits implicated by Johnson and Self. Any views expressed herein are those of the authors and do not necessarily reflect the views of Liskow & Lewis and/or its clients.