Replies to This Discussion

Permalink Reply by Steve P on August 31, 2017 at 15:49

stupid decision to include Wells Fargo as liable, and extremely harmful to Louisiana operators and land/mineral owners. this will block out smaller operators who need financing, because banks will be crazy to lend to them.

Joe Bleich is both smart and rational. i will cast my lot with him.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on September 1, 2017 at 1:27

I agree that the potential collateral damage could be extensive however Wells Fargo should have performed some due diligence in regard to Tauren/Cubic before providing the mortgage commitment.  What is unclear is whether Wells Fargo understood the ramifications of the regulatory statutes and decided to withhold consent to release the lease.  Considering the recently revealed business practices of Wells that could have been their call.  Regardless of any prior recognition of potential consequences, when you lie down with dogs you get fleas. 

The Haynesville Shale boom created numerous situations where these facts apply.

After a bench trial the court found:

• The lease expired and the defendants failed to execute a release of the lease after demand.
• Because of the failure to release the lease, the lessor lost the opportunity to lease the property to another operator
• The real reason the defendants maintained the wells and endured significant net losses was “in hopes of selling the deep rights and profiting from the Haynesville Shale boom.”
• Those actions were clearly speculative, and “a textbook example of what the Legislature intended to prevent in enacting Art. 124.”

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2018 at 4:06

Louisiana Supreme Court’s reversal of Gloria’s Ranch clarifies calculation of damages for unpaid mineral royalties, provides relief for holders of security interests in mineral rights

By Kelly Brechtel Becker and Laura Springer Brown on June 28, 2018 Posted in Appellate, Energy Litigation, Louisiana Law, Louisiana Mineral Law, Louisiana Oil & Gas Law, Oil & Gas, Oil & Gas Contracts, Royalty, Securities

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.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue. By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site. The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

Privacy Policy: By subscribing to Liskow & Lewis’ E-Communications, you will receive articles and blogs with insight and analysis of legal issues that may impact your industry. Communications include firm news, insights, and events. To receive information from Liskow & Lewis, your information will be kept in a secured contact database. If at any time you would like to unsubscribe, please use the SafeUnsubscribe® link located at the bottom of every email that you receive.

• ▶ Reply

Permalink Reply by Steve P on June 28, 2018 at 6:41

Good decision.  As I said above at the time, Judge Joe Bleich had it right in his dissent.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2018 at 6:55

I thought you would appreciate the reversal.  Being the only other person in this discussion thread.  :-)

• ▶ Reply

Permalink Reply by Dion Warr, CPL on June 29, 2018 at 15:57

Skip:

This is a significant victory in lessees / operators in LA continuing to be able to gain access to financing for operations in which lease and well assets are pledged as collateral, as well as lenders in deflecting potential liability to such judgments in merely holding a security interest in working interest / leasehold. The original trial court and appellate rulings, in the opinion of a dissenting judge, had created a “chilling environment” for such financing if the prior rulings were allowed to stand. It appears that this miscarriage has been averted.

I found it important in reading the prior opinions that weight had been given less as to Wells Fargo's security interest and more to its activity in "managing" the lease and operations.  In most cases, lenders do not attempt to institute quite the level of control that WF did in this case.  Certainly this can be attributable in part to the distressed financial position of the working interest owner and its relationship with Wells Fargo in its attempt to take a decidedly more active role in preserving the secured leases and assets.  IMHO (IANAL) the lower courts weighed this in particular in its findings of fact.  A more passive lender likely would have not had the level of exposure to such allegations.

My two cents.

• ▶ Reply

Permalink Reply by William C. Morrison on June 29, 2018 at 8:01

Interesting decision. Double is not treble makes good sense. But there was shenanigans going on and knuckles got rapped.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on June 29, 2018 at 11:17

Thanks for joining us William.  Now there are 3 of us in this discussion thread.  I can't for the life of me figure why Keith decided to "feature" it.  :-)

• ▶ Reply

Permalink Reply by William C. Morrison on June 30, 2018 at 3:19

I think he included it because it is interesting.  No telling what other states are going though.  I live Texas and as you know oil companies run wild.  Takes a while but Texas finally catches up.  Ran Chesapeake out of the Barnett Shale.  CHK got sued by everybody regarding their handling of royalties.  CHK finally settled all the suits and bailed out of Northeast Texas.

• ▶ Reply

Permalink Reply by Steve P on June 30, 2018 at 7:38

this case is very important.  The facts were unusual - a large national bank taking an overriding royalty, etc, instead of just taking a mortgage on the leases and wells, along with the assignment of interest in the event of default.  Some loan officer at Wells Fargo got a little too creative.  But the case is important because the plaintiffs thought that they had found the ultimate deep pocket for their loss.  Don't get me wrong, I'm not here suggesting that the operator has clean hands.  Far from it.  But it would be a truly terrible precedent if the Court had allowed the judgment against Wells Fargo to stand.  Funding for small to mid-sized operators could have been seriously impacted.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on June 30, 2018 at 7:46

The operator in question is ethically challenged.  Wells Fargo picked the wrong partner.  They probably short cut the due diligence.  And dodged a bullet.

• ▶ Reply