Remedies Of Unleased Mineral Owners For Nonperformance Of Obligations By Unit Operators

Andrew Heacock, J.D./C.L. 2014, Paul M. Hebert Law Center, Louisiana State University

In the ongoing case of Adams v. Chesapeake Operating[1], the United States Court for the Western District of Louisiana granted a partial motion for summary judgment in favor of Chesapeake on the issue of whether Louisiana Mineral Code articles 212.21–23 apply to unleased mineral owners pooled within a producing conservation unit.[2] The court ruled that the statutes, which authorize courts to award double damages and attorney’s fees when an operator of a well fails to timely pay pro-rata shares of well proceeds due, do not apply to unleased mineral owners.[3] In arriving at this conclusion, the court adopted an unjustifiably contrived reading of the statutes while overlooking the obvious purpose of the statutes themselves.

Adams is the owner of unleased mineral rights inside a drilling and production unit formed by the Louisiana Commission of Conservation for production of natural gas from the Haynesville Shale formation in DeSoto Parish.[4] Despite being pooled in the unit, Adams did not have a contract of lease for his minerals with any party.[5] On October 25, 2010, Chesapeake Operating completed a gas well inside Adams’s unit.[6]Chesapeake failed to send reports or information to Adams as required by statute.[7]After multiple written requests by Adams for reports and information on the well in his unit, he filed suit for his share of the production from the well, as well as attorney’s fees and double damages for Chesapeake’s failure to respond to his timely requests. [8]

The court upheld Chesapeake’s motion for partial summary judgment on the issue of attorney’s fees and double damages.[9] The court’s decision was based strongly on the rationale that the statutes in question imply some sort of contractual relationship between the two parties, saying “[f]rom a plain reading of the applicable statues, it is clear that Part 2-A of Chapter 13 of Title 31 applies to parties connected, in some form, whether directly or indirectly, by a mineral lease or some type of contract or agreement.”[10] Such a reading of the statutes is at odds with both the text of the statutes themselves and the policy driving their enactment.

The statutes in question come from Chapter 13 of the Louisiana Mineral Code under Part 2-A, which provide:

Chapter 13. Miscellaneous Provisions

Part 2–A. Production Payments and Royalty Payments to Other Than Mineral Lessor; Remedies of Obligee

§ 212.21. Nonpayment of production payment or royalties; notice prerequisite to judicial demand

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

212.22. Required response of obligor to notice

The obligor shall have thirty days after receipt of the required notice within which to pay the royalties or production payments due or to respond by stating in writing a reasonable cause for nonpayment. The payment or nonpayment of the sums due or stating or failing to state a reasonable cause for nonpayment within this period has the following effect.

212.23. Effects of payment or nonpayment with or without stating reasonable cause therefor; division order

A. If the obligor pays the royalties or production payments due plus the legal interest applicable from the date payment was due, the owner shall have no further claim with respect to those payments.

B. If the obligor fails to pay within the thirty days from notice but states a reasonable cause for nonpayment, then damages shall be limited to legal interest on the amounts due from the date due.

C. If the obligor fails to pay and fails to state a reasonable cause for failure to pay in response to the notice, the court may award as damages double the amount due, legal interest on that sum from the date due, and a reasonable attorney’s fee regardless of the cause for the original failure to pay.[11]

Upon reviewing the text of the statutes, no “plain reading” can reasonably lead to the conclusion that a contract is required for the statutes to apply. In fact, it seems clear that all that is required is the absence of a contract of lease between the parties, as the title of Part 2-A clearly limits application to those “other than [a] mineral lessor.”[12] The three statutes use the term “obligor” or “obligee” seven times in total, whereas mention of the word “contract” or any implication thereto is conspicuously absent.[13]

Repeated use in the articles of the terms “obligor” and “obligee” is significant, because those terms are broader in application than merely parties to a contract. Indeed, the Louisiana Civil Code distinguishes between “Conventional Obligations or Contracts”[14]and “Obligations Arising Without Agreement,” and comprehensively treats several varieties of noncontractual obligation in Title V of Book III.[15] One such obligation that is identified by name in the Civil Code is Negotiorum Gestio, or “Management of the Affairs of Another.”[16]

When the relationship between an unleased mineral owner and the operator of a well is considered, the prudent administrator standard and the gestor-gestee relationship are undeniably applicable.[17] All minerals produced by a well in which the unleased mineral owner has an interest become co-owned by the mineral owner and the operator.[18] The operator has an obligation to manage the mineral owner’s property as a “reasonably prudent operator,” just as it has the same obligation to its lessors and other working interest owners in the well. [19] This source of this obligation does not come from any contract, but from the fact that the operator is in possession of property owned by others, and as a result it owes those owners the obligation of acting with reasonable prudence in the administration of that property as well as an accounting of its management.[20]

The gestor-gestee relationship between an operator and an unleased mineral owner was squarely addressed in Taylor v. Woodpecker Corp.[21] The Woodpecker court provided in pertinent part:

LSA-R.S. 30:10 A(3) gives an unleased landowner a cause of action in quasi contract under [the Civil Code.] The unit operator acts as a negotiorum gestor or manager of the owner’s business in selling the owner’s proportionate share of oil and gas produced. In return for the right to sell the share of production of the unleased landowner, the unit operator is obligated by law “without any agreement” to pay the unleased landowner his proportionate share of proceeds…. The “purely voluntary act” of assuming the position of unit operator, and thereby obtaining the right to sell the unleased interest owner’s share of production, results in this obligation to account to the unleased interest owner.[22]

Overlooking the obvious textual references to the obligation of prudence in management of the affairs of another, the court looks beyond the text of the law to the enacting language of the statute to determine that a “production payment” could only be owed under a contract.[23] While it is true that production payments, specifically volumetric production payments (VPPs), are often sold by operators as a financing measure, they are not necessarily created out of a contractual relationship. Rather, “production payments” are just that: payments from a share of production.[24] This common-sense reading of the term encompasses far more than the type of volumetric production payments that are sold as an off-balance sheet financing measure by exploration and production companies. The court clearly erred by looking beyond the plain meaning of the statute, the Louisiana Mineral Code, and the Louisiana Civil Code to the enacting language of a statute.

The obvious purpose of articles 212.21–23 is to hold operators of oil and gas wells accountable to others who are owed payments resulting for minerals produced by wells operated by the operator. If public policy mandates attorney’s fees and double damages in this scenario, who besides an unleased mineral owner is more deserving of those protections? Those who have the benefit of a contact, to whom the court would restrict this remedy, have the ability to negotiate those penalties at the time the contract is formed.[25] The unleased mineral owner does not have such an opportunity, but is instead forced into a partnership with the operator in the development of his minerals without his consent.[26] If anyone needs the protections afforded by articles 212.21–23, it is the unleased mineral owner above all.

The court’s restrictive reading of Mineral Code articles 212.21–23 both ignores the obvious reference to the civilian concept of “Obligation” and frustrates the purpose of those statutes by withholding their application from the very class of person most in need of the remedies they provide.[27]

Preferred citation: Andrew Heacock, Remedies of Unleased Mineral Owners for Nonperformance of Obligations by Unit Operators, LSU J. Energy L. & Res. Currents (February 21, 2013), http://sites.law.lsu.edu/jelrblog/?p=212.