Co-Author Brooke Sizer
What must a Louisiana lessee do to avoid statutory penalties for non-payment of royalty, and what must a royalty owner do to put the lessee on notice that royalties are not being paid? The answers are, more than the lessee did in Samson Contour Energy E&P, LLC v. Smith and less than the lessee argued for.
What the Lessee Did
- When calculating royalty payments for six new wells on a lease, mistakenly used old and obsolete ownership information and paid royalties attributable to a disputed interest to one party not entitled to it.
- Ignored notices of unpaid royalty under Mineral Code Art. 137 that did not include a demand for payment.
What the Lessee Could Have Done
- Pay closer attention to its lease records.
- Pay closer attention to notices from the royalty owner of deficient royalty payments.
- Suspend disputed funds (which requires paying closer attention … ).
Half of the property belonged to the mother, one-quarter to the son, and one-quarter to the daughter. The land was HBP under a lease from 1970s. In 1996, the mother executed an act of donation giving her half of the mineral and royalty interest to son Billy. Similar to what Michael did to Fredo but not as permanent, after Momma died daughter Betty sued to annul the 1996 donation. Samson was informed of the annulment action and suspended royalty for the one-half interest. In 2005 Samson received an uncertified photocopy of a judgment annulling the donation and transferred the subject one-half to the Succession.
Samson drilled six wells that were completed sometime after the disputed interest was originally suspended. When calculating royalty for the new wells, Samson mistakenly used old ownership information and paid the royalties attributable to the disputed one-half to Billy.
A Legitimate Mistake?
The co-administrators of the Succession requested that suspended royalty funds be paid to the Estate. Samson acknowledged receiving the letters of administration and stated that the records had been updated. Later, one of the administrators informed Samson that the records they had received from Samson failed to include the six wells. Samson responded that the Estate did not own any interest in those wells. The administrators each sent Samson another copy of the annulment judgment. Samson then issued a check that still underpaid the Estate by failing to include royalties attributable to the six wells.
- Payment to son Billy was the same as paying the Succession; they should not be treated separately.
- Based on language in the lease, because it did not receive a certified copy of the annulment it could not be liable.
- Notice under Mineral Code Art. 137 was insufficient to trigger the penalty because it did not include a demand for payment and did not provide information so that payment could be made.
Samson failed to follow industry practice in using old information for paying royalties and not adjusting royalty payments after the mistake was discovered.
Samson failed to fulfill its duty as a lessee under the Mineral Code to pay or respond with a reasonable cause for nonpayment within 30 days after receiving notice that payment was incorrect.
The Art. 137 notice has a purpose: To merely inform the lessee he has not paid the royalties deemed by the lessor to be due. It is a chance for the lessee pay royalties due while giving them a chance to avoid the harsh remedy of a lease cancellation. Numerous communications reasonably alerted Samson to the payment failure pursuant to Article 137. Samson failed to explain what caused the error, instead choosing to ignore the error and question the administrator’s right to act on behalf of the Succession.
Samson owed the Succession $1,301.149.13 in royalty payments and double the amount due as penalty. Judgment rendered for $2,602,298.26 in damages, plus interest and $505,000 in attorney fees.
- Send this post – or better yet the entire opinion – to all of your lease administration personnel.
- The operator who swings and misses this often is not going to like the justice meted out by most Louisiana trial judges and juries.
- Woe to the operator who fails to recognize that Louisiana courts set a low bar for a lessor to comply with statutory notice provisions similar to Art 137.
- Hats off to Samson lawyers for a creative but – given the facts – predictably unsuccessful effort.
Our musical interlude honors Samson’s “fighting spirit”.