Creativity abounds: Your 16-year old “explaining” the empty Southern Comfort bottle and the roach clip; President Obama justifying his rejection of Keystone. The Louisiana Supreme Court isn’t much of a supporter, at least in statutory construction. Today we revisit McCarthy v. Evolution Petroleum Corp. As we reported, the court of appeal had authorized causes of action under Mineral Code Article 122 for fraud by silence and fraud by affirmative misrepresentation. The Supreme Court reversed; these causes of action may only be obtained contractually and not by “creative interpretations of Article 122”.
A mineral lessee is not under a fiduciary obligation to his lessor, but he is bound to perform the contract in good faith and to develop and operate the property leased as a reasonably prudent operator for the mutual benefit of himself and his lessor. Parties may stipulate what shall constitute reasonably prudent conduct on the part of the lessee.
The Supreme Court did not agree that the obligation to develop and operate the property “for the mutual benefit of himself and his lessor,” established a cause of action for “fraud by silence”, requiring disclosure of information in connection with Evolution’s purchase of mineral interests from its lessors.
Duties under Article 122
Four duties are derived from Article 122:
- develop known mineral producing formations
- Explore and test all portions of the leased premises after discovery of minerals in paying quantities;
- Protect the leased property against drainage by wells located on neighboring property; and
- Produce and market minerals discovered and capable of production in paying quantities.
All require the lessee to operate in the manner of a reasonable, prudent operator.
The court avoided “hide-and-go-seek” in statutory construction. The true meaning of the statute won’t be hidden until found by a creative plaintiff. Duties requiring the disclosure of information will not be read into Article 122, said the court, especially because the article itself allows for contractual arrangements. A concurring opinion reasoned, “Courts should take care not to go beyond the plain meaning of the provisions of the Code where the meanings are clear and unambiguous and do not lead to absurd consequences.”
The causes of action approved by the court of appeals would be fine if they had been supplied by an agreement between the parties. It did not help the plaintiffs that an allegation of an inadequate price in a mineral sale is not actionable (that “lesion” thing we discussed in the first post). Nor was it helpful that the claims arose out of the purchase of mineral interests and not operations. Nor did it help that the article relieves the lessee of fiduciary obligations.
- Lessor: If you want reporting, disclosure or other duties beyond those required by Article 122, negotiate them into your lease.
- Lessee: You are off the hook for withholding information from your lessor, at least in this situation.
A musical interlude
Allen Toussaint has nothing to do with the subject but much to do with Louisiana’s musical heritage.
Here is one he wrote and produced.
And another one that puts the New Orleans rhythm into a song you’ve heard a hundred times.