Lenders to Louisiana operators are likely to be reconsidering their business practices in light of Gloria’s Ranch v. Tauren et al.
A rather ordinary lease termination suit resulted in the lender Wells Fargo being solidarily liable with the lessees for $22.8 million in lost leasing opportunities, $242,000 in unpaid royalties, $484,000 in statutory damages, and almost $1 million in attorneys’ fees.
Wells was solidarily liable with the lessees because:
- According to Mineral Code Art 168, undivided ownership of mineral rights is indivisible, which made the co-owners’ obligation to execute a release of the lease upon demand indivisible,
- The mortgage contained an assignment of the leasehold,
- Cubic could not release the lease without Wells’ prior consent,
- Wells had an override and an NPI, and
- Wells received cost information from Tauren and Cubic and regularly audited their records.
The lease was on 1,390 acres in Caddo Parish. The deep rights were owned 51 percent by Exco (who settled before trial) and 49 percent by Cubic. The shallow rights were owned 51 percent by Tauren and 49 percent by Cubic. Wells Fargo’s credit facility and mortgage were converted into a net profits interest in a portion of the shallow rights and an override in a portion of the deep rights. The lessees were counting on several Cotton Valley wells to hold the lease.
Mineral Code Article 124 requires production in paying quantities: Would a reasonable prudent operator, for the purpose of making a profit or minimizing loss, continue to operate a well in the manner in which the well in question was operated?
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.”
Penalty for unpaid royalties: Times two or plus two?
Plus two. Under Mineral Code Art. 140 if the lessee fails to pay royalties or to inform the lessee of a reasonable cause for failure to pay, the court may award as damages “double the amount of royalties due”. Is that unpaid royalties times two or plus two? The court concluded that statute means the offending lessee must pay unpaid royalties plus 2 times the royalties.
The dissent, respectful but … indignant?
Two judges were unhappy with the result. Judge Bleich predicted an apocalypse of sorts for Louisiana’s oil business. Judge Brown agreed, contending it was legal error to impose solidary liability on a mortgagee with only a security interest. Solidary liability is never presumed and arises only from a clear expression of the parties’ intent or by law. In the name of public policy alone, this aberration needs to be corrected.
A Cajun musical interlude for a Cajun coach.