Co-author Brittany Blakey*
Louisiana practitioners and their clients tend to know this particular point of Louisiana law, but it could surprise out-of-staters (known in their native habitat as “Texans”), so it’s worth a reminder:
Under Louisiana Mineral Code art. 122 and art. 129, a lessee in a mineral lease is not relieved of its statutory duty to perform the lease as a reasonably prudent operator unless the lessor has expressly discharged the lessee in writing. The original lessee, along with all assignees and sublessees, are solidarily liable to the lessor for the whole performance of the obligations imposed by the lease.
In Rainbow Gun Club, Inc. v. Denbury Res., Inc., SKH acquired leases over land in Cameron Parish. As the ultimate assignee of SKH’s interest, Denbury Resources completed the Rainbow Gun Club No. 1 in 2003. The well produced gas until 2006 and was plugged and abandoned in 2008.
In 2013, the lessors sued Denbury and SKH (among others) alleging that Denbury stuck the drill pipe was stuck in the hole when it drilled the well. The stuck pipe could not be (and was not) adequately sealed, resulting in an “extraneous water invasion” that irreparably damaged the gas reservoir and access to the reservoir itself. The lessors, claiming negligence and breach of contract, sought to recover lost royalty income.
According to stipulations, Denbury stuck the drill pipe, which “is known by all prudent operators to be an undesirable event that should be avoided at all costs.” Testimony at trial revealed that potentially 12 bcf of recoverable gas was lost from the well, equating to nearly $79 million in lost revenue.
The lessors settled with Denbury, and other defendants were dismissed, leaving SKH as the only remaining defendant. At trial, the court found SKH solidarily obligated for one-fourth of the total damages of $10+ million. The court rendered judgment against SKH for $2.5+ million.
Solidary liability – Why?
The court of appeal upheld the judgment against SKH even though it had assigned its leasehold interests and in no way took part in Denbury’s imprudent operations. SKH’s liability did not arise out of its own actions, but rather out of breach of the mineral lease by others and the effect of arts. 122 and 129.
SKH’s virile share of damages
The court also disagreed with SKH’s arguments that the trial court erred in holding it liable for one-fourth of the lessors’ damages. According to SKH, it could not be held liable for any damages because the other three defendants owned 100% of the leasehold interest at the time Denbury breached its implied contractual obligation and SKH did not commit any negligent acts. Revisiting Civil Code articles 1803 and 1804, the court held that since three of the lessee-assignees settled with the lessors, the trial court correctly reduced SKH’s liability so that it was only responsible for one-fourth of the damages; the lessee and the assignees were responsible for equal virile portions of damages.
Think you could outrun a bear? Maybe, but you can’t escape the power of the lessor under the Mineral Code to hold former lessees liable in the absence of an express discharge from liability. Lessees should be mindful of the importance obtaining such a written discharge upon assignment; better yet, negotiate for it upfront. Lessors should know their bargaining position.
*Brittany was a Gray Reed summer associate and will return to Baylor on the joint JD-MBA program.