The question with wide-ranging implications for Louisiana operators and mineral owners in Johnson et al. v. Chesapeake Louisiana LP et al is whether unleased mineral owners in a drilling unit established by the Commissioner of Conservation must bear their proportionate share of post-production costs.

The statutory scheme

Under Louisiana’s forced pooling statutes, the Commissioner may form drilling units and appoint an operator to drill and operate wells for all owners in the unit. Unleased mineral owners (the court called them UMO’s) are exempt from the statutory 200% risk charge for drilling costs applied to non-participating lessees. The operator is required by La. R.S 30:10(A)(3) to pay a UMO who has not elected to market his share of production the tract’s pro rata share of proceeds from the sale of hydrocarbons.

The claims and defenses

Plaintiffs-UMO’s allege in this case in the U. S. District Court for the Western District of Louisiana that Chesapeake improperly deducted certain post-production costs (PPCs) from their share of production proceeds, relying on the plain language of 10(A)(3). PPC’s are not among the statute’s exclusive list of deductible expenses.

Chesapeake originally relied on unjust enrichment and, alternatively, co-ownership to justify deducting PPC’s.  In a motion for reconsideration after the court in 2019 ruled in favor of the UMO’s in competing motions for summary judgment, Chesapeake argued that 10(A)(3) creates a quasi-contractual relationship of negotiorum gestio between the unit operator and the UMO’s when the operator sells the production, and that Louisiana Civil Code Art. 2297 provides the operator the right of reimbursement for PPC’s.

Chesapeake argued that “proceeds from the sale of production” in 10(A)(3) means “in cash” for balancing purposes as compared to “in kind” balancing preferred for other working interest owners. Alternatively, even if the Court were to construe “proceeds” under 10(A)(3) to mean gross proceeds, then 10(A)(3) does not relieve unleased mineral owners of other obligations, for example severance taxes, to be applied against the amount received.

The UMO’s responded that the ordinary meaning of proceeds of a sale is gross proceeds, the entire amount of money received from or brought in by sale, and no other costs are listed in the statute as recoverable. The Court declined to take up the ordinary meaning of “proceeds from the sale of production”.

The result – harmony

The Court concluded that negotiorum gestio as set forth in Civil Code Art. 2292 et seq governs the relationship between operator and UMO’s and provides the mechanism for reimbursement of PPC’s incurred by the operator when marketing UMO’s gas. Art. 2297 allows a manager acting as a prudent administrator to cover necessary and useful expenses which, said the court, is in harmony with 10(A)(3). There is no conflict between 10(A)(3) and Article 2297 and the Court harmonized those two expressions of positive law, thereby allowing reimbursement by the operator for necessary and useful expenses.

The Court noted that operators are authorized to withhold certain expenses such as severance taxes and there is no plausible explanation why severance taxes can be deducted from proceeds but PPC’s cannot.

Finally, the Court believed that, considering the nature of the specific statutory protections afforded the UMO’s, to disallow deduction of PPC’s would lead to “free riding”.

What’s next?

The “is” in the introductory sentence is for a purpose; the case is far from over. The court acknowledged that it expects motions by the UMO’s to amend pleadings to further develop the doctrine of negotiorum gestio and a request for interlocutory appeal (sounds like an invitation). Given Louisiana’s 10-year prescriptive period for these claims the financial stakes are massive for parties and non-parties alike, including putative class action plaintiffs in several cases.

Speaking of Latin, or otherwise foreign … .