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Total E&P USA, Inc. v. Kerr-McGee Oil & Gas Corporation

United States District Court, E.D. Louisiana

October 30, 2014



KURT D. ENGELHARDT, District Judge.

Presently before the Court is a motion for summary judgment filed by Defendant Total E&P USA, Inc. ("Total").[1] Having carefully considered the parties' submissions and applicable law, IT IS ORDERED that Defendant's motion (Rec. Doc. 308) is GRANTED IN PART and DENIED IN PART to the extent stated herein.


The primary focus of Defendant's motion is Plaintiffs' claim for statutory penalties for Defendant's non-payment of overriding royalties during the production period that the federal government's landowner royalty was suspended pursuant to the Outer Continental Shelf Deep Water Royalty Relief Act ("DWRRA").[2] The Court finds Defendant to have timely stated reasonable cause for non-payment of the overriding royalties such that the penalties (double damages and attorney's fees) authorized section 212.23 of the Louisiana Mineral Code are not available to Plaintiffs.[3]

As reflected in the parties' submissions, District Court Judge A. J. McNamara previously granted summary judgment in Defendant's favor, finding that Plaintiffs were not entitled to payment of overriding royalties during the time that the federal government's landowner royalty was suspended.[4] In so ruling, Judge McNamara found the "calculate and pay" clauses in the applicable assignment contracts to be unambiguous "because they clearly provide that the overriding royalties shall be calculated and paid in the manner and subject to the same terms and conditions as the landowner's [federal government's] royalty under the Lease.'"[5] On appeal, the Fifth Circuit reversed and remanded the matter for further proceedings consistent with the majority's opinion.[6] Specifically, the Fifth Circuit majority concluded that the "calculate and pay' clauses... do not clearly and explicitly express the intent that overriding royalty payments shall be suspended whenever the U.S. landowner royalties are suspended under the DWRRA; and [instead] must be interpreted further in search of the common intent of the parties to the assignment contracts."[7] The panel further reasoned:

Assuming without deciding that the "calculate and pay" clauses may reasonably be interpreted as Total and Statoil contend, the clauses are at least ambiguous because a reasonable inference also may be drawn that the "calculate and pay" clauses merely refer to the lease terms and conditions for the method of calculating overriding royalties and that they do not intend for the lessees' obligation to pay overriding royalties out of production to be suspended altogether under any circumstances.[8]

Now, on remand, the instant motion asks the Court to address the availability of statutory penalties authorized by the Louisiana Mineral Code, assuming that Plaintiffs prevail at trial on their breach of contract claims. On this issue, notwithstanding the Fifth Circuit's conclusion relative to Plaintiffs' arguable entitlement to payment of additional overriding royalties, the Court finds the substance of the assignment contracts' "calculate and pay" clauses[9] to be determinative of Plaintiffs' penalty claims. That is, the Court finds no triable question to exist relative to the reasonableness of Defendant's stated cause for non-payment[10] and, moreover, finds Defendant to be entitled to judgment as a matter of law on the issue. In other words, even if Defendant's proffered interpretation of these provisions is ultimately determined to be erroneous - given the parol evidence to be introduced by the parties at trial - Defendant's interpretation cannot, on the showing made, be found legally unreasonable such that statutory penalties are warranted.

In reaching this conclusion, the Court first emphasizes that, although it would not have been difficult to modify the assignment contracts' language to clarify and confirm the parties' intent regarding any suspension of the overriding royalty, no such language was included.[11] This is true notwithstanding the change to the standard form lease necessitated by the passage of the DWRRA in 1995.[12] To the contrary, as emphasized by Judge McNamara and dissenting Circuit Judge Emilio Garza, the 1999 and 2001 assignment contracts - both executed by sophisticated, commercial entities - expressly and undisputedly simply state: "The overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner's royalty under the Lease."[13] Footnote 1 of the Lease expressly states that the Lease may be eligible for "royalty suspension" and, if eligible, sections 5 and 6, which address payment of royalties, are superceded.[14]

Furthermore, at the time in question, as referenced in Defendant Statoil's stated reasons for nonpayment, there was no existing case law addressing whether overriding royalties were either generally suspended during royalty relief periods or suspended based on the specific language of the assignment contracts at issue here. Additionally, according to Plaintiffs' proposed expert, Robert W. Robison, Jr., the question of the impact on an overriding royalty interest, if any, of a suspension of the landowner's royalty interest, was not, at that time, a "hot topic of discussion" within the industry.[15] Thus, although perhaps maverick, the Court cannot say the query raised by Defendant was legally unreasonable.

Significantly, moreover, having questioned its obligation to pay overriding royalties during the DWRRA suspension period, Defendant did not rest on its laurels or wait for the royalty owners to take action. Rather, Defendant filed its declaratory judgment action in early October 2009, seeking judicial determination of the extent of the overriding royalty payment obligations. At that time, Defendant also acted to safeguard the funds sought by Plaintiffs by depositing them (as they accrued throughout 2010) into the registry of the Court.

Despite ruling in Defendant's favor relative to Plaintiffs' penalties request, the Court recognizes that certain facts arguably weigh against Defendant. For instance, Chevron U.S.A., Inc., a party to the 2001 assignment contract, upon query from Defendant Total, in March 2009, and Statoil, in the fall of 2009, advised that it disagreed with their position relative to any suspension of the overriding royalty obligation. Additionally, Chevron paid those royalties from the beginning of production. That being said, statutory penalties may be imposed, pursuant to §212.23 of the Louisiana Mineral Code, only if the cause for nonpayment of royalties is unreasonable; mere error does not suffice.

Plaintiffs also point to economic analyses apparently utilized by Defendant in connection with its acquisition of its interest in the lease, and thereafter, suggesting no expectation of a suspension relative to the overriding royalties, [16] as well as Defendant's (allegedly inadvertent)[17] payment of production royalties to the individual claimants in July and August 2009.[18] Civil penalties are not to be imposed, however, except for clearly egregious conduct. See, e.g., Columbine II Ltd. P'ship v. Energen Resources Corp., 129 Fed.Appx. 119, 123, 2004 WL 977627, *4 (5th Cir. 2004)(citing Crowe v. Equitable Life Assur. Soc., 179 La. 444, 452-53, 154 So. 52 (La. 1934)). Moreover, a penalty award pursuant to §212.23 is not automatic; rather, it is a matter of the Court's discretion. See La. R.S. 31:212.23(C)("the court may award")(emphasis added); see also Columbine II Ltd. P'ship, 129 Fed.Appx. at 123-24, 2004 WL 977627, *3-4 (district court abused its discretion in doubling damages). Thus, even if Plaintiffs are correct that Defendant changed its opinion regarding the point in time at which overriding royalties were due only after lease production drew near, and a close examination of the contractual provisions and resulting financial implications were undertaken, the Court nevertheless does not find a third party's decision to seek judicial determination of its obligations, owed as the result of not one, but two, commercial contracts bearing the language at issue here, prior to paying millions of dollars in royalties that at least arguably were not owed, to be sufficiently egregious to warrant the imposition of substantial monetary penalties. Accordingly, the Court finds Defendant's summary judgment motion meritorious relative to Plaintiffs' request for an award of double damages and attorney's fees pursuant to §212.23 of the Louisiana Mineral Code.

Defendant's summary judgment motion also seeks dismissal of the Plaintiffs' unjust enrichment claims, reformation claims, and requests for declaratory judgment. Plaintiffs do not oppose Defendant's request relative to their unjust enrichment claim. Accordingly, that aspect of Defendant's motion also is granted.

Regarding Plaintiffs' claim for reformation and request for declaratory judgment, it is unclear to the Court that maintenance of these claims remains necessary given the Fifth Circuit's ruling relative to Plaintiffs' breach of contract claim. Nevertheless, in an abundance of caution, the Court will not grant Defendant's motion relative to those aspects of Plaintiffs' claims at the present time. This ruling is without prejudice, however, to Defendant's right to re-urge its request prior to the case being submitted to the jury. The parties are further instructed to promptly ...

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