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Mack Energy Co. v. Expert Oil & Gas, L.L.C.

Supreme Court of Louisiana

January 28, 2015

MACK ENERGY CO., ET AL.
v.
EXPERT OIL AND GAS, L.L.C

ON WRIT OF CERTIORARI TO THE COURT OF APPEAL, FIRST CIRCUIT, PARISH OF ST. TAMMANY.

Warren LeDoux Montgomery; L. L. Morgan, Jude Christopher Bursavich, Carroll Devillier, Jr., BREAZEALE, SACHSE & WILSON, LLP, For Applicant.

E. B. Dittmer, II., TALLEY, ANTHONY, HUGHES & KNIGHT, LLC, For Respondent.

Harry Joseph Philips, Jr., Counsel for Louisiana Association of Business and Industry, For Amicus Curiae.

OPINION

Page 438

[14-1127 La. 1] WEIMER, Justice.[1]

We granted a writ to determine whether an accountant, serving as an arbitrator, exceeded his arbitral authority.

Based on an agreement, an oilfield operator was authorized to charge certain costs against revenues prior to paying the oilfield owners. After a dispute arose, an auditor examined the oilfield operator's costs charged to the oilfield owners and assigned approximately $978,000 as being unsubstantiated and, therefore, impermissibly charged to the owners by the operator. The arbitrator reached a different conclusion regarding what charges were permissible and awarded the owners approximately $1.6 million.

The arbitrator's conclusion was significantly based on employment documents provided by the operator during the arbitration. Those employment documents were [14-1127 La. 2] not entered as an exhibit during the arbitration, nor were the documents made available to the parties for review. The oilfield owners were, nevertheless, apparently satisfied with the arbitration's final outcome, and the owners brought an action

Page 439

in the district court to confirm the award. The oilfield operator, however, moved to vacate the award. The operator argued that the arbitrator improperly considered the employment documents and that the arbitration was limited in scope by the auditor's findings that the unsubstantiated charges totaled approximately $978,000. The district court confirmed the award and denied the operator's motion. The court of appeal affirmed, with one judge dissenting.

Initially, the arbitration proceedings and alleged disproportionate award appeared to approach the limits of Louisiana's generally permissive arbitration laws; therefore, this court granted a writ of review. After oral argument and with the benefit of a full record, however, we find the arbitrator acted pursuant to the authority lawfully and contractually vested in him by the parties. Thus, for the reasons that follow, we affirm.

FACTS AND PROCEDURAL BACKGROUND

The owners of the oilfield's mineral rights are Mack Energy Co., Knight Resources, LLC, Big Sky Operating Companies, Inc., and Duplantis Resources, LLC (collectively " Mack Energy" ). In 2007, Mack Energy executed two agreements with ExPert Oil & Gas, LLC (" ExPert" ) to develop Mack Energy's mineral rights in the Lake Salvador Field in Jefferson and St. Charles Parishes. The " Participation Agreement" indicated that Mack Energy would be given " the authority and responsibility to act as the prospect developer for" the Lake Salvador Field and that ExPert would be the operator. The Participation Agreement also provided details for the payout of any successful wells and that the costs of any mineral operations would [14-1127 La. 3] be paid or reimbursed to ExPert as the operator. The other agreement was an " Operating Agreement," which attached an accounting procedure referred to by the parties as " COPAS," the acronym for the Council of Petroleum Accountants Societies. Under COPAS procedures, a " Joint Account" was established as a means of " showing the charges paid and credits received" for the oilfield operations. The COPAS procedures also gave Mack Energy the right to have the joint account audited.

Mack Energy invoked the right under COPAS to have an audit from the inception of the joint account through December 2010. Accountant Dan Huey served as the lead auditor and examined expenditures charged to the joint account totaling nearly $37 million. In his report, Mr. Huey indicated that not all expenditures charged by ExPert could be justified under the standard of " reasonableness and propriety" by supporting documentation, and he identified such expenditures as " exceptions." Mr. Huey's report indicated that the " [g]ross exceptions totaled $1,437,828.97 with additional unresolved exceptions that are to be determined after response by Operator."

Neither Mack Energy nor ExPert agreed with Mr. Huey's report. Pursuant to the Participation Agreement, Mack Energy and ExPert submitted their dispute to a mediator. Through mediation, of 106 exceptions noted in the audit report, the parties resolved 54 exceptions. Although some exceptions had been resolved to the parties' mutual satisfaction, Mack Energy and ExPert continued to dispute the proper resolution of the joint account after mediation.

Page 440

In fact, Mack Energy sought to terminate ExPert's role as operator. That issue became the topic of a separate arbitration, which concluded with a ruling maintaining ExPert as operator. However, as far as the joint account was concerned, Mack Energy [14-1127 La. 4] again invoked rights described in the Participation Agreement and called for the arbitration at issue in this case. Mack Energy submitted a document to ExPert captioned " Arbitration Claim," which recited the attempted mediation and its results relative to the audit report: " Fifty-two (52) audit exceptions, totaling $977,598.44, remained open at the end of the mediation."

The parties executed a " Procedural Agreement," describing how certain aspects of the arbitration, such as discovery and evidence, would be handled by an arbitrator. The Procedural Agreement also stated that the arbitrator would resolve the issues that were " formally submitted" and indicated that the parties had already jointly selected an arbitrator. The selected arbitrator was an accountant and a member of the Council of Petroleum Accountants Societies, the same organization that promulgated the COPAS procedures to which the parties were bound by the Operating Agreement. During the hearing, the arbitrator considered whether ExPert was required to provide employment documents relating to charges ExPert made to the joint account. The charges had been made for services rendered by employees of ExPert E & P Consultants, LLC, an entity affiliated with ExPert.

ExPert and ExPert Consultants had the same chief financial officer (CFO), Michael Ledet. Moreover, the Participation Agreement was written on letterhead listing both of the ExPert business entities. Notwithstanding the obvious connections between the two entities, during the arbitration, ExPert took the position that charges to the joint account for services from ExPert Consultants were the services of a third party for which ExPert had no obligation to provide documents during the arbitration. After a lengthy debate by the parties' counsel and testimony by the CFO admitting that the auditor had requested the employment documents for the audit, but the CFO [14-1127 La. 5] refused to provide those documents, the arbitrator ordered ExPert to produce the employment documents.

The debate over the production of the employment documents evolved along procedural lines, with the parties taking greatly disparate positions. The range of substantive reasons for the arbitrator's potential use of the employment documents appeared to be well-understood by the parties. Under COPAS, when the operator charges the joint account for services of an entity affiliated with the operator, one of two rates is permissible. In such a situation, the auditor noted in his report that the operator was allowed to charge either " rates commensurate with costs of ownership and operation" or " commercial[ly] prevailing rates ... less 20%." Moreover, the operator is allowed to charge only a flat rate for overhead expenses, such as " administrative, supervision, [and] office services." Thus, substantively, the arbitrator determined the employment documents were necessary to guide his ultimate resolution of the parties' accounting disputes.

After the hearing, the arbitrator ordered ExPert to credit the joint account in the amount of $1,596,269.15. Of this credit, the arbitrator found ExPert had charged $537,579.36 for services of ExPert Consultants, which were " clearly administrative and not chargeable." The arbitrator explained this finding was supported by the employment records, which had been " denied the auditors in the expenditure[s] audit" and which had been the subject of the lengthy dispute ...


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