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Justiss Oil Company, Inc. v. Oil Country Tubular Corp.

Court of Appeals of Louisiana, Third Circuit

April 5, 2017

JUSTISS OIL COMPANY, INC.
v.
OIL COUNTRY TUBULAR CORPORATION, ET AL

         APPEAL FROM THE THIRTY SIXTH JUDICIAL DISTRICT COURT PARISH OF BEAUREGARD, DOCKET NO. 09-1338 A HONORABLE MARTHA ANN O'NEAL, DISTRICT JUDGE

          Robert E. Kerrigan Isaac H. Ryan Deutsch Kerrigan L.L.P., Douglas K. Williams Breazeale, Sachse & Wilson, L.L.P. ATTORNEYS FOR DEFENDANT/APPELLANT Oil Country Tubular Corporation and North American Interpipe, Inc.

          Jimmy R. Faircloth, Jr. Barbara B. Melton Christie C. Wood Brook L. Villa Faircloth, Melton & Sobel, L.L.C. and Donald R. Wilson R. Joseph Wilson Wilson & Wilson ATTORNEYS FOR PLAINTIFF/APPELLEE Justiss Oil Company, Inc.

          Court composed of Judges Sylvia R. Cooks, John D. Saunders, Elizabeth A. Pickett, John E. Conery and Kent D.Savoie.

          SYLVIA R. COOKS JUDGE

         FACTS AND PROCEDURAL HISTORY

         Justiss Oil Company, Inc. (Justiss) (Plaintiff) and MidStates Petroleum Company, L.L.C. (MidStates) entered into an International Association of Drilling Contractors Model Turnkey Drilling Contract[1] for an oil well[2] in Beauregard Parish, Louisiana for the sum of $2, 836, 733.00. The contract specified the 15, 000 foot deep well would have a bore hole lined with a 7 5/8 inch pipe casing to a depth of 12, 500 feet. The remaining 2, 500 feet would be drilled without casing (referred to in the industry as "open hole"). Drilling pipe reaching a bottom hole diameter of 6 ½ inches would be run inside the intermediate casing down to 12, 500 feet. In preparation for drilling the well, Justiss purchased 12, 500 feet of intermediate casing pipe from Oil Country Tubular Co. (Oil Country) (Defendant). The intermediate casing was manufactured by North American Interpipe, Inc. (NAI) (Defendant). Justiss purchased what is commonly referred to in the industry as "buttress thread" casing pipe with a burst pressure rating of 12, 600 pounds per square inch ("psi").[3] Oil Country did not have enough LTC pipe on hand to string the entire depth needed but could provide Justiss with enough buttress thread casing pipe to complete its drilling project. Justiss preferred to use the same type of pipe for the entire string of casing to the 12, 500 foot depth required and therefore opted to purchase the buttress thread casing pipe. Oil Country represented to Justiss the intermediate casing pipe was "API certified pipe, " meaning it met the standards required by the American Petroleum Institute for casing and tubing pipe to be used in oil drilling operations. Oil Country's owner, Mr. J.C. Gallet, represented to Justiss that this buttress thread pipe was fit for the use intended by Justiss as intermediate casing pipe. The pipe was rated as API 5CT, meaning the pipe would hold at least 10, 000 psi for 5 seconds and has a burst pressure of 12, 600 psi. North American stated in its invoices the pipe was certified API 5CT and provided mill certificates certifying each joint of pipe.

         Both Justiss' and Defendants' experts agreed that this type of buttress thread pipe was appropriate for use as intermediate casing in the proposed Musser-Davis 34-1 well. Dr. Robert W. Nicholson, Phd. (Nicholson) was accepted as an expert witness in petroleum engineering with emphasis on design, planning and on-site management of drilling operations. He testified buttress thread pipe was developed in the 1950's as a more robust drilling pipe than the eight-round thread. According to this expert, buttress thread pipe has two important advantages, greater tensile strength and a higher collapse rating. He explained that with improved technology wells could be set at deeper depths. But to reach these depths safely, a pipe with greater tensile rating and greater collapse rating was needed. Buttress thread pipe was developed for these purposes and according to his testimony has proven to be "extremely useful" for deeper drilling. He further testified the API 5CT specification for buttress thread pipe is "very precise" as to how the threads are to be cut in order for the pipe to have the appropriate tensile strength and collapse rating. According to his expert testimony, if the threads are not manufactured properly the pipe can leak and/or it can pull apart. He also testified the pipe purchased by Justiss was certified as API 5CT, which certifies to a purchaser that the pipe "has been manufactured, sampled, tested, and inspected in accordance with API 5CT." This informs the purchaser that this pipe has a particular burst rating, a certain tensile strength, a certain collapse rating, and a particular chemical composition indicating its strength and suitability for drilling a deep well like Musser-Davis 34-1. When experts tested a sampling of pipes from the same batch of pipe purchased by Justiss they found an abnormally high percent of the pipe was defective. In their opinion these defective pipes would leak and would not hold pressure to the certified level. Of the fourteen hundred fifty-seven joints of pipe tested two hundred two were rejected. Their finding showed almost fourteen percent of the batch tested was rejected as defective as opposed to the normal industry rate of two percent.

         Justiss began its drilling operation for Musser-Davis 34-1 by drilling a hole in which it inserted a 10 7/8 inch surface casing pipe which commenced at the earthen surface of the proposed well down to a depth of 3400 feet. Next, the driller hired by Justiss began drilling a 12, 500 foot bore hole which would accommodate the 7 5/8 inch intermediate casing pipe. Upon reaching a depth of 12, 269 feet, Justiss inserted the intermediate casing pipe and then cemented the intermediate casing into the hole according to its normal operating procedures. At this time Justiss was not aware of defects in the intermediate casing pipe. While cementing the intermediate casing in the hole, Justiss repaired a hole in the surface casing so as to avoid any possibility of contaminating ground water by leakage of drilling fluid from such a hole in the surface casing. This was accomplished by inserting a diverter tool which diverted cement upward between the surface casing and intermediate casing which both filled the hole in the surface casing and added stability. Defendant's expert agreed that once casing is cemented in the hole it cannot be removed.

         In accordance with its planned procedures for drilling Musser-Davis 34-1, Justiss initiated pressure tests on the intermediate casing. The casing pipe has a burst pressure of 12, 600 psi, meaning if it exceeds that pressure during drilling operations it will fail, creating a dangerous situation for workers and the well. The hydrostatic columns of drilling mud in the casing needed to safely drill this well created about 9, 000 psi of pressure. Because the casing pipe could not hold sufficient pressure above this requirement the driller attempted to proceed using a lighter weight drilling mud hoping the combined lower pressure in the pipe would keep it from bursting or pulling apart. Using the lighter drilling mud posed risks in controlling the well and avoiding a blowout because upward pressure from salt water continually increases as drilling reaches ever deeper depths. Justiss proceeded with caution attempting to safely make use of the defective pipe. Justiss' five week effort to work around the defective pipe proved to be of no avail, and when conditions became too dangerous to continue, Justiss capped the well to safeguard its workers and the environment.

         During the drilling operations, after the intermediate casing pipe was cemented in the hole it failed to hold pressure to the certified level. Justiss tested the casing to determine if it would test to 2, 500 psi above the drilling mud pressure for a total pressure of 11, 500 psi, leaving a margin of error of 1, 100 psi before the pipe would fail. During this testing the pipe would not hold pressure above 1, 020 psi. Under its turnkey contract with MidStates, Justiss was not compensated for this effort in failing to drill Musser-Davis 34-1 resulting in financial losses. Justiss sued the manufacturer of the pipe, NAI, and Oil Country, from whom it purchased the pipe, for redhibition of the sale and damages.

         The jury returned its verdict through responses to a special verdict form. It determined that Justiss proved by "a preponderance of the evidence that the [pipe] was defective." This finding of fact was not appealed by Defendants. Having answered this question in the affirmative, the jury proceeded as instructed to the next interrogatory indicating it found "by a preponderance of the evidence that the defendants are liable in a claim of redhibition to Justiss Oil Company[.]" Despite these determinations the jury did not then determine the statutory damages due Justiss as a result of the redhibitory defect in the casing pipe. Instead, as instructed by the jury form, the jury proceeded to question number three finding the redhibitory defect in the casing pipe did not "proximately cause any damages sustained by Justiss Oil Company at the Musser-Davis 34-1 well[.]" Proceeding on to question four, the jury found "Justiss Oil Company's negligence proximately contribute[d] to its own damages sustained at the Musser-Davis 34-1 well[.]" Having made this finding, the jury then assigned ten per cent (10%) fault to Oil Country and ninety per cent (90%) fault to Justiss. Finally, the jury awarded $250, 000 in damages as fair and reasonable compensation to Justiss. This sum was reduced by the 90% fault assigned to Justiss by the jury. In its reason for judgment the trial court found the jury form was "confusing and resulted in a contradictory and nonsensical verdict."

         Justiss filed a Motion for Judgment Notwithstanding the Verdict (JNOV) which was granted by the trial court. Defendants also filed a Motion for JNOV which was subsequently withdrawn, and both parties represented to the trial court a new trial would not be in any party's best interest. The trial court set aside the judgment rendered in accord with the jury findings and entered a new judgment in favor of Justiss. The trial court found Defendants liable in solido, and awarded Justiss the return of the purchase price, $391, 050.20; the costs of repair, $1, 165, 450.43, which included Justiss' expenditures over a period of five weeks incurred while attempting to remedy the problem caused by the defective pipe; plus interest and court costs. The trial court also awarded additional consequential damages totaling $2, 836, 733.00, which sum represented Justiss' loss of profit incurred as a result of the inability to complete the turnkey project. The trial judge then reduced the award for consequential damages by 90% based on the jury's allocation of fault. After further briefing and oral argument the trial court additionally awarded Justiss expert witness fees totaling $56, 281.94; special costs in the amount of $21, 818.42; and attorney fees and expenses totaling $208, 337.00 plus all court costs.

         Defendants appealed the trial court judgment. Justiss answered the appeal asserting the trial court erred in applying comparative fault to reduce the award of consequential damages against the manufacturer and seller in redhibition. Justiss seeks an award for the full amount of consequential damages without reduction, and seeks an award of attorneys' fees for this appeal. Initially, Justiss asserted that in all other respects the JNOV is correct. However, it filed a supplemental brief on appeal in which it acknowledges an error in calculation of the damages awarded by the trial court which would improperly result in a double recovery of the purchase price of the defective pipe. The trial court awarded as damages the return of the purchase price and also awarded as consequential damages the lost profits which it found to be equal to the total contract price. The total contract price includes the purchase price of the defective pipe, thus resulting in double recovery of the purchase price. Justiss acknowledges that Defendants are correct in pointing out this error to this court and therefore amends its request for relief to correct this error in the trial court's award.

         LEGAL ANALYSIS

         Oil Country and NAI (Defendants) assert five assignments of error:

1. The district court failed to properly instruct the jury to cease deliberation after they determined that defects in the casing were not the proximate cause of damages to Justiss.
2. The district court failed to give any effect to the jury's verdict that the NAI casing was not the proximate cause of Justiss' damages.
3. The district court erred in granting a JNOV on the amount of damages.
4. The district court erred in failing to reduce [all of] Justiss' damages by the 90% fault found by the jury.
5. The district court erred in awarding attorney's fees to Justiss.

         Causation

         Plaintiff and Defendants present opposing theories as to which body of law should apply in determining damages here-contract or tort. Defendants assert, and the trial court found, that Louisiana Civil Code Article 2323, comparative fault, is applicable to contracts. As discussed later herein, we find it is only applicable to torts. Under contract law, applicable in this case, "an obligor is liable for the damages caused by his failure to perform a conventional obligation." La. Civ.Code art. 1994. The obligor's damages "are limited to only those damages 'caused by' the redhibitory defect, and not those damages attributable to other causes. [Id.]" As the federal court explained in Hollybrook Cottonseed Processing v. Carver, Inc., 2011 WL. 2214936, p. 3 (W.D. La. 6/6/11):

[W]hile comparative fault is inapplicable to Plaintiff's redhibition claim, failure to mitigate and questions of causation remain and may serve to limit the extent of damages attributable to any redhibitory defect and therefore recoverable by the Plaintiff.

         Before we discuss the inapplicability of La. Civ.Code art. 2323 to contracts we must decide whether the trial judge erred in granting the JNOV reversing the jury's factual finding that the defective pipe was not the proximate cause of Plaintiff's damages. The trial court did not disturb the jury's factual findings regarding the existence of a redhibitory defect, and our review of the record supports that finding which we will address later.

         Defendants complain that the trial judge erred in granting the JNOV because the jury correctly found Plaintiff failed to prove the defective intermediate pipe was a proximate cause of the loss sustained for several reasons. First, Defendants assert the intermediate pipe had a hole, Plaintiff put the hole in the pipe, this hole at the top was the problem as it made it impossible to remove the pipe and thereby afford defendants an opportunity to exchange the defective pipe. This, says Defendants, was the sole cause precipitated entirely from Plaintiff's conduct. Second, Defendants assert the well was a dry hole after all and any failure on its part did not play a role in Plaintiff's loss. Third, Defendants suggest Justiss was solely at fault because it used the wrong type of pipe.

         We find the trial judge did not manifestly err in reversing the jury verdict, finding it was internally inconsistent and evidenced the jury's confusion. The trial judge noted the verdict was inconsistent on its face because the jury found the defective pipe was not the proximate cause of Plaintiff's loss; yet also found Justiss 90% contributorily negligent and Defendants 10% negligent.

         We agree with the trial judge's factual findings on the issue of causation for several reasons. First, the record evidence does not show the intermediate pipe had a hole in it when placed in the bore hole. The evidence shows there was a hole in the surface casing at the time it was placed in the bore hole. The evidence also shows this hole in the surface casing had no effect on the problems presented by the defective intermediate pipe. Additionally, the record evidence shows Plaintiff was not wrong in cementing the surface pipe and intermediate pipe in the bore hole which occurred before Plaintiff had any idea that the intermediate pipe was defective. Second, the manufacturer cannot complain that Plaintiff's decision, though reasonable, denied it an opportunity to exchange the intermediate pipe because the law does not afford that right to it. Only the seller has that right, but in this case its argument fails too, because: 1) when the Plaintiff first realized the intermediate pipe was defective the opportunity to pull the pipe had already expired; and 2) in this case the seller has not appealed the trial court's finding holding it solidarily liable for the whole loss. We recognize that the obligation of a good faith seller is different from that of a bad faith seller in redhibitory defect cases, i.e., a good faith seller must be given the opportunity to replace the defective pipe whenever possible and can only be cast in judgment for the return of the purchase price and expenses. The law in addition affords a good faith seller a cause of action against the manufacturer for all damages due to the purchaser. In this case, although the seller filed a third party demand it is represented on appeal by the same lawyers as the manufacturer; and, for whatever reason, the seller and manufacturer decided to speak as one without assigning separate error. The seller did not seek to advance on appeal other defenses or claims solely granted to it.

         Third, the evidence, if presented at all, is wantonly deficient in proving an alleged dry hole existed at the deeper depth. The only discussion in the record in support of that notion is Defendants' expert's hypothesis and speculation, based only on the amount of mud which began flowing at the time Plaintiff decided the excessive flow indicated the situation had become too dangerous to continue with the lighter weight mud especially considering it knew by that time the defective pipe could not hold sufficient pressure. Defendants assert that Mr. J.F. Justiss, III (Mr. Justiss) admitted the well could not be completed because of the alleged hole at 13, 569 feet. A review of Mr. Justiss' testimony at trial makes a very different showing. It is true he, too, engaged in supposition at his deposition to this effect, but upon a thorough examination of the evidence including rig logs, on-site well studies, and all available data, he reached a different conclusion at trial, as did Dr. Nicholson, Plaintiff's expert. Both Mr. Justiss and Dr. Nicholson explained at trial why many in the industry would jump to this initial conclusion before reasoning from the data-a jump viewed as reasonable by defendant's expert Dr. Gary Wooley, Phd. (Dr. Wooley). But Mr. Justiss and Dr. Nicholson presented data gathered on the rig, which evidence is not disputed by defendants, to support their in-court testimony that it was not a hole in the formation that caused them to shut down the drilling operation. Dr. Nicholson explained that the evidence shows no indication of such an alleged hole in the formation. He pointed out that the evidence shows this was a "solid, competent" formation, so much so that the well was perfectly vertical all the way down. They explained that: (1) the defective pipe could not hold nearly enough pressure; (2) the pipe had been leaking at multiple stages of drilling beginning at 3, 500 feet; (3) the defective pipe made it impossible to use a heavy enough drilling mud to safely proceed against increased pressures pushing upward at deeper depths; (4) they were unable to keep the leaks plugged as they slowly pushed forward; and (5) persistent erosion of the metal pipe by abrasives in the drilling mud as it leaked through the defective collars, all taken together points to the reason for the sudden loss of mud when they reached 13, 569 feet. Dr. Nicholson explained that because this was a solid vertical formation, and because they were getting circulation at 13, 569 feet, he concurred with the rig man's conclusion that the mud was escaping at about 8, 000 feet where a serious problem had previously occurred, which Justiss had tried to remedy. Under these circumstances known to Justiss when it experienced the sudden increase of mud loss it felt it was unsafe to attempt to proceed any further as all these factors too strongly indicated they could not control a blowout. In Dr. Nicholson's words "they were losing control of the well." At this point Justiss, having informed defendants of the problems being caused by the defective pipe, offered them the opportunity to continue to drill the well themselves and/or to come to the well site and determine for themselves the cause of the excessive mud loss at 13, 569 feet. Both Defendants declined to do either despite the fact that Defendant NAI had already hired Dr. Wooley as a consultant to address the situation. Dr. Wooley admitted to knowing several techniques to investigate the cause of this problem but he employed none of them. Instead, he faults Justiss for failing to do so. But the burden to prove that some cause other than the defective pipe was the reason the well could not be successfully completed was on Defendants and they utterly failed to carry that burden. Rey v. Cuccia, 298 So.2d 840 (La. 1974) and Tucker v. Petroleum Helicopters, 08-1019 (La.App. 4 Cir. 3/23/09), 9 So.3d 966, writ denied 09-901 (La. 6/19/09), 10 So.3d 736.

         Plaintiff put forth convincing expert evidence and the testimony of lay witnesses directly involved with drilling the well, who presented facts establishing the failure of the intermediate pipe evidenced by the inability of the pipe to hold sufficient pressure, and evidenced by the loss of drilling mud at depths well above the depth at which the increased loss of mud occurred. Plaintiff's evidence left no doubt that the pipe was defective and Defendants do not assert that the pipe was not defective.

         Fourth, there is no basis in the record for the jury award of $250, 000. The trial judge challenged Defendants to provide a basis for such an award but they could not do so. The trial judge pointed out the only basis for this figure was defense counsel's suggestion in closing argument. The record shows that the value of the pipe alone (the purchase price) exceeded this amount.

         Fifth, there is no legal basis for ninety (90) percent versus ten (10) percent as we will discuss herein. And sixth, the evidence of record shows that this type of pipe was developed with advantages for use in drilling deeper wells such as Musser-Davis 34-1. Moreover, Defendants knew that Justiss was going to use the pipe for drilling a well at this depth and certified that the pipe was fit for such use.

         Louisiana Code of Civil Procedure Article 1811 (F) provides a motion for JNOV "may be granted on the issue of liability or on the issue of damages or both." In Dubois v. Armstrong, 15-345 pp 5-6 (La.App. 3 Cir. 2/10/16), 186 So.3d 305, 311, writ denied, 2016-0451 (La. 4/22/16), 191 So.3d 1045, this court explained the basis for granting a JNOV and the standard of review on appeal:

In reviewing a JNOV, the appellate court must first determine if the trial court erred in granting the JNOV. This is done by using the aforementioned criteria just as the trial judge does in deciding whether to grant the motion or not, i.e. do the facts and inferences point so strongly and overwhelmingly in favor of the moving party that reasonable men could not arrive at a contrary verdict? If the answer to that question is in the affirmative, then the trial judge was correct in granting the motion. If, however, reasonable men in the exercise of impartial judgment might reach a different conclusion, then it was error to grant the motion and the jury verdict should be reinstated.
Anderson v. New Orleans Pub. Serv., Inc., 583 So.2d 829, 832 (La.1991).
"The standard of review for a JNOV on appeal is a two part inquiry." Davis v. Wal-Mart Stores, Inc., 00-445, p. 5 (La.11/28/00), 774 So.2d 84, 89. "After determining that the trial court correctly applied its standard of review as to the jury verdict, the appellate court reviews the JNOV using the manifest error standard of review." Id.

         For the reasons stated above we find the trial judge did not manifestly err in granting the JNOV and reversing the jury finding on causation.

         Comparative fault not applicable to contracts.

         Plaintiff agrees with the trial court's JNOV, except Justiss argues the trial judge committed two legal errors. First, the judge applied the wrong theory of recovery in ultimately apportioning the consequential damage award which it insists rest entirely on contract law. Justiss argues that the assessment of Louisiana Civil Code Article 2323[4] comparative fault is applicable only in cases rooted in tort and not those involving the relationship and obligations of ...


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