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L.L.C. v. Tauren Exploration, Inc.

Court of Appeals of Louisiana, Second Circuit

June 2, 2017

GLORIA'S RANCH, L.L.C. Plaintiff-Appellee
v.
TAUREN EXPLORATION, INC., CUBIC ENERGY, INC., WELLS FARGO ENERGY CAPITAL, INC., AND EXCO USA ASSET, INC. Defendants-Appellants

         Appealed from the First Judicial District Court for the Parish of Caddo, Louisiana Lower Court Case No. 541768 Honorable Ramon Lafitte, Judge

          KEVIN W. HAMMOND, APLC By: Kevin W. Hammond Counsel for Appellant(s) Tauren Exploration, Inc. & Cubic Louisiana, LLC.

          LISKOW & LEWIS By: Kelly B. Becker Kathryn Z. Gonski Michael D. Rubenstein Counsel for Appellant Cubic Louisiana, LLC.

          KEAN MILLER, LLP By: Linda S. Akchin Richard D. McConnell, Jr. Samuel O. Lumpkin Richard S. Pabst Scott L. Zimmer William R. Huguet Counsel for Appellant Wells Fargo Energy Capital, Inc.

          WALL, BULLINGTON & COOK, L.L.C. By: Guy E. Wall Paul E. Bullington Philip M. Wood Jonathan R. Cook WEINER, WEISS & MADISON, A PROFESSIONAL CORPORATION By: Jeffrey W. Weiss Counsel for Appellee Gloria's Ranch, L.L.C.

          Before MOORE, STONE, and COX, JJ.

          STONE, J.

         This appeal arises from the trial court's judgment canceling a mineral lease granted by Gloria's Ranch, L.L.C., to Tauren Exploration, Inc. The trial court awarded Gloria's Ranch over $23, 000, 000 in monetary awards and close to $1, 000, 000 in attorney fees. Tauren Exploration, Inc., Cubic Energy, Inc., EXCO USA Asset, Inc., and Wells Fargo Energy Capital, Inc., were found solidarily liable for these awards. For the following reasons and based on the individual facts and circumstances of this case, we affirm the trial court's judgment and award additional attorney fees.

         FACTUAL AND PROCEDURAL BACKGROUND

         On September 17, 2004, Gloria's Ranch, L.L.C., ("Gloria's Ranch"), granted a mineral lease ("the lease"), covering 1, 390.25 acres in Sections 9, 10, 15, 16, and 21, Township 15 North, Range 15 West, Caddo Parish, Louisiana ("the property"), to Tauren Exploration, Inc. ("Tauren"). The lease granted Tauren the exclusive right to explore for, and produce minerals from, any and all depths, horizons, and formations under the land. The primary term of the lease was three years; thereafter, the lease continued "as long ... as oil, gas, sulphur or other minerals … produced from said land hereunder or from land pooled therewith." The lease also contained vertical and horizontal Pugh clauses.[1]

         On February 13, 2006, Tauren assigned an undivided 49% interest in the lease to Cubic Energy, Inc. ("Cubic"). The effective date of the assignment was February 6, 2006.

         On March 5, 2007, Tauren and Cubic executed separate credit agreements with Wells Fargo Energy Capital, Inc. ("Wells Fargo"). Pursuant to its credit agreement with Wells Fargo, Cubic received a revolving credit facility[2] not to exceed $20, 000, 000 outstanding at any time and a $5, 000, 000 convertible term loan.[3] As security for its loans with Wells Fargo, Cubic mortgaged its interest in mineral leases with various landowners, including Gloria's Ranch, and collaterally assigned the profits therefrom ("Cubic mortgage").[4]

         In 2007, Tauren contracted with Fossil Operating, Inc. ("Fossil"), to conduct oil and gas operations on the property.[5] Fossil drilled and completed wells on Gloria's Ranch's property in Sections 9, 10, and 16. The wells in Sections 9 and 10 ("Gloria's Ranch 9-1" and "Gloria's Ranch 10-l") were vertically drilled to the Cotton Valley formation. Fossil vertically drilled the well in Section 16 ("Gloria's Ranch 16-1") to the Haynesville Shale formation, but completed the well only to the shallower Cotton Valley formation.

         During the primary term of the lease, Chesapeake Operating, Inc. ("Chesapeake"), conducted oil and gas operations in Sections 15 and 21. Chesapeake completed Cotton Valley wells in Sections 15 and 21 ("Soaring Ridge 15-1" and "Feist-21-1"), which were unitized with Gloria's Ranch's property in those sections. In 2008, all of Gloria's Ranch's property in Section 15 was unitized in the Soaring Ridge 15-15-15H ("Soaring Ridge 15H"), a 640-acre unit that Chesapeake horizontally drilled into the Haynesville Shale formation.

         On September 1, 2009, Gloria's Ranch executed a top lease[6] to Chesapeake for the right to conduct oil and gas operations on its property in Section 21.

         On October 30, 2009, Tauren and EXCO USA Asset, Inc. ("EXCO"), negotiated a purchase and sale agreement whereby EXCO purchased Tauren's 51% interest in the lease as to all depths below the base of the Cotton Valley formation ("deep rights"). On November 9, 2009, Tauren formally assigned its deep rights interest in the lease to EXCO for $18, 000 per acre. Tauren maintained a 51% interest in the lease as to all depths above the base of the Cotton Valley formation ("shallow rights").

         By virtue of the EXCO sale, Wells Fargo released the mortgage it had on Tauren's interest after receiving repayment and compensation pursuant to the credit agreement. As a condition of Wells Fargo releasing the mortgage, Tauren assigned a 10% net profits interest in its shallow rights interest in the lease to Wells Fargo. Additionally, on November 9, 2009, Cubic assigned to Tauren an overriding royalty interest in the deep rights of its 49% interest in the lease. Tauren immediately assigned a portion of this overriding royalty interest to Wells Fargo.

         On December 3, 2009, Gloria's Ranch sent a letter to Tauren, Cubic, EXCO, and Wells Fargo (collectively referred to as "the defendants"), requesting they provide information on the monthly revenue and operating expenses of the wells on or unitized with the lease. In the letter, Gloria's Ranch expressed a belief that the lease had expired, in whole or in part, for lack of production in paying quantities. After investigating the matter, Tauren responded it had incorrectly allocated monthly revenues and operating expenses of the Gloria's Ranch 9-1, 10-1, and 16-1. Tauren recalculated the revenue and operating expenses, and determined the lease was operating at a profit. Tauren's response made no mention of the Feist-21 or the Soaring Ridge 15H. On January 28, 2010, dissatisfied with Tauren's reply, Gloria's Ranch sent a letter to the defendants demanding a recordable act evidencing the expiration of the lease. However, the defendants did not release the lease.

         Subsequently, Gloria's Ranch filed suit against the defendants for their failure to furnish a recordable act evidencing the expiration of the lease. In its petition, Gloria's Ranch argued the lease expired in 2009, in whole or in part, for failure to produce in paying quantities. Gloria's Ranch argued the defendants' failure to release the lease prevented it from leasing the property to others, thereby damaging it in the amount of bonus payments, rentals, and royalties it would have received. Gloria's Ranch later amended its petition to include a claim for unpaid royalties. According to Gloria's Ranch, if the trial court found the lease was maintained in Section 15 by production from the Soaring Ridge 15H, the defendants failed to pay royalties on the well's production.

         On August 13, 2014, Gloria's Ranch executed a settlement agreement with EXCO. Gloria's Ranch granted EXCO a new lease, and EXCO was dismissed from the suit ("EXCO settlement").

         Following a four-day bench trial, the trial court rendered judgment declaring the lease "expired" and "canceled." In its oral reasons for judgment, the trial court stated:

The lease terminated as to all depths below the Cotton Valley Sand because the defendants did not drill the 16-1 well in good faith. Additionally, the lease expired as to depths in Sections 9, 10, 16, and 21 because there was no production in paying quantities from the unit wells for at least 12 months prior to January 28th, 2010.

         The trial court awarded damages for lost-leasing opportunities at $18, 000 per acre. Additionally, the trial court found Gloria's Ranch was entitled to royalties from the Soaring Ridge 15H's production, plus punitive damages for the defendants' failure to pay royalties upon written notice of nonpayment. The defendants were found solidarily liable for Gloria's Ranch's damages and attorney fees as follows:

1. $22, 806, 000 for the lost leasing opportunities in Sections 9, 10, and 16 ($18, 000 per acre for 1, 267 acres).[7]
2. $242, 029.26 for unpaid royalties from the Soaring Ridge 15H.
3. $484, 058.52 as a penalty for failure to pay royalties due from the Soaring Ridge 15H.
4. $925, 603 for Gloria's Ranch's pretrial attorney fees and expert costs; and
5. $11, 200 for attorney fees incurred by Gloria's Ranch during trial.

         Tauren, Cubic, and Wells Fargo filed motions for new trial. On November 23, 2015, the trial court issued a judgment granting the motions, in part, to reduce the damage awards by 25% to account for the EXCO settlement. Asserting separate assignments of error, Tauren, Cubic, and Wells Fargo now appeal.[8]

         DISCUSSION

         Standard of Review

         It is well settled that a court of appeal may not set aside a trial court's or a jury's finding of fact in the absence of "manifest error" or unless it is "clearly wrong." Rosell v. ESCO, 549 So.2d 840, 844 (La. 1989). In Hayes Fund for First United Methodist Church of Welsh, LLC v. Kerr-McGee Rocky Mountain, LLC, 2014-2592 (La. 12/08/15), 193 So.3d 1110, the Supreme Court reaffirmed the manifest error standard of review, and articulated the duty of appellate courts when reviewing a trial court's factual finding. According to the Supreme Court, an appellate court may not reverse a trial court's factual finding by determining it would have found the facts of the case differently. Rather, in reversing a trial court's factual conclusions, an appellate court is obliged to satisfy the following two-step process based on the record as a whole: 1) there must be no reasonable factual basis for the trial court's conclusion; and 2) the finding must be clearly wrong. Hayes, supra; Stobart v. State through Dept. of Transp. & Dev., 617 So.2d 880, 882 (La. 1993).

         In determining whether the trial court's finding was clearly wrong or manifestly erroneous, the Supreme Court stated the two-step process requires the appellate court to review the entire record. The issue to be resolved on review is not whether the judge or jury was right or wrong, but whether the judge's or jury's fact-finding conclusion was a reasonable one. Hayes, supra; Rosell, supra. Notably, reasonable persons frequently can and do disagree regarding causation in particular cases, but where there are two permissible views of the evidence, the fact-finder's choice between them cannot be manifestly erroneous or clearly wrong. Hayes, supra; Rosell, supra; Baw v. Paulson, 50, 707 (La.App. 2 Cir. 06/29/16), 198 So.3d 186, 190. The Supreme Court, quoting an earlier opinion, summarized the deferential nature of this standard of review as follows:

The manifest error doctrine is not so easily broached. Rarely do we find a reasonable basis does not exist in cases with opposing views. We note it is not hard to prove a reasonable basis for a finding, which makes the manifest error doctrine so very difficult to breach, and this is precisely the function of the manifest error review. A reviewing court only has the "cold record" for its consideration while the trier of fact has the "warm blood" of all the litigants before it. This is why the trier of fact's findings are accorded the great deference inherently embodied in the manifest error doctrine. So once again we say it should be a rare day finding a manifest error breach when two opposing views are presented to the trier of fact.

Hayes, 193 So.3d at 1117 (quoting Menard v. Lafayette Ins. Co., 09-1869 (La. 03/16/10), 31 So.3d 996, 1011).

         "However persuasive the argument, appellate courts do not function as choice-making courts; appellate courts function as errors-correcting courts." Hayes, 193 So.3d at 1112. With this principle in mind, we consider the defendants' assignments of error challenging the trial court's November 23, 2015 judgment.

         Tauren's Assignments of Error

         Production in Paying Quantities

         Tauren argues the trial court erred in finding the lease expired as to Sections 9, 10, 16, and 21, no later than January 28, 2010, for failure to produce in paying quantities. La. R.S. 31:124 ("Article 124") requires production in paying quantities when a mineral lease is maintained by production of oil or gas. The jurisprudence is well settled that even though production continues beyond the primary term, the term of the lease may expire and the contract be automatically dissolved if production is not "in paying quantities." Landry v. Flaitz, 245 La. 223, 233, 157 So.2d 892, 895 (1963); B.A. Kelly Land Co., L.L.C. v. Questar Expl. & Prod. Co., 47, 509 (La.App. 2 Cir. 11/14/12), 106 So.3d 181, 191, writ denied, 2013-0331 (La. 04/19/13), 112 So.3d 223. One of the prime motivations of the requirement that there be production in paying quantities is that the lessee should not be permitted to maintain the lease indefinitely merely for speculative or other selfish purposes. La. R.S. 31:124, comment.

         The standard by which paying quantities is determined is whether or not under all the relevant circumstances, a reasonably prudent operator would, for the purpose of making a profit or minimizing loss, continue to operate a well in the manner in which the well in question was operated. La. R.S. 31:124, comment; see also Middleton v. EP Energy E & P Co., L.P., 50, 300 (La.App. 2 Cir. 02/03/16), 188 So.3d 263, writs denied, 2016-0786 (La. 06/17/16), 192 So.3d 773, 2016-0778 (La. 06/17/16), 192 So.3d 774; and Wood v. Axis Energy Corp., 2004-1464 (La.App. 3 Cir. 04/06/05), 899 So.2d 138, 143, writ denied, 2005-1137 (La. 06/17/05), 904 So.2d 702. Implicit in the term "paying quantities" is the requirement that the production income exceed operating expenses. Middleton, supra.

         Louisiana courts generally use a 12-month to 18-month period to evaluate whether or not a well is producing in paying quantities. See Wood, supra (12-month period used); Edmundson Bros. P'ship. v. Montex Drilling Co., 98-1564 (La.App. 3 Cir. 05/05/99), 731 So.2d 1049 (18-month period used); and Menoah ...


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