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

Supreme Court of Louisiana

June 27, 2018

GLORIA'S RANCH, L.L.C.
v.
TAUREN EXPLORATION, INC., CUBIC ENERGY, INC., WELLS FARGOENERGY CAPITAL, INC., AND EXCO USA ASSET, INC.

          ON WRIT OF CERTIORARI TO THE COURT OF APPEAL, SECOND CIRCUIT, PARISH OF CADDO

          Clark, Justice [*]

         A landowner brought suit against several mineral lessees for breach of the obligations of the mineral lease. The mortgagee of one of the lessees was also named as a defendant. The lower courts held all lessees and the mortgagee solidarily liable for damages resulting from the failure to furnish a recordable act evidencing the expiration of the lease, i.e., failure to release the lease. We granted these consolidated writ applications to determine (1) whether the mortgagee was properly held solidarily liable as an "owner" of the lease under La. Mineral Code art. 207 and a "lessee" under La. Mineral Code art. 140; (2) whether the imposition of solidary liability was correct with regard to the owner of a portion of the shallow rights; (3) whether La. Mineral Code art. 140's calculation of damages contemplates the inclusion of unpaid royalties (the amount due) in addition to double the amount of unpaid royalties (as a penalty) or whether the maximum damage award allowed is twice the amount of unpaid royalties; and (4) whether $125, 000 in attorney fees for work done on appeal is excessive.

         For the reasons that follow, we find (1) the mortgagee was not an "owner" for purposes of La. Mineral Code art. 207 and is, therefore, not liable for failure to release the lease. For the same reasons, we find the mortgagee was not a "lessee" for purposes of La. Mineral Code art. 140 and, is, therefore, not liable for failure to pay royalties that were due. (2) We find Tauren is solidarily liable for the damages because the failure to release the lease is an indivisible obligation under the particular facts of this case. (3) We hold La. Mineral Code art. 140 authorizes as damages a maximum of double the amount of unpaid royalties. (4) Last, we amend the award of attorney fees to reflect our holdings herein.

         FACTS AND PROCEDURAL HISTORY

         Gloria's Ranch, L.L.C. ("Gloria's Ranch") granted a mineral lease to Tauren Exploration, Inc. ("Tauren") on September 17, 2004. The lease covered 1, 390.25 acres in Sections 9, 10, 15, 16, and 21, Township 15 North, Range 15 West, Caddo Parish, Louisiana ("the property"). Tauren was granted "the exclusive right to enter upon and use the land . . . for the exploration for and production of oil [and] gas . . . together with the use of the surface of the land for all purposes incident to [exploration and production] with the right of ingress and egress to and from said lands at all times for such purposes." The lease was granted for a primary term of three (3) years "and as long thereafter as oil, gas, sulphur, or other minerals is produced from [the property] or from land pooled therewith."

         In February 2006, Tauren transferred an undivided 49% interest in the lease to Cubic Energy, Inc. ("Cubic"). On March 5, 2007, Tauren and Cubic executed separate credit agreements with Wells Fargo Energy Capital, Inc. ("Wells Fargo").[1]Wells Fargo provided Cubic with a revolving credit facility not to exceed $20, 000, 000 outstanding at any time and a $5, 000, 000 convertible term loan. As security, Cubic mortgaged its interest in approximately 750 mineral leases, including the instant lease with Gloria's Ranch, and assigned as collateral the profits earned therefrom.

         In 2007, Tauren contracted with Fossil Operating Inc. ("Fossil") to commence oil and gas operations on the property. In early 2008, Fossil drilled and completed wells on Sections 9, 10, and 16 in an area known as the Cotton Valley geologic formation.[2] Fossil vertically drilled Section 16 to the Haynesville Shale formation, but completed the well only to the shallower depths of the Cotton Valley formation. Additionally, in 2008, another company, Chesapeake Operating, Inc. ("Chesapeake")[3] drilled a well, (the "Soaring Ridge 15-1 well") on a neighboring tract in the deeper Haynesville Shale formation. Chesapeake unitized the Gloria's Ranch property located in Section 15 with the Soaring Ridge 15-1 well. The unit, known as the "Soaring Ridge 15H," was horizontally drilled by Chesapeake into the Haynesville Shale formation. Chesapeake also drilled Section 21 ("Feist-21-1"). On September 1, 2009, Gloria's Ranch executed a top lease in favor of Chesapeake for the right to conduct operations on its property in Section 21. By definition and by the contract's terms, Chesapeake's lease only became effective if and when the existing 2004 lease to Tauren expired or was terminated.

         Effective October 30, 2009, Tauren and EXCO USA Asset, Inc. ("EXCO") entered into a purchase and sale agreement. Pursuant to the agreement, Tauren conveyed its 51% interest in the Deep Rights to EXCO. Cubic conveyed to Tauren an overriding royalty interest in Cubic's 49% interest in the Deep Rights. Simultaneously, Tauren made a cash payment to Wells Fargo and assigned to it a 10% net profits interest in the Shallow Rights and the overriding royalty interest in the Deep Rights received from Cubic. In exchange, Wells Fargo cancelled the Tauren mortgage.

         On December 3, 2009, Gloria's Ranch sent a letter to Tauren, Cubic, EXCO and Wells Fargo ("the defendants"), seeking to establish whether the lease was still producing in paying quantities. It was the belief of Gloria's Ranch that the lease had expired for lack of production in paying quantities. Thus, it wanted confirmation via monthly revenue and expense reports that the wells were still profitable.

         Tauren responded that it had miscalculated some of its expenses but assured Gloria's Ranch that the wells were still producing in paying quantities. Ultimately, on January 28, 2010, Gloria's Ranch sent written demand to the defendants, requesting a recordable act evidencing the expiration of the lease. No response was forthcoming by any of the defendants. Accordingly, Gloria's Ranch filed suit, alleging the defendants failed to furnish a recordable act evidencing the expiration of the lease as required by La. Mineral Code arts. 206 and 207. Gloria's Ranch claimed in its petition that the lease expired for not producing in paying quantities and that the defendants' failure to release the lease caused it damages in the amount of lost bonus payments, lost rentals, and lost royalties. Additionally, it sought unpaid royalties for Section 15, which was still maintained by production from the Soaring Ridge 15H.

         Gloria's Ranch reached a settlement with EXCO on August 13, 2014, thereby releasing EXCO as a defendant in this matter.

         A bench trial was held, and the trial court rendered judgment in favor of Gloria's Ranch and against Tauren, Cubic, and Wells Fargo in solido. It found the lease had expired as to Sections 9, 10, 16, and 21 due to lack of production in paying quantities for at least the twelve months preceding the January 28, 2010 demand and that the defendants failed to furnish a recordable act evidencing same, as required by the law.[4] The court also found that the 16-1 well was not drilled in good faith. Rather, it was drilled solely to maintain the Deep Rights for purposes of speculation. The trial court awarded damages for lost-leasing opportunities at $18, 000 per acre ($22, 806, 000).[5] It further awarded $726, 087.78 for unpaid royalties for Section 15 pursuant to La. Mineral Code art. 140 ($242, 029.26 in royalties due plus $484, 058.52 in double royalties as a penalty). Attorney fees in the amount of $936, 803 were also awarded.

         With regard to Wells Fargo's solidary liability, the trial court found that Wells Fargo breached its duty to Gloria's Ranch either to release its mortgage on the lease or to authorize Cubic to release the lease. The trial court reasoned that (1) Wells Fargo's mortgage included an assignment of the lease; (2) Wells Fargo controlled Cubic's right to release and never authorized a release; (3) Wells Fargo controlled the revenue from the lease by virtue of an assignment of revenues, a net profits interest, and a overriding royalty interest; and (4) Wells Fargo knew the lease had expired because it regularly audited Tauren and Cubic's well cost and revenue information.

         Tauren, Cubic, and Wells Fargo filed motions for new trial. On November 23, 2015, the trial court granted the motions, in part, reducing the damage awards by EXCO's virile portion (25%) to reflect EXCO's settlement. See La. C.C. art. 1804. The defendants appealed. The court of appeal affirmed the judgment and awarded $125, 000 in attorney fees for work done on appeal. Gloria's Ranch, L.L.C. v. Tauren Exploration, Inc., 51, 077 (La.App. 2 Cir. 6/2/17), 223 So.3d 1202. Tauren, Cubic, and Wells Fargo filed writ applications. We consolidated and granted their writs to determine the correctness of the lower courts' judgments. Gloria's Ranch, L.L.C. v. Tauren Exploration, Inc., 17-1518, 17-1519, 17-1522 (La. 12/15/17), 231 So.3d 639; 231 So.3d 640; 231 So.3d 642. We will address each writ application separately.

         DISCUSSION

         Wells Fargo

         Wells Fargo challenges the lower courts' finding that it was solidarily liable with the remaining defendants for Gloria's Ranch's damages. Wells Fargo argued that it is not responsible for the obligations sued upon, as they are obligations of the mineral lessees, not of the mortgagee of a mineral lessee. Louisiana Mineral Code art. 206(A) (La. R.S. 31:206) provides:

Except as provided in Paragraph B of this Article [not applicable herein], when a mineral right is extinguished by the accrual of liberative prescription, expiration of its term, or otherwise, the former owner shall, within thirty days after written demand by the person in whose favor the right has been extinguished or terminated, furnish him with a recordable act evidencing the extinction or expiration of the right.

         Louisiana Mineral Code art. 207 (La. R.S. 31:207) provides:

If the former owner of the extinguished or expired mineral right fails to furnish the required act within thirty days of receipt of the demand or if the former lessee of a mineral lease fails to record the required act within ninety days of its extinguishment prior to the expiration of its primary term, he is liable to the person in whose favor the right or the lease has been extinguished or expired for all damages resulting therefrom and for a reasonable attorney's fee incurred in bringing suit.

         Wells Fargo contends it is not an owner of the lease; it is merely a creditor with a security interest in the lease.[6] As such, Wells Fargo asserts it was improperly held responsible for any breach of the lease obligations. Gloria's Ranch, however, argues Wells Fargo is an assignee of the lease, an overriding royalty owner, and a net profits owner. It also argues that the "bundle of rights" assumed by Wells Fargo amounted to ownership under civilian law, and, accordingly, Wells Fargo is liable with the other defendants under a "control theory." Furthermore, Gloria's Ranch avers that Wells Fargo's mortgage created a cloud on its title, and Wells Fargo was properly held liable for its failure to release its mortgage. Last, Gloria's Ranch argues Wells Fargo judicially admitted to having an interest in the lease. Because Gloria's Ranch relied on this statement to its detriment, it contends Wells Fargo should be bound by its admission with no further proof of ownership required.

         The relevant clauses in the mortgage agreement between Cubic and Wells Fargo provide:

2.01 Hypothecation. (a) In order to secure the full and punctual payment and performance of all present future Indebtedness, the Mortgagor does by these presents specially mortgage, affect, hypothecate, pledge, and assign unto and in favor of Mortgagee, to inure to the use and benefit of Mortgagee, the following described property, to-wit:
(1) The Mineral Properties, together with all rents, profits, products and proceeds, whether now or hereafter existing or arising, from the Mineral Properties[.][7]
2.02 The Security Interests. In order to secure the full and punctual payment and performance of all present and future Indebtedness, Mortgagor hereby grants to Mortgagee a continuing security interest in and to all right, title and interest of Mortgagor in, to and under the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located:
(1) The Mineral Properties
2.03 Assignment. To further secure the full and punctual payment and performance of all present and future Indebtedness, up to the maximum amount outstanding at any time...Mortgagor does hereby absolutely, irrevocably and unconditionally pledge, pawn, assign, transfer and assign to Mortgagee all monies which accrue after 7:00 a.m. Central Time...to Mortgagor's interest in the Mineral Properties and all present and future rents therefrom...and all proceeds of the Hydrocarbons...and of the products obtained, produced or processed from or attributable to the Mineral Properties now or hereafter (which monies, rents and proceeds are referred herein as the "Proceeds of Runs"). Mortgagor hereby authorizes and directs all obligors of any Proceeds of Runs to pay and deliver to Mortgagee, upon request therefor by Mortgagee, all of the Proceeds of Runs...accruing to Mortgagor's interest[.] (Emphasis in original).
5.02 Remedies.
(b) Upon the occurrence of any Event of Default, Mortgagee may take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Mortgagor and in and to the Collateral...
5.05 Sale. Upon the occurrence of an Event of Default, Mortgagee may exercise all rights of a secured party under the UCC and other applicable law...and, in addition, Mortgagee may, without being required to give any notice, except as herein provided or as may be required by mandatory provisions of law, sell the Collateral or any part thereof at public or private sale, for cash, upon credit or future delivery, and at such price or prices as Mortgagee may deem satisfactory. Mortgagee may be the purchaser of any or all of the Collateral so sold at any public sale...Upon any such sale, Mortgagee shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold[.]

         The court of appeal rejected the argument that the lease was transferred to Wells Fargo by assignment. Because the mortgage did not transfer Cubic's working interest in the land, the court of appeal found an assignment did not occur. It held:

The language of the mortgage shows the purpose of the instrument was for Cubic to secure its loans with Wells Fargo by granting Wells Fargo a continuing security interest in multiple mineral leases, which included Gloria's Ranch's lease. In the event Cubic defaulted on its loans, the mortgage gave Wells Fargo the right to seize and sell the lease to satisfy the debt. As such, we find the use of the word "assign" in the Hypothecation clause does not deprive the mortgage of its ...

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