Avatar Exploration, Inc. v. Chevron, U.S.A., Inc.

• Decision Date: 12 June 1991
• Docket Number: No. 90-3427,90-3427
• Citation: 933 F.2d 314
• Parties: AVATAR EXPLORATION, INC., Vernon C. Moyers, Jr., and Specter Exploration, Inc., Plaintiffs-Appellants, v. CHEVRON, U.S.A., INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 314

933 F.2d 314

AVATAR EXPLORATION, INC., Vernon C. Moyers, Jr., and Specter Exploration, Inc., Plaintiffs-Appellants, v. CHEVRON, U.S.A., INC., Defendant-Appellee.

No. 90-3427.

United States Court of Appeals Fifth Circuit.

June 12, 1991.

Larry C. Hebert, Paul J. Hebert, Sonnier, Hebert, Cabes & Hebert, Abbeville, La., for plaintiffs-appellants.

John Catlet Christian, Milling, Benson, Woodward, Hillyer, Pierson & Miller, New Orleans, La., for defendant-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before JOHNSON, WILLIAMS, and HIGGINBOTHAM, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

This appeal requires us to determine the rights and duties of parties to mineral leasing contracts in Louisiana. Appellant Avatar Exploration Co. assigned its interest in a mineral lease to Gulf Oil Co., the predecessor of appellee Chevron U.S.A. Prior to assigning the lease to Gulf, Avatar assigned part of its working interest in the lease to appellants Vernon C. Moyers, Jr. and Steve Jenkins. ¹ Gulf did not commence drilling operations on the property prior to the end of the primary term of the lease. Gulf subsequently entered into another lease on the same property.

Appellants brought this action in Louisiana state court, claiming that the original agreement required Gulf to reassign the lease prior to expiration of the primary term. They also claimed an interest in the new lease entered into by Gulf. Chevron removed the action to the district court based on diversity. The district court granted Chevron's motion for summary judgment. We affirm.

Facts

Avatar entered into a mineral lease for 2067 acres of land located in West Baton Rouge and Pointe Coupee Parishes in Louisiana. Steve Jenkins, an independent landman, negotiated the lease with the Kimballs, the owners of the property, on behalf of Avatar. The lease called for a primary term of three years and sixty days, subject to expiration unless Avatar paid annual delay rentals of $100 per acre or began drilling operations on or before May 29, 1981. Payment of delay rentals extended Avatar's lease rights for each twelve month period. Thus, successive payments of delay rentals on May 29, 1982 and May 29, 1983 would maintain the lease for the entire primary term. The owners of the property also received a one-fifth Lessors' royalty interest.

Avatar never intended to conduct its own drilling operations. It obtained the lease for purposes of assignment at a profit to a party with the finances and expertise to develop the property. To that end, it entered into negotiations with Gulf. Before consummating a deal with Gulf, Avatar assigned a portion of its four-fifths working interest in the Lease to Jenkins and Moyers. ² These assignments ("Royalty Assignments") gave Moyers and Jenkins each an overriding royalty interest of one and one-half percent (1 1/2%) from its remaining four-fifths (4/5ths) working interest in the mineral lease.

Avatar assigned all of its interest in the lease to Gulf. Gulf paid Avatar $150 an acre for the assignment. From this lump sum payment Avatar was required to pay the first year delay rentals, leaving it a $50 per acre profit. The assignment required Gulf to maintain the lease during its primary term by either paying the remaining delay rentals or beginning drilling operations. A clause in the lease guaranteed Avatar the right to reassignment of the lease if Gulf elected not to pay the delay rentals. Another provision of the lease explicitly burdened the assignment with the overriding royalty interests of Moyers and Jenkins.

Gulf paid the delay rentals as they became due, but did not begin drilling operations on the lease. On May 2, 1984 Murexco Petroleum, Inc. acquired an option from the Kimballs for a mineral lease effective on the date that the Avatar lease expired (commonly known as a "Top Lease"). Murexco and Gulf entered into a letter agreement on May 18, 1984 to the effect that Murexco would exercise its Top Lease option on the Kimball property and assign it to Gulf if Gulf agreed not to commence operations under the Avatar lease. Gulf complied with that agreement. The primary term of the Avatar lease ended on May 29, 1984. Murexco exercised its option on the property, and assigned the resulting lease to Gulf.

Appellants brought an action against Chevron, as successor to Gulf, in Louisiana state court. Appellants claimed that Gulf breached various provisions of the assignment agreement by letting the lease expire and entering into the agreement with Murexco. Avatar alleged that Gulf breached the agreement by failing to reassign the lease prior to expiration of the primary term. Moyers and Jenkins contend that they are third party beneficiaries of the assignment from Avatar to Gulf. As third party beneficiaries, they also seek damages as a result of Gulf's failure to reassign the lease prior to expiration of the primary term. In addition, they claim that Gulf assumed all of Avatar's duties contained in the Royalty Assignments. Gulf allegedly had a duty to grant them overriding royalty interests in the Murexco lease pursuant to the renewal and extension clause of the Royalty Assignments. Finally, Moyers and Jenkins claim that Gulf breached its duty of good faith by refusing to execute recordable instruments evidencing their overriding royalty interests in the Murexco lease. Moyers and Jenkins contend that the terms of the Royalty Assignments obligated Gulf to execute these instruments.

Gulf removed the action to federal court on the basis of diversity and moved for summary judgment. In response, appellants asked for leave to amend their pleadings to aver mistake. The district court denied the motion, finding it untimely and unnecessary. At the same time the court granted summary judgment in favor of Chevron. The court first held that appellants' claims for damages under the reassignment clause failed because the conditions necessary to trigger the clause did not occur. The court also held that Moyers and Jenkins were not third party beneficiaries to the Avatar assignment, and that Gulf was not obligated to grant them an overriding royalty interest in the Murexco lease.

I. Reassignment Clause

The instrument assigning Avatar's interest in the Kimball property to Gulf contained the following reassignment clause:

Assignor herein reserves the right to a re-assignment of the leases assigned herein if Assignee elects not to pay any delay rentals coming due. Such re-assignment shall be made within sixty (60) days of the rental payment or expiration date.

Avatar claims that Gulf had an obligation pursuant to this provision to reassign the lease to Avatar prior to the expiration of the primary term. Gulf maintained the lease for the duration of the primary term by paying delay rentals, and then allowed the lease to lapse. Avatar allegedly suffered damages as a result of Gulf's failure to reassign the lease prior to the expiration of the primary term. Moyers and Jenkins claim similar damages as third party beneficiaries of the agreement.

The district court granted Chevron's motion for summary judgment on this issue. The court found that the language in the clause obligated Gulf to reassign the lease only if Gulf elected to forego making the delay rental payments when they became due. Since Gulf complied with its duty to make delay rental payments, the condition requiring Gulf to reassign the lease never occurred. The language of the clause was found to be unambiguous and no construction of the facts of the case would allow Avatar to recover based on a claimed violation of the provision.

This court reviews the granting of a summary judgment using the same criteria as the district court. Walker v. Sears, Roebuck & Co., 853 F.2d 355, 358 (5th Cir.1988). Summary judgment is proper if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). A dispute about a material fact is genuine if a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

Avatar relies on the language in the reassignment clause providing that "[s]uch reassignment shall be made within sixty (60) days of the rental payment or expiration date." Avatar argues that inclusion of the "or expiration date" language in the clause evidences an intent by the parties for Gulf to reassign the lease if it chose not to pay delay rentals, and prior to the end of the primary term. Contending that the main purpose of the clause was to prevent expiration of the lease, Avatar claims that the district court erred in its limited interpretation of the scope of the clause. Because it has offered an alternate interpretation of the clause, Avatar argues that the clause was ambiguous and that summary judgment was inappropriate.

Chevron's response follows the same reasoning as the district court: Avatar was entitled to reassignment of the lease only if Gulf elected not to pay delay rentals. We agree with that interpretation of the reassignment provision. The first sentence of the clause reserved a right of reassignment if Gulf elected not to pay delay rentals coming due. The second sentence of the clause began with the words "such reassignment" and described the time limits for reassigning the lease. By using the words "such reassignment," the second sentence was limited in application to reassignment caused by the failure to pay delay rentals described in the first sentence. Nothing in the clause indicated an intent of the parties to expand the right to reassignment beyond the occurrence of that one event.

Avatar makes much of the inclusion of the words "or expiration date" in the clause. Its primary argument is that if we limit reassignment to an election by Gulf not to pay delay rentals, then the "expiration" language has no purpose. Even if we assume that...