933 F.2d 314 (5th Cir. 1991), 90-3427, Avatar Exploration, Inc. v. Chevron, United States, Inc.

Docket Nº:90-3427.
Citation:933 F.2d 314
Party Name:AVATAR EXPLORATION, INC., Vernon C. Moyers, Jr., and Specter Exploration, Inc., Plaintiffs-Appellants, v. CHEVRON, U.S.A., INC., Defendant-Appellee.
Case Date:June 12, 1991
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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933 F.2d 314 (5th Cir. 1991)

AVATAR EXPLORATION, INC., Vernon C. Moyers, Jr., and Specter

Exploration, Inc., Plaintiffs-Appellants,


CHEVRON, U.S.A., INC., Defendant-Appellee.

No. 90-3427.

United States Court of Appeals, Fifth Circuit

June 12, 1991

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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.


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.

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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

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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...

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