987 F.2d 1138 (5th Cir. 1993), 91-3437, Chevron United States, Inc. v. Traillour Oil Co.

Docket Nº:91-3437.
Citation:987 F.2d 1138
Party Name:CHEVRON U.S.A., INC., Plaintiff-Appellee, Cross-Appellant, v. TRAILLOUR OIL COMPANY, et al., Defendants, v. Earl Harvey ARCHER, III, et al., Defendants-Appellants, Cross-Appellees.
Case Date:April 08, 1993
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 1138

987 F.2d 1138 (5th Cir. 1993)

CHEVRON U.S.A., INC., Plaintiff-Appellee, Cross-Appellant,

v.

TRAILLOUR OIL COMPANY, et al., Defendants,

v.

Earl Harvey ARCHER, III, et al., Defendants-Appellants,

Cross-Appellees.

No. 91-3437.

United States Court of Appeals, Fifth Circuit

April 8, 1993

Page 1139

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Thomas Robert Shelton, Mark C. Andrus, Shelton & Legendre, Lafayette, LA, for Frank P. Savoy, Jr. & Swag Oil & Gas Corp.

Gregory P. Massey, Jones, Tete, Nolen, Hanchey, Swift & Spears, Lake Charles, LA, for Talmadge Dennis Bickham, III, et al.

Andrew A. Braun, Robin D. McGuire, Jones, Walker, Waechter, Portevent, Carrere & Denegre, New Orleans, LA, for Rocky Mountain Resources, Ltd.

Michael R. O'Keefe, III, Monroe & Lemann, New Orleans, LA, for Earl Harvey Archer, III and Elva Lavies Weiss.

Lee H. des Bordes, Jr., Baton Rouge, LA, for Tellurogenic & Spencer Oil.

William A. Jackson, John P. Melko, Houston, TX, for Cifia, Inc., et al.

M. Hampton Carver, Patricia A. Geier, Milling, Benson, Woodward, Hillyer, Lierson & Miller, New Orleans, LA, for Chevron U.S.A. Inc.

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

Before VAN GRAAFEILAND, [*] KING, and EMILIO M. GARZA, Circuit Judges.

KING, Circuit Judge:

Chevron U.S.A., Inc., filed this diversity suit in federal district court against various defendants, all of whom are successors in interest to Chevron's lease of the Bayou Couba Field in Louisiana. Chevron sought a declaratory judgment that each of the defendants must (i) provide it with a $2 million letter of credit to secure Chevron's plug and abandon obligations with respect to the Bayou Couba lease and (ii) indemnify it for any plug and abandon obligations it may be required to fulfill. The district court granted the defendants' motion for summary judgment with respect to Chevron's letter of credit claims, but granted Chevron's motion for summary judgment with respect to the underlying plug and abandon indemnity claims. Chevron appeals from the portion of the district court's order dismissing its letter of credit claims, and the defendants appeal from the portion of the district court's order declaring that they must indemnify Chevron for

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any subsequently incurred plug and abandon obligations. For the following reasons, we affirm the district court's decision in part and reverse the district court's decision in part.

I. BACKGROUND

In January of 1984, Gulf Oil Corporation, now Chevron, was the lessee of an oil and gas lease covering the Bayou Couba Field in Louisiana. Numerous wells had been drilled on the leased premises, but the field continued to produce. Consequently, many of the wells had not yet been plugged and abandoned. Gulf was concerned about this situation, because under its lease, 1 as well as under Louisiana law, it appeared that Gulf would eventually be obligated to plug and abandon these wells. Weighing the benefits of continued production against the cost of future plug and abandon obligations, Gulf decided to sell the lease. In selling the lease, Gulf sought to rid itself of any future obligation to plug and abandon the wells on the Bayou Couba lease.

  1. The Assignment from Gulf to Traillour, Marsh, and Rocky Mountain and the Initial Letter of Credit

    On January 13, 1984, Traillour Oil Company ("Traillour") and Marsh Engineering, Inc. ("Marsh") submitted a written offer to Gulf to acquire the Bayou Couba lease and plug and abandon the wells on that lease. The offer provided, in pertinent part:

    Traillour Oil Company and Marsh Engineering, Inc. propose to take over operations in the Gulf, Bayou Couba Field with the expressed purpose of plug and abandonment or re-establishing commercial production. Traillour/Marsh makes this proposal with the precise knowledge that all of these wells will have to be plugged and abandoned if commercial production is not established....

    Traillour/Marsh makes its offer as follows:

    1. For the sum of $1,101,101.00 and the implied costs of plug and abandonment and clean-up, Gulf Oil Corporation assigns to Traillour/Marsh all of their rights, as defined in the attached [lease] documents, to the Bayou Couba Field, the wellbores, and production equipment on an as is basis.

    2. ... As further consideration of its guarantee, that all the wells will be subsequently plugged and abandoned in suitable form, Traillour/Marsh will present an irrevocable letter of credit for the sum of two million dollars ($2,000,000.00) to Gulf on the date that a mutually acceptable transfer of ownership agreement is signed.... This requirement for a letter of credit will expire 30 days after Gulf Oil Corporation has been released by the state of Louisiana and the surface owners of any present, past, or future occurrences or liabilities concerning the Bayou Couba Property as assigned by Gulf to Traillour/Marsh.

    3. Traillour/Marsh agrees to plug and abandon these wells according to the Louisiana Conservation Agency Rules and Regulations, to remove all production equipment and associated hardware and to return the well sites and production area to a form suitable to the present landowner.

    Gulf accepted the offer submitted by Traillour and Marsh, subject to (a) the execution of a mutually acceptable assignment and (b) Traillour and Marsh's ability to acquire a $2 million performance bond or irrevocable letter of credit to secure the plug and abandon obligations. Neither the offer by Traillour and Marsh nor the acceptance by Gulf was recorded in the public records.

    After Gulf had accepted the offer by Traillour and Marsh, Traillour entered into a side agreement with Rocky Mountain Resources, Ltd. ("Rocky Mountain"), so that the acquisition of the Bayou Couba lease could proceed. Apparently, Traillour did not have the money for the cash bid or the capacity to acquire the letter of credit to

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    secure the plugging and abandoning of the wells as required by the bid specifications. To obtain the money and the letter of credit, Traillour agreed to transfer 90% of the interest it was to acquire in the Bayou Couba lease before payout, as well as 83% of the interest it was to acquire after payout, to Rocky Mountain. In return, Rocky Mountain agreed to provide the $1,101,101.00 necessary for the cash bid and "[a] $2,000,000.00 standby letter of credit to secure the plugging and abandoning of the wells in the Bayou Couba Field." The agreement further noted that the letter of credit "shall be made available for the benefit of Traillour at the closing of the purchase of the Bayou Couba field." This side agreement was recorded in the public records.

    In April 1984, the parties closed the sale of the Bayou Couba lease. Gulf was presented with $1,101,101.00 cash and a $2 million irrevocable letter of credit issued by a Texas bank and payable to Gulf on order of Traillour. The letter of credit provided, among other things, that:

    5. This letter of credit ... shall remain in full force and effect for eighteen (18) months, with reduction provided in Paragraph 3, supra, unless [Gulf] has been released by the State of Louisiana and the surface owners of any present, past, or future liability to properly plug and abandon the wells identified on Exhibit "A" hereof and for failure to restore the acreage ... to as close to its original condition as is reasonably practicable; provided however, that before termination of said Letter of Credit, [Traillour and Marsh] shall either furnish [Gulf] another Letter of Credit as provided herein or pay the amount of said Letter of Credit, reduced as provided herein, into an escrow account. Such evidence shall be in the form of a letter in writing accompanied by such releases and acknowledged by Gulf.

    Gulf, in return, transferred its entire interest in the Bayou Couba lease to Traillour, Marsh, and Rocky Mountain. 2 According to the assignment document, Traillour, Marsh, and Rocky Mountain agreed "to promptly plug and abandon all the wells described in Exhibit B [the pre-existing wells on the lease] as well as any wells drilled by Traillour et al under the terms of the lease." Moreover, the "entire costs, expense and risk of plugging and abandoning the ... wells" was to be borne by Traillour, Marsh, and Rocky Mountain. This document, which clearly obligated the assignees to plug and abandon the wells on the Bayou Couba lease, was promptly recorded.

  2. Subsequent Transfers and Renewals of the Letter of Credit

    Shortly after the original assignment from Gulf, Rocky Mountain decided to dispose of its interest in the Bayou Couba lease. Rocky Mountain therefore agreed to transfer all of its substantial interest in the lease back to Traillour. According to the assignment document, Traillour agreed to assume all obligations and formal duties resulting from the ownership of the Bayou Couba lease. In addition, Traillour agreed to promptly plug and abandon all of the wells on the lease and to bear the entire cost, expense, and risk of plugging and abandoning the wells on the lease. Gulf did not sign this assignment, nor did it ever sign a separate document agreeing to the terms of the assignment.

    The transfer back to Traillour, however, was not to take effect until the letter of credit previously obtained by Rocky Mountain for Traillour's benefit had been released or cancelled by Gulf. To effect the transfer, Traillour solicited twenty-six new investors, who together with Traillour were able to obtain another irrevocable $2 million letter of credit from Calcasieu Marine National Bank in favor of Gulf ("LOC 465"). LOC 465 was substantially similar to the letter of credit previously issued by the...

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