Amoco Production Co. v. Texas Meridian Resources Exploration Inc.

• Decision Date: 12 July 1999
• Docket Number: No. 98-30724,98-30724
• Citation: 180 F.3d 664
• Parties: AMOCO PRODUCTION COMPANY, Plaintiff-Appellee-Cross-Appellant, v. TEXAS MERIDIAN RESOURCES EXPLORATION INC.; et al., Defendants, Meridian Resource & Exploration, Co., formerly known as Texas Meridian Resources Exploration Inc., Defendant-Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 664

180 F.3d 664

AMOCO PRODUCTION COMPANY, Plaintiff-Appellee-Cross-Appellant, v. TEXAS MERIDIAN RESOURCES EXPLORATION INC.; et al., Defendants,

Meridian Resource & Exploration, Co., formerly known as

Texas Meridian Resources Exploration Inc.,

Defendant-Appellant-Cross-Appellee.

No. 98-30724.

United States Court of Appeals,

Fifth Circuit.

July 12, 1999.

J. Michael Veron, Patrick Donovan Gallaugher, Scofield, Gerard, Veron, Singletary & Pohorelsky, Lake Charles, LA, for Plaintiff-Appellee-Cross-Appellant.

Charles D. Marshall, Jr., David Neale Schell, Jr., Robert T. Lorio, Milling, Benson, Woodward, Hillyer, Pierson & Miller, New Orleans, LA, for Defendant-Appellant-Cross-Appellee.

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

Before POLITZ, HIGGINBOTHAM and DAVIS, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Amoco brought this suit to terminate a mineral lease and joint exploration agreement with Meridian. Amoco alleged that Meridian drilled a well on a restricted portion of the lease without Amoco's required consent. The district court determined that Amoco had an unlimited right to prohibit operations in the restricted area. As a remedy, the district court dissolved the lease and terminated Meridian's interests in the disputed well and in previously drilled producing wells that were unrelated to the parties' present dispute.

On appeal, Meridian challenges the district court's interpretation of Amoco's right to restrict operations and the remedy the district court imposed. In the alternative, Meridian argues that the district court erred by refusing to allow Meridian to recoup all of its costs incurred in connection with other operations prior to the cancellation of the lease or to retain its interest in the other producing wells. Meridian also claims that the district court erred by granting Amoco attorney's fees and pre-judgment interest on the damages award. Amoco challenges the district court's denial of non-pecuniary damages and seeks attorney's fees for the cost of this appeal.

We AFFIRM the district court on all issues, except the award to Amoco of legal interest on its damages award, which is REVERSED. Amoco's request for attorney's fees on appeal is DENIED.

I

On July 1, 1993, Amoco and Meridian entered a Joint Exploration Agreement covering 5,120 acres of land owned by Amoco in Calcasieu Parish, Louisiana. The JEA allowed Meridian to obtain one-half working interest in a mineral lease covering Amoco's property in exchange for furnishing a seismic survey of the property. Meridian performed the survey, which cost $1,526,409, and provided the data to Amoco, the other one-half working interest owner. Under the JEA, Amoco and Meridian could drill wells and develop the property by first proposing a drilling site to the other party. The propositioned party had to elect whether to participate or non-consent to the drilling proposal; a non-consent election potentially subjected that party to penalty under the JEA. The extent of the penalty depended upon whether the proposed well was an exploratory well or a development well.

As part of the JEA, the parties agreed to maintain part of the land as a restricted area for ecological reasons. The JEA nowhere explicitly discloses that the restricted area included a mini-wildlife refuge that was negotiated by Amoco with the United States Fish and Wildlife Service, but extrinsic evidence demonstrates that Meridian was aware of the mini-refuge lease. The southern boundary of the mini-refuge was later shifted north by Amoco to accommodate a proposed landfill; Amoco never provided Meridian with a copy of the mini-refuge lease or told Meridian that the southern boundary of the mini-refuge had changed.

After the lease was granted, Amoco and Meridian jointly drilled one productive well, Amoco Ben Todd No. 2. Amoco Ben Todd No. 2 was drilled in the restricted area; however, because the mini-refuge boundary had been moved, it was not drilled in the mini-refuge. Meridian proposed building Meridian Ben Todd No. 1, a deeper well, about 2,050 feet east of the Amoco Ben Todd No. 2. The proposed surface location for Meridian Ben Todd No. 1 was within both the restricted area and the mini-refuge. This well was 300 feet from the revised southern boundary of the mini-refuge and within 500 feet of the eastern boundary. It is undisputed that Meridian knew the proposed well was within the restricted area.

Amoco considered the proposal and decided not to consent to the surface operation in the restricted area. Pat Taylor, Amoco's land negotiator, told Frank Steele, Meridian's land negotiator, of Amoco's decision over the phone and wrote a letter to the same effect, explaining that the proposed well "violates the JEA with regard to locating wells in these environmentally sensitive areas ... and, in addition, the proposed well is unnecessary." Meridian insists that it offered to discuss a mutually agreeable location for its proposed well but that Amoco refused to respond to these efforts. Amoco claims that Meridian's request to meet with its fee land supervisor was "obviously intended to create a pretext for this breach."

Meridian informed Amoco that it intended to drill the well without Amoco's consent and requested Amoco to elect whether to participate or non-consent. Taylor wrote a second letter to Meridian reiterating Amoco's opposition to the proposed well and suggesting that if Meridian's objective in drilling was to go deeper than the existing Amoco Ben Todd No. 2, then that well could be deepened upon depletion. Amoco claims that it thereafter suggested a conference with Meridian to resolve the dispute, but Meridian resisted. According to a memorandum by Steele, "Amoco has yet to furnish us [Meridian] with any compelling reasons not to drill the well.... Amoco evidently believes that they have the unilateral right to prohibit our drilling operations on the fee lands in Section 7 for whatever reason." Amoco then filed a declaratory judgment action on June 28, 1996. Meridian did not seek an expedited ruling from the district court. Instead, Meridian commenced its surface preparations. ¹

When Amoco learned that Meridian had begun surface operations, it amended its suit to claim that Meridian had breached the parties' contract and sought consequential damages as well as cancellation of the lease. Meridian continued its activities despite Amoco's continued objections and lawsuit. Meridian believed that the JEA did not afford Amoco the unlimited right to prohibit access for surface operations. The well was completed in September 1996 and was producing by October 1996.

On August 15, 1997, the district court partially granted Amoco's summary judgment motion against Meridian for breaching the terms of the JEA. After examining the express terms of JEA, the district court held that the restricted areas were subject to Amoco's unconditional right to deny Meridian access to them. Meridian filed a motion for reconsideration, and the district court vacated its prior ruling. The district court reexamined the JEA in great detail and again concluded that the contract unambiguously gave Amoco the right to completely deny Meridian access to the restricted area. The district court also ruled that Amoco was entitled to cancel the lease pursuant to Paragraph 17 of the lease, as incorporated into the JEA.

Damages were later determined by a bench trial. The district court found Amoco's total damages to be $10,561,800.41 ($2,206,342.47 in net income received by Meridian on Amoco Ben Todd No. 2 plus $8,355,457.94 in net income received by Meridian on Meridian Ben Todd No. 1). Meridian's total offset was determined to be $2,817,905.57 ($750,000 in separable improvements on Meridian Ben Todd No. 1 plus $2,067,905.57 for labor costs). The difference, $7,662,293.16, was to be paid with legal interest on the sum from the date of judicial demand, June 27, 1995.

Meridian filed a timely notice of appeal, and Amoco cross-appealed. This court has jurisdiction pursuant to 28 U.S.C. § 1291.

II

The standard of review for summary judgment is well-established. See FED. R. CIV. PROC. 56(C). Under Louisiana law, the interpretation of an unambiguous contract is an issue of law for the court. See Texas Eastern Transmission Corp. v. Amerada Hess Corp., 145 F.3d 737, 741 (5th Cir.1998). "When the words of the contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent." La. Civ.Code Ann. art. 2046 (West 1995). "A contract provision is not ambiguous where only one of two competing interpretations is reasonable or merely because one party can create a dispute in hindsight." Texas Eastern Transmission Corp., 145 F.3d at 741 (citing Lloyds of London v. Transcontinental Gas Pipe Line Corp., 101 F.3d 425, 429 (5th Cir.1996)). In the context of contract interpretation, only when there is a choice of reasonable interpretations of the contract is there a material fact issue concerning the parties' intent that would preclude summary judgment.

III

Amoco contends that the JEA affords it the right to deny Meridian access to conduct drilling operations in the restricted areas. Moreover, Amoco maintains that Meridian failed to receive Amoco's required consent to drill in the restricted area. Meridian, on the other hand, insists that the JEA only affords Amoco the right to "reasonably restrict" access to the restricted areas in order to accommodate ecological needs. In the alternative, Meridian argues that if the JEA does provide Amoco the right to deny it access to the restricted areas, Amoco's exercise of that right in this situation was an act of bad faith.

As the district court indicated, Article 2 and Article 10.1 of the JEA are the relevant provisions for determining this dispute. Article 2 of the JEA addresses the seismic permit conditions and provides that the seismic activities...