Cimarex Energy Co v. Mauboules

• Decision Date: 25 June 2010
• Docket Number: 2009-C-1194.,No. 2009-C-1170,2009-C-1180,2009-C-1170
• Citation: 40 So.3d 931
• Parties: CIMAREX ENERGY CO., et al.v.Katherine D. MAUBOULES, et al.
• Court: Louisiana Supreme Court

40 So.3d 931

CIMAREX ENERGY CO., et al.v.Katherine D. MAUBOULES, et al.

Nos. 2009-C-1170, 2009-C-1180, 2009-C-1194.

Supreme Court of Louisiana.

April 9, 2010.

Rehearing Denied June 25, 2010.

Liskow & Lewis, PLC, Joe Barrelle Norman, Collette Ross Gordon, Cheryl Mollere Kornick, New Orleans, for Applicant in No. 2009-C-1170.

Michael Howard Landry, Crowley, Kean, Miller Hawthorne, D'Armond, McCowan & Jarman, G. William Jarman, Linda Sarradet Akchin, Baton Rouge, LaBorder & Neuner, Francis X. Neuner, Jr., Jed Michael Mestayer, Lafayette, Milling, Benson, Woodward, LLP, Robert L. Cabes, Andrew John Halverson, Lafayette, Rabalais, Hanna & Hebert, Steven Bernard Rabalais, Joan D Wallace, Lafayette, Ringuet & Collier, William Howard Collier, Lafayette, for Respondent in No. 2009-C-1170.

Milling, Benson, Woodward, LLP, Andrew John Halverson, Robert L. Cabes, Lafayette, for applicant in No. 2009-C-1180.

Michael Howard Landry, Crowley, Kean, Miller Hawthorne, D'Armond, McCowan & Jarman, G. William Jarman Linda Sarradet Akchin, Lafayette, LaBorder & Neuner, Francis X. Neuner, Jr., Jed Michael Mestayer, Lafayette, Liskow & Lewis, PLC, Joe Barrelle Norman, New Orleans, Rabalais, Hanna & Hebert, Joan D. Wallace, Stteven Bernard Rabalais, Lafayette, Ringuet & Collier, William Howard Collier, Lafayette, The Kilburn Law Firm, PLLC, Kerry Alan Kilburn, John Michael Gottesman, for Respondent in No. 2009-C-1180.

Kean, Miller, Hawthorne, D'Armond, McCowan & Jarman, G. William Jarman, Kimberl Kaye Hymel, Linda Sarradet Akchin, Lafayette, for Applicant in No. 2009-C-1194.

Michael Howard Landry, Crowley, Laborde & Neuner, Francis X. Neuner, Jr., Jed Michael Mestayer, Lafayette, Liskow & Lewis, PLC, Joe Barrelle Norman, New Orleans, Milling, Benson, Woodward, LLP, Andrew John Halverson, Robert L. Cabes, Lafayette, Rabalais, Hanna & Hebert, Joan D. Wallace, Steven Bernard Rabalais, Lafayette, Ringuet & Collier, William Howard Collier, Lafayette, The Kilburn Law Firm, PLLC, Kerry Alan Kilburn, for respondent in No. 2009-C-1194.

JOHNSON, Justice.^*

This case arises out of a dispute involving royalty payments due under a mineral lease held by applicants, Cimarex Energy Co., Ceniarth, Ltd., Palace Exploration Co., and RZ, Inc. (hereinafter “Cimarex”). Alleging that there were competing claims to the royalty payments, Cimarex invoked a concursus proceeding and deposited the funds into the registry of the court. We granted this writ application primarily to review the lower courts' rulings that Cimarex had no reasonable basis to invoke a concursus proceeding in this case, and thereby unreasonably withheld royalty payments due to respondents, Orange River Royalties, L.L.P., Mission Royalty Quest, LLC, Fort Worth Operating Company, L.L.C., Richard Martter, and Coyote Ventures, Ltd. (hereinafter “Orange River”).

Applying the law to the facts of this case, we find that the court of appeal erred in affirming the trial court's ruling in favor of Orange River on its reconventional demand, awarding statutory damages under La. R.S. 31:212.21 et seq. Specifically we find that the court of appeal erred when it concluded that Cimarex had no reasonable basis to invoke the concursus proceeding.

For the following reasons, we therefore reverse the decision of the court of appeal.

FACTS AND PROCEDURAL HISTORY

The royalties at issue arise from a mineral lease between defendants, Katherine D. Mauboules, et al. (“Mauboules Family”) and Cimarex. Various members of the Mauboules family own a tract of land in Vermillion Parish, Louisiana. In October of 1997, the Mauboules sold certain royalty interests in their land to Ereunao Oil & Gas, Inc. (“Ereunao”) via five royalty deeds, all dated October 16, 1997.¹ Ereunao subsequently assigned portions of its mineral interest to numerous entities.

The deeds executed between the Mauboules and Ereunao provided for a three-year prescriptive period for non-use. However, the deeds also included a prescription interruption clause which allowed off-premise production to maintain the entire royalty. The clause expressly provided:

It is expressly understood and agreed that an interruption of prescription resulting from unit production shall extend to the entirety of the aforedescribed tract or tracts of land regardless of the location of the well or of whether all or only part of the aforedescribed tract or tracts of land in included in a unit or units.

On November 14, 2001, the Mauboules' attorney, Kenneth Privat, sent a letter to Ereunao noting that the deeds had a three-year prescriptive period and thus had prescribed on October 16, 2000. Privat asked for a recordable instrument evidencing the extinction of the deeds. On November 20, 2001, Charles M. Fife, Jr., President of Ereunao, responded to Privat's letter, noting that although the deeds had a three-year prescriptive period, the deeds also included the prescription interruption clause relative to off-site production. ² Fife further stated in his letter: “Frankly, I did not realize the above clause was in these royalty deeds until recently. A member of my staff who prepares our royalty deeds advised me that he had inserted the clause as our information about the Key Production drilling program for this prospect was somewhat uncertain respecting its time frame for completion. Usually our royalty deeds have a three year term and do not include the above clause.”

In 2002, Key Production Company, predecessor to Cimarex, became interested in drilling on the Mauboules property, and contacted Privat to discuss and negotiate a lease. On May 29, 2002, an agent for Key Production sent a letter to Privat, extending an initial offer. Negotiations were difficult and continued over a two-year period, primarily due to Privat's assertions that the prescription interruption clause had been wrongfully inserted into the royalty deeds, possibly as a result of fraud, and that the royalty interests of Ereunao and the interests of its successors had therefore prescribed, and the royalty rights had reverted back to the Mauboules family.

On December 26, 2002, Cimarex continued the negotiations for the lease by making a revised offer to the Mauboules through Privat. In addition to stating the lease terms and price per acre, the offer included additional consideration: if the Mauboules pursued a cause of action against Ereunao, Cimarex would agree to pay up to $7,500 of legal expenses associated with that action incurred during the next twelve month period; and if that cause of action was pursued, but failed, Cimarex would agree to pay a cash bonus of $75,000 to the Mauboules upon 150% payout of the well.

The lease between Cimarex and the Mauboules Family was eventually executed on February 10, 2003.³ The lease contained the following miscellaneous provisions, summarized below:

In the event that the well is successful to the extent that the well reaches 150.00% payout, then the Mauboules shall be entitled to a one-time payment of $75,000.00, provided that the following has occurred:

1. At the time of payout, the Mauboules' royalty interest, which was

conveyed unto Ereunao, remains outstanding;

2. That the well reaches 150.00% payout; ⁴

The Lease Purchase Report between the Mauboules and Cimarex, dated April 10, 2003, included the following note:

In the event that our well is successful, Lessor's attorney, Kenny Privat, will file suit against a royalty purchaser known as Ereunao Oil & Gas, Inc., et al.

Kenny Privat contends that representatives of this company altered Royalty Deeds after being approved by him; and further, misled the Royalty Owners as to what portion of the tract that they were actually selling.

The purpose of this suit will be to reduce the extent of the royalty deeds to cover only that portion of the leased premises situated within the confines of the Bourque unit, in lieu of the entirety of the tract.

A $7,500.00 cash payment was deemed appropriate in order to offset future legal expenses incurred by the Suit.

Further, this Agreement was evidenced by that certain unrecorded Letter Agreement dated December 26, 2002 by and between Cimarex and Kenny Privat; a copy of which is included herein.

This royalty interest will then be placed in suspense until final determination rendered by the Court.

Cimarex drilled a successful well and began production in January of 2004.⁵ On March 26, 2004, Privat sent a letter to Cimarex stating that the Mauboules were asserting that the royalty interests deeded to Ereunao had prescribed based on the three-year prescriptive period, and asking Cimarex to place the disputed royalties in suspense until a determination on this issue could be obtained from the courts. Cimarex forwarded the letter to its attorney, James Williams, who then contacted Privat. During a phone call with Privat, Williams learned that Privat was asserting that the off-tract production clause was ineffective because it had been inserted into the royalty deeds either fraudulently or under circumstances tantamount to fraud. Privat stated that he would have the clause declared invalid on the basis of fraud and that the royalty interests at issue had therefore reverted to the members of the Mauboules family.

After receiving Privat's letter, and his phone conversation with Privat, Williams advised Cimarex that the Mauboules were asserting an adverse claim to that of Ereunao and its assigns, and he advised Cimarex to suspend royalty payments attributable to the disputed royalty interests pending resolution of the adverse claim.

On April 23, 2004, Williams sent a letter to Privat memorializing their conversation, and confirming that the Mauboules were contending that the provision in the royalty deeds relative to off-tract production was inserted into the deeds “in what amounts to fraud on the part of the vendee,” and that the Mauboules claimed that the term of the mineral royalty interest expired and they were entitled to 100% of the mineral royalty interest. Williams further stated that,...