Corbello v. Iowa Production

• Decision Date: 25 February 2003
• Docket Number: No. 2002-C-0826.,2002-C-0826.
• Citation: 850 So.2d 686
• Parties: William G. CORBELLO, et al. v. IOWA PRODUCTION, Shell Oil Company, Shell Western E & P, Inc., et al.
• Court: Louisiana Supreme Court

850 So.2d 686

William G. CORBELLO, et al. v. IOWA PRODUCTION, Shell Oil Company, Shell Western E & P, Inc., et al.

No. 2002-C-0826.

Supreme Court of Louisiana.

February 25, 2003.

Opinion Granting Partial Rehearing June 20, 2003.

George Arceneaux, III, Thomas M. McNamara, Patrick W. Gray, Kyle Patrick Polozola, Liskow & Lewis, Lafayette, Marie R. Yeates, Thomas A. Harrell, Baton Rouge, Winson & Elkins, Counsel for Applicant.

Patrick D. Gallagher, Jr., Richard E. Gerard, Jr., Scott J. Scofield, John M. Veron, Scofield, Gerard, Veron, Singletary & Pohorelsky, Lake Charles, Matthew J. Randazzo, Gordon, Arata, McCollam, Duplantis & Eagan, New Orleans, Counsel for Respondent.

Harry A. Johnson, III, Robert E. Meadows, Tracey M. Robertson, Counsel for Chevron U.S.A., Inc. (Amicus Curiae).

Scott James Scofield, Lake Charles, Counsel for H.C. Drew Estate (Amicus Curiae).

Linda S. Akchin, G. William Jarman, Baton Rouge, Richard S. Pabst, New Orleans, Counsel for Louisiana Mid-Continental Oil & Gas and American Petroleum Institute (Amicus Curiae).

Randall C. Songy, Brent G. Sonnier, Lafayette, Counsel for Louisiana Independent Oil & Gas (Amicus Curiae).

David N. Schell, Jr., New Orleans, Counsel for Union Oil Co. of California (Amicus Curiae).

Larry D. Dyess, Belle Chasse, Thomas J. Gayle, Drew A. Ranier, Brett M. Powers, Norval F. Elliot, III, Lake Charles, Counsel for Andrew L. Richard and Betty Richard (Amicus Curiae).

William A. Porteous, III, Michael G. Stag, Stuart H. Smith, New Orleans, Counsel for Joseph Grefer (Amicus Curiae).

Peter N. Freiberg, Stuart H. Smith, Michael G. Stag, Gladstone N. Jones, III, New Orleans, Counsel for Hazelwood Farm Inc. (Amicus Curiae).

Andrew A. Lemmon, Michael G. Stag, Stuart H. Smith, New Orleans, Counsel for Rathborne Properties LLC (Amicus Curiae).

William W. Goodell, Jr., New Orleans, Counsel for Roy O. Martin Lumber Co. (Amicus Curiae).

James P. Doherty, Jr., Opelousas, Robert P. Fuhrer, Morgan City, Gregory C. Lier, New Orleans, Counsel for Rathborne Properties, Hazelwood Farm Inc., C.M. Thibodaux, Ltd. (Amicus Curiae).

Scott R. Bickford, New Orleans, David L. Landry, Thiodaux, J. Clay McCaslin, Counsel for Plaquemine Parish Government and St. Mary Par. School Board (Amicus Curiae).

Newman Trowbridge, Jr., Counsel for Louisiana Landowners Association Inc. (Amicus Curiae).

Gerald C. deLaunay, LaFayette, Counsel for Aristide Broussard Heirs Partnership (Amicus Curiae).

JOHNSON, Justice.

This matter arises from a suit filed by landowners against Shell Oil Company to recover damages in trespass after expiration of a surface lease which was granted to Shell, for unauthorized disposal of saltwater on the property, and for the poor condition of the leased premises. After a trial on the merits, the jury awarded damages to the landowners. The court of appeal affirmed in part, reversed in part, and remanded for further proceedings. We granted Shell's writ application to determine the correctness of the lower courts' decisions. Corbello, et al. v. Iowa Productions, et al., XXXX-XXXX (La.6/14/02), 818 So.2d 779. After review of the record, we reverse in part, remand in part, and otherwise affirm the court of appeal's decision.

FACTS AND PROCEDURAL HISTORY

In 1929, Ferdinand and Eva Heyd granted an oil and gas mineral lease in favor of Shell Oil Company, which then assigned the lease to Shell Western E & P (collectively, "Shell"). The lease covered 320 acres of land in Calcasieu Parish. Shell operated the mineral lease until 1985, when it transferred its interest in the lease to Rosewood Resources, Inc. (Rosewood).

In 1961, Shell obtained a separate lease from plaintiffs, Mr. Heyd's four surviving children, on 120 acres within the 320 acres covered by the oil and gas lease, known as the Iowa Field. Thereafter, Shell built an oil terminal on a five acre parcel within the leased acreage which it operated until 1993.

The 1961 surface lease expired May 10, 1991. On May 9, 1991, plaintiffs sent Shell a letter regarding the lease's termination date. The letter notified Shell that it had breached the lease agreement by disposing of saltwater on the property and by failing to maintain the property as provided in the lease. For approximately sixteen or seventeen months, plaintiffs and Shell attempted to resolve these issues.

In May 1992, plaintiffs filed suit, naming Iowa Production Company, Inc. and Polaris Enterprises, Inc. as defendants, to recover damages for trespass on the leased premises after expiration of the lease, for the unauthorized disposal of saltwater on the leased premises, and for the poor condition of the leased premises.¹ They also sought exemplary damages pursuant to La.Civ.Code art. 2315.3. Shell was named as a defendant in October 1992. It filed a third party demand against Rosewood. Plaintiffs named Rosewood as a defendant on its main demand, but settled with it on September 1, 1999. As part of the settlement, plaintiffs agreed to defend and indemnify Rosewood with regard to Shell's claims against it. Shortly before trial, Shell's third party claim against Rosewood was dismissed on a motion to recuse its counsel on the basis of a conflict of interest. However, the court of appeal reversed the trial court's dismissal of Rosewood. Corbello v. Iowa Prod. Co., 00-1403 (La.App. 3 Cir. 6/6/01), 787 So.2d 596, writ denied, 01-2334 (La.11/16/01), 802 So.2d 615.

In May 2000, the case was tried before a jury over a two and one-half week period. The jury awarded plaintiffs damages in the amounts of $927,000.00 for Shell's failure to vacate the leased premises after the surface lease expired; $33 million to restore the leased premises to its 1961 condition; and $16,679,100.00 for Shell's illegal disposal of saltwater on the leased premises. Pursuant to post-trial motions, plaintiffs were awarded $689,510.00 in attorney fees and expert fees were set at $65,000.00; the trial court reduced the jury's award of $927,000.00 for failure to vacate the leased premises to $32,500.00. The Third Circuit Court of Appeal affirmed the jury's awards of $33 million to restore the leased premises and $16,679,100.00 for Shell's illegal disposal of saltwater on the leased premises; increased the trial court's award of attorney fees from $689,510.00 to $4 million; reversed the trial court's remittitur with regard to the jury's award of $927,000 for failure to vacate the leased premises and remanded for further proceedings on the issue; and reversed the trial court's dismissal of plaintiffs claim for exemplary damages and remanded for further proceedings on the issue. Corbello v. Iowa Production, 01-567 (La.App. 3 Cir. 12/26/01), 806 So.2d 32.

Shell filed a writ of certiorari in this Court assigning numerous assignments of error.

LAW AND ANALYSIS

Restoration of the Leased Premises

We begin our discussion with Shell's assignments of error regarding the damage award for failure to reasonably restore the leased premises. Shell argues that the court of appeal erred in affirming the $33 million breach of contract award for failure to reasonably restore plaintiffs' property for a number of reasons. First, Shell argues that the court of appeal erroneously held that damages for a breach of a contractual obligation of restoration in a lease can be disproportionately greater (in this case, 300 times greater) than the market value of the property. Our first inquiry, then, is whether plaintiffs are entitled to the amount of damages needed to restore the property, without regard to market value, or whether the damage award should be tethered to the market value of the property.

Shell argues that the legal principles that restrain immovable property damages in tort and specific performance cases to the market value of the property should also apply in cases of damages for breach of contract. Shell contends that the amount of damages for breach of the contractual obligation of restoration of the property must be rationally or reasonably related to the market value of the property. Otherwise, awarding an amount which is disproportionately greater than the market value, according to Shell, would give plaintiffs a windfall because plaintiffs would be in a better position than they would be in if Shell had performed under the contract. That is, if Shell had complied with its obligation under the contract to restore the property to its original state upon termination of the lease, plaintiffs would be in possession of property worth $108,000.00. Thus, Shell argues, plaintiffs' damage award for Shell's breach of its contractual obligation should be reasonably or rationally related to the amount of $108,000.00.

In furtherance of its position, Shell argues that the amount of damages recoverable under a breach of contract claim must be controlled by the parties' mutually agreed upon expectations. La. C.C. art. 2045. Here, Shell maintains that the parties bargained for a restoration obligation limited by "reasonableness." Shell argues that to award plaintiffs damages in the amount of $33 million (300 times greater than the value of the property) is unreasonable. Shell contends that no rational, objective lessor would expect that the lessee would be required to restore the property at a cost disproportionately greater than the value of the property itself. Likewise, no rational, objective lessee would expect that such a reasonable restoration obligation would require the lessee to expend sums to restore the property that would be grossly disproportionate to what it would cost to purchase the property outright. For this reason, Shell argues, the contractual obligation of reasonable restoration is confined by an "economic balancing process which balances the cost of perfect restoration against the value of the use to which the land is being put." La. R.S. 31:22 (comments).

Plaintiffs counter that this case is governed by the principle that "the contract is the law between the parties." Plaintiffs...