EDMUNDSON BROS. v. Montex Drilling Co.

• Decision Date: 05 May 1999
• Docket Number: No. 98-1564.,98-1564.
• Citation: 731 So.2d 1049
• Parties: EDMUNDSON BROTHERS PARTNERSHIP and Elizabeth Edmundson, Plaintiffs-Appellees, v. MONTEX DRILLING COMPANY, The Succession of Moncrief and Glickenhaus Energy Company, Defendants-Appellants.
• Court: Court of Appeal of Louisiana — District of US

731 So.2d 1049

EDMUNDSON BROTHERS PARTNERSHIP and Elizabeth Edmundson, Plaintiffs-Appellees, v. MONTEX DRILLING COMPANY, The Succession of Moncrief and Glickenhaus Energy Company, Defendants-Appellants.

No. 98-1564.

Court of Appeal of Louisiana, Third Circuit.

May 5, 1999.

Marc Dupuy, Jr., Marksville, Guy Earl Wall, James Louis Weiss, New Orleans, for Edmundson Brothers Partnership, et al.

M. Hampton Carver, Marshall Taylor Darden, Stacy Smith Brown, New Orleans, for Montex Drilling Co., et al.

Before: DOUCET, C.J., SAUNDERS and SULLIVAN, JJ.

DOUCET, Chief Judge.

The Defendants, W.A. Moncrief, Jr., the Succession of W.A. Moncrief, Montex Drilling Company and Glickenhaus Energy, appeal a judgment by the trial court canceling two mineral leases and awarding damages in connection therewith. The Plaintiffs, Edmundson Brothers Partnership and Elizabeth Edmundson (the Edmundsons), answer the appeal.

I. BACKGROUND

The Edmundsons own the property at issue in Avoyelles Parish, consisting of two tracts which are burdened by two separate mineral leases. The Edmundson Brothers Partnership (Edmundsons) now own 50% of the minerals in these properties. Prior to 1977, Ernest E. Edmundson, Jr. owned the entirety of the minerals. On February 28, 1977, he conveyed one-half of all oil, gas and other minerals on the properties to Thomas A. Durham. The remaining one half mineral interest owned by Ernest Edmundson, Jr. was conveyed to his wife, Elizabeth Diggs Edmundson on July 19, 1986. Mrs. Edmundson indicated that this was done for estate planning purposes. On May 15, 1992, Mrs. Edmundson conveyed the minerals to the Edmundson Brothers Partnership, again for estate planning purposes.

On May 28, 1975, Ernest E. Edmundson, Jr., to whom the Plaintiffs are successors in interest, granted an oil, gas and mineral lease on 1765.60 acres to Shell Oil Company (the Shell Lease). W.A. Moncrief later acquired the Shell Lease and, in 1984, drilled the Edmundson # 2 well (EE# 2) on it.

On June 14, 1980, Ernest E. Edmundson, Jr. and his wife, Elizabeth Diggs Edmundson granted an oil, gas and mineral lease on 1194.54 acres to Durham Enterprises, Inc. (the Durham Lease). W.A. Moncrief acquired the Durham Lease and drilled the Edmundson # 1 well (EE# 1) in 1983.

Both EE# 1 and EE# 2 were vertical wells drilled to the Austin Chalk formation and production was obtained.

On December 10, 1991, Elizabeth Diggs Edmundson, through her attorney, wrote a letter to W.A. Moncrief contending that Moncrief had not properly explored and/or developed the oil, gas and minerals on the two leases. Demand was made upon Moncrief to develop the properties. The parties conducted meetings, with Tom Durham, who was apparently representing Moncrief. By correspondence dated February 13, 1992, from Tom Durham to the plaintiff's attorney, the Defendants were advised that Moncrief was going to develop the property in accordance with the demand letter. Moncrief drilled the EE# 22-1 well on the Shell Lease. The well was drilled horizontally in the Austin Chalk formation. This well was completed on March 27, 1992.

II. TRIAL COURT PROCEEDINGS

In June of 1993, Plaintiffs instituted this litigation setting forth claims which the trial judge in his written reasons for judgment enumerated as follows:

1. Moncrief failed to reasonably develop and explore the Shell Lease.

2. Moncrief failed to reasonably develop and explore the Durham Lease.

3. That the Shell Lease should be canceled for lack of production in paying quantities.

4. That the Durham Lease should be canceled for lack of production in paying quantities.

The petition was later amended to allege that Moncrief fraudulently concealed the expiration of the Shell Lease by falsely reporting production from the EE# 2 well in December 1987.

The case was tried by a judge beginning April 2, 1997. The trial lasted eight days. The trial court handed down extensive written reasons for judgment in which it comprehensively outlined the evidence adduced at trial and delineated its findings. The court rendered judgment pursuant to the written reasons canceling both leases as to the Plaintiffs.

The court further awarded damages in connection with the Shell Lease as follows:

B. IT IS FURTHER ORDERED, ADJUDGED AND DECREED that judgment is hereby rendered in favor of Elizabeth Edmundson and Edmundson Brothers Partnership and against W.A. Moncrief, Jr., the Succession of W.A. Moncrief, Montex Drilling Company and Glickenhaus Energy Corporation, in soldio, (sic) in the following amounts:

1. Lost leasing revenue-$441,250.00 as damages for lost leasing revenues plus legal interest thereon from the date of judicial demand, (June 28, 1993) until paid;

2. Lost production revenue—$183,303.72 as damages for lost production revenues attributable to the Edmundson No. 2 well through December 2, 1997 plus legal interest thereon from the date those revenues were received by defendants until paid; and

3. Future well revenue—

(a) Fifty (50%) percent of all revenues from the Edmundson No. 2 well from and including January 1998 forward, without deduction of costs, together with legal interest thereon from the date those revenues were received by defendants until paid;

(b) Fifty (50%) percent of all revenues from Edmundson No. 22-1 well from judicial demand, June 28, 1993 until December 1, 1997, after deducting costs and royalties paid, with legal interest from those revenues were received by defendants until paid; and

(c) Fifty (50%) percent of all revenues from the Edmundson No. 22-1 well from December 1, 1997 forward, without deduction of costs, together with legal interest thereon from the date those revenues were received by defendants until paid.

With regard to the Durham Lease, the trial court awarded damages as follows:

B. IT IS FURTHER ORDERED, ADJUDGED AND DECREED that Judgment is hereby rendered in favor of Elizabeth Edmundson and Edmundson Brothers Partnership and against W.A. Moncrief, Jr., the Succession of W.A. Moncrief and Montex Drilling Company, in solido, in the amount of:

1. Lost leasing revenue —$208,125.00 as damages for lost leasing revenue and legal interest thereon from the date of judicial demand, June 28, 1993 until paid; and

2. Future Well Revenue—

(a) Fifty (50%) percent of all revenue from the Edmundson No. 1 from date of judicial demand, June 28, 1993, until December 1, 1997, after deduction of costs and royalties paid, with legal interest from the date received until paid; and

(b) Fifty (50%) percent of all revenues from the Edmundson No. 1 well from December 1, 1997 forward, without deduction of costs, together with legal interest thereon from date those revenues were received until paid;

The court further awarded costs and attorney's fees.

The Defendants appeal. The Plaintiffs have answered the appeal. For clarity, we will consider the arguments concerning each lease separately.

III. DURHAM LEASE

There are three issues before this Court involving the Durham Lease, these being:

Did the drilling of the EE# 22-1 well on the Shell Lease serve to develop the Durham Lease? Were the Defendants sufficiently put in default for failing to develop the Durham Lease? And finally, did the Durham Lease produce in paying quantities?

These issues will be discussed separately.

A. Did the Drilling of the EE# 22-1 Well on the Shell Lease Serve to Develop the Durham Lease?

The Defendants argue that the trial judge erred in finding that the EE# 22-1 well did not develop the Durham Lease. The Defendants assert that evidence establishes that the drilling of the EE# 22-1 well on the Shell Lease fulfilled their obligation to develop the Durham Lease.

1. Law.

In Taussig v. Goldking Properties Co., 495 So.2d 1008, 1014-15 (La.App. 3 Cir. 1986), writ denied, 502 So.2d 111 (La. 1987), this court discussed a mineral lessee's duty to develop the producing formation:

After production in paying quantities has been obtained from a mineral formation, it is the duty of the lessee to develop the producing formation as a reasonably prudent operator, taking into consideration both his own interests and those of the lessor. To fulfill the development duty under the law, a lessee has the obligation to develop known mineral producing formations in the manner of a reasonable, prudent operator and to explore and test all portions of the leased premises after discovery of minerals in paying quantities in the manner of a reasonable, prudent operator. Vetter v. Morrow, 361 So.2d 898 (La.App. 2nd Cir.1978). Public policy dictates the necessity of the principle of "reasonable development" to give effect to the parties' intent in confecting a mineral lease, to assure the reasonable development of Louisiana's natural resources, and to prevent the removal of property from commerce. Dawes v. Hale, 421 So.2d 1208 (La.App. 2nd Cir.1982). Therefore, under R.S. 31:122 there is an implied covenant of every mineral lease that the lessee has a duty to develop the leased premises.

The Louisiana Supreme Court in Carter v. Arkansas Louisiana Gas Co., 213 La. 1028, 36 So.2d 26, 28 (La.1948) (emphasis added), set out the standard for determining whether a lessee has fulfilled its duty to develop:

The law of this state is well settled that the main consideration of a mineral lease is the development of the leased premises for minerals, and that the lessee must develop with reasonable diligence or give up the contract; further, that as to what constitutes development and reasonable diligence on the part of the lessee must conform to, and be governed by, what is expected of persons of ordinary prudence under similar circumstances and conditions, having due regard for the interest of both contracting parties. Pipes v. Payne et al., 156 La. 791, 101 So. 144; Stubbs et al. v. Imperial Oil & Gas Co., 164 La. 689, 114 So. 595; Logan v. Tholl Oil Co., et al., 189 La. 645, 180 So. 473. See also Merrill, The Law Relating to Covenants Implied in Oil and Gas Leases, 2d

...