Exxon Corp. v. Crosby-Mississippi Resources, Ltd.

Decision Date02 September 1998
Docket NumberNo. 96-60761,No. 2,CROSBY-MISSISSIPPI,2,96-60761
Citation154 F.3d 202
PartiesEXXON CORPORATION, A New Jersey Corporation, Plaintiff-Appellant-Cross-Appellee, v.RESOURCES, LTD., A MS Limited Partnership; Lynn Crosby Gammill, General Partner; Stewart Gammill, III, General Partner; Stewart Gammill, III, as successor Trustee for Stewart Gammill IV, Trust; Lucius Olen Crosby Gammill, Trust; Jennifer Lynn Gammill, Trust; Lucious Olen Crosby Gammill; Stewart Gammill, IV; Jennifer Lynn Gammill; Stewart Gammill, III, as successor Trustee for Stewart Gammill, IV, Defendants-Appellees-Cross-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

Otis Johnson, Jr., Sam Starnes Thomas, Heidelberg & Woodliff, Jackson, MS, Thomas M. Keiffer, New Orleans, LA, William Rollins Hurt, Exxon Corp., New Orleans, LA, for Exxon Corp.

Harold D. Miller, Jr., Butler, Snow, O'Mara, Stevens & Cannada, Glenn Gates Taylor, Christopher Dale Shearer, Copeland, Cook, Taylor & Bush, Jackson, MS, William Allen Hood, William A. Hood, P.A., Vicksburg, MS, for Defendants-Appellees-Cross-Appellants.

Appeals from the United States District Court for the Southern District of Mississippi.

Before POLITZ, Chief Judge, and HIGGINBOTHAM and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:

This case requires us to interpret an oil and gas agreement entered into by Exxon Corporation (Exxon) and Crosby-Mississippi Resources, Ltd., et al. (CMR). Both parties appeal various rulings made by the district court. For the following reasons we affirm the district court in part and vacate and remand in part.

I. Background

In 1983, Exxon and CMR entered into a joint oil and gas Exploration Agreement to develop their respective mineral resources in an area of Mississippi. Exxon held oil and gas leases covering more than 60,000 acres in the contract area, while CMR owned approximately 20,000 mineral acres in the contract area. Both Exxon and CMR contributed what they owned to the joint oil and gas exploration effort. The parties agreed that Exxon contributed 76% and CMR 24% of the oil and gas interests in the contract area.

Under the terms of the Exploration Agreement, Exxon had the exclusive right to propose the first exploratory well. CMR could choose to participate in the exploratory well up to its 24% contractual share. If CMR chose to participate, it was required to bear its proportionate share of the costs of the drilling, testing, completion, and production expenses of the well. By doing so, CMR would be entitled to 24% of the well's commercial production. If CMR chose not to participate, however, CMR could still be entitled to a "royalty" due to certain provisions which are further explained below.

A substantial number of wells were drilled by the parties. CMR participated in some but not in others. Almost from the beginning the parties were in disagreement over a number of issues. The disagreements eventually led to the filing of this action by Exxon in 1989 to collect amounts it claims are due from CMR for its share of various expenses. CMR filed a counterclaim alleging numerous claims of its own.

Because of the complexity of this case, the district court held a status conference on February 15, 1994. At the conference the court entered an order delineating nine issues for separate discovery and trial. This case is an appeal from the bench trial before the district court on the first of those issues: to what extent Exxon "earned" CMR's interest in one particular section of the contract area. Because this first issue controlled many of the later disputes between the parties, the district court certified its ruling for immediate appeal under Rule 54(b) of the Federal Rules of Civil Procedure. 1

The Exploration Agreement

Under the Exploration Agreement, Exxon was to drill the first exploratory well. CMR could choose to participate in that well up to CMR's 24% contractual interest. If CMR chose not to participate, Exxon could "earn" CMR's 24% interest in the well so long as it was drilled in accordance with Paragraph 7 of the Exploration Agreement. CMR, however, might still be entitled to a 1/8 "customary royalty" 2 if it owned the "actual, unleased mineral interests" in the drilling unit. 3 Moreover, Paragraph 7 of the contract provided CMR with an additional 1/8 "overriding royalty" interest on "production allocated to the parties ... calculated on ... the non-consenting party's 4 contractual interest percentage." Thus, in the simplest case--where both parties collectively possessed 100% of the interests underlying a particular exploratory well--CMR would receive an overriding royalty of 1/8 of 24% of the 100% joint interests of Exxon and CMR. 5

If, under Paragraph 7, Exxon earned CMR's interest in an exploratory well, Paragraph 8 permitted Exxon to earn CMR's interest in any offset wells to the exploratory well, called "development wells." To earn CMR's interest in a development well, Paragraph 8 required Exxon to "commence drilling" on the development well within 180 days of the completion of the exploratory well. Each subsequent development well had to be drilled within 180 days of the completion of the previous development well. If Exxon complied with these time limits, it could earn CMR's interest in the development wells, subject to CMR's customary 1/8 royalty (if CMR owned the "actual unleased mineral interests") and the 1/8 overriding royalty on "production allocated to the parties."

Exxon timely commenced drilling on the first exploratory well, Southern Minerals No. 1. CMR chose not to participate. This well was successful and produced gas. Exxon then drilled the first development well for Southern Minerals No. 1, called Southern Minerals No. 2, and a second development well, called Crown-Zellerbach No. 24-11. Exxon ultimately drilled six more wells in the area, which are not relevant to this appeal.

At trial, CMR challenged the procedures employed by Exxon in drilling the three wells in dispute here. First, CMR claimed that Exxon failed to comply with the Exploration Agreement with regard to the drilling of Southern Minerals No. 1, thus forfeiting its rights to earn CMR's interest in the eight other development wells. The district court ruled against CMR on this issue, and CMR does not appeal this ruling. CMR does appeal the district court's rulings on three other arguments CMR made at the bench trial.

First, CMR asserts that Exxon improperly drilled the first development well, Southern Minerals No. 2, because it failed to "propose" the well to CMR in accordance with Paragraph 8. Second, it contends that Exxon did not "commence drilling" Southern Minerals No. 2 within 180 days from the "completion" of Southern Minerals No. 1, as stipulated in the contract. Third, it argues that Exxon violated the Exploration Agreement on the second development well, Crown-Zellerbach No. 24-11, because Exxon contracted with a third-party to operate the well. According to CMR, each of these failures caused Exxon to forfeit its rights to CMR's interest in the relevant wells. The district court, however, ruled against CMR on each contention, and CMR appeals these rulings.

Exxon was not completely successful in the bench trial, however. Subsequent to the signing of the Agreement, Exxon acquired "farm-ins" from various sources. 6 The trial court ruled that the contract unambiguously required Exxon to pay CMR the 1/8 overriding royalty on gas production occurring on the farm-ins that Exxon acquired after the inception of the Exploratory Agreement. Exxon appeals this ruling.

II. Analysis

A district court's interpretation of a contract is a matter of law which we review de novo. American Totalisator Co. v. Fair Grounds Corp., 3 F.3d 810, 813 (5th Cir.1993). Accordingly, we review the record independently and under the same standards that guided the district court. Id.

Because this suit is founded on diversity jurisdiction, the district court appropriately turned to Mississippi law for the applicable standard of contract interpretation. See Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Under Mississippi law, "[w]here the interests of the parties to an instrument appear clear and unambiguous from the instrument itself, the Court should look solely to the instrument and give same effect as written." Barnett v. Getty Oil Co., 266 So.2d 581, 586 (Miss.1972). See also Century 21 Deep South Properties, Ltd. v. Keys, 652 So.2d 707, 716-17 (Miss.1995). It is by this standard that we, too, review the language of the Exploration Agreement and all other agreements incorporated therein. 7

A. CMR's Claims

CMR first claims that Exxon violated the Exploration Agreement by failing to "propose" the first development well, Southern Mineral No. 2. CMR points to the unambiguous language of Paragraph 8 of the Exploration Agreement. 8 CMR asserts that Paragraph 8 requires the proposal of development wells based merely on the fact that the word "propose" appears in the language of Paragraph 8, which pertains to development wells. CMR also argues that the proposals are necessary because they serve the informational purpose of allowing CMR to monitor whether Exxon was meeting the 180-day "continuous drilling" time frame required by the contract. We disagree with CMR's interpretation of the Agreement.

CMR chose not to participate in the Southern Minerals No. 1 exploratory well under Paragraph 7. As such, Paragraph 8 provides that Exxon obtained the right to earn CMR's interest in the first development well, Southern Minerals No. 2. By obtaining the right to earn CMR's interest in the well, under the express language of Paragraph 8, Exxon "likewise" earned CMR's "right to propose" the development well. Furthermore, under Paragraph 7, it appears the purpose of proposing the initial exploratory well was to give CMR a chance to participate in that well. However, when Exxon earned CMR's interest in the exploratory well, CMR could not...

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