Fairfield Energy Corp. v. Anadarko Petroleum Corp., CIVIL ACTION NO. 08-757
| Decision Date | 13 October 2011 |
| Docket Number | CIVIL ACTION NO. 08-757 |
| Parties | FAIRFIELD ENERGY CORPORATION v. ANADARKO PETROLEUM CORPORATION AND ANADARKO ENERGY SERVICES CORPORATION |
| Court | U.S. District Court — Western District of Louisiana |
Pending before the Court are Defendants Anadarko Petroleum Corporation and Anadarko Energy Services Company's (collectively "Anadarko") Motion for Partial Summary Judgment [Doc. No. 64] and Plaintiff Fairfield Energy Corporation's ("FEC") Opposition to Defendants' Motion for Partial Summary Judgment [Doc. No. 82]. For the following reasons, Defendants' motion is DENIED IN PART and GRANTED IN PART.
This action concerns FEC's interests in several Jackson Parish natural gas wells. In 1982, FEC agreed to transfer its leasehold interest in 115 acres of land in Jackson Parish to Crystal Oil Company ("Crystal"). [Doc. No. 64-3, p. 4]. In return, Crystal agreed to pay FEC $250 per net mineral acre and give FEC an undivided 1/16 overriding royalty interest 1 until payout. [Doc. No. 64-3, p. 4]. Once the overriding royalty interest satisfied the initial debt, FEC retained an option to convert its royalty interest into a one-half working interest on a well-to-well basis. [Doc. No.64-3, p. 4]. At some point in early 2000, Anadarko became the owner of Crystal's interest in the Jackson Parish leasehold, subject to FEC's interests and option agreement.
While Crystal operated the wells, FEC received compensation for some of its interests by receiving actual volumes of gas from pipeline operators, a practice commonly known as in-kind compensation. FEC ceased taking in-kind compensation soon after Anadarko assumed control of the wells in 2000. Anadarko alleges that in 1999, FEC took volumes of gas in excess of its ownership share. To recoup this imbalance, Anadarko reduced its payments to FEC for the Davis Brothers J-1 well from October 2004 through June 2006 by a total of $19,999.62.
Following these reductions in payment, FEC commissioned an audit in January 2007. On March 8, 2007, FEC sent Andarko a letter notifying it of suspected underpayments, and Anadarko responded on March 28, 2007, in a letter denying any wrongdoing.
FEC alleges three distinct complaints against Anadarko. First, FEC claims that Anadarko has violated LA. REV. STAT. ANN. § 31:139, LA. REV. STAT. ANN. § 31:212:21, and LA. REV. STAT. ANN. § 31:212.31 by not providing FEC with an honest accounting of the wells' production and thereby avoiding a portion of the payment due to FEC. [Doc. No. 1-1, p. 2]. FEC seeks double damages and attorney fees under La. Rev. Stat. Ann. § 31:139 and LA. REV. STAT. ANN. § 31:212.23 based on Anadarko's alleged failure to state reasonable cause for the lack of payments.
Second, FEC alleges that Anadarko reduced FEC's net revenue interest in the Davis Brothers J-1 well effective October 4, 2004 and, therefore, owes FEC $19,999.62 in withheld payments. [Doc. No. 1-1, p. 3].
Third, FEC alleges that Anadarko has breached the 1982 option agreement by preventing FEC from converting its overriding royalty interests into one-half working interests. [Doc. No. 1-1, p. 3].
Under Federal Rule of Civil Procedure 56, "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). The moving party bears the initial burden of informing the court of the basis for its motion by identifying portions of the record which highlight the absence of genuine issues of material fact. Topalian v. Ehrmann, 954 F.2d 1125, 1132 (5th Cir. 1992). A fact is "material" if proof of its existence or nonexistence would affect the outcome of the lawsuit under applicable law in the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute about a material fact is "genuine" if the evidence is such that a reasonable fact finder could render a verdict for the nonmoving party. Id.
If the moving party can meet the initial burden, the burden then shifts to the nonmoving party to establish the existence of a genuine issue of material fact for trial. Norman v. Apache Corp., 19 F.3d 1017, 1023 (5th Cir. 1994). The nonmoving party must show more than "some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). In evaluating the evidence tendered by the parties, the Court must accept the evidence of the nonmovant as credible and draw all justifiable inferences in its favor. Anderson, 477 U.S. at 255.
FEC alleges violations of LA. REV. STAT. ANN. § 31:139 and 31:212.21, statutory penalty provisions governing underpayment of mineral royalties. FEC also alleges violations of LA. REV. STAT. ANN. § 31:212:31, a provision that requires certain financial disclosures to accompany payments of mineral royalties.
FEC does not have standing to sue under La. Rev. Stat. Ann. § 31:139 because FEC is not a mineral lessor. Louisiana Rev. Stat. Ann. § 31:139 applies to a "mineral lessor [who] seeks relief for the failure of his lessee to make timely or proper payments . . . ." A lessor is "one who conveys real or personal property by lease." Black's Law Dictionary, 986 (9th ed. 2009). In Louisiana, oil and gas leases are primarily treated as traditional leases of real property. PATRICK H. MARTIN & BRUCE M. KRAMER, WILLIAMS & MEYERS, OIL AND GAS LAW, § 202.1 (LexisNexis Matthew Bender 2010) (citing the comments to LA. REV. STAT. ANN. § 31:123). Here, FEC permanently transferred its leasehold interest in the wells while retaining royalty interests. Unlike a lessor, who transfers his possessory rights for a period of time, FEC has sold its lease without any possibility of reverter. Therefore, FEC is not a mineral lessor. Since FEC does not have standing to bring this claim, Anadarko's motion for summary judgment as to the LA. REV. STAT. ANN. § 31:139 claim is GRANTED.
FEC has standing to bring a claim under LA. REV. STAT. ANN. § 31:212.21, which provides "If the owner of a mineral production payment or royalty owner other than a mineral lessor seeks relief for the failure of a mineral lessee to make timely or proper payment of royalties or a production payment, he must give his obligor written notice of such failure as a prerequisiteto a judicial demand for damages." If the lessee fails to either make payment or provide reasonable cause for the nonpayment within 30 days, LA. REV. STAT. ANN. § 31:212:22 (West 2011), the court may award double the amount due plus legal interest, and attorney's fees. LA. REV. STAT. ANN. § 31:212.23 (West 2011). If the lessee provides reasonable cause for the failure to pay, then the court may only award interest from the date the payments became due. Id. Recovery under these statutes is limited to nonpayment of production payments or royalties, but does not include working interests. Louisiana Land & Exploration Co. v. Pennzoil Land & Exploration Co., 962 F. Supp. 908, 922 (E.D. La.1997) ().
At the outset, Anadarko argues the LA. REV. STAT. ANN. § 31:212.21 claims which accrued prior to March 26, 2005, should be dismissed because the three-year prescriptive period has run. Anadarko emphasizes that it routinely provided FEC detailed financial statements and that a reasonable person could have discovered the alleged underpayments very near the time of occurrence.
In Louisiana, actions to recover underpayments of royalties from the production of minerals are limited by a three year prescriptive period. LA. C.C. ART. 3494(5) (West 2011). The period begins to run when the plaintiff reasonably should have known of the underpayment. See Frey v. Amoco Production Co., 741 F. Supp. 601, 586-87 (E.D. La. 1990). Here, the financial disclosures would not have placed a reasonable person on notice. In Frey, the court noted that the defendant routinely provided check stubs with detailed financial disclosures to the plaintiff. Id. Nonetheless, the court found that these disclosures would only put a reasonable person on notice if there was an "internal inconsistency cognizable from the face of the document." Id. at 587. Similar to Frey, there were not obvious errors on the face of Anadarko's financial disclosures.
Instead, FEC has alleged that Anadarko understated the volume of gas produced by the wells, a discrepancy that would normally require an audit to discover. Since the disclosures would not place a reasonable person on notice of the underpayments, the prescription period did not begin to run until FEC conducted its audit in 2007. Therefore, the LA. REV. STAT. ANN. § 31:212.21 claims are not prescribed.
To survive a motion for summary judgment on its LA. REV. STAT. ANN. § 31:212:21 claim, FEC must demonstrate 1) the failure of Anadarko to make timely or proper payments, LA. REV. STAT. ANN. § 31:212.21 (West 2011), and 2) a written demand for payment given to Anadarko at least 30 days prior to this suit, LA. REV. STAT. ANN. § 31:212.22 (West 2011). If Anadarko provided reasonable cause for the nonpayment within 30 days, FEC will be limited to the amount due plus legal interest and attorney fees. LA. REV. STAT. ANN. § 31:212:23 (West 2011). Here, FEC has offered sufficient evidence to survive the motion for summary judgment on the LA. REV. STAT. ANN. § 31:212.21 claim. FEC submitted an affidavit of John Dean, an accounting expert. [Doc. No. 82-1]. In the affidavit, Dean discusses nine alleged accounting irregularities or improprieties that may have resulted in unpaid royalty interests to FEC.
Regarding the demand requirement, FEC will be limited to recovery under LA. REV. STAT. ANN. § 31:212.21 to the royalty claims for which it provided written notice at least 30 days prior to filing this action. FEC provided...
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