Frankel v. Exxon Mobil Corp.
| Decision Date | 10 August 2005 |
| Docket Number | No. 2004 CA 1236.,2004 CA 1236. |
| Citation | 923 So.2d 55 |
| Parties | Russell M. FRANKEL, et al. v. EXXON MOBIL CORPORATION, et al. |
| Court | Court of Appeal of Louisiana — District of US |
Reginald J. Ringuet, William H. Collier, Ringuet Daniels & Collier, APLC, Lafayette, for Plaintiffs-Appellees Russell M. Frankel, et al.
Robert B. McNeal, Mark L. McNamara, Elizabeth F. Pretus, Alex J. Cenac, Frilot, Partridge, Kohnke & Clements, L.C., New Orleans, for Defendant-Appellant Exxon Mobil Corporation.
Loulan J. Pitre, Jr., Gordon, Arata, McCollam, Duplantis & Eagan, L.L.P., New Orleans, for Defendant-Appellant Taylor Energy Company.
Before: PARRO, KUHN, and WELCH, JJ.
The sublessees under a mineral lease, Exxon Mobil Corporation (Exxon) and Taylor Energy Corporation (Taylor), appeal a judgment concluding they breached the sublease and ordering them to pay damages to the sublessors, who had overriding royalty interests. The sublessors answered the appeal, seeking additional damages for breach of a reassignment clause in the sublease. We affirm.
The mineral lease at issue in this case (the Pool Lease) was executed January 15, 1948, covering land located in the Clovelly oil and gas field in Lafourche parish.1 The original landowner and lessor was Lafourche Land Company, Incorporated; its successor-in-interest was Allain-LeBreton Company (Allain-LeBreton). The original lessee was Wylmer I. Pool; his interest was later conveyed to Berkshire Oil Co., which assigned it to Jules R. Frankel in 1949. In the assignment to Berkshire Oil Co., Wylmer I. Pool reserved an overriding royalty interest, a portion of which he later assigned to Jules R. Frankel. The plaintiffs in this case are Russell M. Frankel; Sherry Frankel; Monte C. Shalett, individually and as trustee of the Monte Cresap Shalett Trust U/W Mae Frankel Shalett; Jackie McPherson, executrix of the estate of Jay B. Shalett; Madeline Elizabeth Simeon Chastain; Don Stanford; and Sheryl Stanford Overstreet (the Frankels). They are the heirs of and successors to Jules R. Frankel, who on February 13, 1951, granted a sublease of the Pool Lease to Humble Oil & Refining Company (Humble), reserving the overriding royalty interest. Humble later assigned a 50 percent working interest to Shell Oil Company (Shell). Exxon is the successor to Humble; Taylor is the successor to Shell.
The Pool Lease provided that after its initial lease term, it would continue in effect as long as there was continuous production. If such production ceased, the lease could be maintained by new drilling or reworking operations, as long as these were commenced within sixty days of cessation of production and continued without any sixty-day gap. It could also be maintained by shut-in royalty payments. A 1966 amendment to the sublease contained a clause obligating the sublessees to reassign the Pool Lease to the Frankels sixty days prior to the expiration of the lease. That clause stated, in pertinent part:
In the event HUMBLE and/or SHELL shall elect not to continue in effect any lease described in Exhibit "A" by any method in said lease permitted, HUMBLE and SHELL shall, not less than sixty (60) days prior to the time when such lease would otherwise expire, deliver to FRANKEL a suitable assignment in recordable form in Frankel's favor of such lease . . ., free and clear of any charges placed thereon by HUMBLE and/or SHELL.
In a previous lawsuit (the first suit) filed by the current lessor, Allain-LeBreton, against the Frankels, Exxon, Taylor, and others,2 a judgment was rendered canceling the Pool Lease as of January 1992, based on the court's finding that Exxon, the operating partner for the lease, had failed to conduct timely reworking operations to maintain the lease after production had ceased. The parties then settled and dismissed the first suit before that judgment became final.3 The settlement of the first suit as of November 1, 1997, terminated the Pool Lease, and a new lease (the New Lease) was confected between Allain-LeBreton and the new working interest owners, Flash Gas & Oil Northeast, Inc. (Flash) and Ashlawn Corporation (Ashlawn).4 Flash and Ashlawn then assigned an overriding royalty interest to the Frankels. The Frankels had been receiving overriding royalties of 21.875 percent resulting from the Pool Lease;5 under the settlement, the Frankels negotiated the continuation of those royalties through October 1997, after which date their overriding royalties were reduced to 10.17187 percent.6
In this lawsuit, the Frankels claim Exxon and Taylor breached the sublease and failed to reassign the Pool Lease to them before it terminated, resulting in lost revenues. All parties agree that three methods of maintaining the lease after its original term—continuous production in paying quantities, new drilling operations, or making shut-in royalty payments—did not occur after production ceased on October 16, 1991. They also agree that Exxon conducted reworking operations until November 12, 1991. Therefore, the issues before the court in this suit were (1) whether activities on the Pool Lease after November 12, 1991, constituted reworking operations without a lapse of more than sixty consecutive days after production ceased until it re-commenced, and (2) whether the sublessees had breached the reassignment clause of the sublease. At trial, the Frankels claimed the breach of the sublease resulted in the termination of the Pool Lease, depriving them of a portion of their overriding royalties after October 1997, and in the alternative, the breach of the reassignment clause in the sublease caused the loss of their potential working-interest share of production revenues after January 1992.
After a three-day trial, the court took the matter under advisement. A judgment was rendered October 10, 2003, and amended February 25, 2004, to include interest and additional expert fees. In reasons for judgment, the court reiterated the factual findings underlying the judgment in the first suit, declaring again that the Pool Lease had expired as of the 61st day following November 12, 1991, and awarding the Frankels $799,804 for the loss of past and future overriding royalties they would have received under the Pool Lease. The court found the reassignment clause of the sublease was breached, but did not award any damages for the Frankels' working interest, finding the evidence on that claim was insufficient. Exxon and Taylor appealed, claiming the court erred in: (1) its conclusion that Exxon's activities were not good faith reworking operations sufficient to maintain the Pool Lease; (2) its interpretation of the reassignment clause in the sublease; and (3) its assessment of damages. Taylor also assigns as error the court's casting it for damages, along with Exxon. The Frankels answered the appeal, seeking recovery of the working interest revenues they lost as a result of the breach of the reassignment clause, which they claimed were $4,055,328.
Lessee's obligation
Louisiana Revised Statute 31:122 sets forth the basic obligations of a mineral lessee to the lessor. It states that the lessee must perform the contract in good faith and develop and operate the leased property as a reasonably prudent operator for the mutual benefit of himself and his lessor. This obligation applies equally to subleases of mineral leases. See Neomar Resources, Inc. v. Amerada Hess Corp., 94-0216 (La.App. 1st Cir.12/22/94), 648 So.2d 1066, 1068, writ denied, 95-0216 (La.3/17/95), 651 So.2d 277. In any consideration of that general duty, the issue evolves into matters of factual circumstances, reasonable and diligent efforts, industry standards, and prudent operations. McDowell v. PG & E Resources Co., 26,321 (La.App. 2nd Cir.6/23/95), 658 So.2d 779, 783, writ denied, 95-1847 (La.11/3/95), 661 So.2d 1382. 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. Edmundson Brothers Partnership v. Montex Drilling Co., 98-1564 (La.App. 3rd Cir.5/5/99), 731 So.2d 1049, 1053.
A mineral lease terminates at the expiration of the agreed term or upon the occurrence of an express resolutory condition. LSA-R.S. 31:133. This case involves the alleged termination of the mineral lease upon the occurrence of an express resolutory condition, i.e., the cessation of production for a period of sixty days and the failure to maintain the lease by other available means, such as drilling, reworking operations, or shut-in royalty payments. See Amoco Production Co. v. Carruth, 512 So.2d 571, 573-74 (La.App. 1st Cir.1987), writ denied, 516 So.2d 366 (La.1988).
Reworking operations
As noted in the Louisiana jurisprudence, an exact definition of reworking operations is difficult to formulate. The problems associated with producing oil and gas from thousands of feet below the surface are many and varied, as are the procedures for rectifying production that is sluggish or has ceased. O'Neal v. JLH Enterprises, Inc., 37,432 (La.App. 2nd Cir.12/1/03), 862 So.2d 1021, 1027. In Harry Bourg Corp. v. Union Producing Co., 197 So.2d 172 (La.App. 1st Cir.), writ refused, 250 La. 903, 199 So.2d 917 (1967), this court accepted a definition of "rework" commonly used in the oil and gas industry, based on the testimony of three experts who testified at trial. In that case, reworking was defined by the experts as any process or procedure which you may undertake to either regain, increase, or create new production in a well; activity to restore or increase production of a well that has been drilled, usually the second attempt; or to work again on a well. In a well that has produced, it would be an operation when the well came off of production or ceased production, and it would be an operation to maintain,...
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