Gloria's Ranch, L.L.C. v. Tauren Exploration, Inc.

• Decision Date: 27 June 2018
• Docket Number: No. 2017–C–1518, No. 2017–C–1522, No. 2017–C–1519,2017–C–1518
• Citation: 252 So.3d 431
• Parties: GLORIA'S RANCH, L.L.C. v. TAUREN EXPLORATION, INC., Cubic Energy, Inc., Wells Fargo Energy Capital, Inc., and EXCO USA Asset, Inc.
• Court: Louisiana Supreme Court

252 So.3d 431

GLORIA'S RANCH, L.L.C.
v.
TAUREN EXPLORATION, INC., Cubic Energy, Inc., Wells Fargo Energy Capital, Inc., and EXCO USA Asset, Inc.

No. 2017–C–1518
No. 2017–C–1519
No. 2017–C–1522

Supreme Court of Louisiana.

June 27, 2018

Clark, Justice^*

A landowner brought suit against several mineral lessees for breach of the obligations of the mineral lease. The mortgagee of one of the lessees was also named as a defendant. The lower courts held all lessees and the mortgagee solidarily liable for damages resulting from the failure to furnish a recordable act evidencing the expiration of the lease, i.e. , failure to release the lease. We granted these consolidated writ applications to determine (1) whether the mortgagee was properly held solidarily liable as an "owner" of the lease under La. Mineral Code art. 207 and a "lessee" under La. Mineral Code art. 140; (2) whether the imposition of solidary liability was correct with regard to the owner of a portion of the shallow rights; (3) whether La. Mineral Code art. 140's calculation of damages contemplates the inclusion of unpaid royalties (the amount due) in addition to double the amount of unpaid royalties (as a penalty) or whether the maximum damage award allowed is twice the amount of unpaid royalties; and (4) whether $125,000 in attorney fees for work done on appeal is excessive.

For the reasons that follow, we find (1) the mortgagee was not an "owner" for purposes of La. Mineral Code art. 207 and is, therefore, not liable for failure to release the lease. For the same reasons, we find the mortgagee was not a "lessee" for purposes of La. Mineral Code art. 140 and, is, therefore, not liable for failure to pay royalties that were due. (2) We find Tauren is solidarily liable for the damages because the failure to release the lease is an indivisible obligation under the particular facts of this case. (3) We hold La. Mineral Code art. 140 authorizes as damages a maximum of double the amount of unpaid royalties. (4) Last, we amend the award of attorney fees to reflect our holdings herein.

FACTS AND PROCEDURAL HISTORY

Gloria's Ranch, L.L.C. ("Gloria's Ranch") granted a mineral lease to Tauren Exploration, Inc. ("Tauren") on September 17, 2004. The lease covered 1,390.25 acres

252 So.3d 434

in Sections 9, 10, 15, 16, and 21, Township 15 North, Range 15 West, Caddo Parish, Louisiana ("the property"). Tauren was granted "the exclusive right to enter upon and use the land ... for the exploration for and production of oil [and] gas ... together with the use of the surface of the land for all purposes incident to [exploration and production] with the right of ingress and egress to and from said lands at all times for such purposes." The lease was granted for a primary term of three (3) years "and as long thereafter as oil, gas, sulphur, or other minerals is produced from [the property] or from land pooled therewith."

In February 2006, Tauren transferred an undivided 49% interest in the lease to Cubic Energy, Inc. ("Cubic"). On March 5, 2007, Tauren and Cubic executed separate credit agreements with Wells Fargo Energy Capital, Inc. ("Wells Fargo").¹ Wells Fargo provided Cubic with a revolving credit facility not to exceed $20,000,000 outstanding at any time and a $5,000,000 convertible term loan. As security, Cubic mortgaged its interest in approximately 750 mineral leases, including the instant lease with Gloria's Ranch, and assigned as collateral the profits earned therefrom.

In 2007, Tauren contracted with Fossil Operating Inc. ("Fossil") to commence oil and gas operations on the property. In early 2008, Fossil drilled and completed wells on Sections 9, 10, and 16 in an area known as the Cotton Valley geologic formation.² Fossil vertically drilled Section 16 to the Haynesville Shale formation, but completed the well only to the shallower depths of the Cotton Valley formation. Additionally, in 2008, another company, Chesapeake Operating, Inc. ("Chesapeake")³ drilled a well, (the "Soaring Ridge 15–1 well") on a neighboring tract in the deeper Haynesville Shale formation. Chesapeake unitized the Gloria's Ranch property located in Section 15 with the Soaring Ridge 15–1 well. The unit, known as the "Soaring Ridge 15H," was horizontally drilled by Chesapeake into the Haynesville Shale formation. Chesapeake also drilled Section 21 ("Feist–21–1"). On September 1, 2009, Gloria's Ranch executed a top lease in favor of Chesapeake for the right to conduct operations on its property in Section 21. By definition and by the contract's terms, Chesapeake's lease only became effective if and when the existing 2004 lease to Tauren expired or was terminated.

Effective October 30, 2009, Tauren and EXCO USA Asset, Inc. ("EXCO") entered into a purchase and sale agreement. Pursuant to the agreement, Tauren conveyed its 51% interest in the Deep Rights to EXCO. Cubic conveyed to Tauren an overriding royalty interest in Cubic's 49% interest in the Deep Rights. Simultaneously, Tauren made a cash payment to Wells Fargo and assigned to it a 10% net profits interest in the Shallow Rights and the overriding royalty interest in the Deep Rights received from Cubic. In exchange, Wells Fargo cancelled the Tauren mortgage.

On December 3, 2009, Gloria's Ranch sent a letter to Tauren, Cubic, EXCO and Wells Fargo ("the defendants"), seeking to

252 So.3d 435

establish whether the lease was still producing in paying quantities. It was the belief of Gloria's Ranch that the lease had expired for lack of production in paying quantities. Thus, it wanted confirmation via monthly revenue and expense reports that the wells were still profitable.

Tauren responded that it had miscalculated some of its expenses but assured Gloria's Ranch that the wells were still producing in paying quantities. Ultimately, on January 28, 2010, Gloria's Ranch sent written demand to the defendants, requesting a recordable act evidencing the expiration of the lease. No response was forthcoming by any of the defendants. Accordingly, Gloria's Ranch filed suit, alleging the defendants failed to furnish a recordable act evidencing the expiration of the lease as required by La. Mineral Code arts. 206 and 207. Gloria's Ranch claimed in its petition that the lease expired for not producing in paying quantities and that the defendants' failure to release the lease caused it damages in the amount of lost bonus payments, lost rentals, and lost royalties. Additionally, it sought unpaid royalties for Section 15, which was still maintained by production from the Soaring Ridge 15H.

Gloria's Ranch reached a settlement with EXCO on August 13, 2014, thereby releasing EXCO as a defendant in this matter.

A bench trial was held, and the trial court rendered judgment in favor of Gloria's Ranch and against Tauren, Cubic, and Wells Fargo in solido. It found the lease had expired as to Sections 9, 10, 16, and 21 due to lack of production in paying quantities for at least the twelve months preceding the January 28, 2010 demand and that the defendants failed to furnish a recordable act evidencing same, as required by the law.⁴ The court also found that the 16–1 well was not drilled in good faith. Rather, it was drilled solely to maintain the Deep Rights for purposes of speculation. The trial court awarded damages for lost-leasing opportunities at $18,000 per acre ($22,806,000).⁵ It further awarded $726,087.78 for unpaid royalties for Section 15 pursuant to La. Mineral Code art. 140 ($242,029.26 in royalties due plus $484,058.52 in double royalties as a penalty). Attorney fees in the amount of $936,803 were also awarded.

With regard to Wells Fargo's solidary liability, the trial court found that Wells Fargo breached its duty to Gloria's Ranch either to release its mortgage on the lease or to authorize Cubic to release the lease. The trial court reasoned that (1) Wells Fargo's mortgage included an assignment of the lease; (2) Wells Fargo controlled Cubic's right to release and never authorized a release; (3) Wells Fargo controlled the revenue from the lease by virtue of an assignment of revenues, a net profits interest, and a overriding royalty interest; and (4) Wells Fargo knew the lease had expired because it regularly audited Tauren and Cubic's well cost and revenue information.

Tauren, Cubic, and Wells Fargo filed motions for new trial. On November 23, 2015, the trial court granted the motions, in part, reducing the damage awards by EXCO's virile portion (25%) to reflect EXCO's settlement. See La. C.C. art. 1804.

252 So.3d 436

The defendants appealed. The court of appeal affirmed the judgment and awarded $125,000 in attorney fees for work done on appeal. Gloria's Ranch, L.L.C. v. Tauren Exploration, Inc. , 51,077 (La. App. 2 Cir. 6/2/17), 223 So.3d 1202. Tauren, Cubic, and Wells Fargo filed writ applications. We consolidated and granted their writs to determine the correctness of the lower courts' judgments. Gloria's Ranch, L.L.C. v. Tauren Exploration, Inc. , 17–1518, 17–1519, 17–1522 (La. 12/15/17), 231 So.3d 639 ; 231 So.3d 640 ; 231 So.3d 642. We will address each writ application separately.

DISCUSSION

Wells Fargo

Wells Fargo challenges the lower courts' finding that it was solidarily liable with the remaining defendants...