Grace-Cajun Oil Co. No. 3 v. Federal Deposit Ins. Corp., GRACE-CAJUN

• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Writing for the Court: Before POLITZ and JOLLY; POLITZ
• Citation: 882 F.2d 1008
• Parties: OIL CO. NO. 3, Plaintiff-Appellant, v. Federal Deposit Insurance Corporation, Defendant-Appellee.
• Docket Number: No. 88-4481,GRACE-CAJUN,88-4481
• Decision Date: 14 September 1989

Page 1008

882 F.2d 1008 GRACE-CAJUN OIL CO. NO. 3, Plaintiff-Appellant,
v.
Federal Deposit Insurance Corporation, Defendant-Appellee. No. 88-4481. United States Court of Appeals,
Fifth Circuit. Sept. 14, 1989.
Rehearing Denied Oct. 16, 1989.
As Amended Nov. 13, 1989.

Page 1009

Michael R. Graber, Lake Charles, La., for plaintiff-appellant.

R. Patrick Vance, Carl D. Rosenblum, Jones, Walker, New Orleans, La., for amicus curiae.

Michael H. Rubin, Kelly Wilkinson, Baton Rouge, La., for defendant-appellee.

Appeal from the United States District Court for the Western District of Louisiana.

Before POLITZ and JOLLY, Circuit Judges, and HUNTER, ^* District Judge.

POLITZ, Circuit Judge:

Grace-Cajun Oil Company No. 3 seeks to recover from MBank, formerly Mercantile National Bank at Dallas, a creditor holding a security interest in oil and gas production proceeds, a proportionate share of certain well drilling and completion costs. The district court granted MBank's motion for summary judgment and dismissed the complaint. For the reasons assigned we reverse and remand for further proceedings.

Background

In February 1980 Delta Energy Resources, Inc. obtained an oil, gas, and mineral lease from Louisiana Farm and Livestock Company, Inc. (LF & L) covering land in Calcasieu Parish, Louisiana. Eight months later Delta executed an operating agreement with Grace-Cajun affecting all wells drilled on that lease. The operating agreement was not recorded in the public records. On March 10, 1981 Delta assigned to Grace-Cajun an undivided 31.36% interest in the LF & L lease. That assignment was recorded in the public records. Delta also assigned an undivided 14.41899% lease interest to a group of investors who were non-operators.

On May 28, 1981 Delta executed a note and loan agreement with MBank, refinancing its existing debt. Delta secured the note with an instrument entitled Collateral Mortgage and Assignment of Production, in which it pledged its share of production proceeds from wells on the LF & L lease. This instrument, which was made subject to the operating agreement, was recorded in the records of Calcasieu Parish. Delta subsequently defaulted on the loan.

Delta also failed to pay its share of well drilling and completion costs and its creditors filed protective liens. On December 23, 1983 Delta initiated a Chapter 11 bankruptcy proceeding. To avoid the effects of foreclosure on the liens Grace-Cajun paid

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Delta's share of the well costs. Production was obtained and the proceeds allocable to Delta's interest in the minerals have been paid regularly to MBank.

Grace-Cajun, a New York corporation doing business in Louisiana, filed suit against MBank, a national banking institution domiciled in Texas, for recovery of the well-drilling costs it had paid on Delta's behalf. Suit, initially filed in Louisiana state court, was removed by MBank to federal court. On motion of MBank the district court granted a summary judgment dismissal, finding that there were no material factual disputes and that Grace-Cajun had failed to state a claim against MBank. Grace-Cajun timely appealed.

Analysis

Summary judgment is appropriate where there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). Grace-Cajun contends that when MBank pursued its remedies under the security instrument, which was made subject to the operating agreement, it acquired the obligation to pay Delta's proportionate share of drilling and completion costs out of the proceeds received.

It is undisputed that Delta and Grace-Cajun are co-lessees of the LF & L lease and that Delta did not pay its share of the costs of drilling and completing the LF & L wells. Under Louisiana law a co-lessee is not entitled to share in the proceeds of production from an oil or gas well until he pays his share of the cost of drilling and completing the well. Huckabay v. Texas Co., 227 La. 191, 78 So.2d 829 (1955); ¹ Willis v. International Oil & Gas Corp., 541 So.2d 332 (La.App.1989). This rule rests on the principle of unjust enrichment. Under Louisiana law, while the right of an owner to refrain from exercising the rights of ownership in such a situation is absolute, Civil Code arts. 491, 496, the owner nevertheless may not enjoy the profits realized from such an oil and gas venture without participating in the expenses incurred in producing those profits. To allow otherwise would violate the moral maxim that no one ought to be enriched at the expense of another. Huckabay, 78 So.2d at 831.

It is manifest that Delta is not entitled to enjoy the proceeds of production from the LF & L wells without paying its share of drilling and completion costs. The question presented by this litigation may be simply stated: What are the parameters of MBank's right to share in the production proceeds vis-a-vis Grace-Cajun and the other non-operators?

The district court found that Delta, as lessee, granted MBank a security interest in the right to production from the lease free of...