Huggs, Inc. v. LPC Energy, Inc.

• Citation: 889 F.2d 649
• Decision Date: 08 December 1989
• Docket Number: No. 88-4822,88-4822
• Parties: HUGGS, INC., et al., Plaintiffs-Appellees, Cross-Appellants, v. LPC ENERGY, INC., Defendant-Appellant, Cross-Appellee. G.E. HUGGS, d/b/a Exordium Oil & Gas Company, Plaintiff-Appellee, Cross-Appellant, v. LPC ENERGY, INC., Defendant-Appellant, Cross-Appellee. HUGGS, INC., Plaintiff-Appellee, Cross-Appellant, v. LPC ENERGY, INC., Defendant-Appellant, Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 649

889 F.2d 649

HUGGS, INC., et al., Plaintiffs-Appellees, Cross-Appellants, v. LPC ENERGY, INC., Defendant-Appellant, Cross-Appellee.

G.E. HUGGS, d/b/a Exordium Oil & Gas Company, Plaintiff-Appellee, Cross-Appellant, v. LPC ENERGY, INC., Defendant-Appellant, Cross-Appellee.

HUGGS, INC., Plaintiff-Appellee, Cross-Appellant, v. LPC ENERGY, INC., Defendant-Appellant, Cross-Appellee.

No. 88-4822.

United States Court of Appeals Fifth Circuit.

Dec. 8, 1989.

Blake G. Arata, Ernest E. Svenson, Gordon, Arata, McCollam & Duplantis, New Orleans, La., James Fleet Howell, Katherine Clark Hennessey, Shreveport, La., for defendant-appellant, cross-appellee.

David Klotz, Bodenheimer, Jones, Klotz & Simmons, Shreveport, La., for plaintiffs-appellees, cross-appellants.

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

Before POLITZ, DAVIS, and DUHE, Circuit Judges.

DUHE, Circuit Judge:

McRae Exploration, Inc. (McRae) and Huggs, Inc. (Huggs) were parties to a letter agreement (the contract) and a Joint Operating Agreement (J.O.A.) relating to the exploration for and production of oil and gas. Huggs prepared both documents. Thereafter, LPC Energy, Inc. (LPC) succeeded to the rights and obligations of McRae under both the contract and the J.O.A.

The contract provided that Huggs would acquire mineral leases in the prospect area and assign them to McRae, which would drill and operate all wells. McRae was obligated to reimburse Huggs for the cost of acquisition plus 10% to cover additional overhead expenses. McRae had a 100% working interest until payout of the costs of drilling the wells but Huggs retained a 5% overriding royalty. After payout, the working interest became owned 80% by McRae and 20% by Huggs.

McRae lost Leases 290(a) and (b) because it failed to pay the required delay rentals and LPC lost Lease 245 because it failed to recommence drilling or reworking operations within ninety days after the cessation of production from the lease well. Huggs filed suit against LPC in federal district court, which had diversity jurisdiction over the parties, seeking damages for loss of the leases. Huggs' suit was consolidated with two other suits filed against LPC, one by Exordium Oil and Gas Company (holder of a 1/16 overriding royalty on all leases assigned to LPC) and one by Henry Goodrich, Gene Robinson and L.R. Brammer, Jr., (who, by unrecorded written agreement, had interests in the leases subject to the contract) along with Huggs, Inc. For purposes of this opinion, all plaintiffs will be designated as "Huggs." During the pendency of the litigation a fourth lease, Lease 677, expired and Huggs added a claim for damages arising out of that loss.

Following a bench trial the district judge held LPC liable for lease acquisition costs for Lease 245 and Lease 677 and for lost profits and royalties on Lease 245. However, the court rejected Huggs' claim for damages for the loss of Leases 290(a) and (b). LPC appeals the trial court's findings as to Lease 245 and Lease 677. LPC also objects to the court's failure to hold a post-trial evidentiary hearing on the proper measure of damages. Huggs answers LPC's appeal and cross-appeals the trial court's rejection of its damage claim for LPC's loss of Leases 290(a) and (b).

Standard of Review

A trial court's factual findings should not be disturbed on appeal unless clearly erroneous. Fed.R.Civ.Proc. 52(a). However, the interpretation of a contract is a matter of law reviewable de novo on appeal. City of Austin, Texas v. Decker Coal Co., 701 F.2d 420, 425 (5th Cir.), cert. denied, 464 U.S. 938, 104 S.Ct. 348, 78 L.Ed.2d 314 (1983). This broad standard of review includes the determination of whether the contract is ambiguous. Id. at 425. Thus as long as the contract as a whole is coherent, ambiguities can be resolved as a matter of law without looking beyond the four corners of the document. Battig v. Hartford Accident and Indemnity Co., 608 F.2d 119, 120 (5th Cir.1979). In such cases a reviewing court is not bound by the clearly erroneous standard of review. Carpenters Amended and Restated Health Benefit Fund v. Holleman Construction Co., Inc., 751 F.2d 763, 766 (5th Cir.1985).

Applicable Law

Louisiana law governs the resolution of this diversity dispute. The Louisiana Civil Code sets forth fundamental interpretive guidelines: interpretation of a contract is the determination of the common intent of the parties. La.Civ.Code art. 2045. When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent. La.Civ.Code art. 2046. The words of a contract must be given their generally prevailing meaning. La.Civ.Code art. 2047. Words susceptible of different meanings must be interpreted as having the meaning that best conforms with the object of the contract. La.Civ.Code art. 2048. A provision susceptible of different meanings must be interpreted with a meaning that renders it effective and not with one that renders it ineffective. La.Civ.Code art. 2049.

Lease 290(a) and Lease 290(b)

We will first address Huggs' claims on cross-appeal. Leases 290(a) and (b) were renewal top leases obtained by Huggs and assigned to McRae, which recorded them in March and May 1982. Each lease had a primary term of three years but required drilling operations or delay rentals in order for McRae to retain them. McRae did not initiate drilling activity and failed to pay delay rentals due in May 1983. LPC succeeded McRae as operator in January 1984 and failed to discover that delay rentals were not paid in 1983 or 1984 until it was contacted by Sugar Creek Producing Company, which acquired a lease on the property in 1985.

The trial court rejected Huggs' claim that the loss of Leases 290(a) and (b) and the failure to detect this loss constituted gross negligence and violated LPC's contractual duty to perform as a reasonable and prudent operator. We affirm the district court's finding that the exculpatory clauses of Paragraph IX of the contract and Paragraph 17 of the J.O.A. shield LPC from liability for loss of the leases.

Paragraph IX of the contract provides in pertinent part:

It is understood that [LPC] shall diligently attempt to make proper payments of delay rentals and shut-in gas royalty payments, but shall not be held liable to Huggs for the loss of a lease or interest therein through mistake or oversight if any delay rental or shut-in gas royalty payment is not paid or is erroneously paid.

The relevant portion of Paragraph 17 of the J.O.A. provides:

[LPC] shall diligently attempt to make proper payment, but shall not be held liable in damages for the loss of any lease or interest therein if through mistake or oversight any rental or shut-in payment is not paid or is erroneously paid. The loss of any lease or interest therein which results from a failure to pay or an erroneous payment of rental or shut-in payment shall be a joint loss and there shall be no readjustment of interests in the remaining portion of the Unit Area.

Article III of the contract imposes upon LPC the duty to act as "a reasonable and prudent operator."

Huggs argues that the trial court misapplied the burden of proof and made erroneous findings of fact. The trial judge's conclusion that the leases were not properly set up in McRae's records and thus never made it onto LPC's computer record of leases when the corporations merged is not clearly erroneous. Although no one witness could testify with certainty as to what exactly caused the failure to pay delay rentals, witnesses for LPC did testify that it made an investigation of the matter and came to the conclusion that the leases were never placed on McRae's computer files. The district judge accepted as reasonable LPC's explanation: "[there is] no better example of oversight than the situation where an operator overlooks a lease and makes the mistake of failing to put the lease on its delay rental records." (R. Vol. 2, p. 269). In Columbia Gas Transmission v. Allied Chemical Corp., 652 F.2d 503 (5th Cir.1981), this court interpreted a similar exculpatory provision in a gas purchase contract. We held that under Louisiana law the term "inadvertence" includes "unintentional, though negligent, conduct." Id. at 509. The district court's finding regarding mistake and oversight is supported by the evidence and thus is not clearly erroneous. Huggs' argument that LPC could not benefit from the exculpatory language of Paragraph IX because its failure to pay delay rentals was intentional since LPC gave its lease records last computer priority when it succeeded McRae is without merit.

Similarly without merit is Huggs' argument that the trial court erred in finding "excusable" mistake or oversight. "Mistake" and "oversight" are not qualified in the contract. The contract as written is not ambiguous; thus this court has no authority to reach beyond the four corners of the document. La.Civ. art. 2046. See Columbia Gas Transmission v. Allied Chemical Corp., 652 F.2d 503, 509 (5th Cir.1981). We will not rewrite the contract at this late date to accord with Huggs' present wishes.

In the same vein, Huggs argues that Paragraph IX requires that LPC prove that it made a diligent attempt at payment of delay rentals before the exculpatory portion of Paragraph IX inures to its advantage. This interpretation of the provision is contrary to fundamental rules of contract construction. In Louisiana a contract is to be read according to its plain intendment. Battig v. Hartford Accident and Indemnity Co., 608 F.2d 119, 120 (5th Cir.1979). The contract provision at issue in Banner Chevrolet v. Wells Fargo Guard Services, 508 So.2d 966 (La.App. 4th Cir.1987), provided that the defendant would "do its best" to perform under the contract but would not be liable for damages caused by negligent acts or omissions or nonperformance of its obligations under the contract. The court r...