Williams v. Humble Oil & Refining Company

• Decision Date: 08 December 1970
• Docket Number: No. 26968.,26968.
• Citation: 432 F.2d 165
• Parties: Floyd WILLIAMS, Frederick C. Williams, et al., Plaintiffs-Cross Appellees, I. R. Price, Edward H. Taussig and Edwin F. Gayle, Plaintiffs-Appellants-Cross Appellees, v. HUMBLE OIL & REFINING COMPANY, Defendant-Appellee-Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

432 F.2d 165 (1970)

Floyd WILLIAMS, Frederick C. Williams, et al., Plaintiffs-Cross Appellees I. R. Price, Edward H. Taussig and Edwin F. Gayle, Plaintiffs-Appellants-Cross Appellees, v. HUMBLE OIL & REFINING COMPANY, Defendant-Appellee-Cross-Appellant.

No. 26968.

United States Court of Appeals, Fifth Circuit.

September 30, 1970.

Rehearing Denied and Rehearing Denied December 8, 1970.

COPYRIGHT MATERIAL OMITTED

Victor A. Sachse, Fernando J. Freyre, Victor A. Sachse, III, Baton Rouge, La., Moise S. Steeg, Jr., Jacqueline McPherson, Steeg & Shushan, New Orleans, La., Breazeale, Sachse & Wilson, Baton Rouge, La., for plaintiffs-appellants and cross appellees.

Bernard J. Caillouet, Lancelot P. Olinde, H. H. Hillyer, Jr., R. King Milling, New Orleans, La., for Humble Oil & Refining Co.; Milling, Saal, Saunders, Benson & Woodward, New Orleans, La., of counsel.

Before WISDOM and DYER, Circuit Judges, and KRENTZMAN, District Judge.

Rehearing Denied and Rehearing En Banc Denied December 8, 1970.

WISDOM, Circuit Judge:

This is a class action filed by plaintiff landowners¹ against Humble Oil & Refining Company, their mineral lessee, seeking an accounting for the alleged drainage of oil and gas from beneath their leased premises caused by Humble's operations on adjoining premises. In the alternative, the plaintiffs seek damages for the alleged breach of Humble's implied obligation to exercise reasonable diligence to protect their property from drainage. Federal jurisdiction is based upon diversity of citizenship under 28 U.S.C. § 1332. The principles therefore to be applied in this case are determined by the law of Louisiana. Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188.

After protracted preliminaries, Humble moved for summary judgment. The district court concluded that the plaintiffs were not entitled to an accounting and therefore granted Humble's motion for summary judgment on that issue. The court denied Humble's motion for judgment on the issues relating to the cause of action for damages.² Williams v. Humble Oil & Ref. Co., E.D. La. 1968, 290 F.Supp. 408. The plaintiffs appealed of right. Humble appealed under 28 U. S.C. § 1292(b) from that part of the district court's order denying its motion for summary judgment. We affirm.

In 1933 the Federal Land Bank of New Orleans granted an oil, gas, and mineral lease to I. R. Price, one of the plaintiffs, covering the Williams property in Acadia Parish, Louisiana. The lease was on a printed form and contained provisions then in common use. Price, a lease broker, acted as an agent for Humble; indeed, he soon assigned the lease to Humble. With the use of Humble's prepayment of two years rentals, Price persuaded the Land Bank to sell the leased premises back to the Williams family, from whom it had been acquired. The Land Bank reserved a quarter interest in the minerals. The Williams family granted Price and another plaintiff, Edwin F. Gayle, mineral interests in the leased property in return for their services.

In 1937 Humble brought in its discovery well in the North Crowley field now known as Williams No. 1. As of March 1, 1964, Humble had drilled twenty wells on the leased premises at a cost of more than $2,750,000. These wells were drilled in a surface spacing pattern containing approximately twenty acres per well. Production of oil and gas from the leased premises is still continuing, and the plaintiffs and others who share in royalties payable under the 1933 lease have received payments from the date of first production to March 1, 1964, of more than $1,274,000. The gross value of the oil and gas recovered from the Williams property in those years exceeded $10,192,000.

The plaintiffs' contentions in this case relate only to the shallow sands, those located above the Frio. As of March 1, 1964, Humble had performed at least 46 workover operations on the wells producing from the shallow sands at a cost of more than $1,000,000. In addition, Humble applied to the State Conservation Department for units affecting certain of the shallow reservoirs, and in 1963 unitization orders were issued pooling the Williams property with other lands overlying the shallow reservoirs.

The plaintiffs contend that their property is being drained by Humble's operations on the adjacent premises. The district court found that there are two unit wells, in the production of which the plaintiffs share, situated on adjoining property within 150 feet of the Williams tract. There are no other wells on adjacent premises located within 150 feet of the Williams property. Nevertheless, the plaintiffs urge that Humble should have taken steps — either by multiple completions or forced pooling — to prevent their land from being drained and that those steps would have been economically feasible for the company.

The questions for review are these: (1) Were the plaintiffs entitled to an accounting? (2) What is the nature and extent of the lessee's implied obligation to protect the leased premises from drainage? (3) Does an express offset provision in the lease preclude the implication of a further duty upon the lessee to protect against drainage? (4) Does the plaintiffs' failure to comply with a notice provision in the lease bar their cause of action for damages?

I. ACCOUNTING

The plaintiffs contend that because Humble failed to exercise reasonable diligence to prevent their property from being drained, it must account to them for that fraction of production on the adjacent property that is attributable to the drainage.³

In granting Humble's motion for summary judgment on this cause of action, the district court held that under Louisiana law the plaintiffs' proper remedy is an action to recover damages. "A creditor, as such, has no right to an accounting in Louisiana." 290 F.Supp. at 412-413. We agree with the result and affirm the judgment. We hold that in the circumstances of this case, the plaintiffs have no action for an accounting. We do not go so far as to say that in Louisiana a mineral lessor is a mere creditor or that mineral lessors never have a right to an accounting from their lessee.

Humble's arguments rest on the incontestable principle that a Louisiana landowner neither owns the minerals beneath his land nor has any right to the oil and gas produced on adjoining property. Humble's position is that an accounting is available only to one who has a property interest in the subject matter of the suit.

It is quite true that Louisiana adheres to the nonownership theory of oil and gas; thus only upon drilling and reducing the minerals to possession does the Louisiana landowner become vested with ownership. Frost-Johnson Lumber Co. v. Salling's Heirs, 1922, 150 La. 756, 91 So. 207. It is also true that under the rule of capture a landowner may produce as much oil and gas as he can from a well bottomed on his land and need not account to his neighbor if he drains oil and gas from beneath his neighbor's land. Louisiana Gas & Fuel Co. v. White Bros., 1925, 157 La. 728, 103 So. 23; Higgins Oil & Fuel Co. v. Guaranty Oil Co., 1919, 145 La. 233, 82 So. 206. Nevertheless, we consider that these principles are not determinative of the issue. It is unsettled in Louisiana what right the plaintiff must possess in order to maintain an action for an accounting. The landowner's exclusive right to explore his land and drill for oil or his right under a lease to one-eighth of gross production in certain circumstances may be sufficient interests to entitle him to an accounting.⁴

It would be a mistake to think that a Louisiana landowner may never compel an accounting by his mineral lessee. Indeed, we have been able to find several oil and gas cases in which Louisiana courts have ordered an accounting. E. g., Fontenot v. Sunray Mid-Continent Oil Co. (La.App. 3d Cir. 1967) 197 So.2d 715; Mire v. Hawkins (La.App. 3d Cir. 1965) 177 So.2d 795; Davies v. Texarkana Crude Oil Co., 1923, 154 La. 424, 97 So. 597; Harris v. J. C. Trahan Drilling Contractor, Inc., La.App. 2d Cir. 1964, 168 So.2d 881; Pierce v. Atlantic Ref. Co., La.App. 3d Cir. 1962, 140 So.2d 19; Bailey v. Meadows, La.App. 2d Cir. 1961, 130 So.2d 501. Each case, however, follows a well-defined pattern, typically an action by the lessor to cancel his mineral lease on the ground of nonpayment of royalties. If the court orders cancellation of the lease, it may also direct the lessee to account to the plaintiff for the royalties earned until cancellation. See Davies v. Texarkana Crude Oil Co.; Fontenot v. Sunray Mid-Continent Oil Co.; Pierce v. Atlantic Ref. Co.; Bailey v. Meadows. Even if the court rejects the lessor's demand for cancellation because nonpayment was excusable, plaintiff is still entitled to an accounting of royalties that have accrued under the terms of the lease. See Mire v. Hawkins; Harris v. J. C. Trahan Drilling Contractor, Inc. Thus at least in oil and gas lease cancellation cases an accounting is ancillary to the action and exists for the equitable purpose of adjusting in one proceeding all the differences between the parties arising from the main cause of action.⁵

For many years in Louisiana the existence of a cause of action based on drainage was in doubt. Finally the case of Breaux v. Pan American Petroleum Corp., La.App. 3d Cir. 1964, 163 So.2d 406, established the right of a landowner to recover damages from his lessee for breach of the lessee's implied obligation to exercise reasonable diligence to prevent drainage. The plaintiffs are right, of course, when they argue that Breaux merely held that an action for damages lies; it did not hold that an action of accounting will not lie. Nevertheless, we believe that an action for damages based on drainage and an action for an accounting are fatally incompatible in a way that an action for cancellation and an accounting are not.

The district court correctly enumerated the elements of an action for damages that Breaux requires the landowner to...