Williams v. Humble Oil & Refining Company

• Decision Date: 28 August 1968
• Docket Number: Civ. A. No. 14312.
• Parties: Floyd WILLIAMS, Frederick C. Williams, Barton W. Freeland, C. J. Freeland, Jr., John Ed Freeland, I. R. Price, Edward H. Taussig and Edwin F. Gayle, Plaintiffs, v. HUMBLE OIL & REFINING COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Louisiana

290 F. Supp. 408

Floyd WILLIAMS, Frederick C. Williams, Barton W. Freeland, C. J. Freeland, Jr., John Ed Freeland, I. R. Price, Edward H. Taussig and Edwin F. Gayle, Plaintiffs, v. HUMBLE OIL & REFINING COMPANY, Defendant.

Civ. A. No. 14312.

United States District Court E. D. Louisiana, New Orleans Division.

August 28, 1968.

Moise S. Steeg, Jr., New Orleans, La., Victor A. Sachse, Baton Rouge, La., Fernando J. Freyre, for plaintiffs.

Bernard J. Caillouet, Lancelot P. Olinde, H. H. Hillyer, Jr., New Orleans, La., for defendant.

RUBIN, District Judge:

FINDINGS ON MOTION FOR SUMMARY JUDGMENT

For reasons set forth in the attached memorandum opinion, the motion for summary judgment is GRANTED in part and DENIED in part. However, in accordance with the provisions of Rule 56(d) of the Federal Rules of Civil Procedure, the Court has examined the pleadings and the evidence before it and has interrogated counsel to ascertain what material facts exist without substantial controversy and what material facts are actually and in good faith controverted. The following facts appear to be without material controversy, and upon trial of this action, they will be deemed established:

1. Humble Oil & Refining Company ("Humble) is the present lessee under the mineral lease originally granted to I. R. Price, as lessee, a copy of which is annexed to the plaintiffs' complaint ("The Lease").

2. In 1933, the Federal Land Bank of New Orleans granted The Lease to I. R. Price, one of the plaintiffs in this suit. Price was a lease broker and was acting as agent for Humble. The property affected by The Lease is referred to as The Williams Property.

3. The Lease was on a printed form and contained provisions then in common use.

4. The Federal Land Bank was a large landowner, and employed experienced persons to look after its mineral interests. In addition, it had available the advice of a lawyer regularly employed by it.

5. Humble paid Price 2 years rentals in advance and, by the use of this prepayment, Price succeeded in getting the Land Bank to sell The Williams Property to the Williams family, from whom it had acquired the property.

6. The Land Bank reserved a quarter interest in the minerals.

7. Price assigned The Lease to Humble.

8. The Williams family granted Price and another plaintiff, Edwin F. Gayle, a mineral interest in The Williams Property for their services.

9. Humble drilled a well on The Williams Property in 1937. This was the discovery well in the North Crowley field, and it is known as Williams No. 1.

10. Humble drilled additional wells on The Williams Property in a surface spacing pattern containing approximately 20 acres per well.

11. Production of oil and gas from The Williams Property or from premises pooled with them is still continuing.

12. The plaintiffs and others who share in the royalties payable under The Lease have received payments from the date of first production to March 1, 1964, of more than $1,274,000.

13. As of March 1, 1964, Humble had drilled 20 wells on The Williams Property at a cost of more than $2,750,000.

14. The plaintiffs' claims in this suit relate only to sands located above the Frio ("The Shallow Sands").

15. In 1963, Humble applied to the State Conservation Department for units affecting The Shallow Sands and unitization orders were issued pooling The Williams Property with other lands as to certain reservoirs in The Shallow Sands effective April 1, 1964.

16. As of March 1, 1964, Humble had performed at least 46 work-over operations on wells on The Williams Property producing from The Shallow Sands; these cost more than $1,000,000.

17. There are two unit wells or units in which portions of The Williams Property are pooled situated on adjoining premises within 150 feet of the leased premises. There is no other well on adjoining premises situated within 150 feet of the leased premises.

18. The plaintiffs do not contend that Humble should have drilled an additional well or wells on The Williams Property in order to prevent drainage of oil and gas from beneath the surface of these premises by wells drilled by Humble on adjacent properties. However, the plaintiffs contend that, if Humble had completed an existing well or wells on The Williams Property to another sand or sands in addition to the one from which that well was already completed, in order to prevent drainage of oil and gas from beneath the surface of The Williams Property by wells drilled by Humble on adjacent properties, Humble could have expected to receive a reasonable profit above the additional cost of effecting the additional completion.

The following conclusions of law have been reached by the Court and shall be applied in the conduct of the trial:

1. In order for the plaintiffs to recover damages from the defendant because of a breach of the defendant's implied obligation as lessee to exercise reasonable diligence to prevent drainage of minerals from beneath the surface of the leased premises, the plaintiffs must establish by a preponderance of the evidence that oil or gas could have been produced from the same reservoirs as those from which production was actually obtained through wells drilled on other property, that this could have been accomplished by additional or offset completions effected from wells already drilled on the leased premises, and that it would have been economically feasible for the lessee to effect such additional completions.

2. The burden of proof is on the plaintiffs to establish the damages sustained by them by showing by a preponderance of the evidence the quantity of oil and gas that would have been produced from the offset completions and the value of the minerals that plaintiffs would have received from that production had the offset completions been timely effected.

3. If the plaintiffs have a claim, it is only for damages, and the plaintiffs are not entitled to an accounting. Therefore, summary judgment should be granted in favor of the defendant on the plaintiffs' first cause of action.

4. This suit is not barred as a matter of law by the plaintiffs' failure to give notice of breach or notice of default. Whether or not it is barred is a question of fact to be decided by the jury.

5. A mineral lessee has a duty to the mineral lessor to act as a prudent administrator of the leased premises. If the lessee is draining oil or gas from beneath the leased premises by a well drilled by the lessee on other property, its duty to act as a prudent administrator may include an implied obligation to unitize the leased premises with those from which production is being obtained, or to drill an offset well, or to effect an offset completion of a well already drilled on the leased premises, if these acts are economically feasible under the principles set forth in paragraph 1, above or to do those other things, if any, that a prudent administrator would do under the circumstances. What action a prudent administrator would take under the circumstances is a factual question to be decided by the finder of fact in the light of the relevant evidence.

These conclusions of law are more fully set forth in the attached opinion and are reached for the reasons and under the authorities set forth therein.

There being no just reason for delay, summary judgment is granted in favor of the defendant on the plaintiffs' first cause of action. The defendant's motion for summary judgment on the issue of notice as a prerequisite to this action is denied.

REASONS FOR SUMMARY JUDGMENT

The plaintiffs seek an accounting and, in the alternative, damages, for breach of Humble's implied obligation as a mineral lessee to exercise reasonable diligence to prevent the drainage of oil and gas from beneath their property. The principles to be applied in this diversity suit are determined by the law of Louisiana. Williams' prospects of recovery in federal court, like Tompkins', are the same as those he would have in state court. Erie R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188.

I. ACCOUNTING

The plaintiffs' first cause of action alleges that the plaintiffs wrote a letter on March 29, 1963, demanding payment of $1,226,000.00 for oil drained from The Williams Property by wells drilled by Humble on adjacent property, and that Humble replied denying "substantial drainage." The plaintiffs conclude that this admits that some drainage occurred and that they thereby became entitled to an accounting. But even if the plaintiffs' premises are correct, their conclusion is a non sequitur. Even if liability is established because Humble's letter is read as admitting "insubstantial drainage," the plaintiffs' claim, under Louisiana law, is one for damages. They have no right to an accounting.

By judicial improvisation, relying largely upon the analogy to principles of lease and servitude, Louisiana's courts have evolved a body of rules applicable to an industry unknown when the Civil Code was adopted. The shaping of the basic precepts began almost 50 years ago. In 1922 Louisiana's Supreme Court held that a landowner does not own the oil and gas beneath his property. Frost-Johnson Lumber Co. v. Salling's Heirs, 1922, 150 La. 756, 91 So. 207. He has the exclusive right to search for minerals and to reduce them to his possession. But only upon taking possession does he become vested with ownership.¹ This rule has since been consistently applied. Although it has been indicated that a wilful or negligent interference with the landowner's right to attempt to reduce minerals to his possession might create a cause of action,² the rule that minerals do not belong to the owner of the surface until he reduces them to his possession has never been qualified.³ The supposed fugacious quality of oil and gas has led the Louisiana courts to conclude that the owner of a tract of land cannot claim the oil or gas produced by a neighbor as a result of drainage from his property.⁴ Enactment of the conservation law has not changed this "rule...