The L/B Nicole Eymard (right) became stuck while servicing a well in the Gulf of Mexico. The owner of the boat sued the contractor that hired the boat, in addition to the well owner, and both were found liable for charter fees while the vessel was unable to move. The well owner obtained indemnity from the contractor because the contractor had agreed to indemnify it for claims “based upon personal injury or death or property damage or loss.” Unpaid charter fees are a “loss” within the meaning of that language, even without proof of damage to property. Offshore Marine Contractors, LLC v. Palm Energy Offshore, LLC, No. 14-30059 (March 2, 2015).
Pioneer suffered an oil well blowout and paid millions to restore order. It sued for reimbursement under its umbrella policy and the Fifth Circuit affirmed judgment for the insurer, based largely on the broad language of the relevant exclusions. Pioneer Exploration LLC v. Steadfast Ins. Co., No. 13-30802 (Sept. 22, 2014). Pioneer argued that the “owned, rented or occupied” exclusion did not apply to a mineral lease. The Court disagreed, noting that the mineral lease gave Pioneer some control over surface land, and that the broad language of the exclusion reached activity associated with oil production (citing Aspen Ins. UK, Ltd. v. Dune Energy, Inc., No. 10-30335 (5th Cir. Nov. 8, 2010, unpublished)). Further, noting that Louisiana law allowed debate as to whether an “owned property” exclusion reached remediation costs incurred to minimize liability to third parties, the Court found that this exclusion “specifically excludes containment costs” (reviewing Norfolk Southern Corp. v. California Union Ins., 859 So. 2d 167 (La. App. 2003)).” Finally, as to another exclusion, the Court found that the insured could not meaningfully allocate expense “between controlling costs and plugging costs.”
Drillers asserted a subcontractors’ lien on Debtors’ oil well. Endeavor Energy Resources, L.P. v. Heritage Consolidated, L.L.C., No. 13-10969 (reviised Sept. 16, 2014). Debtors argued that when the general contractor acquired a 1% ownership interest in the lease, that interest related back to the time before Drillers began work, and voided any lien because a party cannot be both a contractor and an owner.
The Fifth Circuit rejected that argument and reversed the lower courts, finding that the Texas Supreme Court intended the relation-back doctrine in this context to expand the interest to which a valid lien can attach (applying Diversified Mortgage Investors v. Lloyd D. Blaylock General Contractor, Inc., 578 S.W.2d 794 (Tex. 1978)). Noting that this interest was not acquired until after the Drillers had done their work, the Court observed that even an earlier acquisition would reach the same result: “If [GC] gained a 1% ownership interest in the lease at the time that Drillers performed their work, then Drillers may have gained an additional claim for contractors’ liens against [GC]. It would not, however, prevent Drillers from asserting separate subcontractors’ liens against [Debtors].”
Plaintiffs own and operate a mineral lease in the Gulf of Mexico; they allege that their neighbors drilled so as to deplete the value of their lease. Specifically, they pleaded claims for “waste” and “unlawful drainage and trespass” under Louisiana law, as adopted by the Outer Continental Shelf Lands Act. Breton Energy LLC v. Mariner Energy Resources Inc., No. 13-20307 (Aug. 12, 2014). As to the waste claims, after a detailed review of the specific allegations and precedent, the Fifth Circuit found a cognizable waste claim pleaded against the defendant alleged to have perforated the relevant oil sands. The Court affirmed, however, the dismissal of claims against the non-perforating defendants, finding “equivocat[ion]” in a key allegation that those defendants could have caused the Minerals Management Service to “take other steps to protect the correlative rights of adjacent lessees.” The Court also rejected claims for drainage losses and trespass, describing the interplay of those claims with a waste claim under Louisiana law.
After recently reviewing the phrase “computed at the mouth of the well,” the Fifth Circuit returned to oil royalties in Potts v. Chesapeake Exploration LLC, No. 13-10601 (July 29, 2014). The lease fixed the royalty as a percentage of “the market value at the point of sale,” and would be “free and clear of all costs and expenses related to the exploration, production and marketing of oil and gas production . . . ” Since Chesapeake’s sales of gas occured at the wellhead, this language allowed it to deduct a reasonable post-production cost for delivering the gas from the wellhead under Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996). The Court said that its conclusion was not affected, under the terms of this lease, by the fact that Chesapeake sold to an affiliate. The Court also rejected a procedural argument about whether Heritage was binding precedent after the Texas Supreme Court’s 4-4 vote on rehearing.
The defendants in Rainbow Gun Club, Inc. v. Denbury Onshore, LLC removed to federal court under CAFA, arguing that the 167 plaintiffs’ claims based on mineral leases were a “mass action.” No. 14-30514 (July 23, 2014). The dispute centered on whether those claims, which alleged negligent operation of the relevant well, arose from “an event or occurrence in the State” within the meaning of that statute. The Fifth Circuit concluded that the ordinary meaning of those terms, CAFA’s legislative history, and case law from other circuits supported the plaintiffs’ position that “the exclusion applies to a single event or occurrence, but the event or occurrence need not be constrained to a discrete moment in time.” Drawing an analogy to the Deepwater Horizon accident, the Court also rejected an argument based on allegations of multiple acts of negligence, as such an incident “was the event that resulted from a number of individual negligent acts related to each other . . . .” Accordingly, the Court affirmed the remand of the case to Louisiana state court.
Chesapeake’s lease obliged it to pay the Warrens a royalty based on “the amount realized by Lessee, computed at the mouth of the well.” A lease addendum said the royalty “shall be free of all costs and expenses related to the exploration, production, and marketing . . . including, but not limited to, costs of compression, dehydration, treatment and transportation.” Warren v. Chesapeake Exploration LLC, No. 13-10619 (July 16, 2014).
The addendum went on to say that “Lessor will, however, bear a proportionate part of all those expenses imposed upon Lessee by its gas sales contract to the extent incurred subsequent to those that are obligations of Lessee.” The Warrens contended that this sentence defined certain shared expenses which should not have been deducted from the royalty. The Fifth Circuit disagreed and affirmed the Rule 12 dismissal of their complaint, finding that the sentence only referred to “the cost of delivering marketable gas to a sales point other than the mouth of the well.” (distinguishing Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996)).
The Court reversed, however, as to another pair of plaintiffs with a different lease addendum. Noting simply that it was different, the Court found that their claim should not have been dismissed, as “[i]t is not apparent from the face of the complaint or its attachments that they could not conceivably state a cause of action.”
The lower courts agreed that the sale of a pipeline system from a bankruptcy estate was free and clear of an obligation to pay certain fees to “Newco.” Newco Energy v. Energytec, Inc., No. 12-41162 (Dec. 31, 2013). The Fifth Circuit reversed, finding that the obligations arose from a covenant that ran with the land. First, the Court found that the lower courts’ reservation of the “free and clear” issue was sufficient to avoid section 363 of the Bankruptcy Code, which would otherwise moot the appeal for failure to get a stay. On the merits, the Court focused on “horizontal privity” between the parties at the time the covenant was created, expressing doubt that Texas in fact imposed such a requirement, but finding it satisfied in the conveyances here. (discussing Wayne Harwell Props. v. Pan Am. Logistics Center, Inc., 945 S.W.2d 216, 218 (Tex. App.–San Antonio 1997, writ denied)). The Court also concluded that the payment obligation ran with the land, as it related to transportation from the land and was secured by a lien on the entire pipeline. (distinguishing El Paso Refinery, LP v. TRMI Holdings, Inc., 302 F.3d 343 (5th Cir. 2002)).
A Louisiana mineral lease provided that the lessee would pay the lessor “one-eighth (1/8) of the market value at the mouth of the well of the gas so sold . . . .” Cimarex Energy v. Chastant, No. 13-30049 (Aug. 2, 2013, unpublished). The lessor claimed that the payment obligations extended to the benefits of a hedging program operated by the lessee/producer. The Fifth Circuit agreed with the district court that it did not: “[T]he mineral lease between Cimarex and Chastant does not require Cimarex to pay royalties on amounts generated through its separate financial activities. The Court distinguished a case about royalties on take-or-pay payments, noting: “Take-or-pay is, for these purposes, an alternative to actual production, or effectively a minimum production for purposes of rights under the lease. Hedging transactions do not serve that purpose. They are supplements to production, not substitutes.”
The parties arbitrated whether certain offshore oil dealings violated RICO. Grynberg v. BP, PLC, No. 12-20291 (June 7, 2013, unpublished). The arbitrator found that the claimant did not establish damage and dismissed that claim, noting that he lacked authority to determine whether any criminal violation of RICO occurred. The Fifth Circuit affirmed the dismissal of a subsequent RICO lawsuit on the grounds of res judicata, finding that the arbitrator’s ruling was on the merits and not jurisdictional.
An assignment of royalty interests for a continental shelf project had this “calculate or pay” clause: “The overriding royalty interest assigned herein shall be calculated and paid in the same manner and subject to the same terms and conditions as the landowner’s royalty under the Lease.” The parties disputed whether the clause simply required calculation of royalties in the same way as the government’s royalty, or allowed suspension of the assigned payments during a period when the government’s royalty right was suspended. Total E&P USA, Inc. v. Kerr-McGee Oil & Gas, No. 11-30038 (revised June 20, 2013). Applying Louisiana law, the majority found the clause ambiguous on that issue, and further reasoned that at the time of contracting, legal principles that eventually became settled and could resolve the ambiguity were not yet settled. Noting that no cross-appeal was taken, the Court reversed a summary judgment and remanded for consideration of extrinsic evidence. A succinct concurrence noted an additional reason for finding ambiguity based on the grammar of the clause. A dissent took issue with the majority’s analysis of other contract provisions and applicable law, and would have affirmed summary judgment about interpretation but reversed as to reformation for mutual mistake. Both the majority and dissent endorsed consideration of extrinsic evidence, for different reasons and purposes — a general topic which recurs with some regularity in the Court’s contract opinions.