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News and Updates on Oil & Gas Legal Issues

Certain Legal Deadlines Suspended in Louisiana Due to Flooding

Posted in Legal Updates, News

In the wake of the devastating floods that have affected south Louisiana, the State of Louisiana and the federal district courts in Louisiana have suspended certain legal deadlines.

Following his declaration of a state of emergency, Governor John Bel Edwards signed an amended Executive Order on August 17, 2016 (amending a previous executive order of August 15, 2016 and applying retroactively from August 12, 2016) suspending legal deadlines as follows:

  • Liberative prescription and peremptive periods are suspended throughout the State of Louisiana until September 9, 2016.
  • Deadlines in legal proceedings in courts, administrative agencies and boards in the following parishes are suspended until September 9, 2016: Acadia, Ascension, Assumption, Avoyelles, Cameron, East Baton Rouge, East Feliciana, Evangeline, Iberia, Iberville, Jefferson Davis, Lafayette, Livingston, Pointe Coupee, St. Charles, St. Helena, St. James, St. John the Baptist, St. Landry, St. Martin, St. Tammany, Tangipahoa, Vermilion, Washington, West Baton Rouge and West Feliciana.
  • Deadlines in legal proceedings in courts, administrative agencies and boards in all other parishes were suspended from August 12, 2016 through August 19, 2016. However, if a party to a pending matter can show that there is an inability to meet legal deadlines caused by the flooding, then deadlines for that specific matter are to be suspended until September 9, 2016.

The executive order specifies that courts, administrative agencies and boards within the listed parishes should use due diligence in communicating with attorneys, parties and the public on how the executive order will be implemented and interpreted.  Further, the executive order states that the suspensions of deadlines in legal proceedings is not to be interpreted to prohibit an owner of immovable property from reclaiming leased property if abandoned as provided by law or from entering leased property to make necessary repairs as provided by law.  The executive order is effective through September 9, 2016, unless amended, modified, terminated or rescinded by the Governor, or terminated by operation of law before that time.

In addition, the United States District Courts for the Eastern District, the Middle District and the Western District of Louisiana have issued orders relating to legal deadlines in those courts as a result of the flooding.

We recommend that you contact your Gordon Arata attorney if you have any questions about how these state or federal suspensions of deadlines may affect you or your company.

Lease Division in Louisiana – “The Times They Are A-Changin’”

Posted in Louisiana Mineral Code

Under the Louisiana Mineral Code and caselaw, a mineral lease is generally not divisible by assignment.  Nonetheless, courts have long held that a lease contract can be rendered divisible if it contains certain language.  The consequences of the interpretation of this language are of critical importance for oil and gas lessees and their successors and assigns in the context of lease maintenance.  This article examines and reviews some of the earlier cases on the issue and compares them to some more recent cases that are in tension, and perhaps even overrule, these earlier cases.

One of the earliest notable cases on lease division by assignment is Swope v. Holmes, 169 La. 17, 124 So. 131 (1929).  On March 17, 1925, Swope leased approximately 2500 acres of land to McCurry. By mesne conveyances, Holmes became the sole owner of the mineral lease insofar as it affected approximately 440 acres.  The chief reason urged for partial cancellation of the lease was the non-exploration and non-development of some 400 of the relevant 440 acre tract.  The lease contract contained the following provision:

It is hereby agreed in the event this lease shall be assigned as to part or as to parts of the above described lands, and the assignee or assignees of such part or parts shall fail or make default in the payment of the proportionate part of the rents due from him or them, such default shall not operate to defeat or affect this lease in so far as it covers a part or parts of said lands upon which said lessee or assignee thereof shall make due payment of said rental.

The Supreme Court of Louisiana held that the lease was divisible based on the above quoted language, and upheld partial cancellation of the lease.

In Roberson v. Pioneer Gas Co., 173 La. 313, 137 So. 46 (1931), the lessors filed suit to declare an oil and gas lease expired as to 85 of the 125 acres of land leased.  The district court granted judgment for the lessors; and the defendant appealed.  The lease covered 125 acres and was assigned to Pioneer Gas Company, which later assigned the lease to George D. Pipes and W. T. Mack only insofar as it covered 40 acres.  Before the primary term expired, Pipes and Mack completed a profitable gas well on the 40 acres assigned to them.  The well continued to produce in paying quantities and up through at the time of the trial of the case.  But no well was drilled or attempted to be drilled on the 85 remaining acres of land that Pioneer retained.  Just after the primary term expired, the lessors sued Pioneer for partial cancellation of the lease.  Pioneer argued that the gas drilled by Pipes and Mack on their 40 acres kept the entire lease in force including for the remaining 85 acres that Pioneer retained.  The relevant assignment provision in the lease read as follows:

[I]t is hereby agreed in the event this lease shall be assigned as to part or as to parts of the above described lands, and the assignee or assignees of such part or parts shall fail or make default in the payment of the proportionate part of the rents due from him or them, such default shall not operate to defeat or affect this lease in so far as it covers a part or parts of said land upon which said lessee or assignee thereof shall make due payment of said rental.

The district court ruled that the effect of the assignment of the 40 acres to Pipes and Mack was to divide the original lease into two leases, by making a separate lease between the plaintiffs, as lessors, and Pipes and Mack, as their lessees, under the terms and conditions stipulated in the original lease.  What Pipes and Mack did, or failed to do, to keep the lease in force on their 40 acres could not affect the lease as to the remaining 85 acres of land that Pioneer retained.  Relying on this same lease language, the Supreme Court of Louisiana affirmed and thus upheld partial cancellation of the lease as to Pioneer’s 85 acres.

A review of two recent decisions on this issue, specifically Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., L.L.C. in 2011 and Guy v Empress, L.L.C. in 2016, suggest that, at least insofar as geologic lease division is concerned, Louisiana courts—or at least courts in the Louisiana Second Circuit—are not so inclined to follow these decisions of the past.

In Guy v. Empress, L.L.C., 50,404 (La. App. 2 Cir. 4/8/16), 193 So. 3d 177, reh’g denied (May 12, 2016), the plaintiffs, owners of a 140–acre tract, and defendant Long Petroleum, L.L.C. entered into a mineral lease on March 23, 2004, with a primary term that was extended to March 23, 2009. The lease included a typical habendum clause and continuous drilling provision for maintaining the lease without a 90-day gap in production or operations and also included both horizontal and vertical Pugh clauses as well as the following provision regarding assignment of the lease:

[I]f Less[ee] or assignee of part or parts hereof shall fail to comply with any other provisions of the lease, such default shall not affect this lease insofar as it covers a part of said lands upon which Lessee or any assignee shall comply with the provisions of the lease.

In an assignment to Empress, L.L.C., Long retained the “shallow rights” in the lease, while conveying the “deep rights.”  More specifically, the assignment provided that it was a conveyance, assignment and transfer of “[a]ll of Assignor’s right, title, and interest in and to all oil gas leases and subleases and further including working interests, mineral interests, royalty interests, rights of assignment and reassignment, net revenue interests and undeveloped locations under or in oil, gas or mineral leases and interest in rights to explore for and produce oil, gas and other minerals[,]save and except” the formations and depths between the surface and the base of the Cotton Valley formation (the “shallow rights”).

Before the primary term of the lease expired, Long entered into an Operating Agreement with Pinnacle, which spud a Hosston well in the “shallow rights” before the expiration of the primary term and thereafter successfully completed the well, which produced until December 31, 2011.  As to the “deep rights,” preparatory activities for the drilling of the Yarbrough No. 1 well commenced on August 10, 2009 (months after expiration of the primary term); the well was spud in September 2009 and then completed with continuous production thereafter.

The lessors argued that the partial assignment from Long to Empress divided the Lease into two separate and independent leases.  Specifically, they argued that the deep rights expired on March 23, 2009 since the Yarbrough No. 1 was not spud until after expiration of the primary term and that, as to the shallow rights, since the Edwards No. 1 ceased production on December 31, 2011, and thereafter, no drilling, reworking or other operation was undertaken for the shallow rights, the entire lease terminated as of that date.

The Court of Appeal in Louisiana concluded first that the original lessee’s assignment of the deep rights did not divide the lease into two separate leases and second that the lessee and its assigns timely drilled and produced from both shallow and deep formations within the time required by the habendum clause without a 90 day gap.  The court explained that the Edwards No. 1 continued in production until December 31, 2011, by which time the Yarbrough No. 1 had been drilled and was producing.  Therefore, on March 23, 2009—the date upon which the primary term would have expired—defendants were “engaged in operations for drilling, completion or reworking, or [in] operations to achieve or restore production, with no cessation between operations or between such cessation of production and additional operations of more than ninety (90) consecutive days.”

The Supreme Court reached a similar result in Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., 2011-1225 (La. 9/23/11), 69 So. 3d 1161.  In Hoover Tree Farm, a lessor sued its original lessee and a transferee to enforce a favored nations provision in the lease.  The lease agreement between the plaintiff, Hoover Tree Farm, and its original lessee, Petroleo, as agent for Goodrich Petroleum Co., included a provision guaranteeing that as to the “Lease Area”  no lessor of either lessee or Goodrich or their successors and assigns shall recieve a higher bonus and/or royalty than lessor.  Thereafter, Goodrich transferred an undivided 50% of its interest in the lease to Chesapeake Louisiana, LP limited as to depths below the Cotton Valley formation.  After the agreement with Goodrich, Chesapeake obtained oil and gas leases of lands located within the “Lease Area” paying bonuses and royalties higher than what Goodrich paid to plaintiff.  Plaintiff filed suit against Goodrich and Chesapeake seeking to enforce the favored nations provision.

The Hoover Tree Farm court analyzed in great detail the difference between a sublease and an assignment and the related Mineral Code articles. The relevant assignment provision in the lease mirrored the lease assignment language in Empress.  The court pointed to the allusion to geographic rights in the assignment language as distinguishing from the other line of cases on the issue, “the specific assignment of rights which this default provision addresses concerns the assignment to another of all rights of the lessee in a particular geographical area of the Lease.”  And without expounding on the distinction, the court found that the lease assignment did not divide the lease.

So what does this mean for lessees and lessors, when the longstanding interpretation of a simple assignment provision in a contract appears to have suddenly been turned on its head?  Perhaps it means that things are as they should be.  In the words of Bob Dylan: “Keep your eyes wide- The chance won’t come again- And don’t speak too soon-For the wheel’s still in spin-And there’s no tellin’ who- That it’s namin’- For the loser now- Will be later to win- For the times they are a-changin’.”  Be aware of the distinctions that may be read into these assignment provisions should litigious issues arise, and be diligent in drafting these contract provisions.  As our industry and all the things that go along with it develop, progress and advance, so will our judges and their analysis and interpretation of the meaning and intent of the parties to a contract involving these ever-changing issues.

Amendment to Louisiana Risk Fee Statute Closes Loophole Shown by Recent Case

Posted in Legal Updates

Louisiana Revised Statute 30:10, commonly referred to as the Risk Fee Statute, was amended during the 2016 Regular Session of the Louisiana Legislature.  The statute as amended took effect June 13, 2016.  The amendment expressly allows an operator of a commissioner’s unit to assert the risk fee penalty against a non-operator lessee by sending the required notice under the Risk Fee Statute after the spudding of the well.  This article is limited to discussing only the 2016 amendment to the Risk Fee Statute and how it closed a loophole illustrated by a recent case addressing a prior version of the statute.  For prior discussions of other particulars of the Louisiana Risk Fee Statute, see our prior blog and paper.

As background, the Risk Fee Statute was also amended previously in 2012.  The 2012 amendment to the Risk Fee Statute required the risk fee notices to be sent before the spudding of a well.  The pre-2012 amendment version of the statute required an operator to send the risk fee notices to non-operator lessees before the completion of the well.  The potential loophole created by this requirement was illustrated in the recent case of TDX Energy, LLC v. Chesapeake Operating, Inc., 2016 WL 1179206, which was decided under the pre-2012 version of the Risk Fee Statute.

In the TDX case, TDX Energy, LLC acquired several leases in a Haynesville unit operated by Chesapeake Operating, Inc.  The unit order was dated effective September 16, 2008 and the unit well was spud on February 5, 2011 and completed on July 19, 2011.  TDX acquired its leases from Touchstone Energy, LLC on October 25, 2011.  The leases were taken by Touchstone between July 18, 2011 and September 14, 2011 but were dated July 15, 2011 and were not recorded until between July 22, 2011 and September 14, 2011 and thus after Chesapeake had completed the unit well.  Remember that under the pre-2012 version the risk fee notices were required to be sent to non-operator lessees prior to the completion of the unit well.  However, in the TDX case the leases acquired by TDX were not recorded in the parish conveyance records until after the well was completed.  In fact, Chesapeake was not aware of the TDX leases until TDX sent it a request for a report on the well in accordance with La. R.S. 30:103.1 and 30:103.2 on December 5, 2011.  Chesapeake responded by letter dated January 23, 2012 and provided the well costs and invoked the Risk Fee Statute to give TDX 30 days from the date of the risk fee notice to elect whether to participate in the well.

Thereafter, TDX sued Chesapeake in Louisiana federal court to recover production payments, accounting, penalties, and attorney’s fees under La. R.S. 30:103.1 and 30:103.2.  In response, Chesapeake filed a counterclaim seeking a declaration that pursuant to the Risk Fee Statute it was entitled to recover out of the production from the unit well not only the expenses incurred in drilling, testing, completing, equipping and operating the well, including a charge for supervision, allocable to the tracts covered by the TDX leases, but also a risk charge equal to 200% of those costs.

The court ruled that Chesapeake was entitled to own and recover out of production from the unit well TDX’s allocated share of the actual reasonable expenditures incurred in drilling, testing, completing, equipping and operating the unit well, including a charge for supervision.  In fact, TDX did not dispute that Chesapeake was entitled to these well costs.

But the court also ruled that Chesapeake could not recover a risk fee penalty against TDX because the pre-2012 version of the Risk Fee Statute called for the risk fee notice to be sent before the completion of the well with few exceptions, which were not applicable to the facts of the TDX case, i.e., changing the size and/or shape of a unit after the unit well had been completed.  The court recognized the policy behind the Risk Fee Statute was to get rid of the free-rider problem of a non-operator sitting back and waiting until after a well was drilled before deciding to participate in the well.  However, here, the Risk Fee Statute failed to accomplish this goal.  Nonetheless, the Court stated that its hands were tied by the plain language of the statute.  As a result, TDX was able to avoid having the risk fee charged against it by not recording the leases it acquired until after the completion of the well, thereby avoiding letting Chesapeake learn of its interest as a non-operator leaseholder.  The court also reaffirmed the fact that the risk fee cannot be asserted against an unleased mineral owner.  Therefore, there would have been no reason for Chesapeake to risk fee notice the mineral owners before the TDX leases were recorded.

The TDX case shows the loophole that existed in the pre-2012 version of the Risk Fee Statute (and also the version that existed after the 2012 amendment).  Under both prior versions of the Risk Fee Statute, a non-operator lessee could avoid having to bear a risk fee penalty simply by waiting to record its leases until after the unit well at issue was completed (pre-2012) or spud (after 2012 amendment).  That way, any risk fee notice sent by the operator of a unit well to that non-operator lessee would be untimely and, therefore, the risk fee of 200% for a unit well for well costs could not be charged.

Act No. 524, which became effective June 13, 2016, amended La. R.S. 30:10 to allow the operator of a unit well to send the required risk fee notices after a well was spud or even completed.  By allowing for the notice to be sent after a well has been completed, the loophole in the Risk Fee Statute as demonstrated by TDX appears to have been closed.  Therefore, it appears that if TDX were decided under the current version of the Risk Fee Statute, then Chesapeake would have been allowed to assert the risk fee charge against the non-operator lessee.

The 2016 amendment to the Risk Fee Statute makes several other changes to the language and procedures outlined under the statute to allow for the risk fee notice to be sent after completion of a well.  Specifically, the payment of estimated drilling costs by a non-operator lessee is now deemed timely if received by the operator within 60 days of the actual spudding of the well or within 60 days of the receipt by the notified non-operator lessee of the notice of AFE costs, whichever is later.  The prior version of the Risk Fee Statute required the payment to be received within 60 days of the spudding of the well or within 60 days from the receipt of subsequent detailed invoices for subsequent costs incurred after the spudding of the well.  Additionally, the requirement under the prior version of the Risk Fee Statute for notices to be sent within 60 days of the date of a unit order to non-operator lessees in a unit where there is located a well already drilled or drilling (post-drill unitizations) or within 60 days of a unit order to any additional non-operator lessees included in a revised unit has been eliminated.  Again, these changes to the Risk Fee Statute have the effect of allowing an operator to send a risk fee notice to a non-operator lessee after the spudding and completion of a well.

Of additional note, the 2016 amendment to the Risk Fee Statute clarifies that an operator’s failure to provide a risk fee notice to one non-operator lessee will not affect the validity of a risk fee notice being properly provided to any other non-operator lessee.  Thus, a non-operator lessee who receives a risk fee notice cannot attack the validity of that notice by arguing that someone did not timely receive a proper notice. The prior version of the Risk Fee Statute did not directly address this issue.

If you should have any questions concerning the application of the Risk Fee Statute in Louisiana, please do not hesitate to give us a call.

BOEM Issues NTL Implementing Major Changes to its Financial Security Requirements for the OCS

Posted in BOEM

On July 14, 2016, the Bureau of Ocean Energy Management (BOEM) published a long-awaited Notice to Lessees and Operators (NTL) implementing new financial security requirements (NTL No. 2016-N01 dated July 12, 2016).  The NTL was issued to “clarify the procedures and criteria that BOEM Regional Directors use to determine if and when additional security … may be required for Outer Continental Shelf (OCS) leases, pipeline rights-of-way (ROW), and rights-of-use and easement (RUE).”  The NTL will become effective on September 12, 2016 and will do away with the past practice of “waiver” of certain OCS decommissioning obligations.

Determining Financial Strength and Reliability:

BOEM determined that “its previously utilized formulas for determining financial strength and reliability are outdated and no longer provide sufficient protection for liabilities incurred during OCS operations.”  As a result, each company (which includes owners of record title, owners of operating rights, pipeline ROW holders and RUE holders) will now be responsible for ensuring that all obligations, including decommissioning and abandonment, are satisfied for every lease, ROW or RUE in which the company has an ownership interest or for which a company provides a guarantee.

The Regional Director will determine the financial capacity of each company to carry out its abandonment obligations taking into consideration the company’s:

  1. Financial Capacity – financial capacity must be substantially in excess of existing and anticipated lease and other obligations, based upon audited financials and other information (as detailed here).
  2. Projected Financial Strength – projected financial strength must be substantially in excess of existing and anticipated lease and other obligations taking into consideration both existing production and proven reserves of future production.
  3. Business Stability – business stability is based upon five years of continuous operation and production on the OCS or onshore.
  4. Reliability – reliability is based upon the company’s credit rating from Moody’s or Standard and Poor’s, or trade references.
  5. Record of Compliance – record of compliance applies to the company and any of its affiliates or subsidiaries and takes into account any assessment of civil penalties by BSEE or BOEM, findings or citations of noncompliance by BSEE, BOEM or other agencies, and citations for non-payments or under-payments that have been referred to the U.S. Treasury.

In this determination, BOEM will consider 100% of the decommissioning liability for every lease, ROW and RUE in which a company holds an interest.  In the event a company’s abandonment obligations exceed its financial capacity as determined by BOEM, then the company will be required to provide additional security.

Determining the Amount of Additional Security:

If the Regional Director determines additional security is required, the Regional Director will either:

  1. propose an amount of additional security required, and give the company the opportunity to meet with BOEM, within a specified period of time, to discuss this amount; or
  2. order that within a specified period of time, the company provide the required additional security or present to BOEM a tailored plan to meet the additional security requirement.

For sole liability properties, additional security will not be permitted to be phased in.  The designated operator is required to coordinate with lessees to provide the amount of additional security required for each lease.  The RUE holder-of-record and the ROW holder-of-record are required to provide the amount of additional security required for each RUE and ROW, respectively.

A company has 30 days from receipt of the Regional Director’s proposal of the amount of additional security to notify BOEM in writing of any dispute.  If no notice of dispute is made within the 30-day period, the Regional Director will issue an order to provide additional security or to present BOEM with a tailored plan to meet the additional security requirement.  Additional security must be provided within 60 days of receipt of the order for sole liability properties and within 120 days of receipt of the order for all other properties (unless notification is provided to BOEM of an intent to submit a tailored plan or as otherwise specified in the order).

Acceptable Forms of Additional Security:

One or more of the following are acceptable to meet the requirement of additional security:

  1. Surety Bond(s).
  2. Pledge of U.S. Treasury Security(ies).
  3. Tailored Financial Plan.

A tailored financial plan may include surety bonds, pledge of U.S. Treasury securities, abandonment accounts, third-party guarantees, any other form of security approved by the Regional Director or a combination of any of the above.  BOEM will provide guidance in putting together a tailored plan, if requested.  Notice of intent to provide a tailored plan must be provided to BOEM within 10 days of receipt of an order to provide additional security and the plan itself must be submitted for approval within 120 days of receipt of the order (or such other time period as specified in the order).

Self-Insurance:

If additional security is required, the same five categories set out above will be used by the Regional Director to determine whether the company will be permitted to self-insure all or part of the additional security obligations.  Self-insurance (which was capped at 50% of a company’s net worth) will be a maximum of 10% of tangible net worth.  Given the significant recent decline in the price of oil and the resulting decline in the net worth of many oil companies, the new 10% cap could significantly reduce the number of companies that will have the ability to self-insure.  The Regional Director may determine, based on a company’s credit rating, that the company cannot apply self-insurance to sole liability properties.

For a company to meet all or a portion of its additional security, it may be possible for the company to make arrangements to rely upon financially strong co-lessees or co-owners who agree to allocate self-insurance to the co-owned lease, ROW or RUE.

Timing for Compliance with Additional Security Requirement:

As part of a tailored plan approved by BSEE, it is possible to phase in additional security according to the following schedule (unless varied by the Regional Director):

  • Within 120 calendar days from the date of approval, provide at least one-third (1/3) of the remaining required additional security;
  • Within 240 calendar days from the date of approval, provide at least two-thirds (2/3) of the remaining required additional security; and
  • Within 360 calendar days from the date of approval, provide the full amount of the remaining required additional security.

When the Regional Director will Evaluate Financial Ability:

The Regional Director will evaluate companies annually to determine whether additional security is required based upon a company’s financial ability to carry out present and future obligations.

In addition, the Regional Director, in his or her discretion, may at any time review a company’s financial ability.  Per the NTL, the following events will likely trigger such a review:

  • Material or adverse change in a company’s financial strength or OCS obligations;
  • Performance deficiencies, such as incidents of noncompliance, civil penalties or failure to adhere to any term or condition of, or obligation imposed by, a lease, exploration or development and production plan, development operations coordination document, or permit;
  • Change in operator or ownership; or
  • Violation of Department of the Interior or other applicable regulations.

*******************

When the NTL becomes effective on September 12, 2016, it will replace and supersede the current supplemental bonding regime, as detailed in NTL No. 2008-N07.  The NTL will apply to all BOEM regions.  As we noted in blog posts last fall and last spring, this NTL follows the February 2015 BOEM Financial Assurance Forum and a March 2015 meeting between BOEM staff and several lawyers who focus on OCS regulatory matters, including Gordon Arata attorneys.  If you have any questions about this NTL, please contact Cynthia Nicholson, Peck Hayne or Peggy Welsh.

Louisiana Supreme Court Denies Writs

Posted in Legal Updates

By a vote of 4-3 on Friday, June 17, 2016, the Louisiana Supreme Court denied writs in reviewing the First Circuit’s decision upholding the Commissioner of Conservation’s permit to Helis Oil & Gas Company, LLC to drill an oil and gas well in St. Tammy Parish over the objection of the parish government.  We reported the First Circuit decision on our blog post on March 23, 2016.  It’s unusual to have opinions assigning reasons for dissenting from a writ denial; here there were two such dissents with written reasons.

 

Cynthia Nicholson and Peck Hayne Recognized for Their Years of Support to PLANO

Posted in News

Gordon Arata is pleased to announce that on Monday, June 20, Cynthia Nicholson and Peck Hayne received the Professional Landmen’s Association of New Orleans’s Special Award in recognition for their many years of support to the organization, including most recently in connection with their efforts in negotiating a new lease form for the Louisiana State Mineral and Energy Board.  PLANO formed in 1953 and its mission is to promote and advance the art and science of the profession of Petroleum Landmen. 

Cynthia Nicholson focuses her practice on oil and gas transactions with respect to lands located within the State of Louisiana as well as those located on the Outer Continental Shelf (OCS).  She regularly documents and negotiates acquisitions and divestitures of both onshore and offshore properties, and has extensive experience with many types of transaction structures including mergers, asset and stock acquisitions and sales. She regularly counsels clients on a wide range of regulatory issues and has extensive experience counseling clients on issues arising under OCS regulations. Throughout her career, Cynthia has also advised clients on the drafting and interpretation of mineral leases, operating agreements, participation agreements, unitization agreements, servitude agreements and other agreements used in the oil and gas industry.  A significant portion of Cynthia’s practice is also dedicated to the analysis and review of complex land and leasehold titles. She has rendered hundreds of title opinions based on her examination of complex petroleum titles, and she regularly assists clients in the financing of such onshore and offshore properties. Cynthia represents clients before the U.S. Department of Interior’s Bureau of Ocean Energy Management (BOEM) and Bureau of Safety and Environmental Enforcement (BSEE). She has assisted clients in obtaining mineral leases and rights-of-way on the OCS and in the creation of units approved by the BSEE.

Peck Hayne concentrates his practice on oil and gas, pipeline and other energy-related transactions and regulation and on appellate litigation in energy- and property-related matters.  Peck regularly negotiates, drafts, and advises clients on complex purchase and sale agreements, operating agreements, mineral leases, right-of-way agreements, master service agreements, master time charters, transportation and interconnection agreements, gas storage agreements and settlement agreements in complex litigation and other disputes.  He also frequently renders title opinions on complex petroleum titles in Louisiana and on the Outer Continental Shelf (OCS) and assists both lenders and borrowers in the financing of onshore and offshore oil and gas properties.  He has represented clients before numerous Louisiana and federal regulators for the oil, gas and energy industries.  This advice and representation includes transportation, gathering, sale, tariff and pipeline safety issues for both oil and gas; LNG and gas storage; accounting audits; audits of unclaimed mineral proceeds; and operations on the OCS for offshore leases and rights-of-way.  He has also given expert testimony in federal and state courts on Louisiana title issues.

Supreme Court Makes It Easier to Show “Actual Fraud” in Bankruptcy Dischargeability Actions

Posted in Bankruptcy

For individual debtors, obtaining a discharge of their debts in bankruptcy is a prime objective.  That discharge is, however, subject to a number of exceptions designed to prevent abuse of the bankruptcy process.

Among those exceptions is 11 U.S.C § 523(a)(2)(A) which states that an individual debtor is not discharged of any debt –

“… for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition…”

Thus, a creditor who successfully proves conduct by an individual debtor involving false pretenses, a false representation or actual fraud can have that debt ruled non-dischargeable.

Federal circuit courts have disagreed on the necessary elements of “actual fraud” in this context.  The Seventh Circuit has taken a broad view, finding that misrepresentation is not the only type of fraud that is non-dischargeable under § 523(a)(2)(A).  See McClellan v Cantrell, 217 F.3d 890, 893 (7th Cir. 2000).  But the Fifth Circuit (which covers Texas, Louisiana and Mississippi) held that a creditor seeking to block the discharge of a debt for “actual fraud” had to prove that the creditor’s justifiable reliance in extending credit resulted from a false representation by the debtor.  See Gen. Elec. Capital Corp. v Acosta, 406 F.3d 367, 372 (5th Cir. 2005).

The Fifth Circuit last followed its prior approach in 2015. In Husky Int’l Electronics v Ritz, 787 F.3d 312 (5th Cir. 2015), a Chapter 7 debtor transferred his company’s funds to other entities he controlled without receiving equivalent value in return and after incurring a debt to the petitioning creditor.  The Fifth Circuit held that these transfers did not constitute “actual fraud” in the absence of any false representation by the debtor to the creditor.

The United States Supreme Court granted certiorari in Husky and acted to resolve the split between the circuits on this issue.  In an 7-1 decision, the Supreme Court reversed the Fifth Circuit to hold that the term “actual fraud” as used in § 523(a)(2)(A) encompasses fraudulent conveyance schemes—even in the absence of a false representation by the debtor.  Husky Int’l. Electronics v Ritz, 136 S. Ct. 1581 (May 16, 2016).

Writing for the majority, Justice Sotomayor concluded that “[t]he term ‘actual fraud’ in § 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a fraudulent representation.”  The Court noted that, before the 1978 amendment of the Bankruptcy Code, debtors were prohibited from discharging debts that were obtained by “false pretenses or false representations.” Therefore, the Court reasoned, Congress’ later addition of “actual fraud” to the language of § 523(a)(2)(A) was not intended to be duplicative of “false representation.”  Going all the way back to the Statute of 13 Elizabeth (one of the first bankruptcy acts) and subsequent English bankruptcy practice and tracing forward, the Court added that “fraud” can include debtor transfers that impair a creditor’s ability to collect on a debt and circumstances where the debtor and the recipient of assets conveyed were held liable even in the absence of representations to the debtor’s creditors.

Significantly, the Court also rejected the notion that § 523(a)(2)(A) should be restricted only to cases where debt or credit is “obtained by” the transferor of a fraudulent conveyance; instead, it suggested that any transferee who receives a fraudulent conveyance with knowledge could also be subject to a non-dischargeability claim under §5 23(a)(2)(A) for any debts traceable to the fraudulent conveyance.  While Justice Thomas argued that the phrase “obtained by” requires fraud at the point that credit was obtained and should not include fraudulent transfers, his dissent did not carry the day.

By adopting a broad definition of “actual fraud” in the context of 11 U.S.C. § 523(a)(2)(A), the Supreme Court has resolved the circuit split and appears to have now made matters a little easier for creditors seeking to have debts incurred by bad acing debtors ruled non-dischargeable in bankruptcy.

Will Things Be Different in Cameron Parish?

Posted in Environmental

It was only a matter of time before the suits based on alleged violations of the Coastal Zone Management Act made their way to Louisiana’s largest, but most desolate parish: Cameron Parish. Earlier this year, about 11 suits were filed against a number of oil, gas and pipeline companies that largely mirrored those pending in Jefferson and Plaquemines parishes.  But these suits have a notable difference: the petitions do not expressly disclaim maritime claims.  The significance of this difference may affect whether any of these Cameron Parish suits will be the first of the “Coastal Zone Cases” to successfully be removed.

The majors removed the Cameron Parish on the basis of federal question jurisdiction suits before any of the defendants were served. They assert that removal exists under both maritime law and the Outer Continental Shelf Lands Act (“OCSLA”).  Both theories were attempted in the U.S. District for the Eastern District of Louisiana when the similar suits filed in Jefferson and Plaquemines Parishes were removed to that court.  Although the Eastern District remanded all those suits back to state court, the grounds for remand are far from settled.

The majors argue that the key difference between the suits in Cameron and the ones remanded in Jefferson and Plaquemines is the plaintiffs’ lack of affirmation that they are not bringing claims under maritime law.  The statutory language of 28 U.S.C. § 1333(1) establishes that federal courts have original and exclusive jurisdiction over maritime cases.  The plaintiffs assert that the “saving to suitors” clause in § 1331 bars removal of the claims here on the basis of maritime jurisdiction.  But the defendants’ argument that the “saving to suitors” clause does not apply when a plaintiff implicitly pleads claims under maritime law by not expressly rejecting such claims and thus that removal is proper under maritime law.  A number of other grounds to maintain federal jurisdiction are thoroughly briefed, but this maritime appears to be the distinguishing point from the other Coastal Zone Cases.

Another novel issue before the Western District is the State’s independent basis to demand remand. While the State has intervened on the side of the plaintiff in all of the Coastal Zone Cases, it did so in the suits in Jefferson and Plaquemines parishes only after the suits were remanded.  The State now argues that it, and not Cameron Parish, is the proper plaintiff and that the Eleventh Amendment bars removal of its claims against the defendants.  As a result, the Western District will be the first court to consider the State’s Eleventh Amendment argument as a separate ground to remand.

The State alleges that the Eleventh Amendment renders the State “immune from removal against its will.” The State relies on general theories such as state dignity and federalism to support its position.  Of course, the State ignores that the Eleventh Amendment was drafted to protect the State when it is named as a defendant, not when it has chosen to pursue claims as a plaintiff.

Even though the Eastern District has remanded the similar Jefferson and Plaquemines Parish suits, the Western District has some new issues to consider. Specifically, the Western District must assess whether plaintiffs have alleged claims under maritime law and if this warrants it maintaining jurisdiction.  The Western District must also determine whether the State as an intervening party on the side of the plaintiff is immune from federal jurisdiction, as a general matter, based on the Eleventh Amendment.  Magistrate Judge Kay has granted oral argument on these and the other issues briefed in plaintiffs’ motions to remand.  The oral argument is set for September 1.  We are hopeful we will have a ruling before the end of the year and will know whether the Cameron Parish suit will take a different path from the other Coastal Zone Cases.

Can the Government Keep Changing the Rules for its Existing Contracts?

Posted in Legal Updates

In late 2014 and early 2015, I wrote about Century Exploration New Orleans, LLC’s request for the U.S. Supreme Court to review the Federal Circuit’s ruling regarding the validity of new bonding requirements.  The case raised the issue of whether the government may impose new burdens on existing leases in the form of additional bonding requirements that made it cost-prohibitive for companies to operate existing leases they had received from the government in the outer continental shelf (OCS).  When the Federal Circuit upheld the new requirements, I wrote: “It is not hard to imagine that this broad view of the federal government’s power and discretion could engender reticence on the part of many oil and gas companies about entering into new leases with the government or taking assignments of existing leases; any such reticence in turn would discourage offshore production. “  While Century sought review in the U.S. Supreme Court, it declined to hear the case.  You can read my prior articles about this case here and here.

Now once again it appears that federal courts are faced with addressing the limits of the government’s ability to undermine contracts with new laws and regulations.  In April 2016, the D.C. Circuit upheld a district court’s ruling that the United States Department of the Interior’s Bureau of Safety and Environmental Enforcement (BSEE) could order Noble to plug and abandon a well that was drilled under the terms of a government lease, even though the government had already breached the terms of that lease.  Noble Energy, Inc. v. Jewell, No. 15-5202, 2016 WL 3039397 (D.C. Cir. Apr. 29, 2016).

Noble contends that the D.C. Circuit panel (a set of three judges) erred in upholding that BSEE’s determination that the regulations “operate independently from any lease agreement.” Noble argues that Supreme Court precedent establishes a strong presumption that common law principles like discharge apply even in the face of laws and regulations that “invade” the common law.  In short, Noble contends that it should have been discharged from any duty to plug and abandon the well because the government had already breached the terms of the lease.  In most jurisdictions and under the common law, when one party breaches the terms of a contact, the non-breaching party is relieved of any further duty under that contract.  Noble has now sought en banc review of its appeal, which means that if a majority of all judges in regular active service (that is, non-senior judges) on the D.C. Circuit agree, then the entire eleven-member court will rehear the case and decide.  In its petition for hearing en banc, Noble writes:

En banc review is necessary to correct the panel’s dismissal of the Supreme Court’s clear instruction that common law principles are to be retained in positive law absent clear evidence of contrary intent, and to clarify the rights and obligations of the government’s contractual partners operating offshore oil and gas leases that have long been held subject to the common law.

Noble further argues that the panel’s ruling basically gives the government unchecked power to avoid any consequences of its contractual breaches, so long as it can quickly issue rules and regulations to cover its tracks.

Century and Noble find themselves in very similar boats.  Presumably after conducting due diligence and a cost-benefit analysis based on their belief of the terms they would be subject to, they entered into leases with the government.  However, after the leases were executed, the government pulled the rug out from under their feet and essentially made the leases economically unviable for them.  While there may very well be good rationales for the government’s new rules and regulations, it is clear that even some of the most sophisticated operators are being caught off-guard by these actions.  As incidents like these continue to occur, one has to believe that the risk will eventually become too great for many, and perhaps a majority of, potential lessees to engage in production on the OCS.  Assuming the D.C. Circuit declines to rehear the case en banc, or does and agrees with the original panel, it would be very helpful to the industry for the Supreme Court to weigh in and address whether the government does or does not have the ability to regulate itself out of a contract and what obligations the other party will still be obligated to perform.  Perhaps now that this issue has arisen again so soon after Century’s case, the Supreme Court will appreciate the importance of weighing in.  However, with the late Justice Antonin Scalia’s seat still vacant, there is always the possibility that, even if the Supreme Court decides to hear the case, an evenly divided Court may simply kick the can down the road.  We shall wait and see.

Louisiana Water Bottoms and the “Freeze Statute”

Posted in Louisiana Waterways

Those of us that have enjoyed the Sportsman’s Paradise that is Louisiana by hunting, fishing and exploring the great outdoors and those of us who have had the pleasure and good fortune to work as landmen running title in our great state have likely confronted the issue of determining whether a waterway is privately owned or public and/or who owns the bed, bottom or banks of a waterway. The changing course and/or widening of waterways in Louisiana, be it the Red River in Bossier and Caddo Parishes, Calcasieu Lake in Cameron Parish, Grand Lake-Six Mile Lake in St. Martin and St. Mary Parishes and even the Mississippi River or Gulf of Mexico, present unique title issues to private landowners, the state of Louisiana and oil and gas industry folks, including oil and gas landmen and title attorneys. In addition, coastal erosion has a similar effect on title and, therefore, mineral ownership. These questions of ownership can create a nightmare for an exploration and production company trying to obtain rights of way or take leases near a waterbody in Louisiana and/or pay royalties on oil and gas leases covering these lands. This article addresses the basics associated with classifying ownership of waterways in Louisiana and how that ownership, including mineral rights therein, can change over time.

In Louisiana, it is well settled that, by virtue of its inherent sovereignty, the state owns the beds or bottoms of all navigable waters in the state, whether lakes, rivers, streams, bays or in the Gulf of Mexico (See State ex rel. Bd. of Comm’rs of Atchafalaya Basin Levee Dist. v. Capdeville, 146 La. 94, 83 So. 421 (1919). The state of Louisiana owns the land that is covered by water of a river or stream at its ordinary low water mark; the land lying between the ordinary low water mark and the ordinary high water mark is called the bank and belongs to the owner of the adjacent land. Specifically, under Louisiana Civil Code Article 450, the waters and bottoms of natural navigable water bodies are declared to be public things owned by the state. But the banks of navigable rivers and streams are private things subject to public use (See La. Civ. Code art. 456). Louisiana Code articles 499 and 500 discuss accretion and dereliction. Accretion formed successively and imperceptibly on the bank of a river or stream, whether navigable or not, is called alluvion. The alluvion belongs to the owner of the bank, who is bound to leave public that portion of the bank which is required for the public use. Alluvion and accretion are sometimes used synonymously. However, accretion is defined as the act of growing to a thing and is usually applied to the gradual and imperceptible accumulation of land by natural causes, as out of the sea or river. Accretion is the addition of portions of soil by gradual deposition through the operation of natural causes. The term alluvion is applied to the deposit itself, while accretion denotes the act (See Walker Lands, Inc. v. E. Carroll Par. Police Jury, 38,376 (La. App. 2 Cir. 4/14/04), 871 So. 2d 1258, writ denied, 2004-1421 (La. 6/3/05), 903 So. 2d 442). Conversely, dereliction is formed by water receding imperceptibly from a bank of a river or stream. The owner of the land situated at the edge of the bank left dry owns the dereliction (See La. Civ. Code art. 499). However, there is no right to alluvion or dereliction on the shore of the sea (the Gulf of Mexico) or of lakes (See La. Civ. Code art. 500).

Water bodies that were navigable in 1812, when the state of Louisiana was admitted into the Union, and continue to be navigable are public things (See La. Civ. Code art. 450). Conversely, water bodies that were non-navigable in 1812 and continue to be non-navigable are private things. Questions then arise as to the status of water bodies that have become navigable or ceased to be navigable after 1812 (See 2 La. Civ. L. Treatise, Property § 4:2 (5th ed.)). Since the state (in its public capacity) generally owns only navigable bodies of water and non-navigable waterbodies are privately owned, resolution of many of the issues raised in this regard hinge on navigability. Generally speaking, a body of water is navigable in law if it is navigable in fact, and a body of water is navigable in fact if it is capable of being used for commercial purposes over which trade and travel are or may be conducted in the customary modes of trade and travel (See Walker Lands, Inc. v. E. Carroll Par. Police Jury, 38,376 (La. App. 2 Cir. 4/14/04), 871 So. 2d 1258, writ denied, 2004-1421 (La. 6/3/05), 903 So. 2d 442; and Ramsey River Rd. Prop. Owners Ass’n, Inc. v. Reeves, 396 So. 2d 873 (La. 1981)). Hence, navigability must be proven.

Navigability is a question of fact that may require substantial evidence. Moreover, the peculiar geophysical conditions that prevail at the Gulf coast prevent the drawing of a bright line of demarcation between the sea, rivers, lakes, and other inland non-navigable bodies of water. Thousands of acres of marshlands are traversed by innumerable bayous that empty into lakes, bays, and inlets. Fresh water mixes with salt water on the way to the open Gulf and tides cause salt water to enter into bodies of water further inland and render them brackish. Salinity alone can hardly furnish the criterion for the classification of a body of water as sea or as an inland water body. Moreover, the rather frequent absence of a perceptible current renders difficult the classification of a body of water as a river rather than sea or a lake.

Judith Perhay, Louisiana Coastal Restoration: Challenges and Controversies, 27 S.U. L. Rev. 149, 165 (2000). According to well-settled Louisiana jurisprudence, land that becomes part of the bed of a navigable river ceases to be susceptible of private ownership; it thus becomes a public thing, owned by the state in its capacity as a public person. It is the same when lands are eroded by the waters of the sea or of a navigable lake and become sea-bottom or lake-bottom (See A.N. Yiannopoulos, Louisiana Civil Law Treatise, Property § 75, at 151-152 (3d ed. 1991); see also La. Civil Code art. 500). Thus, as private lands erode into navigable water bodies, that new water bottom becomes the property of the state. The state of Louisiana’s interest in this eroded land is articulated in the Louisiana Constitution (See La. Const. art. IX, §3, 4(A); Ryan M. Seidemann, Curious Corners of Louisiana Mineral Law: Cemeteries, School Lands, Erosion, Accretion, and Other Oddities, 23 Tul. Envtl. L.J. 93, 119 (2009)). This change in ownership includes the underlying mineral rights. This is significant to oil and gas exploration and development in our state as it affects large amounts of valuable resources.

You may wonder whether, under the federal due process clause, compensation may be due to a landowner whose land becomes owned by the state by virtue of accretion, dereliction, erosion or subsidence. Surprisingly, this area of the law is somewhat uncharted, and this may be due, in large part, to the “Freeze Statute.”

In response to transfers to the state of Louisiana of previously privately owned lands, the legislature enacted what is commonly referred to as the “Freeze Statute”. Under the Freeze Statute (now codified at Louisiana Revised Statute 9:1151, certain mineral rights in lands transferred to the state of Louisiana by the occurrence of erosion, accretion, dereliction or subsidence may be protected, in that, if before the change the lands were subject to a valid mineral lease, the mineral owner of those leased lands and his lessee will retain those mineral rights for as long as that lease is in effect. The Freeze Statute provides, in full, as follows:

In all cases where a change occurs in the ownership of land or water bottoms as a result of the action of a navigable stream, bay, lake, sea, or arm of the sea, in the change of its course, bed, or bottom, or as a result of accretion, dereliction, erosion, subsidence, or other condition resulting from the action of a navigable stream, bay, lake, sea, or arm of the sea, the new owner of such lands or water bottoms, including the state of Louisiana, shall take the same subject to and encumbered with any oil, gas, or mineral lease covering and affecting such lands or water bottoms, and subject to the mineral and royalty rights of the lessors in such lease, their heirs, successors, and assigns; the right of the lessee or owners of such lease and the right of the mineral and royalty owners thereunder shall be in no manner abrogated or affected by such change in ownership.

The Freeze Statute was first enacted by the Louisiana legislature in 1952 and was later amended by Act No. 963 in 2001 to specifically include erosion and subsidence and also to cover the sea and arms of the sea. The effect of the Freeze Statute is that (i) where a change of ownership occurs as a result of accretion, dereliction, erosion or subsidence and (ii) a mineral lease granted before the change is being maintained as to that land as of the time of the change, that same land is acquired subject to and encumbered by any oil, gas or mineral leases covering the property, and subject to the mineral and royalty rights of the lessor, lessee and royalty owners in said lease as long as the lease is maintained.

Louisiana courts have long upheld the constitutionality of the Freeze Statute. In State v. Placid Oil Co., 300 So.2d 154 (1973), the Supreme Court of Louisiana  plainly stated that the Freeze Statute is constitutional and rejected arguments that it is a deprivation of property without due process and an impairment of the obligations of a contract.  Additionally, in Cities Services Oil and Gas Corp. v. State, 574 So.2d 455 (La. App. 2d Cir. 1991), writs denied, 578 So.2d 132 (La. 1991), reconsideration denied, 580 So.2d 663 (La. 1991), cert. denied, 502 U.S. 863 (1991), the Louisiana Second Circuit Court of Appeal, citing Placid and LSU Law Professor Lee Hargrave’s, “Statutory and Horatory” Provisions of the Louisiana Constitution of 1974, 43 La. Law Review  647, 661-62 (1983), explained:

Nothing is taken from the riparian landowner who has gained land by accretion if he obtains the land without the mineral rights; he had no vested interest in the land to begin with. Article IX, section 3 does not prohibit the state, which obtains land by dereliction, from obtaining less than full ownership, as no alienation or authorization of alienation [sic] has occurred.

Cities Services Oil and Gas Corp. v. State dealt with the changing course of the Red River near the boundaries between Caddo and Bossier Parishes between 1966 and 1978. The state asserted claims to ownership of land acquired by accretion in the Red River, and since the state had granted a lease on the former river bed (“State Lease 6002”), the state argued that the new bed was covered by this lease.  The case presented two issues: (i) did the coverage of State Lease 6002 remain with just the old river bed, did it change and provide coverage to the new river bed in place of the old river bed, or did it provide coverage to both the old and new riverbeds, along with the land formed between the two, and (ii) did the owner of the land formed by accretion have a right to the minerals underlying same under the Freeze Statute.

On the first issue, the Cities court found that State Lease 6002 covered only the former riverbed and did not move to the new bed.  The State Lease at issue contained language stating it covered land “now or formerly” constituting the riverbed owned by the state as of a specific date.  Citing this language, the court concluded that State Lease 6002 did not follow the movement of the river.  On the second issue, the court found the owners of the accretion formed due to the movement of the river were entitled to the mineral rights therein not subject to lease.  Thus, the Cities court held that the Freeze Statute “clearly and unambiguously applies only when there is a change of ownership of land or water bottoms caused by the action of a navigable stream and there is in effect a mineral lease covering and affecting the lands or water bottoms.”  Furthermore, the Cities court explained “the statute does not require that there be actual mineral production from the leased land in order for the statute to be effective.”  In short, under the Freeze Statute and the ruling in Cities, full ownership of land can be transferred as a result of accretion in the absence of a lease.  However, if the relevant land is subject to an outstanding lease, then the rights of the lessee(s) and lessor(s) are protected as long as the lease is maintained.  Upon termination of the lease, mineral ownership devolves to the owner of the land.  Note, just as the state can acquire land with less than full ownership as a result of accretion, dereliction, erosion, or subsidence by application of the Freeze Statute, a riparian (private) land owner can also take advantage of the benefits of the Freeze Statute.

For the state to make a claim under the Freeze Statute, the alluvion or accretion formed would have to have formed after the relevant state lease was granted covering a navigable water bottom at the time of the lease (See State v. Cockrell, 162 So. 2d 361 (La. Ct. App.), writ refused, 246 La. 343, 164 So. 2d 350 (1964)).

Waterbodies throughout Louisiana and the Louisiana coast remain some of the most outstanding areas of the world. These places brimming with beauty and abundant resources are our namesake.  We would all do well to understand the challenges involved in developing and applying permanent legal rules for the management of these lands where constant physical change can lead to what is land today becoming open water tomorrow (and, even if far less common, vice versa).