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Reading, Writing and Retainage

Posted in Legal Updates

A recent Louisiana Fourth Circuit decision has clarified what is prompt payment of obligations due under a public works contract.  In Woodrow Wilson Construction LLC v. Orleans Parish School Board, 245 So.3d 1 (4/18/18), rehearing denied (5/15/18) the Fourth Circuit reinforced a public entity’s duty to promptly pay sums due and payable under contract, or be subjected under La. R.S. 38:2191 to a writ of mandamus compelling payment of the sums due under the contract plus attorney fees.

The Orleans Parish School Board had awarded Woodrow Wilson Construction LLC a contract for constructing a new school. The contract required the entire project to be substantially completed within a certain amount of days and imposed liquidated damages of $5,000 per day for every day the project was late.

The project was late.

Upon substantial completion of the project, and fully satisfying all requirements to payment under the contract, Woodrow submitted its application for final retainage payment; however, the school board refused to pay and asserted its entitlement to withhold the final retainage under the contract to satisfy the liquidated damages from Woodrow’s delay. The school board further alleged that because completion of the project was delayed over a year, the amount of liquidated damages for the delay exceeded the final retainage under the contract.

The pertinent contract provisions of when payment is due read:

“[P]ayment for “normal retainage” is due upon the following having occurred:

(1)        Substantial Completion is achieved;

(2)        the Architect and the Owner approve and accept the Certificate of Substantial Completion, including an attached punchlist;

(3)        the Contractor submits an application for payment for retainage;

(4)        the Contractor submits the lien waivers to accompany the application for payment;

(5)        the 45–day lien period in La. R.S. 38:2242 has expired; and

(6)        the Contractor provides the Owner and the Architect with a clear lien and privilege certificate.”

In reading these contract provisions, along with La. R.S. 38:2191, the Fourth Circuit ruled that the parties’ contract replicated the statutory requirements for prompt payment.  The statute provides:

  1. All public entities shall promptly pay all obligations arising under public contracts when the obligations become due and payable under the contract. All progressive stage payments and final payments shall be paid when they respectively become due and payable under the contract.
  2. Any public entity failing to make any progressive stage payment within forty-five days following receipt of a certified request for payment by the public entity without reasonable cause shall be liable for reasonable attorney fees. Any public entity failing to make any final payments after formal final acceptance and within forty-five days following receipt of a clear lien certificate by the public entity shall be liable for reasonable attorney fees.
  3. The provisions of this Section shall not be subject to waiver by contract.
  4. Any public entity failing to make any progressive stage payments arbitrarily or without reasonable cause, or any final payment when due as provided in this Section, shall be subject to mandamus to compel the payment of the sums due under the contract up to the amount of the appropriation made for the award and execution of the contract, including any authorized change orders.

(emphasis added).

After analyzing the contract as a whole, in light of La. R.S. 38:2191, the Fourth Circuit ruled that because Woodrow’s liability for delays had yet to be judicially determined, the school board did not have the right to withhold the retainage amount it owed to Woodrow.  Instead, the Fourth Circuit explained, the school board had only a “claim” for alleged liquidated damages, which must be tried in a separate ordinary proceeding.  Accordingly, the Fourth Circuit ruled that the school board’s separate claim for delay-damages could not defeat Woodrow’s mandamus action, holding that a public entity’s delay-damage claims against a contractor are secondary to the contractor’s right to prompt payment under La. R.S. 38:2191, and distinct from whether a writ of mandamus should issue under the statute.  The Louisiana Public Works Act (La. R.S. 38:2243(B)) echoes a similar legislative intent: the “claims of the claimants shall be paid in preference to the claims of the public entity.”

The Fourth Circuit held that once Woodrow satisfied the requirements to payment under the contract and La. R.S. 38:2191, the school board was imputed a non-waivable, ministerial duty to tender prompt payment. Consequently, the school board had no discretionary authority to withhold payment based on a separate claim against Woodrow.  Therefore, once final retainage payment became due under the contract, no other contract provision may serve to waive the contractor’s right to prompt payment. The Fourth Circuit further opined that, where a public entity does have a right to unilaterally withhold final retainage under a public works contract, La. R.S. 38:2191 limits that right to 45 days.

Other recent Fourth Circuit cases support this same outcome.  St. Bernard Port, Harbor and Terminal District v. Guy Hopkins Construction Co., 220 So.3d 6 (4/05/17) recognized that “a public entity’s separate claims against a contractor are distinct from the issue of whether a writ of mandamus should issue.”

In Hopkins, a construction company sought a writ of mandamus to compel the St. Bernard Port, Harbor and Terminal District to pay a judgment awarded in a breach of contract case against the Port.  The trial court granted the requested mandamus. The Port appealed, claiming that La. R.S. 38:2191 did not apply to a pre-existing money judgment and that the requirements for obtaining a writ of mandamus under the statute were not satisfied.  Particularly, the Port argued that it was justified in withholding any balance claimed to be due to the construction company after it had abandoned the project, leaving portions of the project incomplete.  In affirming the trial court’s grant of the writ of mandamus, the Fourth Circuit found La. R.S. 38:2191 applicable in holding that a public entity cannot refuse to make a final retainage payment under a public works contract on the basis that it possesses reasonable cause to withhold the payment; the court further explained that, by amending La. R.S. 38:2191 to provide for mandamus relief, the Louisiana Legislature intended to avoid the protracted nature ordinary proceedings to remove the element of discretion from a public entity or officer rendering a progressive or final payment, due under contract, by requiring that the amount at issue was already appropriated.

The trial court in Woodrow distinguished Hopkins because the contractor in Hopkins sought to retroactively apply the mandamus remedy to collect a previously awarded ordinary money judgment that the public entity refused to pay; whereas Woodrow sought the issuance of a writ of mandamus prospectively, without a pre-existing judgment or the delays that accompany ordinary relief.  On appeal, the Fourth Circuit found this distinction insignificant, reasoning that whether the amount due was adjudicated before the grant of a writ of mandamus is irrelevant to the Legislature’s purpose under La. R.S. 38:2191 to ensure the prompt payment of obligations arising under public contracts.

Ultimately, the Fourth Circuit’s holding in Woodrow reinforces a public entity’s duty under La. R.S. 38:2191 to fulfill its contractual obligations as they become due, ensuring that private entities contracting with public entities receive monies due if the other statutory requirements are met. Should a public entity fail or otherwise refuse to fulfill its mandatory duty to promptly pay sums due under contract, La. R.S. 38:2191 subjects the public entity to a mandamus action compelling payment of the sums due, thus providing a procedural mechanism for forcing public entities to promptly pay monies owed under public contracts.  Lastly, La. R.S. 38:2191 imposes an award of attorney fees in favor of the contractor should a public entity fail to make all final payments under contract within 45 days of becoming due and payable.

Notably, the Fourth Circuit did not address the constitutional prohibition against compelling public entities to make payments.  Under article XII, section 10 of the Louisiana Constitution of 1974, “[n]o judgment against the state, a state agency, or a political subdivision shall be exigible, payable, or paid except from funds appropriated therefor by the legislature or by the political subdivision against which the judgment is rendered.”  It is difficult to reconcile these statutory provisions for mandamus relief for payment with this constitutional prohibition, if the school board had in fact not already appropriated funds for these payments.  The Fourth Circuit’s opinion is unclear on this point.  Presumably, the school board either already appropriated the funds at issue or else did not raise this constitutional argument, so it remains to be seen how courts will react if and when a public entity ever raises that defense in an instance where it had not already appropriated the necessary funds.

Industry Expects US Shale Growth to Offset Global Production Problems

Posted in Energy Costs, News, Oil and Gas Operations, Oil Prices

As a sustained upward trend in U.S. shale growth continues, industry analysts predict it will offset the current production problems in the near future.  In recent months the energy market has been heavily influenced by a series of demand-side developments, and investors are continuing to monitor the escalating trade conflicts between the United States and China, as well as the financial crisis in Turkey coupled with the strong U.S. dollar for their effect on the market.  Turkey’s problems, while important globally, have perhaps not received the coverage they deserve.  In the last few months the Turkish lira has plummeted in value against the U.S. dollar.  This makes Turkey’s loans (which are often paid in U.S. dollars) more expensive to pay back; if the lender banks don’t receive their money, their balance sheets become stressed and they lose the ability to continue to lend which increases the interest rates in countries beyond Turkey.

With all these developments, industry insiders believe that the U.S. shale boom is possibly the most notable supply consideration that is going underreported in the news.  As one oil analyst stated,

“The explosion in U.S. tight oil production has long been the dominant supply catalyst within the energy complex but now finds itself at the tail end of concerns. Even so, its ascent continues apace.”

In addition, the American Petroleum Institute (API) reported that U.S. crude stocks rose by nearly 4 million barrels per day in the week to August 10, reaching approximately 410.8 million barrels.  While many have been skeptical of U.S. shale in recent months, insiders stress that the U.S. shale patch is in its best economic shape ever, and the trend is still very much is the upward direction.

Back in 2014, oil was selling at near $120 per barrel, but started to decline due to weak demand, the strong dollar, and increased U.S. shale production.  Additionally, OPEC had been reluctant to reduce output which further lowered prices by flooding the market.  But in late 2016, OPEC began to curtail production.

Investors are keeping an eye on several factors that they believe could affect pricing, such as potential supply disruptions to Iranian crude exports and a ramp up in production by OPEC members and partners.  A key question facing the market in the medium term is how much longer the United States oil supply growth can continue to offset weaker production outcomes throughout the rest of the world.  At least one analyst estimates that without the U.S. crude production, the world’s supply deficit would likely increase to approximately 5.3 million barrels per day over the next five years.  But, because the U.S. crude supply is not significantly affected by politics or ageing oil fields—issues that often plague other major producers—many are optimistic that the Unites States’ supply will fill the supply gap.  Needless to say, all of this presents great opportunities to U.S. players in the industry that hopefully we all can take advantage of.

Take Heed to Avoid Being Cast a Single Business Enterprise

Posted in Legal Updates, Louisiana Corporate Law, Oil and Gas Operations

The Louisiana Third Circuit’s recent decision in Duhon v. Petro “E,” LLC, 2018-57 (La.App. 3 Cir. 7/11/18), stands as a reminder to companies of the exposure to liability they may face under the single business enterprise (SBE) theory.  Reversing a summary judgment dismissal, the court ruled that the plaintiff, an aggrieved landowner, presented facts sufficient enough to support her position that two energy companies were engaged in a single business enterprise, such that one should be held liable for the obligations of the other.

Simply stated, the SBE theory allows for one company to be held liable for the obligations of another company under certain conditions – generally when the two companies are being operated as one.  This form of veil piercing goes both horizontally and vertically, in other words between sister companies and also between a subsidiary and its parent.  However, the SBE theory allows for veil piercing solely among companies, not among individuals.

Louisiana courts analyzing an SBE allegation have applied an 18-factor test, originally set forth by the Louisiana First Circuit in Green v. Champion Ins. Co., 577 So.2d 249 (La. Ct. App.), writ denied, 580 So.2d 668 (La.1991):

  1. corporations with identity or substantial identity of ownership, that is, ownership of sufficient stock to give actual working control;
  2. common directors or officers;
  3. unified administrative control of corporations whose business functions are similar or supplementary;
  4. directors and officers of one corporation act independently in the interest of that corporation;
  5. corporation financing another corporation;
  6. inadequate capitalization (“thin incorporation”);
  7. corporation causing the incorporation of another affiliated corporation;
  8. corporation paying the salaries and other expenses or losses of another corporation;
  9. receiving no business other than that given to it by its affiliated corporations;
  10. corporation using the property of another corporation as its own;
  11. noncompliance with corporate formalities;
  12. common employees;
  13. services rendered by the employees of one corporation on behalf of another corporation;
  14. common offices;
  15. centralized accounting;
  16. undocumented transfers of funds between corporations;
  17. unclear allocation of profits and losses between corporations; and
  18. excessive fragmentation of a single enterprise into separate corporations.

This list of factors is not exhaustive, nor is any one factor dispositive in determining whether a single business enterprise exists.  Instead, courts look at the totality of facts to see if the companies are being operated as separate entities.  If a court finds that multiple entities constitute a single business enterprise, the court may disregard the concept of separateness and extend liability to each affiliated entity.

In reversing the district court’s summary judgment dismissal, the Third Circuit in Duhon noted several factors suggestive of a single business enterprise:

  1. the companies had common ownership and permitted the transfer of funds between themselves without any documentation, interest charges, or efforts made to collect unpaid loans;
  2. the loans between the companies were not “arms-length” transactions;
  3. the companies shared office space without one company paying rent to the other;
  4. the companies shared the same phone and fax numbers;
  5. the work performed by one company for the other was governed by a one-page agreement, which was different from all other contracts with other companies;
  6. the companies participated together in acquiring the lease at issue; and
  7. the contracted company never attempted to collect amounts due under the contract from the other company.

As noted previously, not all 18 factors need be met for a court to find a single business enterprise exists.  Instead a court will perform a fact intensive analysis, guided by the factors set forth in Green, to determine whether two separate legal entities are in fact operating as one, or close enough, such that each separate company should be held liable for the actions of the other.

It is important for energy companies to take note of the single business enterprise theory, as it is fairly common in today’s oil and gas industry to see related entities owned or operated by the same person(s) or entity.  For example, the same person(s) or entity may own and control both Leasing, LLC and Operating, LLC.  The owner may utilize Leasing, LLC to acquire oil and gas leases or other mineral rights and then use Operating, LLC to develop the minerals.

To mitigate liability for each company, it is imperative for each to have structures and systems in place that are independent from the other.  Further, the related entities should separate their accounting and contract with one another as they would with any other, unrelated entity.  Not doing so could expose, for example, Leasing, LLC to liability for damages caused by Operating, LLC.

Therefore, companies operating in this manner should always seek the advice of counsel regarding their exposure to liability under the single business enterprise theory.

Enforcement of Non-Compete Agreements in Louisiana Still an Uphill Battle

Posted in Employment Law, Legal Updates

Under Louisiana law, “[e]very contact or agreement, or provision thereof, by which anyone is restrained from exercising a lawful profession trade, or business of any kind, except as [otherwise] provided [by law], shall be null and void.”  See La. R.S. 23:921(A)(1).  The Louisiana First Circuit’s recent decision in Envirozone, LLC v. The Tarp Depot, Inc., No. 2016 CA 0015, 2016 WL 7444091 (La. App. 1 Cir. 12/22/16), cert. denied, 17-0308 (La. 4/7/17); 218 So.3d 11, highlights the difficulty of enforcing non-compete agreements in Louisiana.  The court’s opinion is also a poignant reminder of the presumption against the enforceability of non-compete agreements in Louisiana.

Envirozone and Tarp Depot are competitors in the hazardous waste disposal business.  Envirozone is located in south Louisiana, while Tarp Depot is located in Houston, Texas.  Despite their competition, the two companies regularly purchased products from one another, particularly when one could produce the item at a lower cost.

Envirozone was concerned that public knowledge of its purchase of products from a competitor might erode its customer base in Texas.  In October 2007, Envirozone and Tarp Depot entered into reciprocal confidentiality agreements.  Thereafter, Envirozone began sharing detailed information on its sales volume and cost structure with Tarp Depot to further develop their business relationship.  Envirozone later discovered that Tarp Depot had disclosed to an Envirozone customer that Tarp Depot was manufacturing filter bags for Envirozone (although it is not clear whether this disclosure occurred before or after the parties entered their non-compete agreement).  As a condition of maintaining their relationship, Envirozone demanded that Tarp Depot enter into a separate, non-compete agreement.  In December 2007, the parties executed such an agreement prohibiting Tarp Depot from selling products to Envirozone customers in Texas.

In 2015, Tarp Depot sent a letter to Envirozone terminating both the confidentiality and non-compete agreements.  Tarp Depot then solicited Envirozone customers in Texas.  In response, Envirozone sued Tarp Depot in Louisiana state court for 1) a declaration that Tarp Depot had not properly terminated the agreements and 2) a preliminary injunction preventing Tarp Depot from selling products to Envirozone’s customers.

The trial court ruled against Envirozone on two separate grounds.  First, it ruled that Tarp Depot had validly terminated their agreements.  Second, it concluded that the non-compete agreement was invalid because Envirozone and Tarp Depot were not on “equal footing.”  As a result, the trial court denied Envirozone injunctive relief.

On appeal, the Louisiana First Circuit affirmed the trial court’s denial of injunctive relief to Envirozone.  Under Louisiana Revised Statute §23:921 any contract or agreement that restrains someone from exercising a lawful profession, trade, or business of any kind is presumed to be “null and void,” except where specifically provided by law.  Even where the law would allow two corporations to enter into such an agreement the companies must be on equal footing.

In La. Smoked Prod., Inc. v. Savoie’s Sausage & Food Prod., Inc., 696 So.2d 1373 (La. 1997), the Louisiana Supreme Court held the parties to a non-compete agreement are on equal footing when 1) both parties are equally bound to the contract, 2) the terms are fair to each party in all respects, 3) there is no disparity in the parties’ bargaining power, and 4) the prohibitions on competition are reasonable.  The First Circuit did not address the trial court’s ruling on this point, but concluded that Tarp Depot had effectively canceled the non-compete agreement pursuant to a clause in the agreement that allowed its termination when “‘in writing and signed by the party or parties affected.’”  Under Louisiana Civil Code article 2024, “[a] contract of unspecified duration may be terminated at the will of either party by giving notice, reasonable in time and form, to the other party.”  Because the non-compete agreement had no specific duration, the court reasoned that either party had the right to terminate the agreement by giving notice “reasonable in time and form.”  The court determined that Tarp Depot’s termination letter satisfied the reasonableness requirements of article 2024.

Regarding the confidentiality agreement, the court stated that under Louisiana jurisprudence an agreement not to use confidential information was enforceable only if the information used was, in fact, confidential.  In this case, Envirozone had failed to indicate what specific confidential information, if any, Tarp Depot had in its possession that would give Tarp Depot a competitive advantage.

Yet the court was not unanimous in its decision.  In a concise dissent, Chief Judge Vanessa Whipple suggested that the majority had overlooked obvious facts in favor of the injunctive relief requested by Envirozone.  For example, Judge Whipple found that the parties were on equal footing because although Tarp Depot was a new and relatively small company, its founder had over twenty-six years of experience that included the recent sale of another hazardous waste disposal company for three million dollars.  From that prior company Tarp Depot had a built-in customer base.  As such, Judge Whipple would have confirmed the validity of the non-compete agreement.

Judge Whipple also concluded that Tarp Depot had not validly terminated the non-compete agreement because the terms of the agreement required any cancellation to be signed by the party or “parties affected” (emphasis added).  Judge Whipple reasoned that “[c]ertainly, the termination of the non-compete agreement herein affects both parties . . . .  Accordingly, to terminate the agreement both parties had to sign, which undisputedly was not done.”  Judge Whipple further suggested that the majority’s rationale based on the notice requirements of article 2024 of the Civil Code was flawed.  Envirozone received Tarp Depot’s letter the day before the purported cancellation of the non-compete agreement.  “I am unable to find that this constitutes ‘reasonable advance notice,’” Judge Whipple stated.

Judge Whipple did not agree that Envirozone had failed to indicate what confidential information Tarp Depot had in its possession.  Both parties testified that the purpose of the confidentiality agreement was to ensure Envirozone’s customers would not learn that Envirozone was purchasing products from Tarp Depot.  Tarp Depot had acknowledged that it learned about Envirozone information that Tarp Depot would not have shared with a competitor without a confidentiality agreement.  This admission combined with the parties’ purpose for entering into the confidentiality agreement was sufficient to support Envirozone’s request for an injunction, Judge Whipple concluded.

The Envirozone case demonstrates the uphill battle in enforcing non-compete agreements in Louisiana even when facts supporting injunctive relief may be “readily apparent from the record.”  As Judge Whipple observed, “the rationale for the confidentiality agreement is readily apparent from the record.”  A company hoping to protect its customer base through a non-compete agreement must not only be concerned about its competitors, but must also be familiar with Louisiana’s non-compete laws.

For more information on enforcing a non-compete agreement or confidentially agreement in Louisiana, please contact Donna Currault or Micah Zeno.

22 GORDON ARATA MONTGOMERY BARNETT Lawyers Selected for Inclusion in The Best Lawyers in America® 2019 Edition, Two Named Lawyer of the Year

Posted in Firm Announcements

In the past 35 years, Best Lawyers has become universally regarded as the definitive guide to legal excellence.  Because Best Lawyers is based on an exhaustive peer-review survey in which more than 36,000 leading attorneys cast almost 4.4 million votes on the legal abilities of other lawyers in their practice areas, and because lawyers are not required or allowed to pay a fee to be listed, inclusion in Best Lawyers is considered a singular honor.  Corporate Counsel magazine has called Best Lawyers “the most respected referral list of attorneys in practice.”

A total of 22 Gordon Arata Montgomery Barnett lawyers representing 24 diverse practice areas have been selected for inclusion in The Best Lawyers in America® 2019 edition.  New Orleans lawyer Donna Phillips Currault has been named “Lawyer of the Year” for her work in Employment Law.  New Orleans lawyer Tim Eagan has been named “Lawyer of the Year” for his work in Energy Law.  Best Lawyers limits the honor of “Lawyer of the Year” to one attorney in each practice area for a particular city.

The named honorees include:

 
Admiralty and Maritime Law
Philip Brooks, Jr. – New Orleans, LA
Gordon Grant, Jr. – New Orleans, LA

Bankruptcy and Creditor Debtor Rights
Insolvency and Reorganization Law
Gerald Schiff – Lafayette, LA

Bet-the-Company Litigation
Tim Eagan – New Orleans, LA
Daniel Lund – New Orleans, LA

Commercial Litigation
Steve Copley – New Orleans, LA
Donna Phillips Currault – New Orleans, LA
Tim Eagan – New Orleans, LA
Greg Grimsal – New Orleans, LA
Martin Landrieu – New Orleans, LA
Daniel Lund – New Orleans, LA
Howard Sinor – New Orleans, LA

Construction Law
Michael Botnick – New Orleans, LA
Howard Sinor – New Orleans, LA

Employment Law – Individuals
Donna Phillips Currault – New Orleans, LA – Also named Lawyer of the Year in New Orleans

Employment Law – Management
Donna Phillips Currault – New Orleans, LA – Also named Lawyer of the Year in New Orleans

Energy Law
Bob Duplantis – Lafayette, LA
Tim Eagan – New Orleans, LA
Peck Hayne – New Orleans, LA
Sam Masur – Lafayette, LA
Cynthia Nicholson – New Orleans, LA

Environmental Law
Terry Knister – New Orleans, LA

Labor Law – Management
Donna Phillips Currault – New Orleans, LA

Legal Malpractice Law – Defendants
Daniel Lund – New Orleans, LA

Litigation – Banking & Finance
Greg Grimsal – New Orleans, LA

Litigation – Construction
Howard Sinor – New Orleans, LA

Litigation – Environmental
Howard Sinor – New Orleans, LA

Litigation – Labor & Employment
Donna Phillips Currault – New Orleans, LA

Litigation – Real Estate
Greg Grimsal – New Orleans, LA

Mining Law
John Y. Pearce – New Orleans, LA

Natural Resource Law
John Y. Pearce – New Orleans, LA

Oil & Gas Law
Bob Duplantis – Lafayette, LA
Greg Duplantis – Lafayette, LA
Peck Hayne – New Orleans, LA
Sam Masur – Lafayette, LA
Cynthia Nicholson – New Orleans, LA
Scott O’Connor – New Orleans, LA
John Y. Pearce – New Orleans, LA
Paul Simon – Lafayette, LA

Personal Injury Litigation – Defendants
Tim Eagan – New Orleans, LA
Daniel Lund – New Orleans, LA

Product Liability Litigation – Defendants
Steve Copley – New Orleans, LA

Securitization and Structured Finance Law
Marion Welborn Weinstock – New Orleans, LA

Tax Law
Caroline Lafourcade – New Orleans, LA

About Gordon Arata Montgomery Barnett

Gordon, Arata, Montgomery, Barnett, McCollam, Duplantis & Eagan, LLC has attorneys in offices in New Orleans, Lafayette, and Baton Rouge, Louisiana and Houston, Texas.  Whether in litigation or transactions or dealing with regulators, the Firm’s lawyers serve clients locally, regionally, and nationally and provide services across a wide range of industries aligned with the Firm’s offices along the Gulf Coast.  The Firm is committed to achieving the best possible results and to fostering relationships with clients. For contact information, please visit our webpage at www.gamb.law.

U.S. Fifth Circuit Affirms Fuel Supplier Does Not Have Maritime Lien for Bunkers

Posted in Louisiana Waterways, Maritime

In yet another court decision in the wake of the O.W. Bunker collapse of 2014, the Fifth Circuit affirmed in Valero Mktg. & Supply Co. v. M/V Almi Sun, 893 F.3d 290 (5th Cir. 2018) that a vessel fuel supplier, performing under a subcontract with O.W. Bunker, does not have a maritime lien for necessaries supplied to a vessel.

Before November 2014, O.W. Bunker (“OWB”) was one of the world’s largest intermediary suppliers of bunkers (marine fuel).  In a typical transaction, a shipowner would contract with OWB, and OWB would then subcontract with a fuel supplier to actually supply the vessel with fuel.  These transactions would be made on credit, and in some situations the shipowner would have consumed the fuel before paying for it.

OWB collapsed and declared bankruptcy in November 2014 with more than $750 million in debts owed.  At that point, many of OWB’s customers had consumed bunkers with no money having traded hands, leaving both OWB and its subcontractors uncompensated.  Shipowners began receiving payment demands from both OWB and its subcontractors.  Confusion and uncertainty arose over the identity of the proper payee:  was it OWB, as the party to the contract with the ship, or was it instead the fuel supplier, as the party that actually supplied the vessel with the fuel?  Under general maritime law and the Commercial Instruments and Maritime Liens Act (CIMLA), 46 U.S.C. § 31341 et seq., a supplier of necessaries (such as food, fuel and repairs) has a maritime lien on the vessel and may bring an in rem action to enforce the lien.  Thus, when OWB’s subcontractors did not receive payment from the shipowners, many began seizing vessels and filing in rem actions against them.

In Valero Mktg. & Supply Co. v. M/V Almi Sun, Almi Tankers S.A., an agent for the ALMI SUN’s owner, Verna Marine Co. Ltd., contracted with O.W. Bunker Malta, Ltd., a fuel trader, to procure bunkers.  O.W. Malta issued a final sales order, listing Valero Marketing & Supply Company as the supplier and listing itself as the seller.  Another OWB entity, O.W. Bunker USA, Inc., then contracted with Valero to purchase the fuel.  OWB’s involvement ended there.  Valero coordinated delivery directly with the ALMI SUN, and the vessel’s agents tested and verified the bunkers’ quality.  After delivery was completed, an authorized officer of the vessel signed the bunkering certificate, and Valero submitted an invoice to O.W. USA.  Following OWB’s bankruptcy filing, Valero filed an in rem action against the ALMI SUN and seized the vessel.

The trial court entered summary judgment in favor of Verna, holding that Valero had not furnished necessaries to the ALMI SUN “on order of the owner or a person authorized by the owner” and thus was not entitled to a maritime lien on the vessel.  On appeal, the Fifth Circuit stated that the sole inquiry was whether Valero furnished the necessaries to the ALMI SUN “on the order of the owner or a person authorized by the owner.”  Based upon its analysis of the CIMLA as “strictly applied” to the underlying facts of the case, the Court concluded Valero did not.

Under section 31343(a) of the CIMLA, a person providing necessaries to a vessel “on the order of the owner or a person authorized by the owner” is entitled to a maritime lien on the vessel.  Section 31341(a) lists the following “persons … presumed to have authority to procure necessaries for a vessel:”

(1)        the owner;

(2)        the master;

(3)        a person entrusted with the management of the vessel at the port of supply; or

(4)        an officer or agent appointed by—

(a)        the owner;

(b)        a charterer;

(c)        an owner pro hac vice; or

(d)       an agreed buyer in possession of the vessel.

 

The Fifth Circuit recognized two lines of cases addressing whether the actual supplier of necessaries has a maritime lien: the general/subcontractor cases and the principal/agent or “middle-man” cases.  The court cited Lake Charles Stevedores, Inc. v. PROFESSOR VLADIMIR POPOV MV, 199 F.3d 220 (5th Cir. 1999), as holding that “the general contractor supplying necessaries on the order of an entity with authority to bind the vessel has a maritime lien;” however, “subcontractors hired by those general contractors are generally not entitled to assert a lien on their own behalf, unless it can be shown that an entity authorized to bind the ship controlled the selection of the subcontractor and/or its performance.”  In Lake Charles, ED&F Man Sugar, Inc. contracted with Broussard Rice Mill, Inc. to purchase rice.  Under the contract, Broussard was responsible for procuring stevedoring services.  Broussard, working through an agent, contracted with Lake Charles Stevedores (LCS) to load the rice onto the vessel.  LCS loaded the rice, and when Broussard failed to pay, LCS asserted a maritime lien for its services.  The court in Lake Charles determined that because Man Sugar “retained no control over the selection of a stevedoring concern, and Broussard accepted all the risk associated,” LCS was not entitled to a maritime lien.  One may ask why control over the selection of a subcontractor should be the linchpin here; however, the court left that question unanswered.

Applying Lake Charles, the Fifth Circuit determined that for Valero to have a maritime lien, it must show that an entity authorized to bind the ALMI SUN “controlled [its] selection … and/or its performance.” Although there was evidence of Verna’s “awareness” that Valero had been retained to supply the bunkers, there was no evidence that Verna “controlled” the selection or performance of Valero, and “mere awareness” of Valero did not equate to “authorization” under CIMLA. In summary, Valero had provided the bunkers at OWB’s request, and OWB was not a person presumed to have authority to procure necessaries.  Thus, the court held, Valero did not have a maritime lien.

Valero was decided by a 2-1 majority, and much of the opinion addresses a disagreement between the majority and dissenting judge on whether the majority’s decision creates a split with cases decided by the Eleventh Circuit holding that a shipowner’s identification and acceptance of a subcontractor prior to performance grants the subcontractor a maritime lien.  The majority disagreed with the dissent’s characterization of the state of the law in the Eleventh Circuit, citing Barcliff, LLC v. M/V DEEP BLUE, 876 F.3d 1063 (11th Cir. 2017), another case decided in the aftermath of OWB’s insolvency.  In Barcliff, the Eleventh Circuit held that the supplier was not entitled to a lien because it “acted on the order of O.W. USA,” not the shipowner.

Somewhat surprisingly, Valero does not analyze whether OWB was an appointed agent of Verna, presumed to have authority to procure necessaries for a vessel as articulated in section 31341(a)(4) of the CIMLA.  Considering that the court relied on OWB decisions from the Second and Eleventh Circuits to support its holding and that it devoted a significant portion of its opinion to addressing the potential circuit split raised by the dissent, it seems the court made a conscious effort to justify its decision as being aligned with other courts’ holdings that OWB’s subcontractors do not have a maritime lien.  As a result, the suppliers’ recourse will be limited to what they can recover from OWB in the bankruptcy court.  Such decisions have been criticized as protecting the shipowners from being doubly liable for the fuel (as often happened in England) at the expense of the unpaid fuel suppliers.  Indeed, the indisputable purpose of the CIMLA is to protect American suppliers by providing them with lien rights to recover against the vessel for unpaid necessaries.  Without doubt, these decisions limiting the lien rights provided under CIMLA will torment the admiralty bar long after the memory of OWB fades.

The Fifth Circuit Allows Debtor Mineral Lessee to Avoid Breached Settlement Agreement with Mineral Lessor

Posted in Bankruptcy, Mineral Leases

The Fifth Circuit’s recent ruling in Fallon Family, L.P. v. Goodrich Petroleum Corp. reinforces that parties to mineral leases should be very careful when drafting documents to be recorded in public records.  The case stems from a 1954 mineral lease between the Fallon Family L.P.’s predecessor in interest, as lessor, and Goodrich Petroleum, as lessee.  The lease covered 487 acres in Caddo and DeSoto Parishes in Louisiana.  In 2012 the Fallon Family sought to terminate the lease on the grounds that Goodrich had ceased continuous operations on three units within the leased area.  In October of 2014, the Fallon Family filed two notices of lis pendens in both parishes to put third parties on notice that there was a pending suit that could affect the leased premises.  Four days later, the parties agreed to settle the dispute and memorialized the settlement in a Settlement Agreement.

Under the Settlement Agreement, Goodrich made a one-time payment of $650,000 and gave the Fallon Family a $1,000,000 promissory note to be paid in $100,000 bi-annual installments.  Having resolved the dispute over the lease, the parties filed in both parishes a Lease Ratification which stated:

NOW, THEREFORE, for the promises and covenants exchanged below, and other good and valuable consideration exchanged by the Parties on or near this date, the receipt and sufficiency of which is hereby acknowledged, the Parties agree to [the listed promises and covenants].

The Lease Ratification went on to provide that the lease was affirmed, ratified, and in full force and effect.  There was no mention of the Settlement Agreement or the promissory note.

Goodrich made one payment on the promissory note, but failed to make the second payment and filed for protection under Chapter 11 of the Bankruptcy Code.

In the bankruptcy proceedings, the Fallon Family sought, among other things, to dissolve the Settlement Agreement because of Goodrich’s breach (i.e., its failure to make payments on the promissory note).  Dissolution of the Settlement Agreement would allow the Fallon Family to pursue a claim for termination of the lease and, presumably, to lease it to another interested party.  Goodrich, in opposition, took the position that section 544 of the Bankruptcy Code, nicknamed the “strong arm” provision of the Code, allowed it to step into the shoes of a bona fide purchaser of the lease and “avoid” the settlement agreement, in a sense “strong-arming” the Fallon Family into continuing the lease despite the breach.  The bankruptcy court, the district court, and the Fifth Circuit all agreed with Goodrich.

For purposes of § 544, the debtor-in-possession (or trustee) is treated as a different entity than the prepetition debtor.  It grants a debtor-in-possession (or trustee) all of the rights and powers of a bona fide purchaser of real property who perfected such purchase at the time of the commencement of the case, whether or not such a purchaser exists.  As the court put it, “the Bankruptcy Code creates a legal fiction affording a debtor-in-possession the abilities it would have as a bona fide purchaser of the debtor’s interests in immovable property at the time the bankruptcy is filed.”

Under Louisiana’s law of registry, a third party (which the court found a bona fide purchaser of real property to be) may rely on the absence of documents in the public record to determine interests in immovables.  The court ruled that because the lease ratification stated that the lease was in full force and effect and that consideration for the lease ratification had been fully paid, Goodrich, wearing the hat of a third party, may rely on that statement (or, more precisely, on the absence of any indication in the public record that the lease’s continuing viability was dependent on payment under the promissory note) and thus prevent the Fallon Family from dissolving the settlement agreement regardless of the fact that Goodrich, as the prepetition debtor, had in fact breached the agreement.  The court concluded that “because the Lease Ratification shows the purchase price has been paid, the Fallon Family cannot dissolve the Settlement Agreement.”  The Fallon Family was, thus, left with a $900,000 unsecured claim against Goodrich without the ability to terminate the lease.  Showing little sympathy, the court concluded with these words: “Unfortunately, creditors often do not receive the full amount of their claims; however, this is a feature, not a flaw, of the design of the bankruptcy system.”

This ruling serves as an important and costly lesson that any documents recorded in the public record should be carefully worded to accurately represent the true nature of all interests in immovable property.  If the rights and interests in immovable property are made subject to a conditional or ongoing obligation (like a promissory note), the recorded document should explicitly reference that obligation.

Louisiana Supreme Court Settles Two Important Questions Under the Mineral Code

Posted in Oil and Gas Operations, Oil and Gas Production

On June 27, 2018, the Louisiana Supreme Court resolved two important questions of Louisiana law over the scope of liability for breaches of mineral leases and over the maximum liability for unpaid royalties.  In Gloria’s Ranch, L.L.C. v. Tauren Exploration, Inc., No. 2017-C-1518 (La. 6/27/18), the Louisiana Supreme Court held (1) that a mineral lessee’s mortgagee is not liable to a mineral lessor for damages under the Mineral Code for breach of the mineral lease and (2) that the maximum allowable damages under Mineral Code article 140 for underpayment of royalties is double (not treble) the amount of damages owed.

The facts in the case are complicated, but here are some critical ones.  In 2004, Gloria’s Ranch granted to Tauren Exploration a mineral lease covering lands in five sections in Caddo Parish; the lease had a three-year primary term.  During the primary term, Tauren assigned an undivided 49% interest in the lease to Cubic Energy, which then granted to Wells Fargo Energy Capital, Inc. a mortgage in its leasehold rights and security interest in its share of related production.  Wells at or above the Cotton Valley Formation (the “Shallow Depths”) were successfully drilled in three sections.  After the primary term, the entirety of each of the two remaining sections was unitized in the deeper Haynesville Shale formation, and a successful well located within each such unit but off the Gloria’s Ranch lease was completed for each such deep unit.  Thereafter, Tauren sold to EXCO USA Asset, Inc. 51% of its leasehold rights with respect to the depths below the Shallow Depths (the “Deep Rights”).  Thereafter, Gloria’s Ranch sent a letter to Tauren, Cubic, EXCO and Wells Fargo for information whether the lease was still producing in paying quantities.  Dissatisfied with the response, Gloria’s Ranch then sent a letter demanding a recordable release of the lease; when no such release was forthcoming, it filed suit alleging that the lease had expired for not producing in paying and seeking damages from this failure to release; it also sought damages for unpaid royalties from one of the sections.  Gloria’s Ranch settled with EXCO and, after a bench trial, obtained a favorable judgment.  Significantly, the trial court held Wells Fargo solidarily liable with Cubic and, for unpaid royalties of around $240,000, awarded three times that amount pursuant to Mineral Code article 140.  The second circuit affirmed.

The Louisiana Supreme Court reversed on both issues.  It squarely rejected the position of the lower courts and Gloria’s Ranch that, in light of the “bundle of rights” and control Wells Fargo held under its mortgage, it should be considered a “former owner” under Mineral Code article 207 and a “lessee” under Mineral Code article 140 and thus solidarily liable with its mortgagor.  The Court explained that Wells Fargo’s rights were merely “incidental to mortgage and credit agreement[s]” and did not “r[i]se to the level of ownership of a mineral lease.”  The Court further reasoned that nowhere in the Mineral Code does ownership of a lessee’s interest transfer via a theory of control of rights, but rather only though assignment or sublease.  This ruling in favor of Wells Fargo is sensible; a ruling otherwise would have jeopardized oil and gas financing throughout Louisiana—and perhaps more broadly nationwide.

The Court also addressed the long-simmering question over the maximum allowable damages under Article 140 of the Mineral Code.  The article provides:

If the lessee fails to pay royalties due or fails to inform the lessor of a reasonable cause for failure to pay in response to the required notice, the court may award as damages double the amount of royalties due, interest on that sum from the date due, and a reasonable attorney’s fee regardless of the cause for the original failure to pay royalties. The court may also dissolve the lease in its discretion.

Since its enactment over forty years ago, the industry and courts alike have grappled with the question whether Article 140 permits a total maximum recovery of just twice the royalties due or instead permits up to twice the royalties due plus the actual royalties due (for a total of three times the royalties due).

Finding the text of article 140 clear, the Court easily held that courts may only award “a maximum of two times the amount of unpaid royalties, not three times.”  The Court explained that to permit treble recovery would assume that the unpaid royalties are something separate than the “damages” permitted under Article 140, which would ignore the common and “plain meaning of the word ‘damages.’”

In a dissenting opinion, Justice Genovese suggested that this holding ignores Mineral Code article 139, which provides that, if a lessee pays the royalties due in response to a notice from the lessor, the court “may award as damages double the amount of royalties due … provided the original failure to pay royalties was either fraudulent or willful and without reasonable grounds.”  Per Justice Genovese, it was illogical that the legislature would allow a lessor to collect no more than twice the royalties due when no royalties were paid, but could effectively allow a lessor to collect three times the royalties due when the actual royalties due were paid before suit was filed.  Although the majority did not address his point, Justice Genovese failed to consider that the opportunity for a triple recovery under article 139 is permitted only in cases of fraud or willful misconduct by the lessee and that article 140 does not address these circumstances.  Admittedly, the entire statutory scheme has some warts, but the majority’s conclusion seems the more textually supported: courts should not, in the name of policy, add statutory language that the legislature, for whatever reason, did not include.  And of course, the legislature is always free to amend the statute in the future.

The Court also raised, but ultimately left for another day, the issue whether the holder of leasehold rights for one portion of a lease (say, shallow rights) could be liable for breaches relating to other portions of the lease (say, deep rights).  Tauren (which ultimately held only a 51% interest in the Shallow Depths) argued that the bulk of the damages relating to failure to provide a release of the Deep Rights and that the obligations relating these Deep Rights were divisible from the obligations relating to the Shallow Depths.  But because Tauren was the original lessee as to all depths and also because the lease had stopped producing in paying quantities before Tauren sold its remaining Deep Rights to EXCO, the Court rejected Tauren’s efforts to limit its liability and thus left for another day this important issue whether obligations to provide a release instrument can in some circumstances be considered divisible or not.

Regardless of how one may feel about the Court’s resolution of these two central issues, it is always nice to have clarity within the law.  The Louisiana Supreme Court’s decision here resolves two important questions that have created consternation within the industry and complicated parties’ analyses of their risks.  Going forward, all players should have a better sense of the lay of the land.  This third issue will have to await another day.

United States Coast Guard Issues Marine Safety Alert and Strongly Recommends Inspection of Personal Flotation Devices

Posted in Louisiana Waterways, Maritime, Offshore, Oil and Gas Operations, Outer Continental Shelf, Uncategorized

On June 18, 2018, the United States Coast Guard (USCG) issued a Marine Safety Alert regarding their discovery of over 100 unwearable Type 1 Personal Floatation Devices (PFDs) during multiple inspections of different vessels. As pictured below, the PFD straps were fused to the side of the PFD.  Due to the fused strap, a user would be unable to separate the halves of the PFD to wear it. The USCG safety alert deliberately omitted the PFD manufacturer’s name because the scope of the potential problem is not fully known.

However, based on the number of problematic PFDs discovered, the USCG strongly recommends that vessel owners and operators using the type of PFD pictured below inspect each PFD for this potential defect. If defects are discovered, owners and operators are encouraged to report their findings to the Coast Guard Office of Design and Engineering Standards via email (typeapproval@uscg.mil) and include the manufacturer, design number, lot numbers, the quantity of PFDs impacted, and the total number of unaffected PFDs onboard.

A full copy of the marine safety alert may be found here.

 

 

 

 

 

 

 

 

 

Personal or Predial Servitudes and Why It Matters

Posted in Oil and Gas Operations, Oil and Gas Production, Transactions

© Creative Commons License- image by Ian Munroe

The new Austin Chalk play in central Louisiana is creating a resurgence of exploration activity in several rural areas.  Exploration companies have already begun leasing hundreds of thousands of acres in order to develop and produce minerals.

A key component in developing the Austin Chalk is securing passage to the drill-sites.  Drill-sites are often located far from a public road and accessible only by traversing long stretches of private roads off the leased lands.  In these cases, it is imperative for the exploration company to secure rights of passage over the private roads.  The exploration company has two options: it may secure a right of passage either from the current landowner over which the private road sits or from another person who has the right to assign such right of passage over the private road.

A right of passage generally comes in two forms: a personal or predial servitude.  Simply stated, a personal servitude of passage, referred to legally as a “right of use” is a charge on an estate for the benefit of a person, whereas a predial servitude is a charge on a servient estate for the benefit of a dominant estate.  In this context “estate” simply refers to “land.”  The distinction between the two types of servitudes is important to understand, as the rights associated with each differ.  The most important distinction is that a predial servitude “runs with the land” in that whoever has title to the dominant estate may exercise the predial servitude of passage, even if that person or entity did not have title to the dominant estate when the servitude was created.  By contrast, the ownership of a personal servitude may devolve independently of the ownership of any parcel of land.  This distinction is important as it informs an exploration company who it may secure access from.

Louisiana Civil Code articles 732 through 734 provide the framework for determining whether a servitude is personal or predial.  First, no analysis is needed if the act clearly and expressly declares that the right granted is for the benefit of a person but not an estate, or vice versa.  However, when the act does not expressly declare one way or another, the act must be analyzed as to its intent.

If the right granted was intended to benefit an estate, then the act is presumed to create a predial servitude.  Louisiana Civil Code art. 733.  But if the right granted in the act is merely for the convenience of a person, then it is not considered to be a predial servitude unless it was acquired by a person as owner of an estate for himself, his heirs and assigns.  Louisiana Civil Code art. 734.

The following three recent decisions show how courts use Civil Code articles 732 through 734 to determine whether an act creates a personal or predial servitude.

Franks Inv. Co. v. Union Pac. R. Co., 772 F.3d 1037 (5th Cir. 2014):

It is understood and agreed that the said Texas & Pacific Railway Company shall fence said strip of ground and shall maintain said fence at its own expense and shall provide three crossings across said strip at the points indicated on said Blue Print hereto attached and made part hereof, and the said Texas & Pacific Railway hereby binds itself, its successors and assigns, to furnish proper drainage out-lets across the land hereinabove conveyed.

Applying Louisiana law, the federal Fifth Circuit held that this language created only a personal servitude for the three crossings.  The court reasoned that the original parties failed to utilize “the successors and assigns language” in the granting clause and thus that these rights of crossing were not automatically acquired by Franks when it later acquired its property adjacent to the railroad property and thus could not now be enforced by Franks.  However, the original parties did include such language for the drainage obligation.  Thus, the court further held that the latter clause concerning proper drainage created a predial servitude that could be enforced by Franks against the railroad.

Ritter v. Commonwealth Land Title Ins. Co., 2012-1654 (La. App. 1 Cir. 8/12/13), writ denied, 2013-2462 (La. 1/17/14), 130 So.3d 945:

THIS ACT IS MADE AND ACCEPTED SUBJECT TO THE FOLLOWING:

  1. Timber deed dated June 3, 1993, COB 1554, folio 830.
  2. Seller to reserve fifty foot right of egress and ingress on east property line.
  3. Seller to have one (1) year to remove timber (select cut).
  4. Timber to be cut same as balance of tract.
  5. Seller agrees not to harvest timber in weather conditions that would cause excess damage to property. (Emphasis added)

The Louisiana First Circuit held that the act created only a personal servitude of right of use.  The court held the act did not create a predial servitude because it failed to even mention a dominant estate.  Further, the act did not state that the servitude was being reserved “by the seller as owner of an estate for itself or its assigns.”

Scrantz v. Smith, 2015-214 (La. App. 3 Cir. 10/14/15), 177 So.3d 130:

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that a servitude of passage is hereby granted across the nineteen (19) acres allocated to the wife to provide the husband access to the eighty (80) acres that were allocated to him. This servitude will be located in an area which is least burdensome and inconvenient to the servient estate.

The Louisiana Third Circuit held that this language created only a personal servitude.  Although the purchasers of the 80-acre tract from the ex-husband argued that the language “to provide … access to eighty (80) acres” indicated that the right was being granted to the ex-husband as the owner of an estate, the Third Circuit disagreed holding that the right of passage was being granted to the ex-husband only as a matter of convenience.  In addition, the court noted that the judgment identified only a specific person, “the husband” and the judgment did not describe the dominant estate.

* * *

Determining whether a recorded servitude is personal or predial is often critical to determining what rights, if any, may be assigned to an exploration company.  Although it is often preferable to acquire a right of passage from the current landowner, that may not always be feasible.  If landowners become hostile and demand an exorbitant amount of value for the right of passage, or if landowners flat out refuse to negotiate a right of passage with the exploration company, then the company needs to explore all possibilities of acquiring access to the drill-site.  If a right of passage has been earlier granted to another person, then the company may be able to acquire rights from that other person.  But if ownership has changed since that other person acquired that earlier right of passage, then it becomes crucial to figure out whether that earlier right of passage granted a predial servitude or instead a personal servitude.  The answer to this question will then dictate those additional persons—beyond the current, obstinate landowner—from whom the oil company may want to seek rights to use the road at issue.

 


© Original image used under the Creative Common License.