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News and Updates on Oil & Gas Legal Issues

Strict Liability for Ultrahazardous Activities Under Former Civil Code Article 667

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

Although Louisiana courts routinely decline to find oil and gas defendants strictly liable under the pre-1996 version of Louisiana Civil Code article 667, plaintiffs continue to plead a cause of action under article 667 for alleged property damage caused by oil and gas exploration and production.  Like many other landowners in legacy lawsuits, the plaintiffs in Watson v. Arkoma Development claimed that defendants were strictly liable for damages caused by contamination to their property before the 1996 amendment of article 667.

The pre-1996 version of article 667 imposes strict liability on proprietors for damage caused by ultrahazardous activities.  To constitute an ultrahazardous activity within this context, the activity (1) must relate to an immovable, (2) must cause the injury, and (3) must not require the substandard conduct of a third party to cause the injury.  An ultrahazardous activity is thus limited to those activities that cause injury even when conducted with the greatest prudence and care.

The Watson plaintiffs specifically alleged that the defendants’ predecessors contaminated their property by storing and disposing toxic and hazardous oilfield waste.  Although Magistrate Judge Karen L. Hayes of the Western District Court of Louisiana was unconvinced that the defendants engaged in any ultrahazardous activity, the claim survived the defendants’ motion to dismiss.  In her report and recommendation to presiding Judge Terry A. Doughty, Judge Hayes concluded that the record was not developed enough to make an ultimate determination on the issue and acknowledged that the courts were at odds as to whether the disposal of hazardous waste constitutes ultrahazardous activity.

Plaintiffs relied on Updike v. Browning-Ferris, Inc., which found that the storage of hazardous waste in pits was an ultrahazardous activity.  Defendants alternatively relied on Bartlett v. Browning-Ferris Indust., Chem. Servs. Inc., which held that the operation of a hazardous disposal facility was not an ultrahazardous activity because the facility could be safely operated with due care.  The Louisiana Third Circuit Court of Appeal in Bartlett clearly stated: “In fact, all the testimony on both sides suggests that a hazardous waste disposal facility, properly operated according to the rules and regulations propounded by the state and federal government, will not cause harm to the residents of the area in which it is situated.”

While this issue has been brought before Louisiana courts numerous times, no other court has found the storage or disposal of hazardous oilfield waste to be an ultrahazardous activity since Updike.  Nonetheless, plaintiffs in Watson v. Arkoma Development will have the opportunity to request the court to revisit the issue and determine whether the storage and disposal of toxic and hazardous oilfield waste qualifies as an ultrahazardous activity.

Good Faith For Interrupting Prescription of Mineral Servitudes

Posted in Louisiana Mineral Code, Mineral Code, Oil and Gas Operations

In Louisiana, the owner of a mineral servitude is under no obligation to exercise it.  However, a mineral servitude will prescribe from ten years of nonuse.  To interrupt the running of prescription, the owner of a mineral servitude may undertake “good faith operations for the discovery and production of minerals.”  Article 29 of the Mineral Code defines “good faith operations” as those:

  1. Commenced with reasonable expectation of discovering and producing minerals in paying quantities at a particular point or depth,
  2. Continued at the site chosen to that point or depth, and
  3. Conducted in such a manner that they constitute a single operation although actual drilling or mining is not conducted at all times.

Notably absent from these requirements is the actual production of oil or gas.  Under the Mineral Code and Louisiana jurisprudence, a “dry hole” is sufficient to interrupt the prescription of nonuse as long as these requirements are met.  See Union Oil & Gas Corp. of La. v. Broussard, 237 La. 660, 112 So.2d 96 (1958); Reeves v. Reeves, 607 So.2d 626 (La. App. 2d Cir. 1992).

Surface owners, or other parties who may benefit from the termination of the mineral servitude, most often challenge the servitude owner under the first two prongs of Article 29.  That is, they argue that the operations were not conducted with a reasonable expectation to discover and produce minerals in paying quantities.  Courts conduct both a subjective and objective fact based inquiry to determine whether “good faith operations” were conducted.  Two cases from the Second Circuit illustrate this type of analysis.

In Matlock Oil Corp. v. Gerard, 263 So.2d 413 (La. App. 2d Cir.1972), the Louisiana Second Circuit ruled that the mere act of drilling through a shallower formation, without any intent to obtain production from the formation, was not “good faith operations” sufficient to interrupt the running of prescription of nonuse.  The court noted three particular factors for its conclusion: 1) contrary to industry standards, the mud logging unit was not installed until drilling operations had almost passed through the particular formation at issue; 2) the petroleum geologist assisting in the drilling operations never requested information from nearby well operators that had produced in the same formation; and 3) the drilling permit obtained by the operator was for oil in a deeper formation than the formation at issue.  The court concluded that the drilling through the shallower formation did not interrupt the running of prescription as the operator never intended to produce minerals in paying quantities from the shallower formation.

By contrast, in Bass Enterprises Prod. Co. v. Kiene, 437 So.2d 940 (La. App. 2d Cir.1983), the prescription of nonuse was interrupted by good faith operations even though the well was unproductive.  In Bass the operator obtained a permit to drill to a formation at a proposed total depth of 11,500 feet.  During drilling operations, as the drilling depth passed through a shallower formation at approximately 9,000 feet, several drilling logs were run to gain information as it related to the shallower formation.  The logs included 1) dual induction lateral log; 2) density neutron log; 3) micro log; and 4) mud logs.  When the well reached the deeper formation and was tested, it was determined that the well, in that formation, was not capable of commercially producing minerals.  The well was then plugged back to a depth of approximately 9,000 feet—to the shallower formation.  The operator had further analysis done on the logs for the shallower formation and then sought and obtained a permit to perforate and acidize the shallower formation.  After obtaining a subsequent permit to frac the sand for further testing, it was determined that the well was commercially unproductive and it was plugged.  The Second Circuit held that the actions, as they related to the shallower formation, were good faith operations with a reasonable expectation of discovering and producing minerals.  Thus, the running of prescription of nonuse was interrupted by the operations conducted at the shallower depths.

The above cases illustrate the necessity for operators to take all prudent measures and to follow all industry standards as to each targeted formation to ensure interruption of prescription through good faith operations.

Louisiana Supreme Court Creates Refund Opportunity for Taxes Paid to Other States

Posted in Tax

Earlier this month, the Louisiana Supreme Court struck down a Louisiana law limiting tax credits for Louisiana taxpayers who pay taxes in other states; thus these taxpayers may now have refund opportunities.  The law at issue is Act 109 of the 2015 Regular Legislative Session.  Act 109 amended Louisiana Revised Statute 47:33 to disallow credits for taxes imposed on net income tax paid to other states that do not offer reciprocal tax credits to those states’ own residents transacting business in Louisiana.  Under Act 109, some Louisiana residents who own business interests in both Louisiana and a state that does not offer reciprocal credits are doubly taxed on the same income.  The Supreme Court decision, issued December 5, 2018, is Smith v. Robinson, Docket No. 2018-CA-0728.  It held Act 109 unconstitutional for impermissibly discriminating against interstate commerce.  The Department of Revenue could still ask for a rehearing by the Louisiana Supreme Court or seek further review by the U.S. Supreme Court.

Smith involved Louisiana residents subject to taxes in both Louisiana and Texas.  The taxpayers held interests in several flow-through entities (limited liability companies and subchapter S corporations) with operations in Texas, Arkansas, and Louisiana.  Although Texas has no state income tax, it does have an entity-level franchise tax (also known as the “Texas margins tax”) based on gross receipts and business profits.  While the entities were subject to the Texas margins tax based on their Texas-sourced income, the individual taxpayers were also, under Act 109, subject to the Louisiana income tax on all of their income whether derived outside or inside Louisiana.  Because Texas does not offer a reciprocal credit for taxes paid to Louisiana, the Louisiana Department of Revenue denied the taxpayers’ credit claim for the franchise taxes they paid to Texas.  Asserting that the reciprocal credit requirement of Act 109 is unconstitutional, the taxpayers sued the Louisiana Department of Revenue to recover the taxes paid.

Texas Franchise Tax is Net Income Tax under La. Rev. Stat. 47:33

The Supreme Court first held that the Texas franchise tax is a “net income tax” paid to another state under La. Rev. Stat. 47:33.  Relying on an earlier Louisiana appellate court decision, the Court reasoned that the calculation of taxable margin is essentially an income tax.

Act 109 Held Unconstitutional

The Court next agreed with the taxpayers that the amendments made by Act 109 were unconstitutional.  Before these amendments, La. Rev. Stat. 47:33 allowed a credit against Louisiana tax for “net income tax” paid to another state and thus prevented Louisiana taxpayers from being subject to income tax more than once on the same income.  Act 109 would limit the credit by providing that the credit is available against taxes paid to another state only if the other state offers a reciprocal credit to that state’s own residents transacting business in Louisiana; Act 109 would also cap the credit so that it cannot exceed Louisiana income taxes paid.  The Court in Smith held that Act 109 violates the dormant Commerce Clause of the U.S. Constitution because it results in a double tax on interstate income but not intrastate income.  Applying the four-part test in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) to evaluate whether Act 109 creates a constitutional tax on interstate commerce, the Court held that Act 109 violates the fair apportionment and discrimination prongs of that test.  Act 109 violates the external consistency test developed to analyze fair apportionment because, the Court held, Act 109 does not reasonably reflect how and where a taxpayer’s income is generated and fails to fairly apportion the tax according to each state’s relation to the income.  In addition, the Court held that Act 109 discriminates against interstate commerce because it exposes one hundred percent of the interstate income of Louisiana residents to double taxation and because, according to the Court, a cap on the credit would cause a portion of the taxpayer’s out-of-state income to be subject to double taxation.

Refund Potential

Louisiana resident individuals who were previously subject to the limitations on the credit for taxes paid to other states should consider filing refund claims with the Louisiana Department of Revenue.  Likewise, Louisiana resident individuals doing business in Texas through a limited liability company, S corporation or a partnership who paid Texas margins tax should review their income tax returns and explore whether a claim for refund of income tax overpayment is available.

But beware!  Last month’s decision in Bannister Properties, Inc. v. State of Louisiana, Dkt. No. 2018-CA-0030 (La. App., 1st Cir., Nov. 2, 2018) suggests a refund claim may fail if a court concludes that the Department’s interpretation that the Texas margins tax is a net income tax constitutes a mistake of law arising from a misinterpretation by the Department.  Although the Bannister Properties decision is not final as of the date of this post (we anticipate the taxpayer will seek review by the Louisiana Supreme Court) and, to us, seems wrongly decided, it is possible that the ruling in that case could limit a taxpayer’s ability to pursue a refund claim should a court determine that the tax overpayments resulted from a mistake of law arising from the misinterpretation of the law by the Department of Revenue.

The Department of Revenue has indicated that it will not issue refund claims to taxpayers whose credits for taxes paid to other states were limited by the provisions of Act 109 if the taxes were not paid under protest, and that such taxpayers would have to file a claim at the Louisiana Board of Tax Appeals.  Thus, a taxpayer filing a refund claim for a tax that was not paid under protest should consider filing a protective claim against the State with the Louisiana Board of Tax Appeals in addition to an administrative claim for refund.  If successful, such claim against the State may be paid only by legislative appropriation and there are no rights to further appeal if the Board of Tax Appeals denies such a claim.

Please call Caroline Lafourcade or Ted Fenasci at 504-582-1111 or email clafourcade@gamb.law or tfenasci@gamb.law with questions regarding refund opportunities from the Louisiana Supreme Court’s decision in Smith.

Fifth Circuit Pumps Brakes on Royalty Owner Class Certification

Posted in Class Action, Federal Rules of Civil Procedure, Leasehold Interest, Oil and Gas Operations

The federal Fifth Circuit recently signaled its continued skepticism of permitting class certification for royalty owners.  In Seeligson v. Devon Energy Production Company, L.P., No. 17-10320, 2018 WL 5045671 (5th Cir. Oct. 16, 2018), a group of royalty owners in the Barnett Shale in Texas alleged that Devon Energy Production Company, L.P. breached its royalty obligations “by selling the raw, unprocessed gas to its corporate affiliate at the wellheads at a price artificially reduced by an unreasonably high processing fee, and then passing this processing fee on to the royalty owners.”

The plaintiffs convinced the trial court to certify a class comprised of royalty owners who claimed that their royalty payments under their individual leases with Devon were reduced by Devon’s pricing scheme.  But the Fifth Circuit was not convinced.

On appeal, the Fifth Circuit first considered the district court’s findings regarding ascertainability (the ability to know the members of the class) and commonality (whether common issues of law and fact apply to individual members).  The Fifth Circuit held that the district court did not abuse its discretion on ascertainability because public records could provide sufficient objective criteria to identity individual class members.  The Fifth Circuit also rejected Devon’s argument as to commonality (namely, that each individual lease must be reviewed before determining whether Devon violated any duty to the class members).  The Fifth Circuit held that the district court did not abuse its discretion “in ruling that Plaintiffs could demonstrate that Devon breached its implied duty to market by basing its price on a higher processing fee than the fee that a ‘reasonably prudent operator would have received at the wellhead.’”

However, the royalty owners’ request for class certification hit a snag when the Fifth Circuit turned to predominance.  Under Federal Rule of Civil Procedure 23, it is not enough that there are common issues of law and fact; those common issues must also “predominate over any questions affecting only individual members.”  Devon argued that predominance did not exist because each lease raised individual issues about tolling and the applicable statute of limitations.  Plaintiffs tried to counter by arguing that limitations periods were tolled by the discovery rule (the clock does not begin to run until one discovers his injury) and fraudulent concealment, but Devon persuasively contended that issues of tolling and fraudulent concealment raise individualized fact questions that would themselves require thousands of mini-trials to resolve.  The Fifth Circuit stopped short of fully resolving the issue and instead noted that the trial court had failed to analyze the role, if any, that tolling or limitations issues would play in the class action.  Without such an analysis, the Fifth Circuit stated that it was “impossible to know” if predominance existed here.  Accordingly, it found that by failing to consider such issues the trial court abused its discretion, and the Fifth Circuit ultimately reversed and sent the case back to the trial court for further proceedings.

Over the last few years, various federal court decisions have made class certification increasingly difficult.  The decision here is consistent with the trend of limiting the instances when class resolution will be allowed.  Although the Fifth Circuit’s decision does not necessarily eliminate Plaintiffs’ attempts to certify a class, it certainly makes their position more precarious.  We shall see if on remand Plaintiffs are able to salvage their class action in the district court and withstand further Fifth Circuit scrutiny.  Stay tuned.

FCC Removes Regulatory Barriers to 5G Wireless Deployment

Posted in Telecommunications

On September 27, 2018, the FCC released its Declaratory Ruling and Third Report and Order, which is expected to help accelerate the deployment of 5G cellular service. In the Matter of Accelerating Wireless Broadband Deployment by Removing Barriers to Infrastructure Inv., WT Docket No. 17-79, WC Docket No. 17-84. To support the rollout of 5G service, the wireless industry is turning to small cell devices, a new technology designed to expand network coverage and capacity. Small cell devices are typically affixed to public rights-of-way and provide a shorter range of cellular service, thus more devices are needed in a given service area to meet user demand. But the attachment of small cells to public rights-of-way has presented a number of regulatory issues that have inhibited the deployment of small cell infrastructure across the country.

As FCC Chairman Ajit Pai has commented:

Installing small cells isn’t easy, too often because of regulations. There are layers of (sometimes unnecessary and unreasonable) rules that can prevent widespread deployment.”

The first part of the FCC’s decision addresses a number of issues wireless providers and government authorities have faced in deploying small cell infrastructure in local communities. For instance, in noting that the Telecommunications Act of 1996 allows state and local governments to charge fees only “to the extent that they represent a reasonable approximation of the local government’s objectively reasonable costs,” the FCC fixed the following fees: “(a) $500 for a single up-front application that includes up to five Small Wireless Facilities, with an additional $100 for each Small Wireless Facility beyond five, or $1,000 for non-recurring fees for a new pole (i.e., not a colocation) intended to support one or more Small Wireless Facilities; and (b) $270 per Small Wireless Facility per year for all recurring fees, including any possible ROW access fee or fee for attachment to municipally-owned structures in the ROW.”

The ruling also addresses two new “shot clocks” that give local government authorities 60 days to approve or deny the deployment of small cell devices on existing structures or 90 days to approve or deny the deployment of small cell devices on new structures.

This ruling is the second set of small cell regulations following a March 2018 decision to exclude small cell deployment from federal review procedures designed for traditional cell towers. It remains to be seen whether these efforts will help accelerate the anticipated widespread deployment of small cell infrastructure.

U.S. Fifth Circuit Holds Tug to be “Operator” of Dumb Barges under OPA 90

Posted in Louisiana Waterways, Maritime, Oil and Gas Operations

In United States v. Nature’s Way Marine, L.L.C., 904 F.3d 416 (5th Cir. 2018), the Fifth Circuit held that a tug owner fit the definition of “operator” of an oil-spilling barge and consequently was ineligible under the Oil Pollution Act of 1990 (OPA 90) for reimbursement of cleanup costs in excess of the share allocated to the tonnage of the tug.

In January 2013, a tug owned by Nature’s Way Marine, L.L.C. was moving two dumb barges owned by Third Coast Towing, LLC when the barges allided with a bridge near Vicksburg, Mississippi, and one of the barges discharged over 7,000 gallons of oil into the Mississippi River.  The Coast Guard designated both Nature’s Way and Third Coast as “responsible parties” under OPA 90.  Nature’s Way paid nearly $3 million in cleanup costs, and the government entities subsequently spent over $792,000 and sought recovery from Nature’s Way.

Following settlement of ancillary disputes, Nature’s Way sought to have the National Pollution Funds Center (NPFC) reimburse it approximately $2.l3 million; Nature’s Way claimed that its liability should be limited based upon the tonnage of the tug, alone, and not the tonnage of the barges.  Its argument hinged on whether it was “operating” the dumb barges, which by their nature lacked the ability for self-propulsion or navigation and were reliant on the propulsion and navigation provided by Nature’s Way’s tug.  If Nature’s Way were deemed to be operating just the tug and not the barges, then it would benefit from the tug’s (lower) limitation of liability level and thus be entitled to a substantial reimbursement from the NPFC.  Conversely, if Nature’s Way were deemed to be operating both the tug and the barges, the NPFC would owe no reimbursement.

Nature’s Way argued that Third Coast was the offending barge’s “operator” because Third Coast was responsible for instructing when the barge would be loaded, unloaded, and moved and thus had operational control over the barge.  The district court disagreed, finding instead that, by towing the barge, thus controlling the barge’s speed, direction, and minute-by-minute navigational decisions, Nature’s Way was “operating” the barge and was liable for the barge under OPA 90.

On appeal, Nature’s Way again argued that the term “operator” should be limited to the person or company with managerial and financial control over the barges, namely, Third Coast.  The Fifth Circuit disagreed.  It observed that although OPA 90 does not define “operating”, it does define “responsible party” as “any person owning, operating, or demise chartering the vessel.”  The court also relied on United States v. Bestfoods, 524 U.S. 51 (1998), a CERCLA case that analyzed the definition of “operator” under that statute as “someone who directs the workings of, manages, or conducts the affairs of a facility.”  Relying on this analysis, the court concluded that the ordinary and natural meaning of an “operator” of a vessel under OPA 90 includes someone who directs, manages, or conducts the affairs of the vessel and that the ordinary and natural meaning of “operating” a vessel under OPA 90 thus includes the act of piloting or moving a vessel.  The Fifth Circuit noted that Nature’s Way “directed precisely the activity that caused the pollution—it was the very party that crashed the barges into the bridge”—and that to hold that Nature’s Way was not “operating” the barge at the time of the collision “would be to strain beyond the ordinary and natural meaning of the word.”

In sum, the Fifth Circuit refused to parse words to let the tug owner off the hook.  Although the court did not directly address the issue, its ruling does not appear to foreclose the argument that the barge owner might also be considered an operator under OPA 90, under certain circumstances.

Tariffic! Will Force Majeure Let Us Escape Our Contractual Obligations?

Posted in Louisiana Corporate Law, Tariffs, Transactions

The continuous reciprocation of tariffs between the United States and China could leave businesses and suppliers in a bind.  With rising costs of supplies, contracts that once appeared lucrative for a business could soon become a financial liability.  As there appears to be no end in sight to the tariffs, can a company claim force majeure or seek to pass on the burden of the tariffs to the other party?

Generally speaking, force majeure refers to unforeseeable circumstances that prevent a party from fulfilling a contract.  As with almost any legal question, whether force majeure excuses contract performance will depend on the circumstances.

A company should first look to the terms of its agreement to determine if the parties contemplated the fortuitous event.  Frequently an agreement will have an express force majeure clause.  Unfortunately, agreements all too often use a general, standardized force majeure clause that is not tailored to the specific agreement.  Further, some standard force majeure clauses provide no more protections to the parties than what the applicable law already provides.

If the force majeure clause does not cover the fortuitous event, or the agreement does not contain any force majeure provision, the next step is to see if the controlling law provides relief.  For agreements governed by Louisiana law, that’s Louisiana Civil Code article 1873.

Louisiana Civil Code article 1873 provides relief to a party when 1) there is a fortuitous event and 2) the event makes the performance impossible.

Courts generally take a strict interpretation to “impossible.”  In Payne v. Hurwitz, 2007-0081 (La. App. 1 Cir. 1/16/08), 978 So.2d 1000, the Louisiana First Circuit explained that even though Hurricane Katrina was undoubtedly a force majeure, that fact satisfied only one part of the contractual defense.  The court continued, “under settled Louisiana jurisprudence, a party is obliged to perform a contract entered into by him if performance be possible at all, and regardless of any difficulty he might experience in performing it.”

Rising costs due to tariffs, while arguably fortuitous, will not make a performance impossible.  Thus, a company will not likely find relief under Civil Code article 1873.

Mitigating Future Risks:

 In drafting new agreements, parties must pay close attention to each and every provision.  Just as important, parties must be proactive instead of reactive in their drafting.  While a fortuitous event, by its own definition, is hard to predict, companies should attempt to identify all potential future and uncontrollable risks to the agreement.  They must then identify how the event may affect the specific agreement and provide for contingencies if certain conditions are met.  This may include outside factors that, while not making the performance impossible, make the performance impracticable or unprofitable.

A key to success in this endeavor is to engage knowledgeable counsel who understand the specific industry from the bottom-up and how outside factors, such as the current global economic and political environment, may affect future operations in the industry.

Your non-compete agreement is probably not enforceable. Here’s why.

Posted in Employment Law

Non-compete agreements have come under increased scrutiny.  This is especially true in employment contracts for laborers and other non-managerial employees who do not have access to trade secrets or intellectual property.  In Louisiana, a non-compete agreement must meet strict requirements to be enforceable.  If you’ve been using the same non-compete agreement for years or for employees in different states, chances are your contract isn’t enforceable in Louisiana.  Here’s why.

 Your agreement is geographically vague.  Louisiana requires that a restriction on the lawful exercise of a business must be limited to a “specified parish or parishes, or municipality or municipalities.”  This means that your non-compete agreement must list the specific cities or parishes where your non-compete is effective.  An agreement that covers “the entire state” or “everywhere we do business” will likely have only limited enforceability, if at all.

The term of your non-compete is too long—or not long enough.  Non-compete agreements in Louisiana can be in effect for up to two years from the date of severance of employment, last work performed under a contract, or sale of a business.  As a result, your three or five-year non-compete agreement will be ineffective after year two.  If your non-compete does not include a specific duration, a court will likely find that it may be terminated at any time by either party.

Louisiana presumes that your non-compete is invalid.  The presumption in Louisiana is that all non-compete agreements are invalid—unless they meet the strict statutory requirements.  If you’re using a template or boiler plate provisions to draft an agreement for employees in different states, you may find that your generic non-compete doesn’t meet the specific requirements of Louisiana law.  And if you’re thinking about applying the law of another state to your non-compete with your Louisiana employee—think again.  Louisiana invalidates all choice-of-law and choice-of-forum clauses in employment agreements unless the employee agrees to it after an alleged breach of the non-compete.

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

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.