DONALD E. WALTER, District Judge.
This matter came before the Court for a bench trial December 12 through 14, 2011, as a consolidated action.
The second suit, 5:10-cv-1499 ("Jones II"), was filed by Jones Energy in state court on September 7, 2010, and was subsequently removed by Chesapeake. Like the first lawsuit, Jones II was filed as a declaratory judgment action and petition for injunctive relief. Jones II sought a declaration from the Court that Chesapeake failed to provide the statutorily required information under 30:10 in its notice letters, thus rendering Jones Energy an "owner not notified" as to the wells described in Jones I and six additional wells.
Jones II also sought an injunction from the Court ordering Chesapeake to: (a) produce all information required under 30:10, (b) provide gas marketing letters and division orders for the ten wells in
Chesapeake denied the allegations made by Jones Energy in both lawsuits, and maintained that it fully complied with the requirements of 30:10. Chesapeake responded that Jones Energy affirmatively elected to participate as a non-operator in each well, that Jones Energy received invoices for each well, and that Jones Energy failed to pay invoices within 60 days of receipt for each well. Chesapeake maintains that it took appropriate action in assessing the risk-fee charge under 30:10, withholding amounts owed by Jones Energy from production, and filing liens against the subject wells in the mortgage records. Chesapeake denies that it engaged in any conduct sufficient to give rise to a claim under the Louisiana Unfair Trade Practices Act.
Chesapeake asserted a counterclaim against Jones Energy for its failure to pay its pro rata share of actual reasonable expenditures incurred by Chesapeake for drilling, testing, completing, and operating the wells in question. Chesapeake also maintains that it properly assessed the additional risk-fee charge of 200% of Jones Energy's allocated share as allowed under 30:10 because Jones Energy failed to remit payment for more than 60 days after it received detailed invoices.
Chesapeake also alleged that it was entitled to recover the full amount owed by Jones Energy under Louisiana's Open Account Statute, La. R.S. § 9:2781, including an award for attorney's fees as provided for under the statute. Finally, Chesapeake alleged that it is entitled to the recognition and enforcement of its liens against Jones Energy under the Louisiana Oil Well Lien Act, La. R.S. § 9:4889.
In response, Jones Energy denies each of Chesapeake's claims and further answers that Chesapeake's remedy, if any, is found exclusively in 30:10.
This case involves 10 unit wells drilled by Chesapeake, as unit operator for each of those units, namely the Carmichael 29 H-1, Clingman Acres 11 H-1, Anthony Forrest Products 28-1, Western D 17-15-15 H-1, Muslow 5-15-25 H-1, Red Oak Properties 33-15-16 H-1, Posey 5 H-1, Taylor-Potter 8-16-14 H-1, Indigo 30-15-16 H-1, and Bryan 3-15-16 H-1. [Doc. #86-Stipulated Facts].
Following public hearings, the State of Louisiana Office of Conservation issued orders that created the relevant units and required that the separately owned tracts, mineral leases, and other properties within the units be force pooled and integrated with each separate tract sharing in unit production on a surface acreage basis of participation. Id. Chesapeake requested to be the unit operator of each of the subject wells, and was designated as such by the Commissioner of Conservation. Id.
Jones Energy does not have a sublease, assignment or Joint Operating Agreement with Chesapeake in connection with the subject wells within the unit area. Id. When a Joint Operating Agreement does not exist, the Louisiana Mineral Code, the Louisiana Conservation Code, and the "Risk Fee Statute" set forth the parties' obligations to each other. Jones Energy
La. R.S. § 30:10(A)(2)(b)(i).
The statute does not require owners to financially obligate themselves to the up-front costs associated with drilling in a compulsory unit. However, it does force a non-operating owner in a drilling unit to either choose to participate in the drilling costs or be subject to a 200% non-consent penalty. The risk-fee charge simultaneously rewards participating working interest owners and discourages "free-riding by non-participating working interest owners." Blaise M. Sonnier, Accounting for Well Cost Adjustments in Louisiana, 55 Loy. L.Rev. 79, 89 (2009).
For an operator to avail themselves of the benefits of the risk-fee statute it must first send notice of its proposed operations to the non-participating working interest owners in the unit. La. R.S. § 30:10(A)(2)(a)(i). The notice must provide the nonparticipating working interest owners the opportunity to elect to participate in the risk and expense of the proposed well. Id. The statute requires that the notice letter include:
Id.
At the conclusion of the trial and after hearing all of the witnesses and having reviewed all of the evidence, the Court ruled from the bench that as a matter of fact Chesapeake sent certified letters to Jones Energy of its intent to drill as to each of the subject wells and that each of the letters substantially complied with the requirements of 30:10(A)(2)(a)(i).
This Court was presented with what appears to be a matter of first impression: whether an operator's notice under 30:10(A)(2)(a)(i) is vitiated if the operator failed to include information or provided inaccurate information as to one of the enumerated categories.
Jones Energy challenged the sufficiency of the original notice it received from Chesapeake based primarily on the alleged failure of Chesapeake to provide "all logs, core analysis, production data, and well test data from the unit well which has not been made public". La. R.S. § 30:10(A)(2)(a)(i)(dd). Jones Energy argued that if the notices sent by Chesapeake were insufficient under the statute then Jones Energy should be considered an "owner not notified" despite its affirmative election to participate and subsequent failure to pay its proportionate share.
Being declared an "owner not notified" by the Court would have allowed Jones Energy to be responsible for only its allocated share of the actual reasonable expenditures incurred in the drilling, testing, completing, equipping, and operating the well. La. R.S. § 30:10(A)(2)(b)(ii). More importantly to Jones Energy, if found to be an "owner not notified" Chesapeake would be unable to recover the additional 200% risk-fee charge as allowed by the statute when a notified owner chooses either not to participate, or elects to participate but then fails to pay its share of expenses within 60 days of receiving a detailed invoice from the Operator. La. R.S. § 30:10(A)(2)(b)(i). Under this scenario Jones Energy would be able to recover its proportionate share from production without ever incurring the actual risk of owing expenses on a dry hole well after affirmatively electing to participate, and without paying the 200% risk-fee charge that Chesapeake would otherwise be able to collect under the statute.
Based on the facts specific to this case, the Court ruled from the bench at the conclusion of trial that Chesapeake substantially complied with the notice requirements of 30:10 because Jones Energy received most, if not all, of the information
The final issue for the Court to consider with respect to 30:10 is whether Jones Energy is personally liable for the amount it owes to Chesapeake (inclusive of the 200% risk-fee) or whether Chesapeake is limited to recovering the amount in rem from production of the subject wells. Jones Energy and Chesapeake offer differing opinions on this issue, each citing to cases analyzing a previous version of 30:10 before the inclusion of 30:10(A)(2)(a) and (b), which provide the notice requirement, the option of a non-operator to elect to participate, and the ability of the operator to collect the risk-fee charge. See Davis Oil Co. v. Steamboat Petroleum Corp., 583 So.2d 1139 (La.1991); Superior Oil Co. v. Humble Oil & Refining Co., 165 So.2d 905 (La.App. 4th Cir.1964).
The previous version of 30:10 did not include the risk-fee charge for non-participating owners or participating owners who failed to tender timely payment. The language of the statute simply stated:
La. R.S. 30:10(A)(1)(c) (effective until Jan. 1, 1985). The plain language of the statute does not specify the manner in which costs are to be determined as chargeable or non-chargeable to non-operators in the unit.
Faced with the language of the statute as it existed in 1964, the Court in Superior Oil Co. v. Humble Oil & Refining Co., 165 So.2d 905 (La.App. 4th Cir.1964) held that a non-operating owner who initiated unitization over land that encompassed a pre-existing well could be held personally responsible for its proportionate share of the costs to drill and complete the well. In reaching this conclusion the Court noted that if the operator were limited to in rem recovery out of production for the non-operator's proportionate share the operator would in essence be financing the non-operator's participation until reimbursement could be obtained from production. Id. at 908. To allow such a result would require the operator to make the entire initial investment, with the return only partly accruing to the operator while other portions were accruing to the non-operator. Id. The Court held that given the
The Court in Davis Oil Co. v. Steamboat Petroleum Corp., 583 So.2d 1139 (La.1991), reached a different conclusion regarding personal liability under the pre-1985 version of the statute when presented with distinctive facts. Davis presented the question of whether an owner within a compulsory drilling unit should be held personally liable for its proportionate share of the drilling expenses when it did not consent either expressly or implicitly to participate in the drilling operations. An important fact in Davis is that the two unit-wells drilled by the operator were ultimately dry holes. Id. at 1141. The Louisiana Supreme Court noted the lack of specificity in the pre-1985 conservation statute, and ruled in equity that a non-operating owner who does not consent to operations within the unit has no liability for the costs of operations except out of his share of production. Id. at 1143. In reaching this conclusion the Court noted that in the absence of implicit or express consent to hold a non-operating party personally liable for its proportionate share of the unit costs in an unsuccessful venture would present a situation where the more fortunate party could yield a considerable amount of power over the less opulent party, which could result in financial ruin or forced divesting of property rights of the latter to the former. Id. at 1144; citing Freeman v. Depression Oil Co., 159 So. 192 (La.App. 2d Cir. 1935).
The addition of the risk-fee language to 30:10 by the legislature in 1984 provides a balance to the competing equities between the operator and a non-operator within a drilling unit. Once again, the relevant language provides:
La. R.S. § 30:10(A)(2)(b)(i). This provision resolves the issue noted in Superior, that an operator should not be required to provide free financing for non-operators, by allowing the operator to recoup the risk-fee charge of 200% from both non-consenting owners as well as participating owners who fail to timely pay their proportionate share of expenses. Thus, the operator is made whole above and beyond any amount expended to finance the collection of the non-participating owners pro-rata share of production. Similarly, the provision resolves the issue noted in Davis, that a non-consenting owner is often less fortunate and less powerful than the operator and therefore, should not be subject to personal liability for drilling expenses. As both Davis and the revised statute make clear, a non-consenting owner's proportionate share may only be collected from production in addition to the 200% risk-fee charge.
Chesapeake argues that the phrase "in addition to any other available remedies to enforce collection of such expenses" allows it to pursue all legal remedies, including a personal judgment against Jones Energy. To accept this interpretation of the statute the court must ignore the plain language of the statute that provides for recovery out of production. The court interprets the phrase "in addition to all available legal remedies to enforce collection of expenses" to include measures such as the filing of liens, but not a personal judgment.
The Court finds the case of King v. Stroke, 673 So.2d 1329 (La.App. 3d Cir. 1996), cited by Chesapeake, to be unpersuasive because the facts and statutory section of 30:10 are distinctive from this case. King involves the rights and obligations between an operator and unleased mineral interest owners, who are provided greater protections under La. R.S. § 30:10(A)(3). This section allows an operator to market production from the unit without consent or a contractual relationship with the unleased interest owner. The trade-off for such an allowance is that an operator has an obligation to pay the pro-rata share of the proceeds from production. King, 673 So.2d at 1338. It is this obligation which is personal and heritable in nature. Id. at 1339. This holding is specific only to La. R.S. § 30:10(A)(3), and this Court declines to flip the running of the obligation to the unleased mineral owner or to extend the holding to relationships beyond what is recognized in 30:10(A)(3) the facts in this case.
Upon due consideration, the Court concludes that any collection of Jones Energy's pro-rata share and risk-fee charge must be taken in rem from production. Further, the collection in rem should be credited to each well from the proceeds of that specific well. The statute refers to the drilling unit well in the singular form, and the Court does not interpret the statute to allow production revenues from one unit well to pay for the costs associated with a separate unit well.
Jones Energy alleged that Chesapeake violated the Louisiana Unfair Trade Practices Act ("LUTPA") by filing "fraudulent" liens against Jones Energy regarding the subject wells in an effort to prevent Jones Energy from selling certain leases to a competitor of Chesapeake for a fair price. At the conclusion of Jones Energy's case in chief this Court granted Chesapeake's Rule 52(c) motion, finding that as a matter of law Jones Energy failed to present sufficient evidence to establish that Chesapeake engaged in any unfair or deceptive act method, act, or practice in violation of La. R.S. § 51:1405(A).
The range of prohibited practices under LUTPA is extremely narrow. The Louisiana Supreme Court has noted:
Cheramie Services, 35 So.3d at 1060.
This Court has found that Chesapeake's notice letters to Jones Energy substantially complied with the statutory requirements of 30:10, and that a minor discrepancy, if any, is insufficient to vitiate the notice. Thus, Jones Energy's election to participate in the drilling of the subject wells under 30:10 created an obligation which Chesapeake had a right to enforce.
Jones Energy argued that Chesapeake's timing in filing the liens in question was sufficient to demonstrate an unfair trade practice because the liens interfered with the completion of a sale of Jones Energy's mineral leases to a competitor of Chesapeake. The Court finds this argument unpersuasive. The Louisiana Oil Well Lien Act provides broad and far reaching protections for operators in conjunction with the drilling of wells. See La. R.S. § 9:4861 et seq; La. R.S. § 9:4882. An operator may assert a privilege over a well within a drilling unit to secure the payment of all obligations incurred for the costs that a non-operator is bound to pay. La. R.S. § 9:4882.
There is no question that after electing to participate in the drilling of the subject wells Jones Energy was obligated to pay, at a minimum, its pro-rata share of the expenses associated with the drilling of the subject wells. However, Jones Energy asks the Court to find the filing of the liens to be a violation of the LUTPA because they were filed immediately before the completion of a sale of certain leases owned by Jones Energy to a competitor of Chesapeake. The Court disagrees with this inference. LUTPA does not prohibit the exercise of sound business judgment, even at the expense of another entity. Chesapeake had a valid reason to file liens against the subject wells, and only took such action after Jones Energy repeatedly failed to remit payment to Chesapeake for its pro rata share of expenses after electing to participate in the drilling of the subject wells. Chesapeake's decision to file the liens was merely the result of prudent business judgment to protect its interests using a legally available avenue. This is far from egregious or unethical behavior necessary to establish a LUTPA violation even if the collateral effect was that Jones Energy's tentative deal with a
Jones Energy also alleged that the liens contained misrepresentations because they improperly included the risk-fee charge in addition to the actual expenses. Again, the Court finds this argument unpersuasive. The purpose in allowing an operator to file a lien is to secure payment for an obligation of the non-operator and to provide notice of a claimed privilege to third parties. As long as Chesapeake had a legitimate reason to file the liens in question, and believed it had the right to assert the amount claimed, the liens are valid. Any issues regarding the actual amount owed on the subject lien must be decided by the Commissioner of Conservation. La. R.S. § 30:10(A)(2)(f). If the Commissioner finds the amounts to be erroneous, Chesapeake must pay for the costs associated with correcting the mortgage records.
Chesapeake makes a counterclaim for payment plus attorney's fees under the Louisiana Open Accounts Statute, La. R.S. § 9:2781. The Louisiana Open Accounts Statute is not applicable to the facts of this case for two reasons. First, the statute requires that the debt owed be for goods or services rendered, which is not the case between Jones Energy and Chesapeake. Double-Eight Oil and Gas, LLC v. Caruthurs Producing Co., Inc., 942 So.2d 1279 (La.App. 2d Cir.2006). Second, Jones Energy did not have an "open account" as contemplated by the statute because the amount owed was not incurred upon the extension of a line of credit by Chesapeake, but under an obligation arising from the language of La. R.S. § 30:10. See Tyler v. Haynes, 760 So.2d 559 (La. App. 3d Cir.2000). Accordingly, Chesapeake's claim for attorney's fees under the Louisiana Open Accounts Statute is denied.
Based on the foregoing, judgment is rendered in favor of Chesapeake. All of Jones Energy's claims are hereby
Having found as a matter of fact that Jones Energy elected to participate in the ten subject wells and then failed to pay Chesapeake within sixty days of receipt of detailed invoices (JIBS) as to the ten subject wells, the Court also found as a matter of law that Chesapeake may assess the risk-fee charge of two hundred percent of Jones Energy's allocated share of the cost of drilling, testing, and completing the subject wells.
