Filed: Apr. 28, 2005
Latest Update: Feb. 21, 2020
Summary: United States Court of Appeals Fifth Circuit F I L E D IN THE UNITED STATES COURT OF APPEALS April 28, 2005 FOR THE FIFTH CIRCUIT Charles R. Fulbruge III Clerk _ No. 04-30326 _ COLUMBINE II LIMITED PARTNERSHIP, Plaintiff-Appellee, versus ENERGEN RESOURCES CORPORATION, Defendant-Appellant. _ Appeal from the United States District Court for the Western District of Louisiana (01-CV-1277) _ Before GARWOOD, BENAVIDES, and STEWART, Circuit Judges. PER CURIAM:* This appeal involves a question as to the
Summary: United States Court of Appeals Fifth Circuit F I L E D IN THE UNITED STATES COURT OF APPEALS April 28, 2005 FOR THE FIFTH CIRCUIT Charles R. Fulbruge III Clerk _ No. 04-30326 _ COLUMBINE II LIMITED PARTNERSHIP, Plaintiff-Appellee, versus ENERGEN RESOURCES CORPORATION, Defendant-Appellant. _ Appeal from the United States District Court for the Western District of Louisiana (01-CV-1277) _ Before GARWOOD, BENAVIDES, and STEWART, Circuit Judges. PER CURIAM:* This appeal involves a question as to the ..
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United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
April 28, 2005
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
_________________________
No. 04-30326
_________________________
COLUMBINE II LIMITED PARTNERSHIP,
Plaintiff-Appellee,
versus
ENERGEN RESOURCES CORPORATION,
Defendant-Appellant.
______________________________________
Appeal from the United States District Court
for the Western District of Louisiana
(01-CV-1277)
______________________________________
Before GARWOOD, BENAVIDES, and STEWART, Circuit Judges.
PER CURIAM:*
This appeal involves a question as to the pro per interpretation of a sublease agreement.
Energen Resources Corporation (Energen), appeals from the district court’s judgment which held that
it had improperly deducted fees from the overriding royalty interest that was owed to Columbine II
Limited Partnership (Columbine) -- for transportation and fuel costs. The district court determined
that Energen’s conduct was beyond the scope of the parties’ sublease agreement. The district court
then entered an order imposing monetary damages based on the period from which the royalties went
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should not be
published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
unpaid. Thereafter, the district court found its original damage award co nstituted insufficient
punishment for Energen’s conduct and thereby doubled the damage award it had imposed. In
addition, the district court found that Energen should be held responsible for paying Columbine’s
attorney’s fees.
Energen argues on appeal that the district court principally committed two significant errors.
First, Energen contends that the district court misconstrued the sublease agreement, which Energen
believes contained language t hat permitted it to deduct the challenged fees. Second, assuming
arguendo that Energen was at fault for deducting the fees, Energen nevertheless maintains that the
district court erred by doubling its damage award and by including an award for attorney’s fees and
related expenses.
For the reasons set forth below, we hold that the district court correctly held that Energen was
not entitled to deduct from the overriding royalty that was owed to Columbine, because these
deductions were not expressly contemplated by the parties’ sublease agreement. However, we also
hold that the district court’s imposition of double damages and attorney’s fees, on these facts,
constituted reversible error. Accordingly, we affirm in part and reverse in part.
FACTUAL AND PROCEDURAL BACKGROUND
This matter stems from a dispute regarding whether a sublease agreement, which entitled the
lessor, Columbine, to an overriding royalty from revenues generated from a gas-producing well,
similarly permitted the lessee, Energen, to charge Columbine for fees associated with fuel and
transportation costs necessary to transport the gas produced to the marketplace. Columbine is the
successor in interest of various subleases located within the Sibley Field in Webster Parish, Louisiana.
These subleases entitle Columbine to an overriding royalty from several gas-producing wells located
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in the Sibley Field. Energen owned a working interest in the wells. Under the terms of the sublease
agreement, Energen would produce the gas and sell it to third parties. Energen would then calculate
the appropriate royalty fee from these sales, which would go towards paying the wells’ operators.
Thereafter, the wells’ operators would pay the overriding royalty fee to Columbine.
Columbine learned in March of 2001 that Energen had been deducting a portion of the fee
that went towards paying the wells’ operators. The consequent effect of course was that Columbine
received a smaller portion of the overriding royalty interest that it was entitled to. Upon learning that
Energen was deducting such fees, Columbine wrote a letter to Energen asserting that Energen’s
conduct was impermissible under the sublease agreement’s terms. In response, Energen maintained
that its actions were in keeping with the conduct of its predecessor in interest, who apparently had
been deducting similar fees in order to offset expenses related to transporting the gas produced to its
eventual point of sale. For example, the gas would necessarily have to traverse a pipeline owned by
an unrelated party in order to reach the marketplace. As a consequence, the owners of these third
party pipelines would charge entities, such as Energen, a fee associated with usage of the pipelines.
Because the third party pipeline owners imposed a fee for using their pipelines, Energen believed that
it, in turn, was entitled to withhold a certain portion of the overriding royalty that was eventually to
be paid to Columbine. Columbine subsequently brought this action in the United States District
Court for the Western District of Louisiana, alleging that Energen had disregarded the express terms
of the sublease agreement.
The district court held that Energen’s deductions were impermissible on the basis that the
language contained within the sublease agreement, which created the overriding royalty, plainly stated
that Columbine’s royalty interest was to be free of all additional costs, including transportation costs.
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The district court also found that the sublease did not suggest, as Energen had argued, that
Columbine’s royalty interest was intended to be paid in-kind. Stated somewhat differently, the district
court believed that Columbine’s royalty interest was not meant to be paid based upon the value of
the gas once it reached the mouth of the wellhead, as this would have permitted Energen to deduct
post-production costs.1 On this point however the district court acknowledged that the language in
the sublease was less than pellucid. Nonetheless, the court held that Energen had violated the terms
of the sublease agreement by withholding fees that were earmarked for Columbine.
The district court further determined that damages were owed to Columbine as a result of
Energen’s conduct. The court entered a judgment against Energen in the amount of $111,258.00 for
unpaid royalties accruing from a period between January of 1998 through August of 2002.
Moreover, the court believed that further penalization of Energen was necessary in order to serve as
a deterrent to others. Therefore, t he district court instituted additional penalties in reliance on
Louisiana Mineral Code §212.23, which provides that upon sufficient notice, a party who fails to pay
an overriding royalty and does not provide reasonable grounds as to why the royalty was not paid
may be required to pay “damages double the amount due, legal interest on that sum from the date
due, and a reasonable attorney’s fee regardless of the cause for the original failure to pay.”
Accordingly, pursuant to §212.23, the district court doubl ed the damages that were due to
Columbine, and as a result, Energen was deemed responsible for paying damages to Columbine in the
1
The Fifth Circuit has previously explained, in a case interpreting Louisiana law, that a lessee
can deduct post-production costs from an overriding royalty particularly when there is no market for
the gas at the wellhead. See Freeland v. Sun Oil Company, 277 F.2d 154, 158 (5th Cir. 1960). The
Freeland court explained that a lessor may not simply reap the benefit of its royalty interest, when the
gas produced at the wellhead is essentially valueless before reaching the marketplace, noting that “all
increase in the ultimate sales value attributable to the expenses incurred in transporting and processing
the commodity must be deducted” from the percentage of royalties the lessor receives.
Id. at 159.
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amount of $222,516.00. The district court also found that Columbine was entitled to attorney’s fees
and ancillary expenses totaling $99,775.26. Consequently the sum total of the double damage award
combined with the attorney’s fee award amounted to $322,291.26. Energen filed this timely appeal
challenging both the determination that it was not permitted to deduct a portion of fees for expenses
associated with transporting the gas produced to the marketplace, as well as finding error with the
district court’s overarching damage award.
STANDARD OF REVIEW
This court reviews a district court’s interpretation of a contract de novo. Travelers Ins. Co.
v. Liljeberg Enterprises Inc., 7 F.3d 1203, 1206 (5th Cir. 1993). All issues of law related to a district
court’s award of damages, will also be reviewed by this court de novo. Tyler v. Union Oil Co. of
Calif.,
304 F.3d 379, 401 (5th Cir. 2002). Unless a determination is made by the reviewing court that
a district court has erred as a matter of law, an award of compensatory damages is an issue of fact
that will be reviewed for clear error.
Id. Similarly, we have recognized that if a compensatory
damage award is “so gross or inadequate as to be contrary to right reason” it will not be upheld, and
should be reversed. Sockwell v. Phelps,
20 F.3d 187, 192 (5th Cir. 1994).
When we review an award of punitive damages, a district court’s determination is entitled to
some deference, and will not be reversed absent a finding of an abuse of discretion. Id. We note that
while the district court actually imposed double damages pursuant to its perceived authority under
the statute, we nevertheless believe that the abuse o f discretion standard is also applicable in this
context.
Finally, the reasonableness and propriety of an award of attorney’s fees will turn on state law
particularly when such law provides the legal basis for the district court’s determination in the
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underlying matter. See Mathis v. Exxon Corp., 302 F.3d 448, 461 (5th Cir. 2002). Accordingly, an
award of attorney’s fees is also reviewed for an abuse of discretion.
Id. However, a challenge to a
district court’s factual determinations in support of an award of attorney’s fees are reviewed for clear
error.
Id.
DISCUSSION
The gravamen of this appeal turns on the proper interpretation of the sublease agreement
which governed the parties. During oral argument both parties conceded, if perhaps implicitly, that
the language contained in the sublease agreement was slightly anomalous in the sense that it at once
provided that Columbine’s royalty interest was to be determined at the mouth of the wellhead, which
under Louisiana law would have necessarily inferred that Energen was permitted to deduct post-
production costs for any efforts related to transporting the gas to the commercial marketplace. See,
e.g., Merritt v. Southwestern Electric Power Co.,
499 So. 2d 210, 214 (La.App. 2 Cir. 1986)
(recognizing that under Louisiana law deductions are generally permitted for “post-production costs
when the royalty payment is determined ‘at the mouth of the well’”). Conversely, the parties also
recognized that a separate clause in the sublease agreement expressly provided that Energen was not
permitted to deduct fees for post-production costs associated with transporting the gas to the
commercial marketplace. Given that the only express language o n the subject in the sublease
agreement expressly precludes the deduction of post-production transportation costs, we conclude
that the district court did not err in holding those costs not deductible. Cf.
Merritt, 499 So. 2d at 214
(observing that under Louisiana law “[u]nless the parties agree otherwise, the cost of marketing gas
once it has been produced is shared by the lessor and the lessee under a market-value lease”)
(emphasis added).
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Given the ambiguous nature of the language contained in the sublease agreement, the fact that
there is no Louisiana case law involving sublease agreements with similar contradictory language, and
based upon our review of the plain text of the relevant sublease agreement, we simply believe that
it was unwarranted for the district court to increase the damages awarded to Columbine far in excess
of the damages that had actually been incurred as a result of Energen’s conduct. We appreciate that
the difficulty and unusual nature of these proceedings required the district court to decide, at least
from our perspective, between two reasonable alternatives. Nevertheless, we conclude that it would
be improvident to accede to the district court’s sum damage award under these circumstances.
Louisiana courts have considered whether the imposition of double damages was appropriate.
Generally speaking, such awards are not viewed entirely favorably unless the conduct necessitating
the award was clearly egregious. See Crowe v. Equitable Life Assur. Soc., 179 La. 444, 452 -53 (La.
1934) (“Penalties in civil actions are not favored by the courts and should not be imposed except in
cases that are clear and free of doubt.”). A principal concern regarding the propriety of an award of
double damages turns on the “reasonableness” of the conduct which mandated the award in the first
instance. See Matthews v. Sun Exploration and Production Co.,
521 So. 2d 1192, 1195 - 97 (La.App.
2 Cir. 1988). In Matthews, a Louisiana appellate court confronted a question involving the proper
amount of royalties due under the terms of an oil, mineral, and gas lease. In Matthews, Sun was
found liable for nonpayment to an overriding royalty interest owner of an additional royalty interest
which it had not been informed that it was responsible for paying. Sun’s explanation was that the
relevant contractual instruments failed to make mention of the additional royalty interest. This
averment, though true, was found unavailing by the trial court which held that Sun should be
required to pay damages. Thereafter, apparently troubled by Sun’s conduct, the trial court imposed
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double damages. On appeal, the Matthews court held that Sun’s conduct was arguably reasonable
because Sun had not been provided with sufficient information from its predecessors in interest which
would have indicated that it was required to pay the additional royalty fee. Id. at 1197. Therefore,
although Sun was still found responsible for paying damages related to the underpayment of the
royalty interest, the trial court’s subsequent imposition of double damages was held to be
unreasonable.
Id.
In the present case, we cannot say with great certainty that Energen’s conduct -- deducting
fees for post-production costs -- was so beyond the pale as to require the district court to impose
double damages. First, it was undisputed, that Energen’s predecessors in interest had engaged in the
same behavior, so it was not unreasonable for Energen to believe that it was similarly permitted to
deduct the fees in question. Second, the parties acknowledge that Louisiana courts have not
expressly confronted a situation like this involving a sublease agreement with seemingly contradictory
clauses involving post-production costs. Third, our review of the sublease agreement compels a
finding that it did contain an inherent ambiguity, in the sense that the relevant clauses appear to
conflict with each other. Therefore these factors, when understood in the aggregate, lead us to hold
that the district court did abuse its discretion by doubling the damages that Energen was required to
pay to Columbine. We reiterate however, we have no quarrel with the original damage award that
was imposed by the district court, and therefore leave that ruling undisturbed.
Finally, we must briefly address the district court’s award to Columbine of attorney’s fees and
ancillary expenses in the amount of $99,775.26. The district court’s order stated that its ruling was
predicated on the same reasons that led it to award Columbine double damages. Under Louisiana
law, trial courts are afforded a great deal of discretion in the awarding of attorney’s fees. See, e.g.,
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Lubom v. L.J. Earnest, Inc., 579 So. 2d 1174, 1182 (La.App. 2 Cir. 1991); Flint v. Rockwood Ins.
Co.,
455 So. 2d 1251, 1255 (La.App. 4 Cir. 1984). Where permitted under law, or if necessitated by
the terms of a contract, Louisiana courts have stated that attorney’s fees awards will not be disturbed
unless they are clearly found to constitute an abuse of the trial court’s discretion. See Lea v. Jarrott,
750 So. 2d 1098, 1100 (La.App. 4 Cir. 1999).
Consistent with this understanding, we have already expressed that the district court’s reasons
undergirding its imposition of double damages were improper. Therefore we conclude that because
the district court’s rationale for awarding attorney’s fee was reliant on a faulty premise -- Energen’s
bad faith -- we find that awarding attorney’s fees pursuant § 212.23 are not warranted under the facts
of this case. Our conclusion is again based in large measure on the conduct of Energen’s
predecessors in interest, the dearth of Louisiana precedent on this exact issue which might have
expressly proscribed Energen’s behavior, and the inherent ambiguity contained with the sublease
agreement, which we believe all militates against an attorney’s fee award -- $99,775.26-- nearly as
large as the original amount of damages that Columbine actually incurred – $111,258.00.
CONCLUSION
We conclude that the district court’s determination that Energen was responsible for paying
damages to Columbine in the amount of $111, 258.00 was appropriate and must stand. However,
the district court erred when it doubled this award to $222,516.00, and as such, this penalty must be
reversed. Moreover, as the district court’s award of attorney’s fees of $99,775.26 dovetailed with
its finding that double damages were appropriate, we find that the district court’s attorney’s fee award
must also be reversed.
AFFIRMED IN PART, REVERSED IN PART.
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