Fite Oil & Gas, Incorporated v. SWEPI, L.P.

Filing

UNPUBLISHED OPINION FILED. [13-31244 Vacated and Remanded] Judge: EGJ , Judge: LHS , Judge: CH Mandate pull date is 02/26/2015 [13-31244]

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit

No. 13-31244

FILED
February 5, 2015
Lyle W. Cayce
Clerk

FITE OIL & GAS, INC.,
Plaintiff-Appellant
v.
SWEPI, L.P.,
Defendant-Appellee

Appeal from the United States District Court
for the Western District of Louisiana
USDC No. 5:11-CV-1621
Before JOLLY, SOUTHWICK, and HAYNES, Circuit Judges.
PER CURIAM: *
Fite Oil & Gas, Inc. appeals from the district court’s declaratory
judgment that, as a lessee who refused to participate in the drilling of a well,
it must pay its own lessors the royalties they are due. Fite’s claims have
become moot during the pendency of this action. We VACATE the district
court’s order and REMAND with instructions that the complaint be dismissed.

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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH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.
*

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FACTS AND PROCEDURAL BACKGROUND
Fite and SWEPI, L.P. held oil, gas, and mineral leases on some of the
same property in northwest Louisiana. According to the original complaint,
Fite acquired interests in 2007 under two leases executed in the early 1960’s,
covering acreage in four sections of land in DeSoto Parish, Louisiana. Fite
claimed that SWEPI acquired leases “in direct conflict with Fite’s interest.”
SWEPI argued that some of its interests were in “top leases,” i.e., subsequent
leases that would become effective only upon the expiration of the prior leases.
In August 2009, Fite demanded that SWEPI release its competing leases. In
September, SWEPI wrote Fite that it would not release its acreage.
In October 2009, SWEPI wrote Fite about its intent to drill a well in a
unit approved by the Louisiana Commissioner of Conservation.

The unit

would cover some of Fite’s leasehold. By statute, owners of separately-owned
tracts within a drilling unit approved by the Commissioner may agree to pool
their interests and jointly develop the property. LA. REV. STAT. § 30:10(A). The
SWEPI letter referred to a subsection of that same statute which provides that
those who drill the well are “entitled to own and recover out of production” the
drilling, completion, and operating costs allocable to the non-participating
owner and also to retain a “risk charge.” § 30:10(A)(2)(b)(i). Only after these
amounts have been recovered out of production will the non-participating
owners begin to receive their percentage of production revenue. See id.
The two companies engaged in discussions about Fite’s lease interests
and the well. According to Fite’s original complaint, SWEPI offered $2,000 per
acre to buy Fite’s interests. Fite claimed SWEPI invalidly withdrew the offer
in September 2010. In December, SWEPI again wrote Fite, setting out the
costs of the well, referring to the statutory penalty that non-participating
working interest owners must bear, and offering Fite a chance to participate
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by agreeing to share in the costs of the well. The well apparently had already
been completed.

According to Fite’s complaint, negotiations between the

companies failed.
The drilling of the well began in October 2009, and it was completed in
March 2010. Production ceased in December 2011. Revenue from the well was
less than the cost of drilling and completion.

Throughout the period of

production, SWEPI paid nothing to Fite because it had not agreed to share in
the costs of the well. Those costs were still being recouped when production
ceased. SWEPI also did not make royalty payments out of this revenue to
Fite’s lessors or to Fite for their benefit. Until it recouped its costs and the risk
charge under Section 30:10(A)(2)(b)(i), SWEPI asserted that it had no
obligation to pay anything to the lessors of a non-participating working interest
owner. It maintained that Fite, as lessee, was required to pay its lessors out
of its own funds.
In September 2011, Fite filed suit in the United States District Court for
the Western District of Louisiana. Production from the well was still occurring
but was nearing its end. In the complaint, Fite claimed that SWEPI had
agreed to purchase Fite’s interests for $693,280. The suit sought that sum,
other damages, and a declaration that SWEPI had to pay the royalties due to
Fite’s lessors. SWEPI denied that it had agreed to purchase Fite’s interests.
It claimed that a formal written agreement was contemplated but never
executed. It also denied any obligation to pay the royalties owed under Fite’s
leases.
Fite amended its complaint in January 2013. It dropped its claim that
SWEPI had agreed to purchase its interests. It now sought only a declaratory
judgment stating that Fite had not incurred the risk penalty, and that SWEPI
was obligated to pay Fite’s lessors the royalties they were due from production.
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The risk charge would become a moot point, though, because production on the
well ceased before the costs of drilling and completing the well were recovered.
Thus, SWEPI could not recover a risk charge out of production revenues.
Both parties moved for summary judgment, contending that Section
30:10(A)(2) required the other to make the royalty payments. In November
2013, the district court ruled in favor of SWEPI. Fite timely appealed.
In November 2014, after briefing and argument, we requested that the
parties submit letter briefs addressing whether Fite’s lessors’ royalty claims
have prescribed, and if so, whether that rendered Fite’s claim that it is not
responsible for paying the royalties moot. SWEPI contends that the lessors’
claims have prescribed. Fite, in contrast, argues that its lessors have claims
against SWEPI that do not relate to royalties and are subject to a longer
prescription period that has not yet expired. It also claims that its suit against
SWEPI was brought on behalf of its mineral lessors, making the lessors’ failure
to bring suit is irrelevant.
DISCUSSION
The district court entered a judgment declaring that Fite and not SWEPI
had the obligation to pay the royalties due to Fite’s lessors. The royalty owners
themselves have never been parties to this suit. The parties have represented
to us that the royalty owners have not brought any suit against either company
to insist on payment. Even so, no question was raised by anyone in the district
court about whether the royalty owners should be parties to a suit that seeks
to determine which company owes them money.
A somewhat analogous and recurring form of litigation is a declaratory
judgment action among multiple insurance companies, with the issue being
which one is to provide indemnity to a common insured.
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suggests there is no actual controversy to support a declaratory action until
there is a judgment against the insured.

10B CHARLES ALAN WRIGHT &

ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2760 (3d ed. 1998).
“After there has been judgment against the insured, [though,] it is clear that a
declaratory action is appropriate to determine which insurer must pay . . . .”
Id. Often, the indemnity has been paid, and the insured has no further claim
against any of the insurance companies. See, e.g., Cont’l Cas. Co. v. N. Am.
Capacity Ins. Co., 683 F.3d 79, 84 (5th Cir. 2012) (suit among multiple
insurance companies who had indemnified insured and reserved their claims
as to which company had actual liability).

Having the claim against the

insured satisfied before a court determines the responsible insurer makes the
dispute concrete.
Unlike situations such as that in Continental Casualty, Fite and SWEPI
are not seeking a declaration as to which of them must pay a judgment already
entered in favor of someone else, or which must pay someone whose claims are
being resolved in the same litigation. Fite, as plaintiff, sought a declaration
that defendant SWEPI had to pay royalties to Fite’s lessors. The judgment
resolved the issue without ordering either to pay the non-party royalty owners.
One question is whether Fite had standing to seek this declaration. “To
establish standing, a plaintiff must present an injury that is concrete,
particularized, and actual or imminent; fairly traceable to the defendant's
challenged action; and redressable by a favorable ruling.” Horne v. Flores, 557
U.S. 433, 445 (2009) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 56061 (1992)). The “critical question” is whether either party has “alleged such a
personal stake in the outcome of the controversy as to warrant [the] invocation
of federal-court jurisdiction.” Id. (citing Warth v. Seldin, 422 U.S. 490, 498
(1975)).
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Fite definitely had a personal stake in the resolution of its claims for
almost $700,000 in contract damages and to be exempt from the risk penalty.
Final judgment resolved neither, though, for reasons we earlier explained. On
the need for standing to receive a declaration that it did not have to pay
royalties, Fite’s most difficult task lies in showing that any injury it incurred
is redressable by a favorable ruling in a suit solely between these two oil
companies. Of course, a validly-entered judgment would bind the two parties
as between themselves. See FED. R. CIV. P. 19, cmt. General Considerations to
1966 Amendments (failure to add a necessary party “does not by that token
deprive [the court] of the power to adjudicate as between the parties already
before it”; absence of a necessary party does not “negate the court's power to
adjudicate as between the parties who have been joined.”). Even so, whether
the district court’s judgment redressed any injury is questionable.
We pretermit the concerns about redressability and other elements of
standing and instead turn to mootness, a different jurisdictional issue that a
court must note on its own when it is not raised. MCG, Inc. v. Great W. Energy
Corp., 896 F.2d 170, 173 (5th Cir. 1990). “We must address the issue of
mootness first, because to qualify as a case for federal court adjudication, a
case or controversy must exist.” Bayou Liberty Ass’n v. United States Army
Corps of Eng’rs, 217 F.3d 393, 396 (5th Cir. 2000).

Article III’s “case or

controversy” requirement bars federal courts from exercising jurisdiction over
moot claims. North Carolina v. Rice, 404 U.S. 244, 246 (1971). A claim is moot
if a decision “cannot affect the rights of litigants in the case before them.” Id.
“If a claim becomes moot after the entry of a district court’s judgment and prior
to the completion of appellate review, we generally vacate the judgment and
remand for dismissal.” Murphy v. Fort Worth Indep. Sch. Dist., 334 F.3d 470,
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471 (5th Cir. 2003) (citing United States v. Munsingwear, Inc., 340 U.S. 36, 39
(1950)).
The mootness question in this appeal is whether the royalty owners’
right to insist on payment still exists. The answer turns on whether Fite’s
lawsuit prevented its lessors’ claims from prescribing, and if not, whether the
lessors’ claims have prescribed. Because the royalty owners are not parties,
our answers to these questions are binding only on Fite and SWEPI.
I.

Fite’s Claims On Behalf of Its Lessors
Fite argues that “the only claims at issue in this matter are the claims

arising under Section 30:10 for payment of the Mineral Owners’ portion of
production asserted directly against SWEPI by Fite on behalf of the Mineral
Owners.” In other words, Fite argues that it sued not on its own behalf, but on
behalf of its lessors. As a result, Fite’s lessors effectively filed their claims
before the expiration of any applicable prescription period.
This argument is a difficult one to accept in light of what Fite’s complaint
said and what claims it had a legal right to bring. Fite sought almost $700,000
for breach of contract and the avoidance of liability for a risk penalty, but those
claims dropped out of the case. What was left was Fite’s claim that SWEPI
must pay royalties to Fite’s lessors. In its amended complaint, Fite sought
these two declarations from the district court:
2. Declaring that Fite has no obligation to pay royalty out of
production from the Well . . . ;
3. Declaring that SWEPI is obligated to pay Fite’s royalty and
overriding royalty owners that portion of production from the Well
due to them under the terms of the contract creating the royalty .
...
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Fite was not seeking monetary relief for its lessors. It was seeking a
declaration that SWEPI was obligated to pay its lessors and that Fite was not
required to do so. As a result, the district court ruled that “SWEPI is not liable
to Fite” under Louisiana law, leaving Fite with the obligation to pay. But the
court did not order Fite to pay its lessors.
Had Fite actually sought payment for its lessors, SWEPI may have
questioned its capacity to do so under Federal Rule of Civil Procedure 17. 1
That Rule requires courts to determine, based on state law, whether a party
not suing on its own behalf may nevertheless sue “in the name of the real party
in interest.” FED R. CIV. P. 17(a); Thomas v. N.A. Chase Manhattan Bank, 994
F.2d 236, 242-43 (5th Cir. 1993). In this case, SWEPI may have contended
that Louisiana law does not permit Fite to enforce its lessors’ right to royalty
payments. 2 Similarly, SWEPI may have sought dismissal based on Fite’s
failure to join an indispensable party.

See FED R. CIV. P. 17(a)(3), 19(b).

SWEPI had no reason to raise these issues because Fite’s complaint did not
attempt to bring claims on behalf of the royalty owners.
We conclude that this lawsuit was strictly a contest between Fite and
SWEPI, which in no way brought the claims of Fite’s lessors, to whom the
royalties are said to be owed, before the district court. Consequently, the
period of prescription on the royalty owners’ claims was not tolled.

In one case under Section 30:10(A)(3), the lessee was appointed an agent for its
lessors to bring claims against the operator. Lamson Petrol. Co. v. Hallwood Petrol., Inc. 763
So.2d 40, 49 (La. App. 3d Cir. 2000). There is no suggestion that Fite’s lessors made such an
appointment.
2 This issue is related to, but distinct from, those relating to standing. Standing
addresses whether a party has an enforceable interest of its own, whereas capacity concerns
a party’s right to sue on behalf of another; the latter may be waived, while the former may
not. See Thomas, 994 F.2d at 242-43; Hous. Auth. of Kaw Tribe of Indians v. City of Ponca
City, 952 F.2d 1183, 1192-93 (10th Cir. 1991); 6A CHARLES ALAN WRIGHT & ARTHUR R.
MILLER, FEDERAL PRACTICE AND PROCEDURE § 1559 (3d ed. 1998).
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II.

Prescription of Lessors’ Claims
We next examine whether the parties have conceded facts that, at least

for this lawsuit, require us to hold that the lessors’ claims have prescribed. In
Louisiana, personal actions are generally subject to a ten-year prescription
period. See LA. CIV. CODE art. 3499. Actions to recover royalty payments from
the production of minerals, however, prescribe in three years. See art. 3494(5).
In both cases, “[p]rescription commences to run from the day payment is
exigible.” art. 3495. Stated another way, prescription begins “as soon as the
action accrues.” Id. comment (b). Here, Fite’s mineral lessors’ royalty claims
accrued as they became due; the last such claim accrued upon cessation of the
well’s production in December 2011. art. 3495; see Ledoux v. City of Baton
Rouge/Parish of East Baton Rouge, 755 So.2d 877, 879-80 (La. 2000). To
decide which period applies, we must determine whether the lessors’ claims
relate to royalty payments.
Under the lease agreement between Fite and its lessors, Fite is entitled
to develop the lessors’ mineral interests and the lessors are entitled to receive
royalty payments. On appeal, Fite argues that “[t]he Mineral Owners’ claims
against Fite for royalty . . . are subject to a three-year liberative prescription
period” and thus “are moot.” Fite maintains that, unlike its lessors’ potential
claims against Fite itself, their claims against SWEPI have not prescribed
because they relate to “portion of production” payments, not royalties.
Fite cites two Louisiana cases for the proposition that “portion of
production” claims are quasi-contractual and entail a ten-year prescription
period. See Wells v. Zadeck, 89 So.3d 1145, 1149 (La. 2012); King v. Strohe,
673 So.2d 1329, 1338 (La. App. 3d Cir. 1996). In each case, an oil and gas
company began production within a drilling unit after leasing mineral rights
from some owners but not others. See Wells, 89 So.3d at 1147; King, 673 So.2d
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at 1332. The courts applied Section 30:10(A)(3), which allows an owner of
unleased mineral interests contained within a unit to seek a pro rata share of
any proceeds from the sale of production relating to the unit. See LA. REV.
STAT. § 30:10A(3); Wells, 89 So.3d at 1149; King, 673 So.2d at 1338. Both
courts held that such claims are subject to a ten-year prescription period. See
Wells, 89 So.3d at 1149; King, 673 So.2d at 1338.
The question of the applicability of Section 30:10(A)(3) turns on whether
a leased interest that is not a participating interest in a well should be
considered an “unleased” interest for purposes of that statute. Fite cites no
caselaw in which that characterization was made. As we just summarized, in
the two cases it does cite, the relevant mineral owners had not executed
mineral leases. In one of the two cited opinions, the Third Circuit Court of
Appeal of Louisiana explained the operation of Section 30:10(A)(3) by referring
to “unleased interests” as those still under the control of a mineral owner:
[The statute] protects the unleased interests and avoids undue
delays in the sale of production. Leased interests are usually
entitled to only an in kind share of production, which they then
market. It is then the lessee's duty to distribute the proceeds under
its contract with its lessor. When there is no lessee, the mineral
interest owner must deal directly with the unit operator, with
whom he has no contractual relationship. In order to facilitate the
sale of the minerals, La.R.S. § 30:10(A)(3) provides a quasicontractual relationship between the unit operator and the
mineral interest owner.
King, 673 So.2d at 1338.
We did discover another Third Circuit Court of Appeal decision in which
the court briefly but inconclusively analyzed the applicability of Section
30:10(A)(3) to the mineral rights in a small strip of land that the operator
claimed was covered by one of its leases. See Lamson Petroleum, 763 So.2d at
41. The court resolved a title question and determined that that strip was not
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covered by any of the operator’s leases but was instead subject to a competing
lease given to the plaintiff. Id. at 43-49. The plaintiff was awarded the
proceeds of production allocable to that small interest. Id. at 49. The court
never determined whether Section 30:10(A)(3) applied to this leased but nonparticipating interest, though it did not categorically dismiss the possibility.
The court only held that the statute was not the exclusive remedy for those
seeking past revenues from production. Id. at 50. We do not consider Lamson
to be contrary authority.
The statute on which Fite relies for the assertion that there is a ten-year
prescriptive period is inapplicable. That statute concerns the marketing of
shares of production allocable to interests “for which the party or parties
entitled to market production therefrom have not made arrangements to
separately dispose of the share of such production . . . .” LA. REV. STAT. §
30:10(3). Fite’s interests do not fall under that category. Certain mineral
owners leased their interests to Fite in exchange for royalty payments, and
Fite held those leases when SWEPI decided to drill a well. The fact that Fite
did not agree to participate in the drilling did not convert its lessors’ interests
into unleased interests. Those nonparticipating but leased interests were
forcibly pooled within the unit, and the operator had the right to market the
production allocable to Fite’s leases as well as the production allocable to
interests that did participate. 3 Fite has never challenged SWEPI’s authority
to sell its share of production. It has only challenged whether some of that
revenue was owed to Fite’s lessors.

One writer stated that the Louisiana statutes and caselaw do not clearly explain the
rights of the operator under the forced pooling statute, but “other owners in the unit generally
are considered to have no control over the operator’s conduct of operations,” which
presumably includes the sale of production. Guy E. Wall, Joint Oil and Gas Operations in
Louisiana, 53 LA. L. REV. 79, 88 (1992).
3

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In summary, the mineral owners under Fite’s leases were not entitled to
seek a “portion of production” but instead were required to seek unpaid
royalties from whomever might have owed it, whether Fite or SWEPI. They
were required to seek their royalty payments within three years of the date
that those payments came due. Both Fite and SWEPI agree that none of the
lessors have filed suit, and the three-year prescription period has now run; the
lessors also did not file a required written notice prior to suit. See LA. REV.
STAT. 31:137; see also § 30:10(A)(2)(b)(ii)(ee).
These concessions do not bind absent parties. If Fite’s royalty owners
have, in fact, taken the relevant steps necessary to preserve their claims under
Louisiana law, those claims are not decided by this opinion. What is important
today is that the parties in this lawsuit have conceded facts that make any
determination of which company is to pay the lessors’ royalties a moot point in
this litigation. The determination made by the district court is one for which
there is no longer an actual case or controversy.
We VACATE the order of the district court and REMAND with
instructions that the complaint be dismissed.

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