Magnolia Point Minerals L L C v. Chesapeake Louisiana L P et al

Filing 83

MEMORANDUM RULING: Before the Court are cross motions for partial summary judgment filed by Magnolia Point Minerals L L C (Record Document 23) and Chesapeake Louisiana L P. (Record Document 31). This Court initially issued its ruling in favor of Che sapeake on 7/30/2012 (Record Document 53). However, in light of the Motion for Reconsideration (Record Document 56) filed by Magnolia, various briefs filed by both parties, and potential inconsistencies in relevant case law, this Court vacated its pr evious ruling and reopened the summary judgment record. The Court has now conducted a full review and consideration of all outstanding filings related to the pending cross motions, including the supplemental briefs (Record Document 78 and 80) address ing the Louisiana Supreme Courts recent decision in Clovelly Oil Co L L C v. Midstates Petroleum Co. For the reasons that follow, 23 Motion for Partial Summary Judgment and 31 Cross Motion for Partial Summary Judgment are hereby DENIED. The Lease at issue is ambiguous and there remains a genuine dispute as to the intent of the parties. Additionally, Magnolias 67 Supplemental Motion for Reconsideration is hereby GRANTED in so far as the Court has reconsidered and vacated its original ruling. It is DENIED in all other respects. Signed by Judge S Maurice Hicks on 8/2/2013. (crt,Putch, A)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF LOUISIANA
SHREVEPORT DIVISION

MAGNOLIA POINT MINERALS, LLC

CIVIL ACTION NO. 11-00854

VERSUS

JUDGE S. MAURICE HICKS, JR.

CHESAPEAKE LOUISIANA, LP AND
PXP LOUISIANA LLC

MAGISTRATE JUDGE HORNSBY

MEMORANDUM RULING
Before the Court are cross motions for partial summary judgment filed by plaintiff
Magnolia Point Minerals LLC (“Magnolia”) (Record Document 23) and defendant
Chesapeake Louisiana, LP (“Chesapeake”). (Record Document 31). The co-defendant,
PXP Louisiana, LLC (“PXP”), has opposed only Magnolia’s motion. (Record Document
30). This Court initially issued its ruling in favor of Chesapeake on July 30, 2012
(Record Document 53). However, in light of the Motion for Reconsideration (Record
Document 56) filed by Magnolia, various briefs filed by both parties, and potential
inconsistencies in relevant case law, this Court vacated its previous ruling and reopened
the summary judgment record.

The Court has now conducted a full review and

consideration of all outstanding filings related to the pending cross motions, including
the supplemental briefs (Record Document 78 and 80) addressing the Louisiana
Supreme Court’s recent decision in Clovelly Oil Co., LLC v. Midstates Petroleum Co.,
2012-2055 (La. 3/19/13), 112 So. 3d 187, 191. For the reasons that follow, the cross
motions for partial summary judgment (Record Document 23 and 31) are hereby
DENIED. The Lease at issue is ambiguous and there remains a genuine dispute as to
the

intent

of

the

parties.

Additionally,

Magnolia’s

Supplemental

Motion

for

Reconsideration (Record Document 67) is hereby GRANTED in so far as the Court has
reconsidered and vacated its original ruling. It is DENIED in all other respects.
BACKGROUND
On April 11, 2008, Robert Smitherman (“Smitherman”) sent a request for
proposal to Chesapeake indicating his interest in leasing the mineral rights to his 447.7
acre tract in Caddo and Bossier parishes. (Record Document 43 at 1). On May 6, 2008,
Matthew Smitherman, a relative of Robert Smitherman and one of the attorneys
representing Smitherman, mailed a bid proposal package to Chesapeake. See id. This
bid proposal package invited Chesapeake to submit a bid to lease or purchase the
minerals on Smitherman’s land. (Record Document 43 at 2). Chesapeake responded by
submitting a bid to lease the mineral rights to Smitherman’s land and, on May 21, 2008,
Smitherman granted an oil, gas, and mineral lease (“Lease”) in favor of Chesapeake.
(Record Document 23-3 at 8). The Lease consisted of a “paid up lease” form provided
by Chesapeake, nine separate changes to the proposed lease form proposed by
Smitherman, and an Exhibit, containing nineteen provisions, drafted by Smitherman.
(Record Document 43 at 2-3). Chesapeake later transferred an undivided twenty
percent (20%) interest in the Lease to PXP. See id.

On December 30, 2008,

Smitherman “conveyed all of his [personal] interest in the oil, gas, sulphur, lignite, coal
and other minerals subject to the Lease” to Magnolia Point Minerals, LLC, a limited
liability company owned by Smitherman. (Record Document 23-2 at 1).

Therefore,

Magnolia is the current owner of the mineral servitude covering all of the oil, gas, and
minerals subject to the Lease and is entitled to receive all royalty payments in
accordance with the Lease. See id.

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After a dispute arose regarding the computation and payment of royalties under
the Lease, Magnolia filed action seeking “an accounting for and payment of all royalties”
and damages due to the late payments or under payments of these royalties. (Record
Document 1-1 at 12). Further, Magnolia seeks dissolution of the Lease. (Record
Document 1-1 at 13). Magnolia filed a Motion for Partial Summary Judgment (Record
Document 23) and Chesapeake responded by filing a Cross Motion for Partial Summary
Judgment on the calculation of royalties payable under the Lease. (Record Document
31).
SUMMARY JUDGMENT
Summary judgment is proper pursuant to Rule 56 of the Federal Rules of Civil
Procedure when “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.”1 Quality Infusion Care, Inc. v. Health Care
Serv. Corp., 628 F.3d 725, 728 (5th Cir. 2010). “A genuine issue of material fact exists
when the evidence is such that a reasonable jury could return a verdict for the
nonmoving party.” See id. “Rule 56[(a)] mandates the entry of summary judgment, after
adequate time for discovery and upon motion, against a party who fails to make a
showing sufficient to establish the existence of an element essential to that party's case,
and on which that party will bear the burden of proof at trial.” Patrick v. Ridge, 394 F.3d
311, 315 (5th Cir.2004). If the movant demonstrates the absence of a genuine dispute
of material fact, “the nonmovant must go beyond the pleadings and designate specific
facts showing that there is a genuine issue for trial.” Gen. Universal Sys., Inc. v. Lee,
379 F.3d 131, 141 (5th Cir.2004).

In order to determine whether or not summary

1

The Court notes that the amended Rule 56 requires that there be “no genuine
dispute as to any material fact,” but this change does not alter the Court’s analysis.
See F.R.C.P. 56(a) and advisory committee’s note (emphasis added).
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judgment should be granted, an examination of the substantive law is essential.
Substantive law will identify which facts are material in that “[o]nly disputes over facts
that might affect the outcome of the suit under the governing law will properly preclude
the entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106
S. Ct. at 2510.
LAW AND ANALYSIS
The Lease at issue originated as a typical “paid up lease form” used in north
Louisiana and was provided by Chesapeake. (Record Document 43 at 2). It is clear
from the face of the form Lease that, as part of the negotiation process, line-outs, or
edits, were made to the proposed Lease. (Record Document 31-2 at 2).

Those

changes were made by Robert Smitherman and/or his attorneys. (Record Document 43
at 2-3). Smitherman also drafted the contested language specifically at issue in the
Exhibit to the Lease. (Record Document 43 at 2).
The legal dispute in this matter arises when the original Lease form is construed
in pari materia with the Exhibit to the Lease. It is undisputed that the original Lease form
determines the amount of net royalty payments through the use of the benchmark of
“market value at the well.”2 It is further undisputed that the Exhibit to the Lease contains
two provisions at the heart of these cross motions:
(1) The language and terms set forth in this Exhibit shall
prevail in the event of a conflict between this Exhibit and the
foregoing printed Lease;
(2) [N]o cost shall be charged or allocated to Lessor’s interest
except severance and other applicable taxes.

2

“Market value at the well” is a longstanding term of art commonly used in the
Louisiana oil and gas industry. It will be discussed in detail, infra.
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(Record Document 31-2 at 6). The key issue is whether the Exhibit’s “no cost” provision
forbids Chesapeake from deducting transportation costs from Magnolia’s “interest”
before making net royalty payments to Magnolia.
Under the general principles of contractual interpretation in Louisiana, there are
various, and at times perhaps conflicting, rules of contractual interpretation applicable to
the present case. As a starting point, “[t]he Lease contract is the law between the
parties, defining their respective legal rights and obligations...as well as the rules for
interpretation of contracts as laid down in the Civil Code...art. 2045 et seq.” Frey v.
Amoco Prod. Co., 603 So. 2d 166, 172 (La. 1992) (citations omitted).
The purpose of interpretation is to determine the common
intent of the parties. See La.Civ.Code art. 2045. Words of art
and technical terms must be given their technical meaning
when the contract involves a technical matter, see
La.Civ.Code art. 2047, and words susceptible of different
meanings are to be interpreted as having the meaning that
best conforms to the object of the contract. See La.Civ.Code
art. 2048. A doubtful provision must be interpreted in light of
the nature of the contract, equity, usages, the conduct of the
parties before and after the formation of the contract, and
other contracts of a like nature between the same parties.
La.Civ.Code art. 2053.
Id. Additionally, “[w]here the language of a contract is clear and unambiguous, it must be
interpreted solely by reference to the four corners of that document.” Tammariello
Properties, Inc. v. Med. Realty Co., Inc., 549 So. 2d 1259, 1263 (La. App. 3d Cir. 1989);
La. C.C. art 2046. “On the other hand, a contract is ambiguous, under Louisiana law,
‘when it is uncertain as to the parties' intentions and susceptible to more than one
reasonable meaning under the circumstances and after applying established rules of
construction.’” Texas E. Transmission Corp. v. Amerada Hess Corp., 145 F.3d 737, 741
(5th Cir. 1998) (citing Lloyds of London v. Transcontinental Gas Pipe Line Corp., 101
F.3d 425, 429 (5th Cir.1996), 101 F.3d at 429).
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Under the established rules of construction, a “contract must be viewed as a
whole and, if possible, practical effect given to all its parts, according to each the sense
that results from the entire agreement so as to avoid neutralizing or ignoring any of them
or treating them as surplusage.” Lambert v. Maryland Cas. Co., 418 So. 2d 553, 559 (La.
1982). Moreover, “[e]ach provision in a contract must be interpreted in light of the other
provisions so that each is given the meaning suggested by the contract as a whole.” La.
Civ. Code art. 2050; see also, Clovelly, 112 So. 3d at 192. As recently reiterated in
Clovelly, “when the printed contract provisions irreconcilably conflict with the provisions
added by the parties, the added provisions will control.... Since the parties actually chose
to add to or modify the printed contract, the written terms presumably better reflect their
intention than those contained in a printed contract intended for general use.” 112 So.
3d at 193. However, as demonstrated by the Louisiana Supreme Court in its holding,3 it
is paramount that the language should be harmonized, if possible, so that each term is
given the meaning suggested by the contract as a whole. These bedrock principles of
contractual interpretation must be applied by the Court to the language of the Lease at
issue.

3

In Clovely, Exhibit A of the contract at issue contained typewritten terms made by
the original parties to the Joint Operating Agreement (JOA). Section I of Exhibit A
listed certain geographic parameters to which the lease at issue would be
applicable. 112 So. 3d at 190. However, the parties disagreed as to whether the
JOA applied to all land located within the geographic parameters listed in Exhibit A,
or only to the land within the relevant geographic parameters that was also owned
at the time the JOA was executed. The Louisiana Supreme Court looked to the
entire contract in determining which interpretation of the JOA was correct. Id. at
193. The Court limited the applicability of the JOA to only cover land which was
owned by the parties at the time the JOA was executed based on the present tense
language in the Preamble and other sections of the JOA. Id. To hold otherwise
would render Exhibit A in conflict with other provisions of the contract. Id. at 194.

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In Louisiana, the general rule is that post-production costs are shared pro rata
unless a lease says otherwise. A common method of altering this default rule is
calculating royalty payments by determining the “market value at the well.”

In

determining the market value at the well of natural gas, Louisiana applies the
reconstruction approach. “Under this approach, market value is reconstructed by
beginning with the gross proceeds from the sale of the gas and deducting therefrom any
additional costs of taking the gas from the wellhead (the point of production) to the point
of sale.” Merritt v. Sw. Elec. Power Co., 499 So. 2d 210, 213 (La. Ct. App. 2nd Cir.
1986). Therefore, it is clear that when parties agree to alter the default rule by
determining production payments based on the “market value at the well,” they are
agreeing that the lessor may bear certain costs, e.g., transportation costs.
If the Lease agreement at issue stopped here without the Exhibit, there would be
no dispute that Chesapeake possesses full contractual authority to deduct postproduction costs before making royalty payments.

However, the so-called “no cost”

provision in the Exhibit drafted by Smitherman appears to impact the implementation of
the reconstruction approach used to determine the “market value at the well.” Magnolia
contends that the “market value at the well” provision and the “no cost” provision
irreconcilably conflict, and, therefore, the “no cost” provision prevails and any deduction
of post-production expenses is contractually forbidden. Nevertheless, it is clear under
Louisiana law, specifically the recent decision in Clovelly discussed above, that the Court
should attempt to harmonize the printed lease form with the added exhibit in order to
give effect to all provisions in the contract. See Clovelly, 112 So. 3d at 194. In other

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words, if there is a reasonable interpretation of this contract that gives effect to both the
“market value at the well” provision and the “no cost” provision, the Court must adopt that
interpretation.

However, the Court can only reach or conduct that analysis if the

language in the Lease is clear and unambiguous and leads to no absurd results when
harmonizing all provisions.
After due consideration of the specific language used within the four corners of
the Lease, the Court finds that the terms of Lease are unclear and ambiguous and that
there remains a genuine dispute as to a material fact. Here, the definition of “lessor’s
interest” appears to be determinative. However, this term is ambiguous and the parties
have presented scant evidence, if any, as to what constitutes Magnolia’s interest and at
what time that interest is established. The Court is uncertain as to the parties' intentions
with respect to the meaning of “interest” which affects the scope of the “no cost”
provision in the Exhibit. The parties intent is the key issue because the phrase “lessor’s
interest” is susceptible to more than one reasonable meaning under this set of
circumstances.
The Exhibit’s “no cost” provision states that “no cost shall be charged or allocated
to [Magnolia’s] interest except severance taxes and other applicable taxes.” However,
the Exhibit itself does not quantify or provide any definition for the term “interest.”
Accordingly, the Court can only determine if Chesapeake violated the added “no cost”
provision when it paid royalties of 1/4 of the “market value at the well” (which, under the
calculation method employed by Chesapeake, inherently included the deduction of
transportation costs) after the Court has first established what constitutes Magnolia’s

Page 8 of 11

“interest.” If Magnolia’s “interest” is one-fourth of the proceeds of gas after deducting the
cost of bringing the gas to market, then the “no cost” provision would have no bearing on
costs paid to bring the product to a suitable market and would only prevent the deduction
of any post-hoc expenses, such as administrative or accounting charges. However, if
Magnolia takes an immediate interest in the gas as it is produced, then it would be
reasonable to interpret the “no cost” provision to prevent the deduction of all costs,
including transportation expenses. Because the “no cost” provision is susceptible to
multiple reasonable interpretations, the court cannot determine the intent of the parties
from the four corners of the Lease and Exhibit alone. Rather, the rights and duties of the
parties under the Lease can only be determined through the examination of extrinsic
evidence, including possible expert testimony on the custom, pattern, or practice in the
oil and gas industry as to the meaning of “interest.” Therefore, summary judgment at this
stage is premature.
Additionally, Magnolia relies heavily upon Columbine II Ltd. v. Energen
Resources, 129 Fed. Appx. 119 (5th Cir. 2005) for the proposition that transportation
costs cannot be deducted by Chesapeake. However, Columbine II is distinguishable
from the present facts. In Columbine II, the lease holder 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 on the subject in the sublease
agreement expressly precludes the deduction of post-production transportation costs,
[the Fifth Circuit concluded] that the district court did not err in holding those costs not
deductible.”

Id. at 122-123.

Here, the “no cost” provision is not the “only express

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language” concerning royalties due to the existence of the “market value at the well”
provision. Further, the language in Columbine II expressly referred to post-production
transportation costs. Id. This express language clearly demonstrated the intent of the
parties to override the traditional “market value at the well” calculation as it pertained to
transportation costs. Here, the “no cost” provision does not address transportation costs
specifically. The Lease form at issue does not contain a line-out of the phrase “market
value at the well,” or specific language in the Exhibit including clear, unambiguous
language indicating that the “no cost” restriction applied before the gas was transported
to a suitable marketplace.

If the Magnolia/Chesapeake Lease contained language

expressly forbidding the deduction of post production transportation costs, Columbine II
would be persuasive.
CONCLUSION
The Court finds that the Lease language at issue is unclear and is, in fact,
ambiguous.

The Court cannot determine the intent of the parties through the four

corners of the Lease and Exhibit at this stage. The Exhibit contains the ambiguous
phrase “[N]o cost shall be charged or allocated to Lessor’s interest.”

There are

competing reasonable interpretations as to what constitutes the “Lessor’s interest,” and
when such “interest” accrues. It is only after such determination is made that the Court
can decide whether the Lease’s “market value at the well” clause and the Exhibit’s “no
cost” provision can be harmonized or whether the two clauses irreconcilably conflict.
Therefore, at this point, the Court is precluded from entering summary judgment with
respect to the rights and duties of the parties under the lease.

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Accordingly,
IT IS ORDERED that both Chesapeake and Magnolia’s competing Cross Motions
for Partial Summary Judgment (Record Document 23 and 31) be and are hereby
DENIED.
IT

IS

FURTHER

ORDERED

that

Magnolia’s

Supplemental

Motion

for

Reconsideration (Record Document 67) be and is hereby GRANTED in so far as the
Court has reconsidered and vacated its original ruling. It is DENIED in all other respects.
An order consistent with the terms of the instant Memorandum Ruling shall issue
herewith.
THUS DONE AND SIGNED, in chambers, Shreveport, Louisiana on this 2nd day
of August, 2013.

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