Black Diamond Investments L L C v. Chesapeake Louisiana L P et al

Filing 38

MEMORANDUM RULING: re 12 MOTION to Remand filed by Black Diamond Investments L L C. Black Diamond's motion to remand will be granted, subject to the stay set forth in the accompanying order. The other motions will be left for resol ution by the state court. Given the volume of post-removal proceedings in this case, counsel for the parties should ensure that all relevant answers and motions filed with this court are filed in the state court after remand. Signed by Magistrate Judge Mark L Hornsby on 4/22/13. (crt,Delgado, S)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF LOUISIANA
SHREVEPORT DIVISION

BLACK DIAMOND INVESTMENTS, LLC

CIVIL ACTION NO. 12-2079

VERSUS

JUDGE STAGG

CHESAPEAKE LOUISIANA, LP, ET AL

MAGISTRATE JUDGE HORNSBY

MEMORANDUM RULING
Introduction
Black Diamond Investments, LLC (“Black Diamond”) stopped receiving payments
on an overriding royalty (“OR”). It filed suit in state court against five defendants and
prayed for payment of the royalties plus damages. Defendant Chesapeake Louisiana, LP
(“Chesapeake”) removed the case despite (1) the lack of diversity between Black Diamond
and three of the defendants and (2) the lack of consent to removal from the fourth defendant.
Chesapeake asserted that the lack of diversity and consent could be overlooked because the
other four defendants were improperly joined.
Black Diamond filed a Motion to Remand (Doc. 12) and challenged the improper
joinder arguments. The defendants who were alleged to have been improperly joined then
filed motions for leave to file counterclaims and crossclaims (Docs. 15 and 23) in which they
attack the viability of the 1952 lease under which Black Diamond receives its OR. A new
party filed a Motion to Intervene (Doc. 22) to seek a declaration that its 2012 mineral lease
on the same property is superior to the allegedly expired 1952 lease. For the reasons that

follow, the motion to remand will be granted, and the other motions will be left for resolution
by the state court.
Relevant Facts
J. T. Wurtsbaugh, in 1952, granted a mineral lease to Gilbert Johnson, Jr. on land in
Sections 1 and 2 of a township in DeSoto Parish, Louisiana. The lease continued past its
primary term because of operations and production. The rights of Mr. Johnson as lessee (to
explore for and produce minerals) have passed through several hands. By 1993, they were
held by Faulconer Energy Corporation and two individuals. The Faulconer group assigned
their interest as lessees with respect to the North Half of Section 2 (less than the entire
acreage covered by the 1952 lease) to BoMar Oil & Gas, Inc. It is that approximately 320
acre tract (“the Subject Property”) that is at issue in this case.
Hallmark Oil and Gas Company, Inc. eventually came to hold BoMar’s leasehold
interest in the Subject Property. Hallmark executed an assignment in 2009 that granted its
leasehold interest to Chesapeake Louisiana, LP (“Chesapeake”) and Black Diamond.
Hallmark granted (1) Chesapeake a leasehold interest in all depths below the Cotton Valley
Formation, subject to an OR; and (2) Black Diamond a leasehold interest in all other depths,
plus Hallmark’s OR and reversionary rights to the deep rights granted to Chesapeake. Mr.
Wurtsbaugh’s position as the owner of a mineral servitude on, and the lessor of, the Subject
Property is now occupied by three individuals referred to as the Sample Defendants.
Petrohawk Operating Company (“Petrohawk Operating”), as operator, completed a
Haynesville Shale well on the Subject Property in 2010 and began producing natural gas
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from it. The record implies that this production is from the deep zones on which Chesapeake
holds the rights of lessee, subject to the OR held by Black Diamond.
Chesapeake made some payments to Black Diamond in connection with the well but
stopped paying on the OR after March 2011. When Black Diamond made demand for
payment, Chesapeake responded that Petrohawk Operating had issued a revenue reversal for
payments to Chesapeake “due to a dispute over deep rights in the well.” Chesapeake said
that it had in turn placed Black Diamond in negative suspense to recoup Black Diamond’s
share (more than $20,000) of the reversal. Black Diamond then wrote Petrohawk Operating,
stated that it was not aware of any conflicting claims to the deep rights, requested a copy of
the title opinion or other documentation relied on by Petrohawk Operating to support the
reversal of revenue, and demanded payment of all royalties due.
Black Diamond later filed suit in state court against Chesapeake, Petrohawk
Operating, and the Sample Defendants. The petition set forth the basic facts concerning
Black Diamond’s interest and the cessation of royalty payments. It also alleged that the
Sample Defendants had caused a cloud on Black Diamond’s title by protesting the payments
to it and had coerced or conspired with Petrohawk Operating to interrupt the payments.
Black Diamond prayed for payment for all production attributable to its OR, plus penalties
and attorney fees available under Louisiana law, and cancellation of the assignment from
Hallmark to Chesapeake (which would potentially vest Hallmark’s former deep rights in
Black Diamond). The petition also asserted that Black Diamond was entitled to damages
from (1) Petrohawk Operating for the unlawful withholding of the production payments and
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(2) the Sample Defendants for unlawfully creating a cloud on Black Diamond’s title and
interfering with production payments due Black Diamond.
Chesapeake (Oklahoma) removed the case based on an assertion of diversity of
citizenship between it and Black Diamond (Louisiana). Chesapeake acknowledged that the
Sample Defendants are, like Black Diamond, citizens of Louisiana, but it argued that the
Sample Defendants could be ignored because they were improperly joined. Petrohawk
Operating (Texas) is diverse in citizenship from Black Diamond, but it did not consent to the
removal as required by 28 U.S.C. § 1446(b)(2)(A). Chesapeake asserted that Petrohawk’s
consent was not required because it, too, was improperly joined. Black Diamond filed,
within 30 days of removal, a Motion to Remand that challenged the improper joinder pleas
and raised both the jurisdictional and procedural challenges to the removal.
The Sample Defendants filed an answer in state court before the case was removed.
Doc. 10. The final paragraph of the pleading states their intent to assert a reconventional
demand (counterclaim) against Black Diamond and a crossclaim against Chesapeake for
cancellation of the 1952 lease to the extent it covers the Subject Property. The Sample
Defendants stated that they had made statutorily required pre-suit demands but had to wait
at least 30 days for a response before they could file their intended claims.
Soon after removal, the Sample Defendants did file a Motion for Leave to File
Counterclaim and Crossclaim (Doc. 15) as promised. Petrohawk Operating filed a similar
Motion for Leave to File Counterclaim and Crossclaim (Doc. 23). The proposed claims
assert that the rights of the lessee under the 1952 Wurtsbaugh lease were divided in 1993
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when the Faulconer group assigned their interest in the lease with respect to the North Half
of Section 2 (the Subject Property) to BoMar. The Sample Defendants and Petrohawk
Operating contend that the 1952 lease terminated with respect to the Subject Property in
about 1992 after production from a well on that particular tract ceased, even though the lease
continues in effect as to the other leased land due to production on Section 1.
The Sample Defendants, apparently confident in their position that the 1952 lease
terminated, signed a lease in June 2012 to Petrohawk Properties, LP (“Petrohawk
Properties”) of the Subject Property, limited to certain depths but inclusive of the Haynesville
Shale formation. Petrohawk Properties (Texas; Delaware) has filed a Motion to Intervene
(Doc. 22) and sue Black Diamond (Louisiana) and Chesapeake (Oklahoma). Its proposed
complaint in intervention makes the same attack on the 1952 lease as in the proposed
counterclaims and crossclaims by the Sample Defendants and Petrohawk Operating. If the
parties on this side of the dispute are correct that the 1952 lease was divided and terminated
with respect to the Subject Property, then the Petrohawk Properties lease is valid and Black
Diamond’s OR is expired.

Improper Joinder
Congress has provided a statutory framework for removal of certain cases where there
is diversity of citizenship. Those statutes have been interpreted by the courts to require
complete diversity; jurisdiction is lacking if any defendant is a citizen of the same state as
any plaintiff. That strict requirement would, on its face, permit a plaintiff to name as a
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defendant any citizen of his home state and defeat removal. To prevent such shams, the
“judge-imported concept of fraudulent joinder” has developed. Bobby Jones Garden
Apartments, Inc. v. Suleski, 391 F.2d 172, 176 (5th Cir. 1968). The Fifth Circuit has since
adopted the term “improper joinder” to describe the doctrine, but there is no substantive
difference between the two terms. Smallwood v. Illinois Central R.R. Co., 385 F.3d 568 n.
1 (5th Cir. 2004) (en banc).
There are two ways to establish improper joinder: (1) actual fraud in the pleading of
jurisdictional facts or (2) inability of the plaintiff to establish a cause of action against the
non-diverse party in state court. Only the second way is at issue in this case. That second
test asks whether the defendant has demonstrated there is no reasonable basis for the district
court to predict the plaintiff might be able to recover against the in-state defendant.
Smallwood, 385 F.3d at 573; Travis v. Irby, 326 F.3d 644, 646-47 (5th Cir. 2003).
Analysis
Chesapeake argues in its opposition that the relief Black Diamond requests in its
petition – payments due for production under the well and cancellation of the Hallmark
assignment to Chesapeake – are properly directed at Chesapeake but not the other
defendants. The prayer portion of Black Diamond’s petition does list only those forms of
relief, but the body of the petition plainly attempts to state a claim against and seek damages
from the Sample Defendants and Petrohawk Operating.
Black Diamond alleges in its petition that the Sample Defendants have taken no steps
to cancel the 1952 lease but have caused a cloud on Black Diamond’s title by protesting
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payments and challenging with Petrohawk Operating Black Diamond’s interest. Petition, ¶¶
37-43. Black Diamond asserts that it “is entitled to damages, penalties, interest, and
attorney’s fees from the Sample defendants for unlawfully creating a cloud on Black
Diamond’s title and without provocation or basis interfering with the payments due Black
Diamond for production on the Property.” ¶ 46. A similar demand for damages and
penalties is made against Petrohawk “for the unlawful withholding of [Black Diamond’s]
portion of production and payment.” ¶ 45.
Chesapeake argues that Black Diamond does not have a contractual relationship with
Petrohawk Operating and has not explained how its claims would be viable under Louisiana
law, which Chesapeake contends is “a necessary showing to defeat a claim of improper
joinder.” Chesapeake is incorrect about the relative burdens with respect to improper joinder.
It is not Black Diamond’s burden to defeat Chesapeake’s plea of improper joinder. Rather,
Chesapeake is the party with the burden. “The doctrine of improper joinder is a ‘narrow
exception’ to the rule of complete diversity, and the burden of persuasion on a party claiming
improper joinder is a ‘heavy one.’ ” Campbell v. Stone Ins., Inc., 509 F.3d 665, 669 (5th Cir.
2007). The unchallenged factual allegations in the petition are taken in the light most
favorable to Black Diamond. Id. Important here, any ambiguities in state law must be
resolved in favor of Black Diamond. Gray v. Beverly Enterprises-Mississippi, Inc., 390 F.3d
400, 405 (5th Cir. 2004).
Chesapeake argues that Black Diamond cannot make out a claim against Petrohawk
Operating because the operator is not a party to the assignment under which Black Diamond
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claims its OR. Chesapeake does not, however, cite any Louisiana decisions that would bar
Black Diamond’s claim against the operator and lessor in a setting where the OR owner
claims it is not being paid due to the lessor’s wrongful clouding of title and the operator
withholding payments otherwise due.
The Fifth Circuit applied Louisiana law in Huggs, Inc. v. LPC Energy, Inc., 889 F.2d
649 (5th Cir. 1989) to a claim by the owner of an OR against an operator who allowed the
lease to expire. The operator, much like Chesapeake, argued that there was no privity of
contract between the two so there could be no breach of contract damages awarded. The Fifth
Circuit examined Louisiana law and affirmed a judgment for the OR owner based on tort
law. This demonstrates that the lack of privity of contract between Black Diamond and
Petrohawk Operating does not mean Black Diamond cannot make out a claim against the
operator.
The challenge to Black Diamond’s claim against the Sample Defendants is on similar
footing. Chesapeake has not pointed to any law that would bar Black Diamond from seeking
damages from the Sample Defendants for clouding title to the lease and related OR.
Louisiana courts have recognized a claim for damages for clouding or slandering title. See
Maniscalco v. Shell Petroleum, Inc., 146 So. 33 (La. 1933). To the extent there is any
uncertainty about the applicability of that law to these facts, it must be resolved in favor of
Black Diamond. Gray, 390 F.3d 400, 405 (no reported MS cases on point, coupled with
unreported district court decisions favorable to plaintiff; defendant did not meet improper
joinder burden).
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The court need not resolve the claims in this setting or even estimate the likelihood
they will survive more substantive challenges such as summary judgment. It need only
determine whether Chesapeake has shouldered its heavy burden of showing that Black
Diamond has no reasonable possibility of recovery in state court against the Sample
Defendants or Petrohawk Operating. Chesapeake, which made its challenge based solely on
the allegations in the petition, has not met that burden. Black Diamond’s motion to remand
will be granted, subject to the stay set forth in the accompanying order. The other motions
will be left for resolution by the state court. Given the volume of post-removal proceedings
in this case, counsel for the parties should ensure that all relevant answers and motions filed
with this court are filed in the state court after remand.

THUS DONE AND SIGNED in Shreveport, Louisiana, this 22nd day of April, 2013.

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