Energy Law

Oil and Gas Operators are Not Entitled to Reimbursement of Production Expenses from Unleased Landowners - Caldwell Lands, Inc. v. Cedyco Corp., 2007-1515 (La. App. 3rd Cir. 4/2/08), 980 So. 2d 827

by April Rolen-Ogden

This case involved a suit by an unleased landowner against an oil and gas unit operator seeking unpaid production proceeds. The landowner owned a portion of a small tract of property, which was included in an oil and gas production unit that was apparently being operated by the defendant, Cedyco. The trial court awarded Caldwell the unpaid production proceeds attributable to Caldwell’s production unit acreage. It is significant to note that the operator was  not represented by counsel at trial, which may explain the ultimate outcome in this case.

On appeal, Louisiana’s Third Circuit initially applied Louisiana Civil Code articles 487 and 488 to the landowner’s claims, which is not typically seen in mineral law cases because of the presence of Louisiana Revised Statute 30:10. The court had held it was legal error for the trial court to not require the landowner to reimburse Cedyco, the operator, for its expenses. The appellate court reversed the trial court’s decision and ruled that the operator was entitled to reimbursement from the landowner of its production expenses; however, the operator was still required to pay the landowner the remainder of the production proceeds.

Then, on rehearing, the appellate court issued a per curiam decision which resulted in a complete about-face on this issue. The court held that, based on article 487 of the Louisiana Civil Code, “only a good faith possessor is entitled to reimbursement of production expenses.” Since the record revealed no act transferring title in the operator’s favor, i.e., no lease from the landowner to the operator, the court reversed its prior decision and held instead that the landowner was not required to reimburse the operator for the operator’s production expenses. The court reasoned that without an act translating title to the operator, any minerals reduced to the operator’s possession are possessed by the operator in bad faith. Possessors in bad faith are not entitled to reimbursement of expenses under the Louisiana Civil Code. 

The result in this case is atypical because this issue is generally analyzed under Louisiana Revised Statutes 30:10, which is based on the theory of unjust enrichment. Even unleased landowners are required to pay their proportion of the production expenses under the Louisiana Mineral Code. Nevertheless, this case presents an additional concern for oil and gas operators who have unleased owners within their production units. 

Full post as published by The Energy Law Blog on December 29, 2008 (boomark / email).