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Mineral leases are created by contract. La. Mineral Code art. 114 (La. Rev. Stat. Ann. § 31:114).Ownership of the mineral lease can be transferred by assignment or sublease. La. Mineral Code art. 127 (La. Rev. Stat. Ann. § 31:127). In the instance of assignment or sublease, to the extent of the interest acquired, an assignee or sublessee acquires the rights and powers of the lessee and becomes responsible directly to the original lessor for performance of the lessee's obligations. La. Mineral Code art. 128 (La. Rev. Stat. Ann. § 31:128).
Gloria's Ranch, L.L.C. ("Gloria's Ranch") granted a mineral lease to Tauren Exploration, Inc. ("Tauren") on September 17, 2004. The lease covered 1,390.25 acres in Sections 9, 10, 15, 16, and 21, Township 15 North, Range 15 West, Caddo Parish, Louisiana ("the property"). Tauren was granted "the exclusive right to enter upon and use the land . . . for the exploration for and production of oil [and] gas . . . together with the use of the surface of the land for all purposes incident to [exploration and production] with the right of ingress and egress to and from said lands at all times for such purposes." The lease was granted for a primary term of three (3) years "and as long thereafter as oil, gas, sulphur, or other minerals is produced from [the property] or from land pooled therewith." In February 2006, Tauren transferred an undivided 49% interest in the lease to Cubic Energy, Inc. ("Cubic"). On March 5, 2007, Tauren and Cubic executed separate credit agreements with Wells Fargo Energy Capital, Inc. ("Wells Fargo"). Wells Fargo provided Cubic with a revolving credit facility not to exceed $20,000,000 outstanding at any time and a $5,000,000 convertible term loan. As security, Cubic mortgaged its interest in approximately 750 mineral leases, including the instant lease with Gloria's Ranch, and assigned as collateral the profits earned therefrom. Tauren contracted with multiple corporations to commence oil and gas operations on the property.
Effective October 30, 2009, Tauren and EXCO USA Asset, Inc. ("EXCO") entered into a purchase and sale agreement. Pursuant to the agreement, Tauren conveyed its 51% interest in the Deep Rights to EXCO. Cubic conveyed to Tauren an overriding royalty interest in Cubic's 49% interest in the Deep Rights. Simultaneously, Tauren made a cash payment to Wells Fargo and assigned to it a 10% net profits interest in the Shallow Rights and the overriding royalty interest in the Deep Rights received from Cubic. In exchange, Wells Fargo cancelled the Tauren mortgage. On December 3, 2009, Gloria's Ranch sent a letter to Tauren, Cubic, EXCO and Wells Fargo ("the defendants"), seeking to establish whether the lease was still producing in paying quantities. It was the belief of Gloria's Ranch that the lease had expired for lack of production in paying quantities. Thus, it wanted confirmation via monthly revenue and expense reports that the wells were still profitable. Tauren responded that it had miscalculated some of its expenses but assured Gloria's Ranch that the wells were still producing in paying quantities. Ultimately, on January 28, 2010, Gloria's Ranch sent written demand to the defendants, requesting a recordable act evidencing the expiration of the lease. No response was forthcoming by any of the defendants. Accordingly, Gloria's Ranch filed suit, alleging the defendants failed to furnish a recordable act evidencing the expiration of the lease as required by La. Mineral Code arts. 206 and 207. Gloria's Ranch claimed in its petition that the lease expired for not producing in paying quantities and that the defendants' failure to release the lease caused it damages in the amount of lost bonus payments, lost rentals, and lost royalties. Additionally, it sought unpaid royalties for Section 15, which was still maintained by production from the Soaring Ridge 15H. A bench trial was held, and the trial court rendered judgment in favor of Gloria's Ranch and against Tauren, Cubic, and Wells Fargo in solido (a settlement was reached with EXCO). It found the lease had expired as to Sections 9, 10, 16, and 21 due to lack of production in paying quantities for at least the twelve months preceding the January 28, 2010 demand and that the defendants failed to furnish a recordable act evidencing same, as required by the law. The trial court awarded damages for lost-leasing opportunities at $18,000 per acre ($22,806,000). It further awarded $726,087.78 for unpaid royalties pursuant to La. Mineral Code art. 140 ($242,029.26 in royalties due plus $484,058.52 in double royalties as a penalty). With regard to Wells Fargo's solidary liability, the trial court found that Wells Fargo breached its duty to Gloria's Ranch either to release its mortgage on the lease or to authorize Cubic to release the lease. Tauren, Cubic, and Wells Fargo filed motions for new trial. On November 23, 2015, the trial court granted the motions, in part, reducing the damage awards by EXCO's virile portion (25%) to reflect EXCO's settlement. The defendants appealed. The court of appeal affirmed the judgment and awarded $125,000 in attorney fees for work done on appeal.
Did the lower courts err in holding Wells Fargo liable as an “owner” under La. Mineral Code art. 207?
The "bundle of rights" controlled by Wells Fargo were not traits of ownership, but of security rights. The mortgage and credit agreement contained provisions typical of security contracts, all designed to protect the collateral. Importantly, none of the provisions of the mortgage or credit agreement conveyed to Wells Fargo the right to explore for and produce minerals on the property—the primary right granted in a mineral lease and the stamp of ownership thereof. Rather, the provisions incorrectly held by the court of appeal as rights of "usus," "abusus," and "fructus" were security interests and derivative interests related to the sole goal of safeguarding the collateral (the lease).
As to the contracts at issue, Cubic contractually agreed that, only upon default, it would pay to Wells Fargo the proceeds from production. This pledge of proceeds, which is authorized by La. Mineral Code art. 204, was merely a security device — not an assignment of the fructus (civil fruits) of the mortgaged property for purposes of creating ownership or holding a mortgagee liable for the obligations of its debtor. The existence of a security interest without more, does not subject a mortgagee to liability for the mortgagor's breach of the lease contract. Also, the pledge at issue was conditional, and there was no record evidence that Cubic was ever in default or that Wells Fargo ever exercised such rights so as to trigger the assignment of the proceeds.
Regarding the purported "usus" (physical use) of the property, the Court found the oversight rights, the right to enter the property, and the right for Wells Fargo to direct "use of the proceeds," among others, were typical rights of a secured creditor and existed for the clear purpose of insuring the maintenance of the collateral. They did not convey any rights of ownership. Rather, these rights were solely to keep the lender abreast of the debtor's ability to pay back the loan and remain informed of the collateral's condition.
The last category, the alleged right of abusus (alienation), merited additional discussion inasmuch as Gloria's Ranch and the lower courts emphasized the provision which requires Wells Fargo's consent as a prerequisite to Cubic releasing its lease interest. First, Cubic never requested Wells Fargo's consent to release the lease (or the mortgage thereof). Second, even if Wells Fargo had released its mortgage, the lease still would not have been released as it relates to Gloria's Ranch. This was because there was never any privity of contract between Wells Fargo and Gloria's Ranch. The privity of contract existed between Gloria's Ranch and its lessees pursuant to the mineral lease. A separate contractual relationship existed between Wells Fargo and Cubic in the form of a mortgage and a credit agreement. A breach of one contract does not directly impact the other contract so as to create a cause of action where one does not exist. Namely, any failure of Wells Fargo to consent to release the lease did not amount to a cause of action by Gloria's Ranch against Wells Fargo. Rather, if Cubic had requested Wells Fargo's consent (of which there is no record evidence) and Wells Fargo had withheld it, the recourse would not be for Gloria's Ranch to sue Wells Fargo. The only available recourse for Gloria's Ranch would be to sue the owners of the lease (the lessees), with whom it has privity of contract. Cubic, in the event consent had been requested and withheld, could have available to it a contractual claim against Wells Fargo in the form of indemnity, third party demand, reimbursement, or some other incidental demand. However, this obligation was distinct and separate from that owed by Cubic to Gloria's Ranch. The clause in Cubic's mortgage that required Wells Fargo's consent to release the lease was merely a protection over its collateral, not an element of ownership. As such, Wells Fargo could not be held solidarily liable for the obligation of an owner of the lease merely by virtue of its security interest.