Fifth Circuit Certifies Post-Production Costs Question to Louisiana Supreme Court

In a rare move, the Fifth Circuit Court of Appeals has certified a question to the Louisiana Supreme Court in Self v. BPX Operating Co., 80 F.4th 632 (5th Cir.  9/08/2023). In Self, unleased landowners in an oil and gas unit created by the Louisiana Commissioner of Conservation sued the unit operator BPX for deducting post-production costs from their share of production payments; the unleased owners argue that, under Louisiana Revised Statute 30:10, such costs are not deductible. Throughout the litigation, the unit operator has advanced multiple arguments in favor of deduction of post-production costs, such as unjust enrichment and co-ownership. The newest argument, which relies on an ancient Civil Law doctrine, is the one that has gotten the most traction.

Negotiorum gestio, or “management of affairs,” is a quasi-contractual relationship whose elements are codified in Louisiana Civil Code article 2292, which states: “There is a management of affairs when a person, the manager, acts without authority to protect the interests of another, the owner, in the reasonable belief that the owner would approve of the action if made aware of the circumstances.” A simple example of this would be a person securing his out-of-town neighbor’s home against an approaching hurricane. In that instance, the “gestor” has acted without any authority to protect his neighbor’s home under the reasonable belief that his neighbor would approve. In that case, the Civil Code provides that the neighbor is bound to reimburse the gestor for all necessary and useful expenses (e.g., plywood for covering windows).

The operator in Self convinced the Western District of Louisiana that this doctrine should apply to unit operators and thus that the deduction of post-production expenses from payments to unleased parties is allowed. On the plaintiffs’ appeal, a Fifth Circuit panel, finding no controlling Louisiana cases, opted to certify to the Louisiana Supreme Court the question whether negotiorum gestio could apply to this particular relationship.

The Fifth Circuit considers three factors when deciding to employ this rare judicial procedure: (i) the closeness of the question and the existence of sufficient sources of state law, (ii) the degree to which considerations of comity are relevant in light of the particular issue and case to be decided, and (iii) practical limitations on the certification process. In the instant case, a panel majority concluded that these factors favored certification, as Louisiana scholarly opinion disagrees with the rulings of the Western District in the operators’ favor and the interplay of Louisiana oil and gas law, and Louisiana civil doctrine presents a novel issue requiring the judgment of Louisiana courts rather than speculation by a federal court. Seeing no practical impediments to certification, the court certified the question on September 8, 2023.

Perhaps the most interesting part of the certification was the dissent, written by Circuit Judge (and former Louisiana Supreme Court Justice) James Dennis. Judge Dennis concluded that there was no need to certify the question because “La. R.S. 30:10(A)(3) and article 2292 [are] distinct legal regimes with different requirements and different duties, they are necessarily incompatible.” In Judge Dennis’s view, a gestor must act “without authority” and since the operator acts under the authority of Louisiana’s unitization law (the quasi-contractual relationship between an operator and an unleased mineral owner in a unit is to facilitate the sale of minerals), their duties and obligations are authorized by Title 30. The quasi-contractual relationship created by negotiorum gestio is separate and distinct from the circumstances here. Finally, Judge Dennis concluded that the rules of statutory interpretation favor this result because specific statutes like R.S. 30:10 trump more general statutes. Likewise, if the court is to give meaning to every word in the statute, as required, Judge Dennis concluded that the words “without authority” in article 2292 may not be ignored in order to apply the doctrine of negotiorum gestio to the operator/unleased owner quasi-contractual relationship.

Even if the Louisiana Supreme Court sides with Judge Dennis or refuses to accept the certification, that would not end the case. There may be a more straightforward resolution to this issue of whether unleased owners in a Commissioner’s unit can get a free ride by not sharing in any post-production costs.

In a companion case still awaiting a Fifth Circuit opinion, Johnson v. Chesapeake Louisiana, LP, the operator raised an additional argument why the Civil Code provisions on co-ownership support an operator’s right to collect an unleased owner’s share of post-production costs.  Although the district court rejected this argument, it has yet to be addressed at the appellate level. Chesapeake argued that, under the Civil Code’s provisions on co-ownership, particularly article 806, it is entitled to deduct expenses it incurs in managing co‑owned things—such as the molecules of oil or gas produced from a Commissioner’s unit, where the unleased owners do not take their share of the production in kind but instead leave it to the unit operator to sell their share of the unit production. The “molecular theory” that each mineral owner in a compulsory unit is a co-owner of each molecule of oil or gas produced from the unit is well established. See, e.g., Hunt Oil Co v. Batchelor, 644 So.2d 191 (La. 1994). Although the plaintiffs argued that the specific provisions in La. R.S. 30:10 should trump Louisiana’s general Civil Code provisions, it is not clear that the two are in conflict here. For example, the detailed provisions in La. R.S. 30:10(A)(2) address “the cost of development and operation of the pooled unit,” Chesapeake argued that its silence regarding post-production issues opens the door to the application of other relevant law.

For now, we await the Louisiana Supreme Court’s opinion on the specific question of application of the doctrine of negotiorum gestio. After this issue is settled, we will remain apprised of developments related to the co-ownership argument and the eventual end of this years-long legal dispute on this significant issue affecting almost every Commissioner’s unit with unleased owners.

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