5th Circuit Upholds “Subsequent Purchaser Rule” For Mineral Leases

On April 18, 2017, the United States Court of Appeals for the Fifth Circuit held in Guilbeau v. Hess Corp. (Docket No. 16-30971) that Louisiana’s subsequent purchaser rule applies to rights arising under mineral leases.  The ruling surely comes to the relief of the oil and gas industry concerned over uncertain liability to third parties with whom oil companies had no privity of contract.

The subsequent purchaser rule in Louisiana, as articulated in Eagle Pipe & Supply Co. v. Amerada Hess Corp. (79 So. 3d 246 (La. 2011)), is based on the premise that although injury to property is damage to the real rights in the property, the right to sue another who infringes upon that real right is a personal right, which belongs to the owner of the real right (that is, the owner of the property) at the time the damage is inflicted.  (Id. at 279.)  Thus, the theory goes, “an owner of property has no right or actual interest in recovering from a third party for damage which was inflicted on the property before his purchase, in the absence of an assignment or subrogation of the rights belonging to the owner of the property when the damage was inflicted.”  (Id. at 256–57.)

The Court’s opinion in Eagle Pipe contained a conspicuous footnote, in which the Court expressed “no opinion as to the applicability of [the subsequent purchaser rule] to fact situations involving mineral leases or obligations arising out of the Mineral Code.”  (Id. at 281 n.80.)  Enter, Guilbeau, who seized on this language to argue that there is uncertainty whether the rule applies to mineral leases.  The land at issue, which Guilbeau purchased in 2007, had earlier been leased to Hess’s predecessor for oil and gas operations.  The operations ceased in 1971, and the lease terminated in 1973.  By the time Guilbeau purchased the property, all wells had been plugged and abandoned.  The federal court for the Western District of Louisiana dismissed the case, holding that the subsequent purchaser rule barred Guilbeau’s cause of action.

The Fifth Circuit agreed with the district court and recited decisions from the Louisiana First Circuit (Global Marketing Solutions, L.L.C. v. Blue Mill Farms, Inc., 153 So. 3d 1209 (La. Ct. App. 2014)), Second Circuit (Wagoner v. Chevron USA, Inc., 55 So. 3d 12 (La. Ct. App. 2010); Walton v. ExxonMobil Corp., 162 So. 3d 490 (La. Ct. App. 2015)), and Third Circuit (Bundrick v. Anadarko Petrol. Corp., 159 So. 3d 1137 (La. Ct. App. 2015); Boone v. Conoco Phillips Co., 139 So. 3d 1047 (La. Ct. App. 2014)), all of which applied the subsequent purchaser rule to hold that a plaintiff, as owner of land, cannot recover for damages that arose on a leased premises before the plaintiff  acquired the same premises.  In Walton, however, the Second Circuit noted that although a purchaser cannot recover for damages that occurred under a mineral lease before the purchaser acquired its interest in the land/lease, a purchaser may still recover for damages that occur after the purchaser’s acquisition of its interest in the land/lease.

Finding no persuasive data to suggest that the Louisiana Supreme Court would rule differently from this consensus among the Louisiana appellate courts, the Fifth Circuit ruled similarly and upheld the district court’s ruling that, absent an assignment or subrogation, a purchaser of property may not recover for damages incurred under a mineral lease before the purchaser’s acquisition of an interest in the property/lease.

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