Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr-McGee Rocky Mountain, LLC: The 3rd Circuit Gives Plaintiff Landowners the Cream Without the Calories

On October 1st, the Louisiana Third Circuit Court of Appeal issued an opinion that interpreted a common mineral lease provision to mean that defendant operators were strictly and absolutely liable for all surface and subsurface reservoir damages.

In Hayes Fund, the named defendants operated the wells at issue under a series of leases emanating from a 1999 mineral lease originally containing the common provision in Paragraph 8 stating that the “Lessee shall be responsible for all damages to timber and growing crops of Lessor caused by Lessee’s operations.”  In executing the 1999 lease, the phrase “to timber and growing crops of Lessor” had been stricken by the parties, leaving Paragraph 8 of the executed lease to read: “Lessee shall be responsible for all damages caused by the Lessee’s operations.”

After production ceased from the wells, plaintiff landowners sued defendant operators, alleging that the defendants operated the wells imprudently in violation of article 122 of the Mineral Code, causing plaintiffs to sustain substantial losses in royalties.  Defendants prevailed before the trial court, in large part because the trial court interpreted the clause (and the stricken language) to find that “the change d[id] not impose strict and/or absolute liability on the defendants for ‘all’ damages without reference to the remainder of the contract.”  The trial court further found that, although defendants had an obligation under the lease not to cause damage to the plaintiffs’ property in conducting drilling operations, the plaintiffs “must still prove at trial that the operations of the defendants were imprudent and these imprudent operations were the cause of the damages suffered.”

The Third Circuit disagreed.  In addition to holding that the trial court committed manifest error in making numerous factual findings, the Third Circuit held that Paragraph 8, read in conjunction with Exhibit A to the lease (stating that Lessee is responsible for all damages cause by Lessee’s operations “including, but not limited to, damages to the surface of the land, timber, crops, pastures, . . . water wells and improvements”), “expounded upon rather than limited” defendants’ responsibilities and liability.  Holding that “the words of the lease are clear and explicit,” the Third Circuit held that the trial court erred in requiring plaintiffs to prove defendants’ operations were imprudent to collect damages when the lease “provided that the landowners only had to prove causation and damages.”

Based primarily on that interpretation of the lease (as well as the reversal of several of the trial court’s findings of fact), the Third Circuit awarded the plaintiffs in Hayes Fund damages of $13,437,895.  Notably, the evidence on damages proffered by the plaintiffs’ expert was based upon royalties that plaintiffs would have received if the wells “had been prudently operated.”  But the Third Circuit’s interpretation of the lease removed the burden from the plaintiff to show that the defendants’ operations were imprudent!  To add insult to injury, the Third Circuit in its damage award refused to consider evidence that suggested the actual productive limits or size of the reservoir were less than the limits established by the Office of Conservation in its unitization orders.

Although Gordon Arata would like to attribute the Hayes Fund holding to the specific facts in this case and, particularly, the language of that 1999 lease, the fact is that the Hayes Fund lease appears to contain no unusual or unique language to set it apart from many current, valid mineral leases.  But the Hayes Fund court’s holding of absolute liability on the part of the defendant operators without requiring any burden of proof on the plaintiff landowners’ part is absolutely unusual—and disturbing.  The attorneys at Gordon Arata will continue to watch for an appeal from the Hayes Fund defendants and are hopeful that the Louisiana Supreme Court will grant that writ of certiorari and clarify the law on these issues.

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