STATE OF LOUISIANA COURT OF APPEAL, THIRD CIRCUIT
12-142
CLOVELLY OIL CO., LLC
VERSUS
MIDSTATES PETROLEUM CO., LLC, ET AL.
**********
APPEAL FROM THE THIRTEENTH JUDICIAL DISTRICT COURT PARISH OF EVANGELINE, NO. 70728B(A) HONORABLE JOHN LARRY VIDRINE, DISTRICT JUDGE
ELIZABETH A. PICKETT JUDGE
Court composed of Jimmie C. Peters, Elizabeth A. Pickett, and Shannon J. Gremillion, Judges.
REVERSED IN PART; AFFIRMED IN PART; REMANDED FOR FURTHER PROCEEDINGS.
M. Taylor Darden Matthewy J. Fantaci Carver, Darden, Kortezky, Tessier, Finn, Blossmand & Areaux, L.L.C. 1100 Poydras St., Suite 3100 New Orleans, LA 70163 (504) 585-3800 COUNSEL FOR PLAINTIFF/APPELLANT: Clovelly Oil Co., LLC Matthew J. Randazzo, III Christopher B. Bailey Shawn A. Carter Randazzo, Giglio & Bailey, LLC P. O. Box 51347 Lafayette, LA 70505-1347 (337) 291-4900 COUNSEL FOR DEFENDANT/APPELLEE: Midstates Petroleum Company, LLC
Raymond A. Beyt Beyt & Beyt, APLC 700 East Unitversity Avenue Lafayette, LA 70505 (337) 233-6771 COUNSEL FOR DEFENDANT/APPELLEE: Midstates Petroleum Company, LLC
Paul J. Goodwine Holly M. Occhipinti Slattery, Marino & Roberts 1100 Poydras St., Suite 1800 New Orleans, LA 70163 (504) 585-7800 COUNSEL FOR DEFENDANT/APPELLEE: Wells Fargo Bank, N.A. PICKETT, Judge.
The operator under a joint operating agreement appeals the trial court‟s grant
of summary judgment in favor of a non-operator and a secured creditor of the non-
operator. For the following reasons, we reverse the judgment in favor of the non-
operator but affirm the judgment in favor of the secured creditor.
FACTS
This matter arises out of a joint operating agreement (the JOA) dated July
17, 1972, which was later assigned to Clovelly Oil Co. LLC (Clovelly) and
Midstates Petroleum Company, LLC (Midstates). Clovelly is the successor in
interest to the operator designated in the JOA and the former operator‟s 56.25%
working interest as provided in the JOA and subsequent acquisitions. Pursuant to
an Assignment and Bill of Sale, dated effective September 1, 2007, Midstates is
the successor in interest to a non-operating, undivided 43.75% working interest as
provided in the JOA. The JOA affects property situated in the Pine Prairie Field in
Evangeline Parish.
Midstates secured an oil and gas lease, dated effective July 1, 2008, from
Crowell Land & Mineral Corporation that covers 242.28 acres situated in Sections
27 and 35, Township 3 South, Range 1 West of Evangeline Parish. In April 2009,
Midstates re-entered an abandoned Crowell Land & Mineral Corporation well and
prepared the location for work on other abandoned wells situated on the Crowell
leased lands.
In April 2009, Clovelly notified Midstates that Midstates‟ leasing activities
and operations in the Pine Prairie Field were covered and affected by the JOA.
Clovelly averred that any leases taken by Midstates after the date of the assignment
from its predecessor, Opex Energy, LLC (Opex), (the New Leases) were subject to
a claim of majority ownership by Clovelly and the right of Clovelly to be designated as operator of the wells drilled in connection therewith. Midstates
denied it was bound by the JOA because the JOA was not recorded in the public
records.
Wells Fargo Bank, N.A. (Wells Fargo), as mortgagee, took certain
mortgages and security interests in and to numerous oil and gas leases and
production arising from those leases from Midstates, including certain leases in the
Pine Prairie Field. Clovelly claimed to have an interest in certain of those
mortgaged leases, i.e., the New Leases.
Clovelly filed a Petition and an Amended Petition for Breach of Contract
and Declaratory Judgment, seeking judgments against Midstates and Wells Fargo,
(1) declaring the respective rights and obligations of Clovelly and Midstates under
the terms and conditions of the JOA; (2) declaring the interest of Wells Fargo, if
any, in and to the lands, oil and gas leasehold interests, and/or oil and gas interests
that are subject to the JOA; (3) requiring Midstates to comply with the terms and
conditions of the JOA; and (4) for damages for Midstates‟ breach of contract.
Prior to answering Clovelly‟s Petition, Midstates filed a Motion for Partial
Summary Judgment, alleging that because the JOA was not recorded, Midstates
was not bound by its terms and conditions. Clovelly opposed the motion, arguing
that the case did not turn on the public records doctrine but upon whether
Midstates had assumed the obligation under the JOA when it acquired Opex‟s
interest in the Pine Prairie Field. The trial court granted the motion and dismissed
Clovelly‟s suit. On appeal, this court held that if evidence adduced at trial showed
that Midstates had assumed the JOA as part of the Assignment from Opex, it was
not protected by the public records doctrine. The court further determined,
however, that a genuine issue of material fact existed as to whether Midstates
assumed Opex‟s obligations under the JOA through Opex‟s assignment of its 2 interest in the Pine Prairie Field and, therefore, reversed the grant of summary
judgment in favor of Midstates. Clovelly Oil Co., Inc. v. Midstates Petroleum Co.,
LLC, 09-1230 (La.App. 3 Cir. 4/7/10), 34 So.3d 997.
Thereafter, Midstates filed an answer to the Petition and Reconventional
Demand against Clovelly and claimed in its reconventional demand that portions
of certain Clovelly leases located within the Unit Area had expired due to a
defective voluntary unit agreement and that Midstates took leases over that
unleased acreage. Midstates, Clovelly, and Wells Fargo then filed motions for
partial summary judgment or summary judgment. Clovelly and Midstates filed
motions for partial summary judgment on the issue of whether the JOA applies to
the New Leases. Clovelly and Wells Fargo filed Cross-Motions for Summary
Judgment on the issue of whether Wells Fargo‟s mortgage encumbers the 56.25%
working interest Clovelly claims under the JOA in the New Leases. Although this
court had already determined it was not entitled to summary judgment, Clovelly
filed another Motion for Partial Summary Judgment, seeking a declaration that
Midstates bound itself to the terms and conditions of the JOA and acknowledged
and assumed the JOA as part of the Assignment from Opex.
The trial court granted partial summary judgment in favor of Midstates,
declaring that the JOA does not apply to the New Leases and in favor of Wells
Fargo‟s, holding Wells Fargo‟s mortgage and security interest as to Midstates‟
leases in the Pine Prairie Field, the New Leases, were not subject to the JOA. The
trial court denied Clovelly‟s partial motion for summary and certified it as a final
judgment. Clovelly appealed all judgments.
ASSIGNMENTS OF ERROR
Clovelly now assigns the following errors:
3 1. The district court erred in granting Midstates‟ motion for partial summary judgment declaring that the JOA does not apply to leases acquired by Midstates within the Unit Area after the Assignment from Opex, and in denying Clovelly‟s cross-motion for partial summary (i) seeking an order requiring that Midstates comply with the terms and conditions of the JOA governing operations of the Unit Area, (ii) recognizing Clovelly as the owner of a 56.25% working interest in all leases acquired by Midstates, and in all operations conducted by it on leases, after the Assignment from Opex, subject to Clovelly‟s payment of its proportionate share of the costs associated with such operations and leases, and (iii) recognizing Clovelly as the operator of all new operations conducted by the parties within the Unit Area.
2. The district court erred in granting Wells Fargo‟s motion for summary judgment, and denying Clovelly‟s cross-motion, and in holding that Wells Fargo‟s mortgage and security interest in the leases that Midstates acquired in the Pine Prairie Field subsequent to the Opex Assignment are not subject to the terms and conditions of the JOA.
DISCUSSION
Appellate courts review summary judgments de novo, using the same
criteria applied by the trial courts to determine whether summary judgment is
appropriate. Louisiana Safety Ass’n of Timbermen-Self Insurers Fund v. Louisiana
Insurance Guaranty Ass’n, 09-23 (La. 6/26/09), 17 So.3d 350. A motion for
summary judgment will be granted “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to material fact, and that mover is entitled to
judgment as a matter of law.” La.Code Civ.P. art. 966(B). Summary judgment is
favored and shall be construed “to secure the just, speedy, and inexpensive
determination of every action.” La.Code Civ.P. art. 966(A)(2).
The initial burden of proof is on the movant to show that no genuine issue of
material fact exists. La.Code Civ.P. art. 966(C)(2). However, if the movant will
not bear the burden of proof at trial, he need not negate all essential elements of his
opponent‟s claim, but he must point out that there is an absence of factual support
4 for one or more elements essential to the claim. Id. Once the movant has met his
initial burden of proof, the burden shifts to the adverse party “to produce factual
support sufficient to establish that he will be able to satisfy his evidentiary burden
of proof at trial.” Id.
Clovelly’s Appeal of the Denial of its Motion for Summary Judgment
To the extent that Clovelly assigns error with the trial court‟s denial of its
motions for summary judgment, the assignments lack merit because no right of
appeal lies from the denial of a motion for summary judgment. La.Code Civ.P. art.
968. This is true although the trial court certified the denial of Clovelly‟s motion
for judgment against Wells Fargo as a final judgment pursuant to La.Code Civ.P.
art. 1915(B). Cavazzo v. Gray Ins. Co., 08-1447 (La.App. 3 Cir. 6/3/09), 15 So.3d
1105, writ denied, 09-1444 (La. 10/2/09), 18 So.3d 115.
Does the JOA Apply to Leases Acquired by Midstates within the Unit Area after the Assignment from its Predecessor?
The primary issue presented by Clovelly‟s first assignment of error is
whether the JOA covers and affects the New Leases. As this determination
requires interpretation of the JOA, we review the rules of contract interpretation
which the supreme court restated in Prejean v. Guillory¸ 10-740, pp. 6-7 (La.
7/2/10), 38 So.3d 274, 279:
“[W]hen a contract can be construed from the four corners of the instrument without looking to extrinsic evidence, the question of contractual interpretation is answered as a matter of law.” Sims v. Mulhearn Funeral Home, Inc., 07-0054, p. 10 (La.5/22/07), 956 So.2d 583, 590. “Interpretation of a contract is the determination of the common intent of the parties.” La. Civ.Code art. 2045. The reasonable intention of the parties to a contract is to be sought by examining the words of the contract itself, and not assumed. Sims, 07-0054 at p. 7, 956 So.2d at 589; McConnell v. City of New Orleans, 35 La. Ann. 273 (1883). “When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties‟ intent.” La.Civ.Code art. 2046. Common intent is determined, therefore, in accordance with the general, ordinary, plain and popular meaning of the words used in the 5 contract. Louisiana Ins. Guar. Ass’n v. Interstate Fire & Cas. Co., 93-0911, p. 5 (La.1/14/94), 630 So.2d 759, 763. Accordingly, when a clause in a contract is clear and unambiguous, the letter of that clause should not be disregarded under the pretext of pursuing its spirit, as it is not the duty of the courts to bend the meaning of the words of a contract into harmony with a supposed reasonable intention of the parties. See Maloney v. Oak Builders, Inc., 256 La. 85, 98, 235 So.2d 386, 390 (1970); McConnell, 35 La. Ann. at 275. Most importantly, a contract “must be interpreted in a common-sense fashion, according to the words of the contract their common and usual significance.” Lambert v. Maryland Cas. Co., 418 So.2d 553, 559 (La.1982).
Clovelly argues Midstates is not entitled to summary judgment declaring the
JOA does not apply to the New Leases. Pointing to the JOA‟s definition of “Unit
Area,” it asserts the location of the lands subject to the New Leases determines
whether the leases are subject to the JOA. The JOA is a Model Form Operating
Agreement first adopted in 1956 by the American Association of Petroleum
Landmen. It defines “Unit Area” as:
The term “Unit Area” shall refer to and include all of the lands, oil and gas leasehold interests and oil and gas interests intended to be developed and operated for oil and gas purposes under this agreement. Such lands, oil and gas leasehold interests and oil and gas interests are described in Exhibit “A.”
Clovelly also urges that the content of Exhibit A and the fact that it was prepared
by the parties, rather than a preprinted form as the JOA is, leads to the conclusion
that the New Leases are subject to the JOA.
Exhibit “A” of the JOA is divided into three sections: “I. Lands subject to
this agreement,” “II. Interests of Parties to this agreement,” and “III. Addresses of
parties to which notices should be sent.” Section “I. Lands subject to this
agreement” reads:
The following described property situated in Evangeline Parish, Louisiana:
Township 3 South, Range 1 West
Section 23 – S½ Section 25 – All fractional Section 26 – All fractional 6 Section 27 – All fractional Section 28 – E½ Section 34 – Fractional E½ Section 35 – All Section 36 – All Section 37 – All
Township 4 South, Range 1 West
Section 1 – All Section 2 – All Section 3 – All Section 4 – Fractional E½
All as is more fully shown in red on the plat marked “Attachment I” annexed hereto.
Attachment I is a plat on which an area is outlined in red.
Clovelly argues the JOA‟s definition of “Unit Area” in terms of a
geographic area which includes “all of the lands” and leasehold interests “intended
to be developed and operated,” rather than in terms of specific leases, shows that
the parties who confected the JOA intended it to apply to leases and interests they
owned when the JOA was executed and to leases and interests in lands situated
within the Unit Area they acquired thereafter. It urges the parties‟ use of a
geographic definition for the Unit Area “prevents parties to the JOA from
unilaterally acquiring competitive leases within the Unit Area.”
Midstates contends the only leases subject to the JOA are leases that the
parties owned when the JOA was executed or leases that were renewed or extended
as provided in Section 23 of the JOA. It points to the verb tense in two of the JOA
provisions as support for its position. The first provision reads:
WHEREAS, the parties to this agreement are owners of oil and gas leases covering and, if so indicated, unleased mineral interests in the tracts of land described in Exhibit “A”, and all parties have reached an agreement to explore and develop these leases and interests for oil and gas to the extent and as hereinafter provided:
7 The second provision is the definition of “oil and gas interests” which are defined
as “unleased fee and mineral interests in tracts of land lying within the Unit Area
which are owned by the parties to this agreement.”
Midstates argues the parties‟ use of the present tense of the verb “are” in
these two provisions shows that the only leases the parties they intended to be
affected by the JOA were leases owned by them at the time the JOA was executed.
It also argues that if the parties wanted the JOA to apply to future acquired leases
they would have included an Area of Mutual Interest1 provision in the agreement.
The parties did not include such a provision; therefore, the inference is that they
did not intend the JOA to affect future acquisitions of leases. Additionally,
Midstates argues that Clovelly‟s arguments are flawed because they negate the
provisions of Section 23. Section 23 provides that if one party to the JOA secures
the renewal of a lease subject to the contract, the other parties to the contract have
the right to participate in the ownership of the lease if they elect to do so in
accordance with the requirements set forth therein. Midstates asserts that
accepting Clovelly‟s argument writes this provision out of the JOA.
No Louisiana case addresses the precise issue presented here, and Clovelly
cites the case of Amoco Production Co. v. Charles B. Wilson, Jr., Inc., 77,999
(3/12/99) 266 Kan. 1084, 976 P.2d 941, as support for its position. Amoco
addresses almost the same issues and arguments presented by Clovelly and
Midstates. There, Amoco sought to avoid the geographically-defined Unit Area as
provided in the JOA at issue. In doing so, it made the same arguments raised by
Midstates as to the tense of the verb “are.” The court rejected that argument and
accepted the defendants‟ argument that the geographically-defined Unit Area was
1 An Area of Mutual of Interest is an area identified by the parties to a JOA for the express purpose of future development. Any leases secured within that area are subject to the JOA. 8 determinative of the parties‟ intent. Specifically, the court rejected Amoco‟s
argument that the use of the present tense of “are” in the “Whereas” clause limited
the agreement to leases that were in effect at the time the JOA was executed.
The primary reason for the court‟s rejection of that argument was the
parties‟ description of the Unit Area. In rejecting the argument, the Kansas
Supreme Court applied the rule of contract interpretation that typewritten language
added to a form contract by the parties controls or is determinative of the parties‟
intent on the issue addressed in the typewritten language and concluded that the
typewritten Exhibit A “prevail[ed]” because “[t]he parties specifically agreed as to
what their agreement covered.” Id. at 1103.
Louisiana jurisprudence on the inclusion of typewritten provisions in form
contracts is the same as that stated in Amoco:
Under elementary principles of interpretation of contracts, the written portions prevail over the printed portions when the two are in conflict; and, therefore, we find no difficulty in holding that the typewritten sentence providing that the commission would be paid „at the act of sale‟ suspersedes the printed clause providing that the commission is earned when the offer is accepted.
Kuhn v. Stan A. Plauche Real Estate Co., Inc., 249 La. 85, 93, 185 So.2d 210, 212,
(1966).
The first circuit applied this rule of interpretation to a joint operating
agreement in Martin Exploration Co. v. Amoco Production Co., 93-349 (La.App. 1
Cir. 5/20/94), 637 So.2d 1202, writ denied, 94-2003 (La. 11/4/94), 644 So.2d 1048,
and held that the typewritten Exhibit A to the agreement, which identified each
party‟s percentage of interest before payout and after payout, governed the dispute
at issue, not a provision in the printed portion of the JOA. The court concluded
that although the exhibit‟s designation of the parties‟ percentages conflicted with a
printed provision in the agreement, which read: “[i]f any provision of any exhibit,
9 except Exhibit „E‟, is inconsistent with any provision contained in the body of this
agreement, the provisions in the body of this agreement shall prevail,” the contract
was clear and not ambiguous. Id. at 1207. It applied the terms of the JOA in light
of the exhibit‟s designation of interests.
We agree with the courts‟ conclusions in Amoco and Martin Exploration and
conclude that Exhibit A governs the claims between Clovelly and Midstates
because it was prepared by the parties to the JOA and, therefore, reflects their
intent as to what interests the JOA encompasses. Moreover, we do not find the
parties‟ use of the present tense verb “are” to be an indication by the original
parties to the JOA that they did not intend to acquire and develop more leases
and/or properties under the terms of the JOA.
For these reasons, we reverse the judgment granting summary
judgment in favor of Midstates and hold that any “unleased fee and mineral
interests in tracts of land lying within the Unit Area,” as delineated on Exhibit A to
the JOA, were “intended to be developed and operated” by the original parties to
the JOA. Therefore, if it is determined Midstates assumed Opex‟s rights and
obligations under the JOA, any leases acquired by Midstates or Clovelly that cover
land described in Exhibit A are subject to the JOA.
Are Wells Fargo’s Mortgage and Security Interest in the New Leases in the Pine Prairie Field Subject to the Terms and Conditions of the JOA?
The trial court also granted summary judgment in favor of Wells Fargo,
holding that the unrecorded JOA did not affect Wells Fargo‟s security interest in
the leases Midstates acquired after the JOA was assigned to Midstates. We find no
error in the judgment. The JOA was not recorded in the records of Evangeline
Parish, and Wells Fargo was not a party to the agreement. Therefore, Wells Fargo
10 was a third party and not affected by the unrecorded JOA, even though it may have
had knowledge of it, which it denies.
In Cimarex Energy Co. v. Mauboules, 09-1170, 09-1180, 09-1194, pp. 19-20
(La. 4/9/10), 40 So.3d 931, 944, the supreme court explained the public records
doctrine, which is set forth in La.Civ. Code art. 3338,2 stating:
The public records doctrine has been described as a negative doctrine because it does not create rights, but, rather, denies the effect of certain rights unless they are recorded. [Peter S. Title, Louisiana Real Estate Transactions, § 8.16 (2009)]; Camel[v. Waller, 526 So.2d 1086, 1089- 1090 (La.1988)]; Phillips v. Parker, 483 So.2d 972, 975 (La.1986). In explaining the negative nature of the doctrine, this Court has stated that third persons are not allowed to rely on what is contained in the public records, but can rely on the absence from the public records of those interests that are required to be recorded. Camel, 526 So.2d at 1090 [citing Redmann, The Louisiana Law of Recordation: Some Principles and Some Problems, 39 Tul. L.Rev. 491 (1965)]. The primary focus of the public records doctrine is the protection of third persons against unrecorded interests. Camel, 526 So.2d at 1090; Phillips, 483 So.2d at 976.
The Mineral Code makes the public records doctrine applicable to joint operating
agreements in Article 2163 and provides that to be effective against third persons,
2 Louisiana Civil Code Article 3338 provides, in pertinent part:
The rights and obligations established or created by the following written instruments are without effect as to a third person unless the instrument is registered by recording it in the appropriate mortgage or conveyance records pursuant to the provisions of this Title:
(1) An instrument that transfers an immovable or establishes a real right in or over an immovable.
(2) The lease of an immovable.
.... 3 Louisiana Revised Statutes 31:216 provides:
An agreement entered into by or among the owners of mineral rights for the joint exploration, development, operation or production of minerals thereunder shall be binding upon third persons when the agreement is filed for registry in the conveyance records of the parish or parishes where the lands affected by the mineral rights are located.
11 joint operating agreements must be recorded in the conveyance records of the
parishes in which the lands affected by the agreements are situated.
Clovelly contends Wells Fargo is not a third person protected by the public
records doctrine or Article 216. With regard to a contract, a “third person” is a
person who is not a party to the contract. La.Civ.Code art. 3506(32). Moreover,
the supreme court has concluded that “[b]ecause recordation is essential for
effectiveness against third parties, actual knowledge by third parties of unrecorded
interests is immaterial.” Dallas v. Farrington, 490 So.2d 265, 269 (La.1986).
Wells Fargo was not a party to the JOA; accordingly, it is a third person to the JOA
and cannot be affected by it because it was not recorded.
Attempting to avoid application of the doctrine to its claims, Clovelly next
argues Midstates cannot assign more than it owned. As noted by the supreme court
in Wede v. Niche Marketing USA, LLC, 10-243 (La. 11/30/10), 52 So.3d 60, 63,
n.6, this argument does not survive the doctrine‟s application:
Louisiana‟s public records doctrine includes the use of a “race to the courthouse” system of recordation: “Instruments take effect as to third persons in the order in which the instruments are filed.” 1 PETER S. TITLE, LOUISIANA REAL ESTATE TRANSACTIONS § 8:16 (2d ed.2008). The public records doctrine “does not create rights in the positive sense, but rather has the negative effect of denying the effectiveness of certain rights unless they are recorded.” Id. A well-established consequence of these two principles is illustrated in McDuffie v. Walker, 125 La. 152, 51 So. 100, 105-106 (1909), in which this court ruled that an unrecorded contract affecting immovable property has no effect as to third persons, even when a third person has actual knowledge of that unrecorded contract.
Clovelly has not pointed to anything other than the unrecorded JOA of its
right to a working interest. Therefore, Wells Fargo‟s mortgage and assignment
does affect the New Leases. In reaching this conclusion, we have considered
Clovelly‟s argument that we should follow the holding in Southwest Gas
Producing Co. v. Creslenn Oil Co., 181 So.2d 63 (La.App. Cir. 1965), writ denied, 12 248 La. 797, 182 So.2d 74 (1966). In Creslenn, the court determined that the
public records doctrine did not apply to an unrecorded joint operating agreement
because title to real property was not at issue and that a secured creditor‟s security
interest in the working interest of the plaintiff was limited by the terms of the
unrecorded joint operating agreement. Section 216 of the Mineral Code was
enacted in 1974 as La.R.S. 9:2731; Cresslen was decided in 1965. Therefore, the
court‟s decision therein is not applicable to the facts of this case.
Having affirmed summary judgment in favor of Wells Fargo, we need not
address Wells Fargo‟s Motion to Strike or File Sur-Reply Brief and Clovelly‟s
Opposition to Strike and Motion for Leave.
DISPOSITION
The judgment of the trial court granting summary judgment to Midstates is
reversed; the judgment of the trial court granting summary judgment to Wells
Fargo is affirmed. Midstates is assessed all costs associated with Clovelly‟s appeal
of the judgment in its favor, and Clovelly is assessed with all costs of the judgment
in Wells Fargo‟s favor.
REVERSED IN PART; AFFIRMED IN PART; REMANDED FOR FURTHER PROCEEDINGS.