Hollenshead Oil & Gas, LLC v. Gemini Explorations, Inc.

44 So. 3d 809, 2010 La. App. LEXIS 1050
CourtLouisiana Court of Appeal
DecidedJuly 21, 2010
DocketNo. 45,389-CA
StatusPublished
Cited by8 cases

This text of 44 So. 3d 809 (Hollenshead Oil & Gas, LLC v. Gemini Explorations, Inc.) is published on Counsel Stack Legal Research, covering Louisiana Court of Appeal primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Hollenshead Oil & Gas, LLC v. Gemini Explorations, Inc., 44 So. 3d 809, 2010 La. App. LEXIS 1050 (La. Ct. App. 2010).

Opinion

MOORE, J.

hThe seller, Hollenshead Oil & Gas LLC, appeals a judgment awarding damages of only $35,500 instead of $257,000, and attorney fees of only $25,000 instead of $113,000, for an alleged breach of contract. The buyer, Gemini Explorations Inc., answers the appeal, contesting the award of attorney fees. We amend to correct the award of legal interest but otherwise affirm.

Factual Background

The seller is a limited liability company whose principal is David P. Hollenshead; references to “David” in this opinion will be to the man and “Hollenshead” to the company. The buyer, Gemini, is a corporation owned by Gene DuCharme and Frank Vozzella. All three men are experienced in the oil and gas business.

In October 2005, DuCharme learned that Hollenshead was looking to sell its oil production interests in Northwest Louisiana, including some 500 wells on 60 leases in the Pine Island area. Hollenshead was asking $6 million for the deal. During 60 days of due diligence prior to the sale, DuCharme and Vozzella calculated that the field was worth about $8.5 million, so they agreed to buy at the asking price. On December 22, 2005, they executed an “Act of Sale of Oil and Gas Working Interests, Equipment and Oilfield Yard” for a base price of $5.7 million plus a seller’s commission of $300,000.

The final element of the price — where the instant dispute arose — was payment for the production in tanks. Under § 6.1 of the contract, the parties were to “gauge and measure the oil, gas, and mineral production contained pin all tanks associated with the leases.” Then they were to “jointly determine and record * * * the volume of oil contained in each such tank, without any deduction for water or other contaminate in such tank.” Finally, the seller agreed to sell and buyer “to purchase the volume measured.” Section 6.2 tied the price to the daily prevailing posted price for Northwest Louisiana Crude for December 2005.

Pursuant to this contract, DuCharme met David and his manager, Dwayne Au-try, at the site the next morning to gauge 144 tanks on the leases. Autry climbed atop each tank, dropped a plumb line to measure the liquid, and called his reading [812]*812down to David who manually recorded it as DuCharme watched. Linear depth was then converted to volume in barrels using a formula based on the dimensions of the given tank. According to David, these measurements showed over 4,454 barrels in the 93 production tanks and 1,020 barrels in the gun barrel tanks. Using the price stated in § 6.2, David ultimately contended he was due over $250,000 for this production.

Gemini took possession of the leases immediately after they finished gauging on December 23. Based on production history, these leases usually yielded 4,800 to 5,500 barrels per month. To DuCharme’s surprise, however, for the first several days the gauges showed no production from any of the 60 leases, and after a week’s time, a handful had shown only a few inches’ worth. He then began opening some production tanks and discovered that most of them were filled with saltwater, sand and other unsalable components which comprise 98% of raw production and are | ¡¡segregated from raw production in a gun barrel tank. DuCharme theorized that David had “flushed” the contents of the gun barrel tanks into the production tanks shortly before December 23 to create the false appearance that they contained a lot of oil.

On further research, Gemini discovered that less than a week before December 23, Hollenshead had sold virtually all the “merchantable crude oil,” some 2,800 barrels, from its production tanks to another buyer, Genesis Oil Co. This confirmed Gemini’s suspicion that on December 23, there was virtually no merchantable crude in any of the production tanks, only a saltwater flush from the gun barrels. When the production payment fell due on February 28, 2006, Gemini did not pay.

Procedural History and Trial Testimony

Hollenshead filed this suit in July 2006 seeking from Gemini $257,007.24 for the production payment,1 an attorney fee, “delay damages” from February 28, and legal interest from date of judicial demand. Hollenshead later amended its petition to add DuCharme and Vozzella as solidary obligors with Gemini.

Gemini answered, denying any liability for the reasons summarized above. Gemini also reconvened, seeking damages for the improper flushing of gun barrels into the production tanks.

The matter went to a four-day trial in January and February 2009. As background information, all witnesses established that in the Pine Island area, raw production from underground is pumped into a “gun barrel” or 14separator tank, in which gravity separates oil from water and solids, such as sand (often called base sediment and water or “BS & W”). The oil, which comprises only about 1% of raw production, floats to the top. When a sufficient amount of “good oil” has accumulated, it is drained into a storage or “production” tank to await sale. Buyers require that the contents of production tanks be about 98% good oil, with only minimal saltwater, sand and other contaminants. To avoid getting these contaminants, buyers will drain a production tank only down to the “gauge line,” usually 16 inches from the bottom of the tank. The sludge, called “back gauge,” that remains under the gauge line contains oil but is not generally considered salable. The raw, highly contaminated contents of the gun barrel tank are never considered salable.

[813]*813David testified that pursuant to § 6.1, he sold all the oil they measured in all the tanks on December 23, but Gemini never paid him for it. He admitted they did not test the contents while gauging the tanks, but DuCharme raised no objections and agreed to all measurements. He also admitted that an oil company like Genesis (to whom he sold much of his production days before closing the sale with Gemini) did not buy gun barrel fluid, but he maintained that there was plenty of good oil in the production tanks when Gemini took possession.

Hollenshead’s manager, Autry, testified that in December 2005 David asked him to “get the oil ready” for Gemini; he gave a long (and often digressive) account of his methods of servicing gun barrels and production tanks. He admitted that shortly before the sale to Gemini, he “pushed” or 1 ¡/‘flushed” the gun barrels into the production tanks, at David’s request, but he explained that this was a normal procedure.

DuCharme testified that at the closing, David asked if he objected to letting Hol-lenshead flush the gun barrels before the sale, and to paying him for back gauge; DuCharme replied, “No way.” Even though he read § 6.1, he knew that nobody in the industry paid for back gauge and saltwater, so he felt the contract was all right. He also admitted that after he serviced several production tanks, they began to produce merchantable crude.

Vozzella also testified that at the closing, Hollenshead’s attorney told him that they would like to include back gauges and gun barrels as part of the sale, but he (Vozzel-la) replied, “Absolutely not.” He also said he understood § 6.1 to mean there would be no deduction for the normal contamination in production tanks, but not for saltwater flushed straight from a gun barrel. Nevertheless, by his reckoning (and that of their CPA, Thomas Youngblood, who also testified), Gemini extracted 812 barrels of “good oil” present in the production tanks on December 28, and for this Gemini owed Hollenshead $35,556.

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Bluebook (online)
44 So. 3d 809, 2010 La. App. LEXIS 1050, Counsel Stack Legal Research, https://law.counselstack.com/opinion/hollenshead-oil-gas-llc-v-gemini-explorations-inc-lactapp-2010.