McCarthy v. Evolution Petroleum Corp.

111 So. 3d 446, 182 Oil & Gas Rep. 945, 2013 WL 692544, 2013 La. App. LEXIS 313
CourtLouisiana Court of Appeal
DecidedFebruary 27, 2013
DocketNo. 47,907-CA
StatusPublished
Cited by5 cases

This text of 111 So. 3d 446 (McCarthy v. Evolution Petroleum Corp.) 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
McCarthy v. Evolution Petroleum Corp., 111 So. 3d 446, 182 Oil & Gas Rep. 945, 2013 WL 692544, 2013 La. App. LEXIS 313 (La. Ct. App. 2013).

Opinions

STEWART, J.

| plaintiffs, John C. McCarthy, individually and as trustee of the Kathleen McCarthy Balden Trust, and Majorie M. Moss, filed suit against defendants, Evolution Petroleum Corporation (“Evolution”), formerly known as Natural Gas Systems, Inc., and NGS Sub. Corp. (“NGS”), for rescission of the sale of their royalty rights in the Delhi Field Unit in the Holt Bryant Reservoir, damages, and attorney fees. Plaintiffs asserted fraud and error as to cause as the grounds for rescission. The defendants filed the peremptory exception of no cause of action, which the trial court granted. The plaintiffs now appeal the dismissal of their action.

As did the trial court, we find that the petition fails to state a cause of action. However, because this suit is between parties to a longstanding mineral lease and for reasons explained this opinion, we find that plaintiffs should be afforded the opportunity to amend their petition to state a cause of action, if any, under La. R.S. 31:122.

FACTS

According to the petition filed on July 27, 2011, the plaintiffs are the successors-in-interest to mineral leases on lands in Richland Parish. The leases were executed more than 60 years ago and have been held active by production in paying quantities since execution. Plaintiffs and their predecessors received from the lessees regular royalty payments along with reports on production and sales. The lessees’ rights were assigned to various operators over the years. The petition indicates that the defendants purchased the rights in the Delhi Field Unit in September 2003 for $2.8 million dollars.

| .According to the petition, production had declined by September 2003 to approximately 18 barrels of oil a day, but the defendants increased production over the next two years to 145 barrels of oil per day. The petition alleges that in 2004 the defendants began seeking a purchaser for the Delhi Field Unit for the purpose of using “C02 enhanced oil recovery technology” to produce the recoverable reserves. The defendants’ efforts resulted in a deal with Denbury Resources, LLC (“Den-bury”), for a purchase price of $50 million dollars.

Attached to the petition is a press release by NGS, now Evolution, dated May 9, 2006, stating that NGS would retain a 4.8 percent royalty interest in the Delhi Field Unit and that upon generation of $200 million of net cash flows, it would regain a 25 percent working interest. According to the press release, Denbury estimated that its capital expenditures would be in the area of $200 million with potential reserves of 30 million to 40 million barrels, net to its interests. NGS estimated its potential recovery would be in the range of 9 million to 14 million barrels with no capital costs incurred.

[450]*450In short, the plaintiffs’ petition alleges that the defendants made unsolicited written offers to purchase their royalty rights without disclosing the deal with Denbury for the sale of the Delhi Field Unit or their knowledge about the recoverable reserves. The petition states that the offer letter warned that the “funding source for this purchase is of a limited time and any transaction must be closed in May 2006.” Plaintiffs allege this statement was untrue, because the defendants were going to receive $50 | ^million from Denbury and they made similar offers to others after May 2006. The petition alleges that while the offer letter referred to “Delhi Field Royalty Owners,” only select individuals, such as the “vulnerable elderly” like Moss and those “unsophisticated in oil and gas matters” like the McCarthy plaintiffs, were targeted with purchase offers.

The petition alleges that the defendants offered the plaintiffs 16 years’ worth of previous royalties for their rights. Plaintiffs accepted. The McCarthy royalty owners received $15,957 each, and Moss received $9,859. According to the petition, plaintiffs received only 43 cents for each barrel of recoverable reserves.

The plaintiffs allege in their petition that a relation of confidence developed over the 60 years of lessor/lessee relations between the parties and their predecessors-in-interest. Because of this relation of confidence, they relied on the defendants’ fraudulent statements and omissions in accepting the offer to sell their royalty rights.

After the trial court overruled dilatory exceptions raised by the defendants, they raised the peremptory exception of no cause of action. Defendants argued that the petition fails as a matter of law to state a cause of action for rescission based on fraud. They argued there was no relation of confidence or fiduciary duty between the parties and no duty on their part to disclose the Denbury agreement or any special knowledge about the value of the mineral rights. Defendants also argued that the plaintiffs’ claims were really disguised claims of lesion beyond moiety, a remedy that is unavailable under the Mineral Code.

|4The plaintiffs countered that the facts alleged, which must be accepted as true, state causes of action based on fraud, error as to cause, and breach of contract. As to fraud, plaintiffs argued that the defendants misrepresented the closing period for the sale, failed to disclose the Denbury deal, and failed to disclose the certainty of recoverable reserves of 35 to 40 million barrels of oil by use of the “C02 enhanced oil recovery technology.” Plaintiffs argued that the defendants’ fraudulent actions and the relationship of confidence prevented them from learning the true facts about the value of their royalty interests. Recognizing that there is no fiduciary duty between mineral lessees and lessors, plaintiffs argued that a relation of confidence is something apart from a fiduciary relationship.

Asserting that the sale should be rescinded because of error as to cause, plaintiffs argued that they were in error as to the quantity of recoverable reserves and the existence of the Denbury deal. They argued that the defendants actively cultivated these errors and that they would not have consented had they known the true facts.

Lastly, plaintiffs argued that the facts alleged in their petition state a claim for breach of contract. They asserted that the defendants stopped making royalty payments due under the original lease agreements.

The exception was submitted on the record and taken under advisement. The trial court granted the exception of no cause [451]*451of action and rendered judgment dismissing with prejudice the plaintiffs’ claims. In its ruling, the trial court found no support for the alleged relation of confidence between the parties and concluded that the defendants had no duty to Rdisclose the Denbury deal. The trial court found that the plaintiffs were really asserting a claim of lesion beyond moiety, which is prohibited under the Mineral Code.

On appeal, the plaintiffs raise the same arguments summarized above in opposition to the defendants’ exception.

DISCUSSION

An exception of no cause of action tests the legal sufficiency of the petition by questioning whether the law affords a remedy based on the facts alleged in the petition. Bogues v. Louisiana Energy Consultants, LLC, 46,434 (La.App.2d Cir.8/10/11), 71 So.3d 1128. In the context of the exception, the “cause of action” refers to the operative facts that give rise to the plaintiffs right to assert the action against the defendant. Id.

No evidence may be introduced on the trial of an exception of no cause of action. La. C.C.P. art. 929.

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111 So. 3d 446, 182 Oil & Gas Rep. 945, 2013 WL 692544, 2013 La. App. LEXIS 313, Counsel Stack Legal Research, https://law.counselstack.com/opinion/mccarthy-v-evolution-petroleum-corp-lactapp-2013.