In Franklin v. Regions Bank the Fifth Circuit concluded that a royalty clause in a mineral lease resulted in a gross proceeds royalty; the royalty owners did not bear their proportionate share of post-production costs. Read on if you want to know how the Court reached this conclusion.
The form lease said,
- Royalty on gas would be “the market value at the well of one eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one eighth of the amount realized from such sale”.
An addendum (Exhibit “A”) said,
- “In the event of a conflict between the language as stated in Exhibit A and the language stated hereinabove, the language in Exhibit “A” shall prevail.
- [W]henever the term one-eighth (1/8) appears in the printed lease form … said term is hereby deleted and the term 25% is inserted and substituted therefore.
- There shall be no cost charged to the royalty interest created under this lease.
The ambiguity
The Fifth Circuit deemed the royalty provision to be ambiguous and allowed extrinsic evidence to determine the parties’ intent. The form provided the royalties would be paid on the “market value at the well” but the addendum included inconsistent limiting language: PPC’s would not be charged to the royalty interest.
The parties’ failed by express language in the addendum to alter the royalty calculation from market-value-at-the-well to gross proceeds. That would have fixed it. And the addendum did not make it apparent at what point in the post-extraction process the royalty would be calculated. The meaning of the agreement was fairly susceptible to more than one interpretation and therefore was ambiguous.
The trial court considered conflicting testimony from witnesses, expert and otherwise, and previous lessee Petrohawk’s history of paying royalties without deducting PPC’s. Per La. CC art. 2053, Petrohawk’s course of dealing gave particular meaning to and supplemented or qualified the terms of the agreement.
The Louisiana Rule
The Court discussed Warren v. Chesapeake Exploration, and Heritage v. NationsBank, but those were Texas cases. The Louisiana default rule is that the royalty owner shares responsibility for PPC’s, but the allocation is discretionary between the parties.
According to the Court, Louisiana has identified two methods for determining market value at the well: The method that has meaning here is to reconstruct market value by starting with gross proceeds from the sale of the minerals and deducting costs of taking the minerals to the point of sale. The increase in the sales value attributable to the expenses incurred in transporting and processing the commodity ordinarily must be deducted from the royalty. But here the addendum’s controlling language demanded a different result.
The result
The District Court awarded Franklin $3.4 million in past damages and $954,000 in estimated “future royalty damages”. The Fifth Circuit affirmed the District Court’s ruling that the royalty clauses created gross-proceeds leases and reversed and remanded the rejection of evidence of actual future losses. The evidence was available at trial but ignored, which was reversible error.
There was more
No room here to discuss other issues:
- A previous suit by Franklin against Matador to rescind a 2007 extension of a 2004 lease and a previous trip to the Fifth Circuit in this case,
- This suit was against Regions for mishandling the lease extension which caused them to receive 20% royalties on the extended lease instead of 25% under two 2008 Petrohawk leases,
- Region’s prescription, law-of-the=case, and exculpatory clause defenses (all failed),
- Calculation of pre-judgment interest,.
- The Court’s several references to Louisiana Mineral Leases: A Treatise, by Lafayette lawyer Pattrick Ottinger.
Your surprising musical interlude … and the (incomparable, sorry Mick) original.
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