Fishman Haygood Attorney Publishes Article on Mineral Lease Rights

BUNDRICK V. ANADARKO PETROLEUM COMPANY: THE THIRD CIRCUIT DENIES CERTAIN MINERAL LESSORS THE RIGHT TO DEMAND RESTORATION

By E. Blair Schilling; Fishman Haygood, LLP; New Orleans, Louisiana

In Eagle Pipe and Supply, Inc. v. Amerada Hess Corp, the Louisiana Supreme Court defined the subsequent purchaser doctrine as

[a] jurisprudential rule which holds that an owner of property has no right or actual interest in recovering from a third party for damages which was inflicted on the property before his purchase, in the absence of an assignment of the rights belonging to the owner of the property when the damage was inflicted.[1]

Eagle Pipe involved a surface (not a mineral) lease, and the Court found – in a plurality opinion – that whether damage to property is apparent or unapparent, the right to sue for such damages is a personal right of the landowner that does not pass to a subsequent owner without assignment or subrogation – it is not a real right that transfers automatically with the sale of the property.[2]

Only three justices subscribed to the opinion. Significantly, two out of the three subscribing justices – Justices Kimball and Victory – are no longer on the court. Several justices wrote dissenting opinions, stating that the subsequent purchaser doctrine does not apply to cases involving non-apparent damage. Given the acute disagreement among the justices, it is far from certain that the Eagle Pipe plurality opinion would pass muster with the current court.

One thing is certain, however, and that is that the Eagle Pipe plurality opinion was not intended to apply to cases “involving mineral leases or obligations arising out of the Mineral Code.”[3]

That being said, there has been no pronouncement from the Louisiana Supreme Court on the subsequent purchaser doctrine’s applicability to mineral rights, causing mayhem among the lower courts.  For example, in Bundrick v. Anadarko Petroleum Co., the Third Circuit recently held that a mineral lease transfers a real right to a lessee, but it only transfers a personal right to the lessor – an absurd result.[4]

In order to understand the defects in the Bundrick decision, it is important to first discuss the myriad of logical flaws that mire lower court decisions cited by the Bundrick court in support of its ruling.  The Frank C. Minvielle, L.L.C. v. IMC Global Operations, Inc. opinion is the epitome of this confusion.[5] 

In Minvielle, the plaintiff purchased land burdened by a mineral lease granted by a previous owner and subsequently filed suit against a sublessee, alleging its operations contaminated the property.[6] Dismissing the action, the federal magistrate judge held that the plaintiff lacked standing to pursue its claims because there was no assignment or subrogation of the right to sue from the previous owner to the plaintiff, and “[a]ctions arising from a breach of contract or lease of property are classified as involving personal rights rather than real rights” that only transfer through assignment or subrogation.[7]

This conclusion is based upon the false premise that a predial lease and a mineral lease convey the same rights.  In fact, that is not the case – a predial lease gives rise to personal rights and obligations, whereas a mineral lease gives rise to real rights and obligations per the Mineral Code. 

            This misunderstanding of the rights created by a mineral lease persisted in the Minvielle opinion on reconsideration, wherein the court found that a mineral lease created a real right only in the hands of the mineral lessee based on the comments to La R.S. § 31:16, providing that, “All things considered, the lease has the major characteristics of a real right: the mineral lessee may follow the land, regardless of transfers of ownership; the mineral lessee may assert his right against the world just as the proprietor of any other real right….” Finding no correlative language in favor of the lessor, the Minvielle court concluded that a mineral lease creates real rights only in favor of the lessee, and a subsequent lessor does not have standing demand restoration of the land absent an assignment or subrogation.  

This conclusion ignores that the Mineral Code specifically states that all mineral rights – including those created by a mineral lease – are real rights.[8] Although the lessor is not specifically identified, there is nothing in the Mineral Code that suggests that the lessor is given fewer or a different category of rights from the lessee.

Notably, regardless of whether a mineral lessor’s rights are real or personal, the Minvielle court erred by ruling that the lessor lacked standing to pursue its restoration claims against the mineral lessee. A mineral lessee has obligations pursuant to the Mineral Code and the Civil Code,[9] and the Civil Code imposes restoration obligations on a mineral lessee upon expiration of the lease.[10] For example, a mineral lessee is bound to “return the thing at the end of the lease in a condition that is the same as it was when the thing was delivered to him, except for normal wear and tear…” That said, at a minimum, the Minvielle lessor had standing to enforce the obligations owed to it by the lessee at the end of the lease under the Civil Code.

Still, several courts have blindly echoed the flawed reasoning in Minvielle and dismissed restoration claims of mineral lessors. For instance, in Duck v. Hunt Oil Co., the plaintiff obtained a one-half interest in 5.2 acres tract of land in 2004.[11] The act of sale did not contain an express transfer or assignment of any rights from the former owner of the property.[12] Six years after the sale, the plaintiff filed a petition for damages against the mineral lessee to recover the cost of remediating the contaminated property.[13]

Applying the subsequent purchaser doctrine as set forth in Eagle Pipe, the trial court dismissed the plaintiff’s claims on an exception of no right of action.[14] The Third Circuit reversed the lower court’s decision, correctly holding that Eagle Pipe did not apply because its holding was limited to surface leases.[15]

But, relying on Minvielle,[16] the Third Circuit found that the right to sue under the mineral lease did not pass as a real right with the land; in order for the subsequent landowner to have a right of action against a mineral lessee, the court held that the lessor must have either “privity of contract [with the lessee], assignment of rights, or be the beneficiary of a stipulation pour autrui.” [17]

A year later, in Bundrick v Anadarko Petroleum Co., the Third Circuit distanced itself from its decision in Duck, finding that the Eagle Pipe opinion does apply to actions involving mineral leases.[18] Recognizing that the plain language of the Mineral Code establishes that mineral rights are real rights, the Third Circuit still held that the real right “status is reserved to the mineral lessee and not the mineral lessor.”[19]

Although the Mineral Code focuses on transactions involving the lessee’s interest, it is generally silent with regard to transactions involving the lessor’s interest. However, it does state, “To the extent of the interest acquired, an assignee or sublessee acquires the rights and powers of the lessee and becomes responsible directly to the original lessor for performance of the lessee’s obligations.” La. R.S. 31:128. There is no corresponding statute pertaining to a subsequent owner’s obligations towards the lessee, original or otherwise.[20]

Based on this finding, the court dismissed the lessor’s claims.

As a result of Bundrick, the standing law in the Third Circuit is that a mineral lessee has real rights that follow the land regardless of any transfer to subsequent landowners, but a lessee’s obligation to restore the damage caused to the land through the exercise of those rights is only owed personally to the owner at the time the damage is caused.

This result is contrary to the basic tenets of Louisiana law. Real rights give rise to a real obligations.[21] Mineral rights – including those created by a mineral lease – are real rights.[22] The Mineral Code provides that the mineral lessee is bound to perform the contract in good faith and to develop and operate the property leased as a reasonably prudent operator for the mutual benefit of himself and his lessor.[23] As explained supra,

[1] Eagle Pipe and Supply, Inc. v. Amerada Hess Corp, 10-2267 (La. 10/25/11); 79 So. 3d 246, 256-57.

[2] Id. at 275.

[3] Id. at 281, n.80.

[4] 14-993 (La. App. 3 Cir. 3/4/15); 159 So. 3d 1137.

[5] 380 F.Supp.2d 755 (W.D. La. 2004).

[6] Id. at 758-59.

[7] Id. at 766.

[8] La. R.S. § 31:16 (“The basic mineral rights that may be created by a landowner are the mineral servitude, the mineral royalty, and the mineral lease. This enumeration does not exclude the creation of other mineral rights by a landowner. Mineral rights are real rights and are subject either to the prescription of nonuse for ten years or to special rules of law governing the term of their existence.”).

[9] La. R.S. § 31:2 (providing that the provisions of the Mineral Code are supplementary to the Civil Code and when the Mineral Code does not expressly or impliedly provide for a applicable rules, the provisions of the Civil Code apply).

[10] See La. Civ. Code arts. 2683, 2686, 2687, and 2692.

[11] Duck v. Hunt Oil Co., 2013-628 (La. App. 3 Cir. 3/5/14); 134 So. 3d 114, 116.

[12] Id.

[13] Id.

[14] Id.

[15] Id. at 119.

[16] 380 F.Supp. 2d 755, 776 (W.D. La. 2004).

[17] Id. at 119-20.

[18] 14-993 (La. App. 3 Cir. 3/4/15); 159 So. 3d 1137, 1142-43.  This conclusion was based on the Supreme Court’s instruction to the First Circuit to consider its ruling in Eagle Pipe when remanding Global Mktg. Sols., LLC v. Blue Mill Farms, Inc., 2010-1922 (La. 3/2/12); 84 So. 3d 538, 538 back to the First Circuit.

[19] Id. at 1143.

[20] Id.

[21] See La. Civ. Code art. 1763.

[22] See La. R.S. § 31:16.

[23] La. R.S. § 31:122.