12

By R. Lee Vail

The Occupational Safety and Health Administration (“OSHA”) published a Request for Information (“RFI”) on December 9, 2013 concerning possible changes to the Process Safety Management (“PSM”) program codified at 29 C.F.R. 1910.119. See 78 Fed. Reg. 73756 (Dec. 9, 2013). Likewise, the Environmental Protection Agency (“EPA”) published an RFI on July 31, 2014 relating to possible changes to the similar Risk Management Program (“RMP”) rules codified at 40 C.F.R. Part 68. See 79 Fed. Reg. 44604 (July 31, 2014). In lieu of making some changes through rulemaking, OSHA chose to revise older policies. On June 5, 2015, OSHA issued an interpretation letter that addresses the method of determining whether chemical in a mixture exceeded a threshold quality.

In response, the American Chemical Council and the National Association of Chemical Distributors filed suit challenging the policy. On July 7, 2016, OSHA and the parties settled the suit and agreed to a revised policy. On July 18, 2016, OSHA rescinded and replaced that policy with a modified policy.

Whereas the general policy did not substantially change, OSHA agreed that certain aqueous solutions were not covered by PSM. These include:

  1. Ammonia, Anhydrous (CAS 7664-41-7);
  2. Dimethylamine, Anhydrous (CAS 124-40-3);
  3. Hydrogen Cyanide, Anhydrous (CAS 74-90-8);
  4. Methylamine, Anhydrous (CAS 74-89-5);
  5. Hydrochloric Acid, Anhydrous/ Hydrogen Chloride (CAS 7647-01-0);
  6. Hydrofluoric Acid, Anhydrous/ Hydrogen Fluoride (CAS 7664-39-3).

Special emphasis was placed on the case of Hydrogen Chloride and Hydrogen Fluoride. Both were listed twice under the same CAS Number and Threshold Quantity. In settling the suit, OSHA agreed that these chemical were effectively only listed once in the anhydrous (without water) form. In addition, OSHA determined that that “aqueous mixtures of hydrogen bromide (at concentrations below 63%) and mixtures of alkylaluminum (at any concentration) will fall within the partial pressure exemption under all normal handling and storage conditions.”

Otherwise, OSHA’s proposed revisions to PSM are still pending and the EPA is evaluating comments from its proposed rule. Stay tuned for more developments.

Close-up on a dollar sign.

By R. Chauvin Kean and Sean T. McLaughlin

On June 29, 2016, the Louisiana Court of Appeal, Third Circuit, affirmed a jury’s verdict of $125,000 in compensatory damages and $27,000,000 in punitive damages in a maritime products liability case, resulting in a damages ratio of 184:1! In Warren v. Shelter Mutual Ins. Co., 15-354, 15-838, & 15-1113 (La. App. 3 Cir. 06/29/16); — So. 3d —, the Third Circuit affirmed both the jury’s determination that punitive damages were warranted and the amount of punitive damages. This case is noteworthy for many reasons, but this article focuses on only two: (1) the Third Circuit’s decision that punitive damages are available to non-seafarers under the general maritime law; and (2) the Third Circuit’s finding that the amount of punitive damages did not violate the Due Process Clause of the Fourteenth Amendment, despite the 184:1 ratio.

On May 7, 2005, Derek Hebert was a passenger in a small boat operated by Daniel Vanvoras. They were in a former channel of the Calcasieu River traveling between Mr. Vanvoras’ home and the Lake Charles Country Club. While en route, the boat suffered a complete functional loss of its steering system. Mr. Hebert was ejected and struck by the boat’s propeller nineteen times. He was killed almost instantly. Following the accident, an investigation was performed into the boat’s steering system. It revealed that the loss of a relatively small amount of hydraulic fluid would result in a complete loss of steering. Mr. Hebert’s relatives filed wrongful death claims and a survival action against the several parties, including the manufacturer and designer of the boat’s steering system, Teleflex. The claim against Teleflex was simple: Teleflex failed to warn boat owners or their passengers about the potential catastrophic consequences of losing a very small amount of hydraulic fluid.

At trial, the evidence established that in 1989 Teleflex performed testing of its steering system. Their tests showed that the loss of mere teaspoons of hydraulic fluid resulted in a complete loss of steering. Prior to the complete loss, the steering on the boat was reported to “feel different.” Teleflex’s designer, Eric Fetchko, testified that Teleflex “assumed that the different feel in the steering response would alert users that they had a problem.” The evidence also established that Teleflex “received thousands of complaints regarding fluid loss.” At trial, Teleflex contended that those thousands of complaints “must be kept in context because Teleflex has sold millions of the [steering] systems.” Even though Teleflex knew that a minimal amount of fluid loss could end in the death of vessel operators and passengers, it believed “the frequency was not high enough to justify” a more specific warning because Teleflex “did not want to cause ‘mass hysteria.’”

The case was tried to a jury twice. The first time, a jury ruled in favor of Teleflex. This ruling was overturned due to inaccurate information being provided to the jury. At the second trial, the jury ruled in favor of the plaintiffs, awarding $125,000 in compensatory damages and $27,000,000 in punitive damages against Teleflex.

Because the accident occurred upon the navigable waterways of the United States, admiralty jurisdiction and general maritime law applied to this case. The U.S. Supreme Court has recently affirmed that punitive damages are allowed under the general maritime laws unless Congress has statutorily prohibited a plaintiff from seeking such damages. See, Atlantic Sounding Co., Inc. v. Townsend, 557 U.S. 404, 414-15 (2009); see also, McBride v. Estis Well Service, LLC, 768 F. 3d 382, 389-91 (5th Cir. 2014) (en banc). [Editor’s note: click here for more discussion on McBride and maritime punitive damages]. The Jones Act and the Death on the High Seas Act (“DOSHA”) are such statutes, and expressly limit a seafarer’s recovery to pecuniary damages; whereas the Longshore and Harbor Workers’ Compensation Act (“LHWCA”), for example, does not have the same limitations. Mr. Hebert, as a passenger on a recreational vessel, was not subject to an overlapping federal statute such as the Jones Act, the LHWCA, or the DOHSA. Due to this fact, punitive damages are available under the general maritime law. Although rare, where the plaintiff can prove the defendant’s intentional or wantonly reckless conduct amounted to a conscious disregard for the rights of others, he may be awarded punitive damages. See Poe v. PPG Indus., 00-1141, p. 6 (La. App. 3 Cir. 03/28/01); 782 So. 2d 1168, 1173.

Because he was not a member of the boat’s crew or deemed a worker covered under a federal statutory scheme, Mr. Hebert was classified as a non-seafarer and thus was entitled to all remedies under general maritime law – including punitive damages for the claims asserted against Teleflex for its failure to warn boat operators and passengers of the steering system’s hidden dangers.

On appeal, the Louisiana Third Circuit conducted a thorough analysis of U.S. constitutional law and the jurisprudential understanding of punitive damage award ratios compared to compensatory damages. Outlining the various concepts and guidelines announced by the U.S. Supreme Court, the court began with the notion that all punitive damage awards invoke some type of analysis under the Due Process Clause of the Fourth Amendment. The rationale is that where an award is grossly excessive, it furthers no legitimate state purpose and constitutes an arbitrary deprivation of property. See Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1991).

To that end, the Third Circuit examined the excessiveness of the $27,000,000 punitive damages award under BMW of North America, Inc. v. Gore, 517 U.S. 559, 575-85 (1996). In BMW, the U.S. Supreme Court set out the standard for analyzing the gross excessiveness of a punitive damage award, which includes: “(1) the degree of reprehensibility of the misconduct; (2) the ratio, or disparity between the punitive award and the harm, or potential harm, suffered by the plaintiff; and (3) the difference between this remedy and the civil penalties authorized or imposed in comparable cases.” The Supreme Court has consistently held that there is no-bright-line rule or rationale for determining what is an appropriate punitive damage award.

Applying the relevant guideposts from BMW, the Third Circuit first examined the reprehensibility of Teleflex’s alleged misconduct. Noting that Teleflex had actual and substantive knowledge of the defect in the steering system several years prior to the accident, the court found it reprehensible that Teleflex chose not to provide supplemental warnings to owners, operators, or their passengers of such defects or dangers simply to avoid causing “mass hysteria.” In fact, the court went on to note that unlike most cases where there was “hard-to-detect” wrongdoing by the liable party, here, Teleflex’s concealment of its own knowledge that its product could be defective or fail and cause occupants of the vessels to die was held to be egregious behavior. For these reasons, the court found the reprehensibility guidepost fully realized in this case, as opposed to Teleflex’s misconduct being merely reckless, as is most common in similar cases. Finding that Teleflex’s behavior was egregious rather than reckless allowed the Third Circuit to ignore the usually-accepted damage ratios and actual-damage findings of prior case law, and laid the foundation for the court’s novel approach in affirming the punitive damages awarded by the trial court.

With that finding already being made, the court reviewed the second guidepost – the ratio of punitive damages to compensatory damages – to determine if a 184:1 ratio was grossly excessive under the circumstances. This analysis was done without any consideration as to the potential harm factor to the plaintiff. Given the egregiousness of Teleflex’s conduct, the Third Circuit focused on the potential harm that could have occurred rather than the harm that actually occurred. The court noted that since Mr. Hebert died almost instantly, he experienced very brief, but extreme, pain and suffering. Had he not died – or died after months of treatment – the compensatory damages award would have been much, much higher – possibly over $10,000,000. Using the potential harm ($10,000,000) as the benchmark, the punitive:compensatory damage ratio was only 3:1. As the court noted, there is no mathematical formula for determining the reasonableness of a punitive damages award. Citing various opinions, the court highlights that the U.S. Supreme Court has consistently held that “low awards of compensatory damages may properly support a higher ratio than high compensatory awards, if, for example, a particularly egregious act has resulted in only a small amount of economic damages.” BMW, 571 U.S at 582-83.

The final guidepost calls for a comparison of the civil penalties and remedy imposed in the present matter to comparable cases. As stated before, there are no statutory or codal authorities that impose monetary civil or criminal penalties for the deprivation of life of Mr. Hebert. Because of this, the guidepost did not offer any assistance to determine the gross excessiveness of the award. This finding further assisted the court is affirming that the punitive damages award was reasonable under the circumstances and did not violate the Due Process Clause of the Fourteenth Amendment.

With the high value of the punitive damages awarded in this case, and the relatively novel approach by the Court in reaching its opinion, we would expect this case to end up at the Louisiana Supreme Court soon, if not the U.S. Supreme Court thereafter. While this case was maritime in nature, the analysis in the Third Circuit’s review of an alleged grossly excessive punitive damage award has the potential to transcend legal subject matter, making this case one to watch. Stay tuned.

c

By Edward H. Warner and Linda Perez Clark

On Thursday, May 5, 2016, the Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rules that would fundamentally change the way certain businesses contract with consumers.  Among other actions, the proposed rule would eliminate class action waivers from pre-dispute arbitration clauses and agreements for certain businesses.  The announcement of the proposed rule was somewhat expected, considering Congress directed the CFPB to study the use of mandatory arbitration clauses in consumer financial markets beginning in 2012.  The CFPB released the results of its three year study in March 2015 and found that class actions were the favored method for consumers to hold certain financial services businesses accountable.  The May CFPB press release states that “the CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.”

What does this proposal intend to change?

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is proposing to establish 12 CFR part 1040, which would impose two sets of limitations on the use of pre-dispute arbitration agreements by providers of consumer financial products and services (“Covered Providers”).

First, the proposed rule would prohibit Covered Providers from using an agreement with a consumer that provides for arbitration of any future dispute if such an agreement bars the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  Second, the proposal would require a Covered Provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

What does this change mean for your company?

While only a proposal at this point, this development warrants attention if your company uses pre-dispute arbitration agreements containing class action waivers.  If the proposal is approved, Covered Providers would need to eliminate class action waivers from pre-dispute arbitration agreements and clauses.  The proposal would apply to Covered Providers who are typically in the core consumer financial markets of lending money, storing money, and moving or exchanging money.  Additionally, if the rule is passed, any pre-dispute arbitration agreement will need to include a mandatory statement that the consumer cannot be stopped from filing his/her claim as a class action in court, or from participating in a class action filed by someone else.

What are the legal implications and timelines moving forward?

The new regulations would apply to pre-dispute arbitration agreements entered into on the date that is 211 days from the date the final rule is published, and thus would not apply to any agreement in effect prior to that date.  The 90-day period for the public to comment on the proposed regulations expires August 22, 2016.  Businesses should monitor the outcome and enlist counsel to prepare to address these new requirements if adopted.

If you wish to view the proposed rule, or file a public comment, you may do so at the link here.

 

Drilling rig at sunset

By Daniel Stanton

In the recent Fifth Circuit case of Hefren v. Murphy Exploration & Production Company, USA, et al., 2016 WL 1637758 (5th Cir. April 25, 2016), the court took up the riveting issue of contractual defense and indemnification. All levity aside, the issue addressed by the court is one that arises in nearly every case stemming from a casualty on the Outer Continental Shelf. In this case, an employee of Murphy, Hefren, was injured aboard the Front Runner SPAR on the OCS adjacent to the coast of Louisiana. Hefren brought suit in the Western District of Louisiana against both Murphy and McDermott, the builder of the Front Runner. Murphy achieved dismissal early on based on its status as Hefren’s employer and the employer immunity granted under the Longshore Harbor Workers’ Compensation Act. Shortly thereafter, McDermott filed a cross-claim against Murphy seeking indemnification for its defense costs based on the Master Service Contract that covered the construction of the Front Runner.

McDermott then moved for and received a summary judgment on Hefren’s claims as extinguished under the Louisiana peremptive period for claims for deficiencies in design and construction. McDermott then moved for a partial summary judgment against Murphy on its cross claim for indemnification. The district court granted McDermott’s motion and awarded McDermott its attorney fees and costs incurred in defending against Hefren’s suit. Murphy appealed the decision as contrary to the Louisiana Oilfield Indemnity Act (“LOIA”).

On appeal, the Fifth Circuit found that on its face, the LOIA voids indemnification provisions requiring a company to indemnify another for injuries to its employees caused by its own fault or negligence. But despite this, the Louisiana Supreme Court, in response to a certified question from the Fifth Circuit has stated that where an indemnitee is found free of fault after a trial on the merits, the LOIA will not bar the recovery of defense costs. See Meloy v. Conoco, 504 So.2d 833 (La. 1987). In the later case of Melancon v. Amoco Production Co., 834 F.2d 1238 (5th Cir. 1988), the Fifth Circuit further found that even when a court failed to reach the issue of the indemnitee’s fault or negligence, the LOIA would not bar the indemnitee’s recovery of defense costs where the issue of fault or negligence was not reached as a result of a legal bar. In Melancon, the indemnitee was entitled to recover because the plaintiff’s suit was barred by the Longshore Harbor Workers’ Compensation Act. In Hefren, the court found that similarly, Hefren’s claims against McDermott were legally “barred” by the statutory peremptive period. As a result, even though the court did not adjudicate McDermott free of fault after a trial on the merits, the LOIA would not bar McDermott’s claim for indemnification. The Fifth Circuit affirmed the trial court’s award of defense costs and attorneys’ fees to McDermott.

While not the most exciting issue in Fifth Circuit jurisprudence, the issue of defense and indemnity is a common one. Nearly every contract for service in the oil and gas industry includes defense, indemnity, and/or insurance clauses. While the effectiveness of these clauses may be undermined by the LOIA in many cases, Hefren clarifies and reiterates the important exception to the LOIA established by Melancon – that a finding of no fault or negligence is not required where a legal bar to the plaintiff’s recovery against the indemnitee exists.

As an aside, the 5th Circuit also ruled in this case that a SPAR was an immovable under Louisiana law. Thus, the 5 year preemptive period for defects in construction or improvement of immovable property applied to the Front Runner SPAR.

offshore-drilling

By R. Chauvin Kean

On March 17, 2016, the Obama Administration announced through the Bureau of Ocean Energy Management (“BOEM”) its newly proposed air quality emission regulations for offshore oil and gas activities. According to BOEM, the primary benefit of this rule is “to ensure that offshore facilities and operations are in compliance with the air quality objectives and requirements of the OCSLA.” The proposal includes reductions in emissions of Volatile Organic Compounds, Nitrogen Oxide, Sulfur Oxide, Carbon Monoxide, and Particulate Matter. These measures will likely affect all activities conducted in Federal waters, including the Outer-Continental Shelf (“OCS”), of the Western and Central Gulf of Mexico, and the Artic. The remaining OCS areas will remain under the permitting and jurisdiction of the Environmental Protection Agency.

A major change to the existing regulations will be to “require a lessee or operator to add together emissions generated by proximate activities within one nautical mile from multiple facilities, whether or not they are described in a single plan.” The aggregate emissions from those facilities would then be combined for analysis. Therefore, if an operator utilizes various facilities in close proximity to one another for a single plan or project, the aggregate emissions of all of the facilities will be combined and considered one singular unit for regulatory compliance. This may pose compliance issues for operators utilizing a singular network of facilities to facilitate operations over a vast area as these network projects.

The new proposal also includes changes to the emission calculations for support vessels. Under the old regulations, emissions from supply vessels were considered part of a facility’s operations only if within 25 miles. The new proposed regulations would consider a support vessel’s emissions for the entirety of the vessel’s voyage. This change could pose a significant impact on facilities’ regulatory compliance based on the nature of deepwater drilling and vast distances now serviced by these support vessels. Also, this proposal does not provide specifics as to what constitutes a “support vessel.” A broad application could further reduce a facility’s allotted emissions.

In its Regulatory Impact Analysis, BOEM estimates the industry compliance costs for activities in the first year will be $23 million, the peak year (2020) $49 million, and $290 million over 10 years discounted at 3 percent.

The updated regulations proposed by the Administration will not only affect new plans or projects submitted to the Bureau, but will also affect previously approved plans, which will need to be made compliant. The public comment period has been extending to June 20, 2016. The press release addressing these new proposed regulations, including information on how to submit a comment may be found here.

Cargo ship in the harbor at night

By Tod Everage

The application of the collateral source rule is a common dispute in personal injury litigation because it affects the amount of recoverable damages in the case. When it applies, the defendant is potentially on the hook for a higher amount of past medical expenses, typically, the amount invoiced by the medical providers. When it does not, the plaintiff’s recovery of past medical expenses is reduced, usually to the actual amount paid to the providers. Since its inception, Louisiana courts have regularly been called upon to decide whether certain outside payment sources fall under the the collateral source rule. Recently, Judge Morgan in the Eastern District of Louisiana ruled that employer-based benefits for Longshoreman are not covered by the rule.

The premise of the collateral source rule is that “a tortfeasor may not benefit, and an injured plaintiff’s tort recovery may not be reduced, because of monies received by the plaintiff from sources independent of the tortfeasor’s procuration or contribution.” Bozeman v. State, No. 03-1016 (La. 7/2/04); 879 So.2d 692, 698. The rule was meant to ensure that a tortfeasor was not able to benefit from the victim’s foresight in purchasing insurance and other benefits. It is applied to a variety of factual circumstances, although typically applies to tort cases involving insurance benefits.

There are two primary considerations for determining whether the collateral source rule applies: “(1) whether application of the rule will further the major policy goal of tort deterrence; and (2) whether the victim, by having a collateral source available as a source of recovery, either paid for such benefit or suffered some diminution in his or her patrimony because of the availability of the benefit, such that no actual windfall or double recovery would result from application of the rule.” Lockett v. UV Ins. Risk Retention Grp., Inc., No. 15-166 (La. App. 5 Cir. 11/19/15); 180 So.3d 557, 570 (citing Bellard v. Am. Cent. Ins. Co., 980 So.2d 654, 669 (La. 2008)); see also Hoffman v. 21st Century N. Am. Ins. Co., No. 14-2279, (La. 10/2/15); 2015 WL 5776131, at *3.

In Bozeman, the Louisiana Supreme Court held that Medicaid recipients cannot collect Medicaid “write-off” amounts as damages because no consideration is provided for the Medicaid benefit. In Bellard, the Louisiana Supreme Court also noted: “The purpose of tort damages is to make the victim whole. This goal is thwarted, and the law is violated, when the victim is allowed to recover the same element of damages twice.” In finding that the collateral source rule did not apply to workers’ compensation benefits, the Louisiana Supreme Court stated: “unlike sick leave, annual leave, or employer-provided health insurance, workers’ compensation benefits cannot be considered a fringe benefit in the nature of deferred compensation that would otherwise be available to the plaintiff but for his injury. To the contrary, workers’ compensation benefits are required by law, and that same law prohibits an employer from assessing an employee, either directly or indirectly, with the cost of workers’ compensation insurance.”

More recently, the Louisiana Supreme Court again addressed the collateral source rule, this time with regard to its application to the discounted rate negotiated by the plaintiff’s attorney. See Hoffman v. 21st Century N. Am. Ins. Co., No. 14-2279, (La. 10/2/15); 2015 WL 5776131. In that case, the Court declined to extend the collateral source rule, holding that an attorney-negotiated medical discount, or “write-off,” did not qualify as a diminution of the plaintiff’s patrimony. The court explained that “allowing the plaintiff to recover an amount for which he has not paid, and for which he has no obligation to pay, is at cross purposes with the basic principles of tort recovery in our Civil Code.” The Court then held that because the plaintiff suffered no diminution of his patrimony, “the defendant in this case cannot be held responsible for any medical bills or serves the plaintiff did not actually incur and which the plaintiff need not repay.” Conversely, in Lockett, the collateral source rule applied when the plaintiff personally negotiated a reduction of her medical bills.

The U.S. Fifth Circuit’s jurisprudence is in accord with Louisiana law on this issue. In Miciotto v. U.S., 270 F. App’x 301, 303 (5th Cir. 2008) the Fifth Circuit explained that “for the [collateral source] rule to apply to ‘write-off’ amounts of medical expenses that were billed but not paid because a third-party negotiated a lesser amount, the plaintiff must give some consideration for the benefit obtained or otherwise suffer a diminution of patrimony.”

Judge Morgan reviewed each of these cases in formulating her well-reasoned opinion in Thibodaux v. Wellmate, 2016 WL 2983950 (E.D. La. May 23, 2016). In that case, the Plaintiff had incurred $626,529.68 in past medical expenses, though his Longshore carrier had only paid $244,702.87. The remainder of the bills were not paid because the carrier had negotiated lower amounts, as is typical. The defendant filed a Motion in Limine to address whether the collateral source rule applied to Longshore benefits.

In her ruling, Judge Morgan noted that the Plaintiff “gave no consideration for the compensation” that his employer provided under the LHWCA. “Indeed, compensation benefits, including for medical services and supplies, are required by law.” Thus, because there was no evidence of any diminution of patrimony, the collateral source was inapplicable. Judge Morgan also found that forcing the defendant to pay for the plaintiff’s past medical expenses actually paid still served the policy goal of tort deterrence.

Concept of construction and design. 3d render of blueprints and designer tools on the panorama of construction site.

By Jessica Engler

On May 3, 2016, the Louisiana Supreme Court held that the notice and recordation requirements of the Louisiana Public Works Act do not bar a suit on contract by a subcontractor against the general contractor’s surety. The Court’s opinion is nuanced, and dependent on the meaning and word choice of certain terms in the Louisiana Public Works Act, but has important impacts for public works contractors in Louisiana.

Pierce Foundations, Inc. v. JaRoy Construction, Inc. arose out of a public works construction project in Terrytown, Louisiana from the Jefferson Parish Council (“Jefferson Parish”).[1] JaRoy Construction, Inc. (“JaRoy” or “contractor”) was contracted to serve as the general contractor on a project to construct a gymnasium. In compliance with the Louisiana Public Works Act, JaRoy furnished a bond to Jefferson Parish with Ohio Casualty Insurance Company (“OCIC”) as the surety. Thereafter, JaRoy entered into a written subcontract with Pierce Foundations, Inc. (“Pierce”) to provide and install pile drivings. On November 3, 2008, Pierce completed the pile drivings. JaRoy failed to pay Pierce certain funds Pierce contended were due under the subcontract.

Notably, Pierce did not file a sworn statement of claim (lien) into the mortgage records. Instead, in July 2009, Pierce filed suit against JaRoy and, in July 2010, amended the petition to add OCIC as a defendant. OCIC filed several affirmative defenses against Pierce, including that Pierce failed to comply with the requirements of the Public Works Act before filing a claim against a surety.[2]

On October 17, 2011, when the project was substantially completed, Jefferson Parish filed a notice of acceptance of the work with the Jefferson Parish mortgage records. This recordation was made over a year after Pierce had added OCIC to the lawsuit.

Once the notice of acceptance was filed, OCIC moved for dismissal of Pierce’s suit on the grounds that Pierce was required to comply with the notice and acceptance requirements of the Public Works Act and, because it failed to do so within 45 days of acceptance of the project, Pierce could not recover from OCIC under Revised Statute 38:2247. OCIC argued that the exclusive rights of action against a surety are as set forth in Revised Statute 38:2247, and Pierce’s failure to comply with the requirements of the Act (including the notice and recordation requirements) bar recovery against OCIC. Pierce countered that the permissive “may” of the Revised Statute 38:2242(B) could not be converted into a mandatory requirement, holding that a claimant who does not file the sworn statement is “deprived of all rights against the surety”—including those rights in contract. Pierce also argued that it had filed suit over a year before Jefferson Parish filed the notice of acceptance, so OCIC could not reasonably claim it did not have notice of the claim. The Louisiana Supreme Court granted the writ application to determine whether, under the Louisiana Public Works Act,[3] the notice and recordation requirements of the Act are necessary conditions for a claimant’s right of action against a bond furnished pursuant to Louisiana Revised Statute 38:2241.

The Louisiana Public Works Act was enacted in order to give persons who do not have privity of contract with the general contractor or with the governing authority a claim against the general contractor and his surety for claims on public works projects.[4] To achieve this goal, the Act imposes a number of requirements. First, when a public entity enters into a contract in excess of $25,000 for the construction, alteration, or repair of any public works, the contractor is required to post a bond “in a sum of not less than fifty percent of the contract price for the payments by the contractor or subcontractor to claimants as defined in [Revised Statute] 38:2242.”[5] To assert a claim against that bond under Revised Statute 38:2242(B):

Any claimant may after the maturity of his claim and within forty-five days after the recordation of acceptance of the work by the governing authority or of notice of default of the contractor or subcontractor, file a sworn statement of the amount due to him with the governing authority having work done and record it in the office of the recorder of mortgages for the parish in which work is done.[6]

The Act also addresses a claimant’s direct right of action on the bond against the general contractor and/or surety and the claimant’s ability to seek a separate right of action outside the parameters of the Public Works Act in Revised Statute 38:2247, which reads in pertinent part:

Nothing in this Part shall be construed to deprive any claimant, as defined in this Part and who has complied with the notice and recordation requirements of R.S. 38:2242(B), of his right of action on the bond furnished pursuant to this Part, provided that said action must be brought against the surety or the contractor or both within one year from the registry of acceptance of the work or of notice of default of the contractor except that before any claimant having a direct contractual relationship with a subcontractor but no contractual relationship with the contractor shall have a right of action against the contractor or the surety on the bond furnished by the contractor, he shall in addition to the notice and recordation required in R.S. 38:2242(B) give written notice to said contractor within forty-five days from the recordation of acceptance by the owner of the work or notice by the owner of default, stating with substantial accuracy the amount claimed and the name of the part to whom the material was furnished or supplied and for whom the material was furnished or supplied or for whom the labor or service was done or performed.[7]

The Louisiana Fifth Circuit Court of Appeals had previously agreed with OCIC that Pierce’s failure to comply with the notice and recordation requirements of the Act bar recovery against OCIC. The Louisiana Supreme Court overruled the Fifth Circuit Court of Appeal’s holding, finding instead that where a subcontractor fails to comply with the notice and recordation requirements of Revised Statute 38:2242(B), the subcontractor loses his privilege, or lien, against the funds in the hands of the public authority. However, the failure to comply will not affect the rights of a subcontractor, who is in contractual privity with the general contractor, from proceeding directly against the contractor and its surety. Accordingly, while it a contractor’s ability to file a lien for non-payment will expire if it fails to fulfill the Public Works Act’s notice and recordation procedure, a contractor’s claim in contract is still preserved. The Court noted that the Fifth Circuit’s decision was flawed because it rendered the permissive “may” in Revised Statute 38:2242(B) as mandatory in Revised Statute 38:2247. The Court then deemed that the Public Works Act created an additional remedy to persons contributing to the construction, alteration, or repair of public works—a “privilege against the unexpended fund in the possession of the authorities with whom the original contract had been entered into.”[8] The Act is not intended to affect rights between parties proceeding directly in contract. The Act is also silent on the question of parties that are in contract and file suit well before the notice of acceptance or default is filed. Consequently, the Court held that Pierce’s lawsuit was timely filed against the general contractor and surety, and that the failure of the plaintiff to perfect its privilege against the public authority does not defeat its right of action against the surety.

This holding is important for construction subcontractors because it confirms their ability to still pursue claims against the surety and other persons in contractual privity with them on contract claims, even if the subcontractor failed to perfect its claim under the Louisiana Public Works Act. As stated by the Court, the remedies under the Public Works Act are an additional remedy, not an exclusive remedy. Last, the Court has indicated that the additional notice in the Public Works Act may be unnecessary when suit has been filed prior to issuance of the notice of acceptance for contract claims. However, notice and recordation is still required should the contractor wish to bring a claim under the Public Works Act. Consultation with an attorney is recommended for assessment of the claims that a contractor may have under both contract and the Public Works Act and guidance in taking the right steps to protect those claims.

[1] Case No. 2015-C-0785, Louisiana Supreme Court (May 3, 2016) (J. Crichton; J. Knoll, dissenting; J. Guidry, dissents and assigns reasons).

[2] JaRoy later filed for bankruptcy in December 2010, and the suit proceeded solely against OCIC.

[3] La. R.S. 38:2241, et seq.

[4] Wilkins v. Dev Con Builders, Inc., 561 So. 2d 66, 70 (1990).

[5] La. R.S. 38:2241(A)(2).

[6] La. R.S. 38:2242(B).

[7] La. R.S. 38:2247.

[8] Wilkins v. Dev Con Builders, Inc., 561 So. 2d 66, 70 (1990).

construction site

By Josh Coleman

On April 6, 2016, Louisiana’s Third Circuit Court of Appeal issued a ruling on the question of whether the state’s relatively new anti-indemnity statute affects a defendant’s ability to assert the “statutory employer” defense for purposes of workers compensation. Blanks v. Entergy Gulf States Louisiana, LLC, No. 15-1094, — So.3d —-, 2016 WL 1358492 (La.App. 3d. Cir. Apr. 6, 2016). The Blanks opinion is notable in that, to date, very few courts have interpreted the statute in published rulings. Although the Blanks ruling does not answer every open question surrounding Louisiana’s anti-indemnity rules, it does shed light on the statute’s relationship (or lack thereof) to the workers compensation scheme. Set forth below is background on the anti-indemnity statute and a brief summary of the Blanks opinion.

Louisiana’s Anti-Indemnity Law: Background

The concept of “indemnity” refers to one party shifting its risk of loss to another party. Insurance is the most common form of indemnity, where for the cost of a premium the insured shifts the risk of loss upon an insurer. Indemnity may also be created by contract, in which one party (the “indemnitee”) passes risk of loss and liability for certain damages to another party (the “indemnitor”).

In 2010, the Louisiana State Legislature enacted the first version of the state’s anti-indemnity law applicable to construction contracts, La. R.S. 9:2780.1. In general, the anti-indemnity law operates to invalidate any provisions within a construction contract that purport to hold the indemnitor responsible for damages arising from the negligence or intentional acts of the indemnitee.

This basic principle—that a party can’t require indemnification for its own bad acts—is relatively straightforward and consistent with a nationwide trend of other states’ anti-indemnity restrictions.

Other elements of the statute are less straightforward and have yet to be fleshed out by the courts. For example, the statute expressly allows indemnity provisions (that otherwise would be invalidated) if two conditions are met: (1) the same contract requires the indemnitor to obtain insurance for that obligation, and if (2) “there is evidence that the indemnitor recovered the cost of the required insurance in the contract price.” La. R.S. 9:2780.1.  What type and extent of “evidence” is so required remains an open question not yet fully addressed in any published court opinion.

Third Circuit’s Blanks Ruling

The Blanks dispute originated from a workplace accident. The plaintiff, an employee of an industrial contractor, was injured while working a boiler repair job on premises owned by defendant Entergy. At the time of the accident, plaintiff’s employer and Entergy had in place a services contract under which Entergy was deemed “statutory employer” for purposes of Louisiana’s Worker’s Compensation Act.[1]

Seeking to recover from Entergy outside the confines of worker’s compensation, the plaintiff’s argument was twofold. First, plaintiff argued that the services contract between Entergy and plaintiff’s employer contained an indemnity provision that was overly broad. Because no evidence had been introduced to show that the employer/indemnitor “recovered the cost” of the related insurance against those risks, plaintiff contended, the provision was thus invalid. The trial and appellate court agreed, holding that the indemnity provision was overly broad and unenforceable as written. Notably, the Third Circuit offered no commentary on the nature of the lack of “evidence” as to the indemnitee’s purchase of insurance.

Plaintiff’s second (and more creative) argument was that Entergy was prohibited from maintaining its statutory employer defense strictly because the indemnity provision within the underlying services contract had been invalidated by the anti-indemnity statute. A valid indemnity provision, according to plaintiff, was a prerequisite to the indemnitee’s assertion of the statutory employer defense. Here, both the trial and appellate court disagreed, finding the anti-indemnity and workers compensation statutes to be separate and distinct:

“the language of each statute addresses distinct relationships. Louisiana Revised Statutes 9:2780.1 applies to construction contracts, advancing various requirements for general, contractual indemnification…. However, no language is included within La.R.S. 9:2780.1, or elsewhere, that would indicate that it obviates La.R.S. 23:1061’s separate statutory employer defense from tort liability in applicable cases. Had the legislature intended for La.R.S. 9:2780.1 to operate as an additional element to La.R.S. 23:1061, it could have included language specifically requiring such a change. It did not.”[2]

*         *         *

Although several questions continue to surround the interpretation of the anti-indemnity statute, the Third Circuit’s ruling in Blanks offers a degree of clarity on the statute’s relationship with the worker’s compensation scheme: a defendant may assert a “statutory employer” defense regardless of the validity of an underlying contractual indemnity provision.

[1] For purposes of worker’s compensation, an entity may become a “statutory employer” over a separate contractor’s employees if that relationship is properly spelled out in a contract. Although not the technical “employer”, the entity is then considered the equivalent “statutory employer” and enjoys workers compensation immunity against suits from the contractor’s employees. See La. R.S. 23:1061.

[2] Blanks at *5.

ogw

By Will Huguet

Terminology employed in oil and gas exploration may often become antiquated. In this regard, this comment is intended to introduce the reader to the dated and potentially confusing terms “mineral acre” and “royalty acre.” Although the author is not a large proponent of the use of such terms, they are part of the fabric of mineral and royalty deeds and will continue to be utilized for the foreseeable future.

Mineral Acre Discussion

A “mineral acre” is a full mineral interest in one (1) acre of land.  One may ask – why not simply say “acre” when a full interest in one (1) acre equals one (1) mineral acre?  It is surmised that use of “mineral acre” sprung from concerns over warranty and quantifying what is to be sold.  In this respect, if the exact acreage of a tract is unknown, e.g. somewhere between 45-50 acres, or undivided ownership is unknown, e.g. the person either owns a 3/5 interest or 4/5 interest in a tract, a mineral purchaser may seek to protect itself by establishing a floor and buying a set number of mineral acres. For example, in a scenario wherein a seller is to convey fifty percent (50%) of their interest in a “50 acre” tract, but the exact acreage is unknown, a prudent buyer may set forth that they are purchasing 25 mineral acres. In the event that a survey (or other title impediment) reveals that the tract actually comprises 45 acres, the buyer would receive a mineral servitude covering 25 net acres (with the vendor now owning 20 net mineral acres), rather than 22.5 acres under the fifty percent (50%) conveyance language. In summary, although the term “mineral acre” is fairly basic to grasp, there still may be areas of confusion pertaining to multiple tracts and inadvertently blending the concept with those of royalty, etc.

Royalty Acre Discussion

A “royalty acre” appears to have been originally conceptualized as the full lease royalty on one (1) acre of land, i.e. the lessor’s royalty. As the longstanding (but now largely inapplicable) lessor’s royalty was one-eighth (1/8), if one purchased one (1) royalty acre from a landowner subject to a mineral lease with a one-eighth (1/8) lessor’s royalty, that party would be buying all of the royalty payable to the landowner under said lease. Over time, it appears that the term “royalty acre” became disconnected from lease royalty and came to mean a “1/8 royalty on the full mineral interest in one acre of land.” See Dudley v. Fridge, 443 So.2d 1207, 1208 (Alabama 1983). Stated alternatively – one (1) mineral acre came to be equated with eight (8) royalty acres.

However, some scholars and commentators (like Williams & Meyers) counter that “royalty acre” should continue to reflect a full lease royalty. In other words, if a landowner is subject to a one-fourth (1/4) lessor’s royalty on one (1) acre of land and sells one (1) royalty acre, then such grant would cover the full lessor’s royalty interest. However, if one (1) mineral acre equals eight (8) royalty acres, a one-fourth (1/4) lessor’s royalty on a one (1) acre tract would yield two (2) royalty acres and only transfer one half (1/2) of the grantor’s lessor’s royalty. There is Louisiana case law on this matter, which appears to embrace the definition that a “royalty acre” equates to a “1/8 royalty on the full mineral interest in one acre of land,” as discussed in following.

In Thibodeaux v. American Land & Exploration, Inc., 450 So.2d 990 (La. App. 3 Cir. 1984), the Court noted the following in footnote 3:

Supple testified that the term “royalty acre” is a commonly used industry term. He also stated that production distribution is based on the ownership of royalty acres which are derived by converting ordinary acreage into royalty acreage on the basis of the standard one-eighth (1/8) royalty, which was the fraction ordinarily reserved by owners leasing their land for oil production. Thibodeaux had, however, reserved a one-fifth (1/5) royalty interest in the production under his lease with Stone Oil, thus creating more royalty acreage on the land than would have existed under a one-eighth (1/8) reservation.

Harrison and Supple both calculated that the 29.5 acres owned by Thibodeaux and his children contained 47.2 royalty acres. [1]  In his deed to American Land, Thibodeaux transferred one-half of his one-half interest, or one-fourth of the total (or 11.8) royalty acres.

Therefore, Louisiana appears to have adopted the position (albeit with limited authority), that one (1) mineral acre includes eight (8) royalty acres regardless of the lessor’s royalty. However, due to this issue, prudent parties often specifically define “royalty acres” in a royalty deed. [2]  Using this definition, if one (1) acre of land is subject to a one-eighth (1/8) lease, there is one (1) royalty acre available to the lessor, if subject to a three-sixteenths (3/16) royalty lease, the lessor is entitled to one-and-one-half (1.5) royalty acres, and if subject to a one-fourth (1/4) royalty lease – two (2) royalty acres. [3]  Returning to the rationale behind use of “mineral acres,” if attempting to buy fifty percent (50%) of a landowner’s royalty interest in one (1) acre of land under a one-fourth (1/4) royalty lease, one could set forth that they are buying 1 “royalty acre.” In doing so, if the tract is ultimately found to only comprise 0.8 acres, then the purchaser owns a mineral royalty covering 0.5 acres, whereas the seller will only be entitled to the royalty on the remaining 0.3 acres.

Additional Issues

The reader is further advised of a couple of additional problems which may be encountered in conveyancing. The first is the use of inconsistent and potentially conflicting grants – such as using both a stated percentage of the grantor’s interest and specifying the exact mineral acres or royalty acres conveyed. This may be remedied by avoiding the conflict or clearly stating which is to control, e.g. the intent is to convey one-half (1/2) of grantor’s interest, but the specific figure will control in the event of a conflict. Further, when the grant covers several tracts or involves several units, attribution issues may be encountered. The undersigned has reviewed royalty deeds wherein several tracts were covered and the tracts included differing undivided ownership, were subject to different mineral lease burdens, or presented distinct title issues. In such an event, issues with attribution of the stated gross mineral or royalty acres to specific tracts may be encountered, which may potentially be remedied by separately listing the mineral or royalty acres to be conveyed with respect to each separate tract.

Will Huguet has assisted buyers and sellers in numerous transactions involving mineral and royalty deeds, including title, curative, negotiation, and drafting the involved instruments.

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[1] Which would be calculated as follows: 29.5 x 8 x 1/5 = 47.2. 

[2]  An example would be as follows: “When used herein, the term ‘Royalty Acre’ means and includes a mineral royalty interest in 1/8 of 8/8 in and under one (1) acre of land.”

[3]  Note that under this formulation, if one (1) royalty acre is sold subject to a 1/8 mineral lease and said lease lapses and the landowner enters into a new mineral lease with a 1/4 lessor’s royalty, the royalty purchaser and landowner would each be entitled to 1/2 (or 1/8 each) of the lessor’s royalty.

 

wet

By Sam O. Lumpkin

On May 31, 2016, the US Supreme Court ruled in United States Army Corps of Engineers v. Hawkes Co., Inc. that a jurisdictional determination issued by the Corps of Engineers under the Clean Water Act constitutes a final agency action that is judicially reviewable under the Administrative Procedure Act.  Justice Roberts wrote the decision of the Court, to which all other justices joined or concurred in the result.

The Clean Water Act prohibits the unpermitted discharge of any pollutant into “the waters of the United States,” including wetlands, without a permit.  However, only wetlands with a “significant nexus” to other waters of the United States are within Corps and EPA Clean Water Act jurisdiction.   Rapanos v. United States, 547 U.S. 715 (2006).  Dredging and filling activities are considered to be the discharge of a pollutant.   As a result, any dredging or filling activities involving a waters of the US within Corps jurisdiction must be approved beforehand by the US Army Corps of Engineers, which is responsible for issuing permits for discharges that would otherwise be forbidden by the Clean Water Act. The Clean Water Act allows imposition of potentially massive criminal or civil penalties for discharging any pollutant without a permit.

Determination of what constitutes a “wetland” or “other waters” of the US often involves expert determinations.  Further, the process for obtaining a Corps permit can itself be time-consuming and expensive – the Court noted that the average applicant for the type of permit at issue in Hawkes spends “788 days and $271,596 in completing the process,” and “[e]ven more readily available ‘general’ permits took applicants, on average, 313 days and $28,915 to complete.” To aid applicants, the Corps issues “jurisdictional determinations” (“JDs”) on a case-by-case basis. JDs are either “preliminary” – advising that there may be waters of the United States on a piece of land – or “approved,” which definitively states the presence or absence and extent of such waters.  The JDs provide some certainty for a landowner or developer as to whether they are required to endure the permitting process. The approved JDs are administratively appealable to the Corps; however, until the Hawkes decision, it was unclear as to whether judicial review of the Corp decision was available.

In Hawkes, the applicant sought a jurisdictional determination and was granted an approved JD stating that the property contained “water of the United States,”with a delineation of where those waters were located. Central to the case was whether the wetlands had a close enough nexus to a major river 120 miles away such that they were within the Corps’ jurisdiction. The applicants administratively appealed the JD under 33 C.F.R. Part 331, and the Corps reaffirmed its decision with revisions to the extent of the wetlands. Not satisfied, the applicants sought review of the JD in a federal district court under the Administrative Procedure Act (APA), which allows district courts to review “final agency actions.” 5 U.S.C.A. § 704. The Corps argued that judicial review was available only at the time of the final permitting decision or on an enforcement action commenced for dredge or fill activity without a permit. The district court agreed with the Corps and dismissed for lack of jurisdiction, holding that a JD is not a “final agency action.” 963 F.Supp.2d 868 (Minn. 2013). The applicants then appealed to the US Court of Appeals for the Eighth Circuit, which reversed. 782 F.3d 994 (2015).

The Supreme Court agreed with the Eight Circuit, holding not only that an “approved” JD is a final agency action, but also that there are no adequate alternatives to the APA for challenging a Corps JD in court. On the issue of finality, the Court noted that  JDs give rise to “direct and appreciable legal consequences,” and they are also binding on the Corps and the EPA for five years following the determination.[1] Unlike other possible agency actions which are merely advisory, such as informal advice from an agency or a preliminary JD, an approved JD follows extensive fact-finding, marks “the consummation of the agency’s decision-making process” and constitutes a final determination of rights and obligations “from which legal consequences will flow.” The Court further held that there are no adequate alternatives to an APA challenge to the Corps’ JD, noting that the only alternatives available were to forego a permit altogether or proceed with the permitting process. Without a permit, the applicant could either proceed with its proposed activity and be exposed to the civil and criminal penalties of the Clean Water Act, or abandon its proposed activity altogether. But the permitting process also poses a highly expensive, time-consuming, and uncertain proposition, for which judicial review would only be available when complete. As a result, the Court held that an approved JD is reviewable in federal district court under the APA.

The Hawkes ruling is a narrow one, and applies only to approved JDs. However, because JDs are literally determinations of the extent of the Corps’ jurisdiction, the scope of the Corps’ authority will likely be subjected to many more challenges than in the past, when such objections would have to wait until the permitting process was complete. As a result, in the future the Corps’ jurisdiction may face additional restraints imposed by federal courts.

Because an adverse ruling on an approved JD is appealable beyond the Corps after Hawkes, a thorough record in the initial JD proceeding is more important than ever. Ordinarily, a consultant will prepare a draft JD for submission to the Corps, which may or may not visit the site in question; the Corps then issues its decision on the record. This process, however, does not offer the applicant any further opportunity to develop the record. Any administrative appeal and subsequent judicial review is limited to the administrative record before the Corps, unless good cause is demonstrated as to why additional information should be admitted. As a result, applicants should ensure that their consultant’s initial submittal is thoroughly documented and, possibly, subjected to legal review prior to submission. Because federal district courts do not possess the same expertise as the Corps, a well-documented and clearly explained initial proposal will aid a district court with the information it needs to review the Corps’ decisions.

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[1]  There were three concurring opinions taking differing positions on whether a Memorandum of Agreement between the Corps and EPA makes the JDs binding on EPA. This aspect could bear further review.