On Friday, April 9, 2010, the Louisiana Supreme Court (1) reversed the Third Circuit Court of Appeal’s decision in Cimarex Energy Co. v. Mauboules (2), in which the Circuit Court held that
(1) a royalty interest vendors’ oral assertion to a mineral lessee that the royalty interest vendee fraudulently inserted a prescription interruption provision in the royalty deed, and that therefore the royalty interest had reverted back to the vendors, is not a reasonable basis for the mineral lessee to initiate a concursus proceeding to determine the ownership of royalty payments because the innocent third party purchaser of the royalty interests is protected by the public records doctrine; and
(2) the mineral lessee is liable not only for the royalties paid into the registry of the court, but also for an additional sum equal to double the amount of royalties paid into the registry of the court, as damages.
The Third Circuit decision represented a gross departure from well-established Louisiana law relating to concursus proceedings, upon which the oil and gas industry, and mineral royalty payors in particular, have long relied in order to avoid the risk of multiple liability and the vexation of multiple lawsuits, as well as to avoid a penalty for nonpayment of royalties pursuant to Mineral Code provisions allowing a penalty under certain circumstances.
The legal arguments pitted the long-standing policy reasons for allowing the concursus procedure as a method of providing a stakeholder of disputed funds immunity liability against provisions of the Civil Code relating to the public records doctrine and Mineral Code provisions relating to penalties for nonpayment of royalties. The case also raised a much-disputed and unresolved questions regarding the calculation of a royalty payee’s recovery for nonpayment of royalties pursuant to the penalty provisions of the Mineral Code. For these reasons, the decision was significant to the oil and gas industry, particularly mineral royalty payors. Louisiana Mid Continent Oil and Gas Association and Louisiana Oil and Gas Association submitted amicus curiae briefs to both the Third Circuit and to Supreme Court.
The Supreme Court’s reversal of the Third Circuit is significant because it reaffirms over eighty-five (85) years of Louisiana legislation and jurisprudence which recognized concursus as a mechanism for a stakeholder faced with competing claims to funds to avoid multiple liability and a multiplicity of lawsuits. The Court granted the writ application primarily to review the lower courts’ ruling that the mineral lessee had no reasonable basis to invoke a concursus proceeding, and thereby unreasonably withheld royalty payment. Addressing that issue, the Court held that the concursus proceeding was properly invoked where (i) one group of claimants asserted that they held the subject royalty interests because a prescription interruption clause had been fraudulently inserted in a royalty deed, was therefore null, and the royalty interests had reverted to them; and (ii) another competing group of claimants claimed that regardless of the alleged fraud, they had purchased the royalty interests from the other claimant groups’ vendee in good faith, could rely upon the public record for the validity of their title, and therefore were protected innocent third-party purchasers. (3)
Specifically, the Court examined whether there were “competing claims,” and whether the mineral lessee was required to determine the merits of the competing claim prior to invoking the concursus. After considering the jurisprudential and legislative history of the concursus proceeding in Louisiana law, the Court noted that the purpose of a concursus is to (i) protect the stakeholder from multiple liability; and (ii) avoid a multiplicity of lawsuits. The Court also noted that in 1960 the Legislature broadened the application of the concursus proceeding by borrowing some of the flexible principles of federal interpleader. Most particularly, the Court recognized that the language of La. C.C.P. Art. 4562 provides that use of the concursus proceeding is allowed even if the stakeholder denies liability owed to one or all of the claimants:
Persons having competing or conflicting claims may be impleaded in a concursus proceeding even through the person against whom the claims are asserted denies liability in whole or in part to any or all of the claimants, and whether or not their claims, or the titles on which the claims depend, have a common origin, or are identical or independent of each other. La. C.C.P. Art. 4562 (emphasis added).
The Court rejected the argument that there was no true competing claim, noting that the above-quoted language in Article 4562 protects a stakeholder from having to determine at his peril, which claimant has the better claim. The Court further reasoned that there is no requirement in the Article that claims must be made in a specific format, or with any formality. Oral allegations of fraud were sufficient to constitute a competing claim to the royalty proceeds. Furthermore, in this case, the assertions made by the claimant group involved more than a mere possibility that a competing claim may be asserted.
The Court also held that the stakeholder had no duty to definitively determine whether the claimant group asserting fraud had any chance of success in pursuing its claim against the claimant group relying upon the public records doctrine and its status as an innocent third party purchaser. The use of concursus is not dependent on the merits of the adverse claim; and in almost all concursus proceedings, the claim of one of the parties will ultimately be found to be invalid.
The Court explained that the Third Circuit erred when it based its decision on the merits of the fraud claim, reasoning that the fraud claim could not defeat the protections of the public records doctrine. Moreover, the Third Circuit’s reliance on the public records doctrine was found to be misplaced. The public records doctrine is a negative doctrine because it does not create rights, but rather, denies the effect of certain rights unless they are recorded. Third persons are not allowed to rely on what is contained in the public records (in this case a prescription-interruption clause), but instead can rely on the absence from the public records of those interests that are required to be recorded. Because recordation of the mineral royalty deed is not the source of legal rights, the innocent third-party purchaser cannot simply rely on, and only look to, the public records doctrine to support its position that the fraud claim was not a competing claim for purposes of concursus. The question of whether the fraud claim might affect title certainly presented a legitimate basis for the stakeholder to fear that the innocent third-party purchaser’s position possibly might not be protected by the public records doctrine. Even though the general protections of the public records doctrine indicated that the claimant group alleging fraud had little chance of success, the Court declined to put the burden on the stakeholder to make that final legal determination. Such a determination is properly placed in the hands of the court.
Furthermore, the Court found that the Third Circuit erred because by focusing on the merits of the fraud claim, it focused only on the “multiple liability” purpose of concursus, and ignored the “vexatious litigation” purpose. Even assuming that the fraud claim is tenuous at best, requiring the stakeholder to pay still exposes it to the costs and risks of defending multiple suits. Thus, the Court found that the stakeholder was justified in its fear that it might be later faced with a suit brought by the fraud claimants, and its use of concursus to avoid such multiple litigation was proper.
Finally, the Supreme Court rejected any contention that the stakeholder invoked the concursus in bad faith (and violated the clean hands doctrine) (4) simply because it knew when it took the lease that the royalty interest vendors might claim fraud. Once the stakeholder was presented with a letter asserting a claim to the royalty interests and was advised by its attorney to suspend royalty payments and invoke a concursus, it was reasonable to do so. At that point, the stakeholder had more than a theoretical concern that the fraud claimants would make a claim to the royalty proceeds.
Because the Supreme Court determined that the invocation of the concursus proceeding was appropriate, and because the stakeholder timely responded to the third party innocent purchasers’ demand for payment of royalties, explaining that the royal interest vendors were asserting a claim to the royalty payment, it never reached the question of how to calculate the amount of any judgment for nonpayment of royalties pursuant to the Mineral Code, particularly, La. R.S. 31:212.23, which governs production payments and royalty payments to others than mineral lessors and provides in pertinent part:
If the obligor fails to pay and fails to state a reasonable cause for failure to pay in response to the notice, the court may award as damages double the amount due, legal interest on that sum from the date due, and a reasonable attorney’s fee regardless of the cause for the original failure to pay. La. R.S. 31:212.23(C) (emphasis added).
Appellate Court jurisprudence regarding the calculation of a royalty payee’s recovery under this provision is nonexistent, and the decisions interpreting other penalty provisions having similar language (5) are both unclear and inconsistent regarding whether a mineral royalty payee falling under this provision may be awarded no more than double the amount of royalty due as damages (double damages), or may be awarded as much as the amount of royalty due plus double the amount of royalty due as an additional (treble damages). Because the Supreme Court determined that the concursus proceeding had been appropriately invoked, this issue was rendered moot, and the industry is still without a definitive interpretation of La. R.S. 31:212.23(C) from the State’s highest court. (6)
The Court also did not address the question of whether for purposes of La. R.S. 31:212.23(A), the deposit of royalties into the registry of the court in a concursus proceeding, within thirty days of written notice by the royalty owner pursuant to La. R.S. 31:212.21, (7) constitutes “payment” of the royalties such that the royalty payee shall have no further claim with respect to those payments. Paragraph B of La. R.S. 31:212.23 provides:
If the obligor pays the royalties or production payment due plus the legal interest applicable from the date payment was due, the owner shall have no further claim with respect to those payments. La. R.S. 31:212.23(A) (emphasis added). (8)
Thus, the question of whether the stakeholder/mineral royalty payor is insulated from exposure to the penalty provision of La. R.S. 31:212.23, even if the concursus procedure is ultimately determined to have been improvidently invoked (and the funds and accrued interest ordered released) remains open.
(1) Cimarex Energy Co. v. Mauboules, 2009-1170, 2009-1180 and 2009-1194 (La. 4/29/10), available at http://www.lasc.org/news_release/2010/2010-027.asp. Kean Miller Partners G. William Jarman and Linda S Akchin and Kean Miller attorney Kimberly Hymel represented, on appeal, a an owner of an undivided working interest who joined with Cimarex in paying its share of the disputed royalties into the registry of the court, submitting a Writ Application and Brief on the Merits to the Louisiana Supreme Court on behalf of their client, addressing the propriety of the concursus proceeding and the interpretation of the penalty provision of the Louisiana Mineral Code.
(2) Cimarex Energy Co. v. Mauboules, 2008-452 (La. App. 3 Cir. 3/11/09), 6 So.3d 399.
(3) Only Justice Knoll dissented, finding that the stakeholder/mineral royalty payor’s decision not to pay was not “a reasonable cause for nonpayment” under La. R.S. 47:212.23(B), which provides: “If the obligor fails to pay within the thirty days from notice but states a reasonable cause for nonpayment, then damages shall be limited to legal interest on the amounts due from the date due.” Justice Knoll reasoned that (i) at some point [the stakeholder/royalty payor] should have realized that the royalty interest vendors’ claim of fraud was “simply bogus,” and (ii) the fraud claim could “in no way affect” the third party purchasers’ status as a bona fide purchaser entitled to the protections of La. Civ. Code Art. 2035, which provides: “Nullity of a contract does not impair the rights acquired through an onerous contract by a third party in good faith. If the contract involves immovable property, the principles of recordation apply to a third person acquiring an interest in the property whether by onerous or gratuitous title.”
(4) The “clean hands doctrine” is a fundamental principle expressed in the maxim: “He who comes into a court of equity must come with clean hands.”
(5) La. R.S. 31:139 and La. R.S. 31:140, relating to royalty payments to mineral lessors, both contain language providing that “the court may award as damages double the amount of royalties due.”
(6) Justice Knoll, dissenting, reached this question and held that, pursuant La. R.S. 31:212.23, the royalty payee is entitled to double the amount of the royalty owed, and no more, reasoning that (i) if the Legislature had intended the provision to permit a treble damage award it would have said so; (ii) the legislature has in other instances enacted statutes unambiguously permitting treble damages; and (iii) as a penal statute, La. R.S. 31:212.23 must be strictly construed.
(7) La. R.S. 31:212.21 provides: “If the owner of a mineral production payment or a royalty owner other than a mineral lessor seeks relief for the failure of a mineral lessee to make timely or proper payment of royalties or the production payment, he must give his obligor written notice of such failure as a prerequisite to a judicial demand for damages.”
(8) Justice Knoll, dissenting, noted that she need not resolve this issue because more than thirty days passed between the date of demand for payment of royalties and the date of deposit into the registry of the court.